GreenTree Hospitality Group Ltd. American depositary shares, each representing one Class A ordinary share

Good day and welcome to the Green Tree Hospitality Group LTD's first quarter 2020 financial results release conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. And to withdraw your question, please press star then two. Please note that this event is being recorded. I would now like to turn the conference over to Rene Vangestein of Christensen Green Trees Investor Relations Firm. Please go ahead, sir.

Thank you, Chuck. Hello, everyone, and thank you for joining us. Green Trees earnings release was distributed earlier today and is available on our IR website at ir.998.com as well as on PR Newswire services. As a reminder, we also posted a PowerPoint presentation that accompanies our comments to the same IR website. On the call from Green Tree are Mr. Alex Xu, Chairman and Chief Executive Officer, Ms. Selina Yang, Chief Financial Officer, Ms. Megan Huang, Director of IT Department, and Mr. Nicky Zhang, our IR Manager. Mr. Xu will present the company's first quarter 2020 performance overview, followed by Ms. Wang, who will discuss business operations, and Ms. Yang will then discuss financials and guidance. They will be available to answer your questions during the Q&A session, which follows. Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as may, will, expect, anticipate, aims, future, intents, plans, beliefs, estimates, continue, target, is or are likely to, going forward, confident, outlook, and similar statements. Any statements that are not historical facts, including statements about the company and its industry, are forward-looking statements. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known and unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ materially from those in the forward-looking statements. You should not place undue reliance on these forward-looking statements. Future information regarding these and other risks, uncertainties, or factors is included in the company's filings with the U.S. Securities and Exchange Commission. All information provided, including the forward-looking statements made during this conference call, are current as of today's date. The company does not undertake any obligation to update any forward-looking statements as a result of new information, future events, or otherwise, except as required under applicable law. It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Alex Hsu. Mr. Hsu, please go ahead.

Thank you, René. And thanks, everyone, for joining our first quarter earning call today. Let's start with slide five. In the first quarter, our operating performance was severely impacted by COVID-19. Our blended ADR decreased 7.8% year-over-year to 150 RMB. Our occupancy rate dropped to 47.3%. and the raw power decreased 44.1% to 71 RMB. Nonetheless, we continued to expand our market presence across China. During the first quarter, we opened 62 hotels, mainly in the first part of January 2020, and we ended the quarter with 1,025 hotels in our pipeline. That's up 113.1% year over year. By the end of the quarter, we had grown our geographic coverage to 342 cities across China, with 3,998 hotels in operation, up 41.3% over the prior year. Total revenues were 157.4 million RMB, a 33.1% decrease compared to the first quarter of 2019. Gross profit decreased 56.4% to 67.6 million RMB. Non-GAAP adjusted EBITDA decreased 64.5% to 47.6 million RMB. And the core net income per ADS, this basic undiluted non-GAAP, decreased 70.3% to 0.27 RMB. Let's now turn to slide seven for an update on the impact of COVID-19. Thanks to the government's efforts, The outbreak has largely come under control in China. Inevitably, our operating performance declined due to the lockdown of a number of cities, business closures, and the travel restrictions imposed by governments around China. However, Green Tree's overall performance was better than the average performance across the hospitality industry in China. due to the strong dedication and hard work of our staff, franchisees, and partners in the food and beverages business, as well as our strong positioning in tier three and the smaller cities. Now please turn to slide eight. The COVID-19 outbreak created new needs, which together with our franchisees, Green Tree answered immediately. We responded promptly to the government's call and provided rooms to house medical staff, volunteers, and travelers that needed to be quarantined and stayed, anticipating the resumption of the business. We worked with our corporate clients to provide the quarantine rooms for the workers who were returning to work. We provided waivers and other meaningful financial support to our franchisees. And we implemented the new precautionary measures to reinforce our already stringent health, safety, and hygiene standards and protocols. With these assistance from Green Tree, our franchisee have gradually managed to resume business operations, and as a result, our occupancy rate has rebounded and exceeded 65% on average in the second half of May. That's from a low of 21.5% at the end of January. And since March 9th, our individual or corporate members have accounted for more than 80% of all of our guests. Despite these encouraging trends, we expect the revenues for our second quarter to be down 18 to 23% year over year. I cannot thank enough all of our employees, franchisees, and guests, as well as the medical professionals, police, firefighters, and community leaders for their support and dedication in helping us resume our business rapidly. Despite these extremely challenging times, We are well positioned to deliver our multiple missions. That is to serve our guests, to support our franchisees and employees, and to create long-term and sustainable growth for our shareholders. I will now pass the call over to Megan Huang, who is also in charge of our sales marketing. Megan, please go ahead.

Thank you, Alec. Moving to slide 10. At the end of this third quarter, we had 3,998 hotels in operation, 41.3% higher than a year ago. Thirty-five of these hotels were leased and operated, all LR hotels, and 3,963 were franchised and managed, all FM hotels, while the mid-scale segment remains the core of our business with almost 64.6% of all our hotels. Last year, we expanded more into both the higher-end and economy segment of the market. As a result, by the end of this quarter, the number of hotels in the mid- to upscale and luxury segments increased to 7.3% of the total portfolio, and the economy segment drew to 28.1%. Our entry into these segments will enhance our ability to cross-market our different brands. We have also increased our dominant position in Tier 3 and smaller cities. As a result, 66.8% of all hotels were located in these cities at the end of this first quarter. Industry data, such as STR, indicates that hotels in these cities are recovering faster and performing better than hotels in Tier 1 and Tier 2 cities. On slide 11, you can see that we opened 62 hotels compared to 102 in first quarter 2019, a 39.2% drop. Seven of these were in the mid- to upscale segment, 37 in the mid-scale segment, and 18 in the economy segment. Three were in Tier 1 cities, 13 in Tier 2 cities, and the remaining 46 were in Tier 3 and smaller cities in China. Meanwhile, we closed 21 hotels, five due to brand upgrade, eight due to non-compliance with our brand and operating standards, and eight due to property-related issues. So, net-net, we added 41 hotels to our portfolio in the first quarter. Slide 12 shows the growth in our pipeline of new hotels. Our pipeline increased from 949 on December 31st, 2019 to 1,025 on March 31st, 2020. Around 39% of these hotels are in the mid-scale segment, about 36% in the economy sector, and around 25% in the mid-to-segment. Slide 14. summarize the impact of COVID-19 on our third quarter operating performance. Our FM Hotels ADR decreased 7.6% to 149 RMB. Occupancy rate from 78.4% to 47.7%. And the Red Park decreased 43.8% to 71 RMB. While our LO Hotels ADR decreased 15.4% to 169, occupancy rate dipped from 59.6% to 32.7%, and the red part decreased 53.6% to 55 RMB. Slide 15 shows the quarterly red part change. As you can see, red part for our LO hotels decreased 53.6% year-over-year to 55 RMB, and the red part for our FM hotels decreased 43.8% to 71 RMB. With that, I'll pass the call over to our CSO, Ximena Yang.

Thank you, Megan. Please turn to slide 17. Total revenues decreased 33.1% year-over-year. to 157.4 million RMB. Total revenue from FM hotels decreased 32.6% to 123.6 million RMB, while total revenue from Aero hotels decreased 34.8% to 33.8 million RMB. The decrease was almost entirely due to the impact of COVID-19 which resulted in declined RAPA temporary closures in compliance with local government requirements, delays in new hotel openings, as well as partial reduction and extension of sublet income. What's more, in support of our franchisees, from February 1st to March 31st, we reduced both franchisee management fees and central reservation system usage fees by 50%. Slide 18 shows that hotel operating costs were 89.8 million RMB, up 12.2% year-over-year. These increased costs were mainly attributable to higher depreciation and amortization and the consolidation of agro and urban. Excluding agro and urban, Hotel operating costs decreased 3.9%, which was primarily due to the decrease in salaries of regional general managers and decreases in utilities, consumables, food and beverage, which resulted from the declined occupancy rate. Value and marketing expenses were 17.8 million RMB, a decrease of 27.7% year over year. The decrease was mainly attributable to decreases in advertising, traveling, and meals because of the measures taken to control the spread of COVID-19, including the lockdown of certain cities, business closures, and the restrictions on travel. General and administrative expenses were $28.7 million RMB. up 11.7% year-over-year. The increase was primarily attributable to increased legal and accounting consulting fees and consolidation of expenses from agro and urban. Excluding agro and urban, G&A expenses decreased by 15.5%, mainly due to a decrease in stock-related costs and compensation expenses. Overall, total operating costs and expenses grew 5.4% year-over-year to 137.5 million RMB. Excluding agar and urban, total operating costs and expenses decreased 11.0% compared with one year ago. On slide 19, you see that gross profit decreased by 66.4%, year-over-year to 67.6 million RMB. Growth margin decreased from 66% to 43%. Net income decreased 110.6% to negative 14.1 million RMB. And net margin decreased from 66.9% to negative 9%. This year-over-year decreases were primarily due to the impact of COVID-19. On slide 20, you can see that adjusted EBITDA decreased by 64.5% year-over-year to 47.6 million RMB. Adjusted EBITDA margin decreased to 30.2%. Core net income decreases 69.9% to 27.7 million RMB, and core net margin was 17.6%. Please turn to slide 21. Net income for ADS, basic and diluted, decreased 108.7% to negative 0.11 RMB. That's equal to negative two cents US dollars. While core net income per ADS, basic and diluted non-GAAP, decreased the 70.3% to 0.27 RMB, equal to 4 cents US dollars. Let's now look at slide 22. Our operating net cash outflow was 48.4 million RMB as a result of an operational net income loss because of COVID-19. As of March 31st, 2020, we had cash and cash equivalents of 1.6 billion RMB as compared to 1.8 billion RMB as of December 31st, 2019. Primary due to loans to franchisees, loan losses from investment in equity securities, and investment to upgrade hotel decoration. The cash and cash equivalents provide us with ample resources as we continue to evaluate potential investments and to support our franchisees. Our long-term cooperation with several banks in China and our strong financial position operational performance have allowed us to obtain and utilize the bank facilities of $330 million on BIN. On slide 23, as Alex mentioned, COVID-19 had significant impact on our business. As a result, we expect decline in total revenues of 10% to 15% for the full year 2020, as compared to 2019. This concludes our prepared remarks Operator, we are now ready to begin the Q&A session. Thank you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then 2. At this time, we'll pause momentarily to assemble our roster. And our first question will come from Justin Walk with Goldman Sachs. Please go ahead.

Hi, Marlene, Alex, and team. Thanks for taking my question. Perhaps I'll start with two questions more broadly. One is on the M&A side. I think as you've just mentioned immediately, you've got $1.6 billion worth of cash and cash equivalent now. What are you seeing in the market post-COVID-19? Are you actually seeing more opportunities coming out or not? Because I think when I talked to a lot of the industry participants, it seems that this time around the disruption was pretty short and then there was still quite ample liquidity, so they are not seeing a lot of deals happening. So that's the first one. And the second one, regarding your revenue growth guidance for the second quarter, can I get a sense on What broadly you are assuming, say, in terms of your occupancy level, in terms of your room rate level, and also are you assuming any further discount or help to the franchisees through the franchise fees cut or rebate as well? Thank you.

Thanks, Justin. Selena, I'll take the two questions that you can add on top of that. So, Justin, those are great questions. Regarding the M&A landscape, since the beginning of COVID-19, I think there's a number of measures taken by the government, also taken by the companies, and also taken by the participation through the employees and hotel owners. I think most of the hotel companies at this moment are still able to absorb the shock. So we have, we know the overall financial performance of the hotel industry has been impacted severely. But it takes time for the companies to realize, you know, that a strategic partnership with the green frame would be the best interest to their, you know, hotel owners, to all the parties. So we have received information regarding certain smart medium and some regional, some of the certain segment that inquiries about certain of, potential strategic investment. But we do expect that I think in the third quarter and the fourth quarter, there should be more opportunities because the recovery is rapid, but we'll see really how rapidly the recovery speed is. At this moment, I think the recovery, the speed, just like what we said in the second quarter, From May, the second half of May, we only recovered to 65% of the occupancy. Originally, I think it's a little bit lower than the industry's, than our expectation. And so overall, the industry recovers. I think we looked at numbers a little bit slower than the green trees. So we would expect the M&A opportunities will be more. There will be definitely more. towards the second half of the year. So we're prepared to evaluate. Green Tree has always been very reasonable, trying to create a win-win situation for all parties. So we hope that we will take advantage of the situation and seize the moment and to create a win-win for everybody. So that's on the... the M&A landscape, and that's the reason why we have untapped these credit lines. We plan to obtain more from our lender if we need. Regarding your second question, the revenue covers on the second quarter, as we have indicated to you, The second quarter, our revenue consists of several components. One is the amortized income from the hotel opening and the system fees and also the franchise fees. And those are the three primary fees we have. And that so we have in combined that we have a 18 to 23% depending on the second, you know, the second that they choose recovery speed. I know I think, I know that government is really speeding up helping the business to recover. So it really depends on the recovery speed of the June. So we have, that's why we have a, you know, we have a range or what there are 5% plus or minuses. And so we think that the raw power still comparing with the last Q2 in 2019 in probably 20 to 30% or 25% plus or minus in that end. So Selena can correct me if I'm wrong. And so we expect the third quarter of the recovery will be better than the second quarter. And so we do not at this moment, the health, the financial health of our franchisees, Justin, are the most critical elements that Green Tree pays attention. That's the most important area we focus on. We want to make sure Green Tree's franchisee has the best financial health in the industry. So we'll do whatever we need, including you can see our cash flow, the first quarter, We have provided more than 80 million to support our franchisees. And we also waived 50% of all the fees. We also returned. The reason why we have a 48 roughly million cash from operation loss, you know, that negative, is that we have a core earnings of 27 million or so. We're supposed to have similar cash flows. But because we refunded the prepaid deposit with the cancellation with also prepaid deposit and the prepaid also paid the revenue, the room revenue to our central reservations, we actually refunded that. We actually disbursed those quickly. So created a negative almost $80 million of cash upflow. And so our balance sheet, you'll see that number drop. We delete that. At the impact of that, we still have a positive cash flow from the operation to the company. So we plan to use them all to support our franchisees if necessary. At this moment, what we observe is our overall financial conditions of the franchisee are very healthy. So we have not planned to cut any franchise or system fees or reservation fees. And that, however, if depending on recovery speed, if there is really another dip and another, you know, that somehow another impact, then we're prepared to do everything possible to help our franchisees. But at this moment, we don't see, we have not seen the great need other than we may continue to provide some financial support to our franchisees who wants to open more hotels during this time period because the capital to them in the market is not as readily available like before. So because it's not real estate hard assets, it's more on the supply chain side, construction, improvement, and renovation. my questions, my answers to your question, Justin. So, Selena, do you have anything else to add?

Thank you. As of Justin's question, I want to comment that we observed our operation performance has resumed since the middle of May. I mean, it resumed more quickly than ever before. So as we have introduced, our RAPA decrease in the first quarter was 44%. And now we observed our decrease in RAPA was about 30% to 35%. So if everything is going smooth, then we're likely to see the decrease in the RAPA will narrow in the coming second quarter. Thank you.

Thanks, both. May I just have one more question? It's that obviously the current discussion on ADR relisting or dual listing to Hong Kong market is something very hot in the market in a way. How would management see these in terms of the opportunities or in terms of the considerations that you're looking at if you can just hopefully provide some overall feedback? Thank you.

Okay, Justin. Selena, I'm also going to take this question. Okay, so, Justin, we take every risk factors very seriously because our mission is really to protect very clearly to protect all, you know, the financial health of the franchisees and keep a stable platform for our employees as well as providing a long-term stable returns to our shareholders. So, the recent HSEA initiative by the Senate alarmed us greatly. So, we do not know how this will be impacted and how quickly that we implemented or will be implemented ever. However, that what we have checked, have already commissioned our advisor to do analysis on the 19C to see whether we can be prepared in advance to secure an alternative just to have a backup plan to mitigate the risk for this potential legislation. So, again, we take everything, we take every risk very seriously in order to protect our shareholders' long-term interest. So, Justin, and we can, we'll continue to report to our investors about progress we're making, but we are, we have taken the initiatives.

Thank you. And our next question will come from Praveen Kudre with Morgan Stanley. Please go ahead.

Thank you very much for taking my question. This is Praveen. Two questions for me, Alex and Selena. The first one is I'm trying to understand the demand side of the equation. There are two parts to that question. One is in the new normal, considering the social distancing, what part of the business is not yet coming back? For example, leisure probably is coming back slower. I'm just trying to understand whether it will come back at all or it will not come out at least in Q3, Q4 this year and what percentage of your business comes from that segment. The second related question is what you mentioned, I think that 80% of your customers were members. I wanted to understand what percentage of that was corporate versus individual. And then I have a third question, which is not related to demand, which is about equity portfolio, which has seen some losses in Q1, which is understandable. But I just wanted to know whether you have either bought new shares or sold any of those existing shares. Thank you.

Thank you so much for those two wonderful questions. I will take the first part that Celina and Megan, you guys can complete the supplement. Regarding the demand side, we'll just talk about the general trend. And we are particularly concerned about the long-term impact of this COVID-19 pandemic. number one, to leisure, number two, to group meetings, to the conventions, because the conventions and the holidays and the leisure provide a strong support during certain months for the entire hospitality industry. And whether they, for the time being, I believe the company are very concerned about the risk to the employees, and so are we. So in terms of conventions, large group gathering and also the large amount of the long-distance domestic travelers prevent that. We think that will slowly come, that will not be quickly coming back. Depends, also depends on our government, our China government's initiatives because the society is a little bit different. I think our business community and citizens can be easily mobilized to do certain things. But worldwide, we'll see that we're coming back slowly. I think we'll not be a sharp V-type rebound. You know, that's just the number of months takes to drop, the number of months takes to coming back. So, luckily, I think that the sector that impact the most for that are not of the main focus of our business. Our business has been always the slack and limited services to the essential business travelers. So they are just as we described to you, the traveling medical professionals, the key logistic suppliers, engineers, and the key supporting people. So those are the types of also the like selective surgeries, people going to the hospitals, going to schools, going to the research, you know, going to a key location. So those are the types of client that we see right now. We're catering to them. we will be very careful in terms of monitoring our high-end hotels and how do we actually solve the problem for the lack of group reservations because I think it's a social distancing until and unless we have either, you know, effective vaccine or, you know, some kind of therapeutic remedy. I think then there will be so much pent-up demand from my point of view I don't think there will be a problem. But until then, I think we see the business and even ourselves are taking a lot more precautions to protect our people. And I think the other businesses are doing the same. And in addition, the families, you know, you don't recommend your family members to travel long distance. So the leisure travelers, I think, will be subdued. And coupled with a lack of international traveling, the tourist demand, so the leisure travel will be, I think, will be coming back slower than the price point where we are providing. So the 80%, you said, the members of individual and corporate, at this moment, we see the, like, more than 50%, 60% are from local corporates. and then 30% to 40% for individual members. But they are also traveling for business. And more and more towards the later part of May, I think we see half and half. And so it's a healthy balance. And we also see a great, you know, higher, quicker recovery in the third and fourth-tier cities. We had a strong, you know, strategy in the past, initiative to going down to providing the – to providing a brand and system support to those cities' hotel operators, I think yield a good result. And so that's the demand side. So we are pretty lucky that in the past that we have that strategy to provide the most affordable, that value-driven hotel products and services to our business and also individual travelers. I think that is being paid off. I think another reason they're being paid off is because a lot of small to medium-sized businesses, you know, they provide 70% of the employment, but they are also very constrained with the budget, you know, the lack of revenues in the COVID-19. And so, naturally, they will also cut back on their travel budget, and we are here for them. And regarding your second question, the equity portfolio, basically, we only invest in the past that we report to our shareholders. And the key strategic, I think, in our portfolio, we still have some left in the ICBC from the past. Then the other three stocks we have are our second largest shareholder for the yielding hotel chain. That's the, I think, number one domestic five-star brand in China. So we have not changed the positions. Last quarter, we neither buy nor sold any positions. We didn't change. So I think luckily, we'll see the second quarter will be rebound. The second is we are a strategic cornerstone at the time of investor for a new century. That's a second. That's also one of the best higher-end luxury hotel, and also for the five-star hotel chain, new century. And the third is we have a strategic investment in the university, you know, the Kinko University. That's the best, largest hospitality four-year bachelor degree degree. university in China and that they are the best. So that's the three major holdings we have. And the hospitality industry has impacted the most, so have the staff, and that's why we have a reduction in the equity value in those. And we do expect that those will be fully, you know, coming back in the near future. So, again, that's my quick, you know, quick answers. Selena and Megan.

Thank you, Alex. And we're also observing that our contribution from property members and individual members are keep increasing in the second quarter. If we compare their contribution of the first quarter in May and April, we can see that the percentage of our individual members increased by and 5%, and the percentage of corporate members increased by 2%. Meanwhile, the percentage of OTA decreased by nearly 2%. Thank you.

And our next question will come from Jessing Li with CLSA. Please go ahead.

Hey, hi. Good morning and good evening. Alex, Selena, and Megan. And Nikki, if you're taking a question. I have maybe two to three questions. I will go maybe one by one. Number one is a hotel closure, actually. So actually in first quarter 20, we recorded even fewer hotel closures than first quarter 19 or any quarters previously. So I was trying to understand if we anticipate more hotel closures in the quarters to come, given the COVID situation. and maybe they are more to come that will also impact our revenue going forward. I'd like some colors to be shared on this many things.

Okay. So, Selena, I remember that we have the closure. We have the closure, I think, about one-third of them is due to the upgrade of hotels that that's why we have the closure reopening. And then I think that it's due to the noncompliance and also due to the property related issue that is now we will have hotels that are underlying property leases. For instance, that they are already expiring. So their lease come to a termination. And so We because that we have a responsible approach to help our franchisees and so our area GMs and our hotel GMs. So overall, our franchisee have not, you know, we have not seen a major trend, a lot of closures in the horizon. I think if there are any major closures, it's going to be the second quarter. but we have not seen a large flux of closure in the pipeline. And all closure mainly are due to the hotel lease, real estate lease is already expiring. And some are not able to keep up with the maintenance of the hotels because franchisee have some other cash needs for other operations. They may not be able to put all the some of the profit back to fix the hotels up so they are not in compliance. And some will be just internal because we have other brand and then we are able to upgrade for the, you know, renovation. So that's my reading from our pipeline of the request. So, Selena, do you have anything to add?

No, as we have explained very clearly. Thank you.

So we don't expect a large number to close. And we have always been, as I mentioned here, that's a demonstration that we have been able to maintain a pretty good support to our franchisees. We try our best. And during the COVID, every – employees, every staff in the corporate office work to support their frontline operation.

I got that. Thanks, Alex and Selena. My second question is on the general ADR trend. So we have seen some data saying in tier one cities, for example, in China, that the general average ADR decline year on year has been even larger than in March. So I was wondering if in Tier 3, the four cities, we have seen a similar trend or we see, well, a similar ADR decline year-on-year versus March because we have also on the presentation that we have recorded already much less than industry ADR decline in first quarter. So I was wondering if we are not affected that much by ADR in the quarters to come as well. Thank you.

Okay. Selena? Would you like to answer this question?

Sure, sure. Thank you, Jason, for the question. Just like you said, you observed the overall decrease of ADR in the Tier 1 CTs was not good. Actually, we observed the same trend. In the Tier 3, the overall decrease of ADR was better than that of the Tier 1 CTs. Actually, if we compare the performance in Tier 1, Tier 2, and Tier 3 cities, the ADR decrease in Tier 3 cities was less than that of Tier 2 and which was less than that of Tier 3.

So let me also add a little bit more to that. one of the reasons we believe, okay, we believe is the Tier 3 city has a lot of local travelers. They are more like in the smaller, you know, smaller groups and the smaller team, individuals. And the Tier 1, Tier 2 cities, especially Tier 1 cities, they're in the past, you know, some of the key drivers right now, they're missing. So it's very natural, and this will continue as long as those key groups are not coming back. For instance, the international tourism, international travelers, and also the group travelers, conventions, meetings. And so the entire, those sectors are, right now, are not very active. So the result of that, I think, tier one cities, are really having a sharper drop in the ADR and occupancy. But we are very hopeful that those will come back in the near future.

Thanks.

Yes, you're right, Alex. I'd like to add some comments because CO1 cities include Beijing, Shanghai, Guangdong, Shenzhen, And during COVID-19, there are more restrictions on traveling or lockdown cities for these four big four cities. And since late April, we find that there's more traveling between these big four cities and so that we hopefully like that and more occupancy will be increased in these four cities. Thank you.

Yeah, the drop, Jisha, is about 10%. I think there's a 10% difference between the Tier 1 and Tier 3 cities. So for instance, Tier 1 city, if the Tier 1 city is 50%, Tier 3 city would be 40%. So there could be 10% difference. So the Tier 3 city performs much better in that sense than the Tier 1 city at this moment.

Okay. Thank you. So my last question is on government subsidies. So I've seen that in first quarter you have already recorded some government subsidies on just the EBITDA level. I was wondering if these were related to the requisition hotels during the COVID peak outbreak or it is not. So maybe a follow-up on this is that our requisition hotels in first quarter, how many are they and how many government subsidies do we estimate to be in coming from second quarter and third quarter onwards? Are there similar levels as what we have seen in first quarter or would these be more actually?

Thank you. Yes, thank you for the question. The subsidiaries was mainly attributable to the tax subsidiaries coming from the government. It's not for the requisition. And the second quarter, our number of hotels used by the government was less than 3%. And now, nearly all the hotels that are opened are due to to be used by the government.

Thank you. I think that one of the, those are pretty much a payroll-related tax, some of the rebate, in other words, the refund. So it's part of the subsidies in that end. So I think primarily, just as Selena said, is part of reduction of the tax in essence.

Thank you. So maybe just a quick follow-up on this. If the government subsidy in first quarter was not at all related to requisition hotels, so when these government subsidies related to requisition hotels come in the future, accounting-wise, would you record that in red power, or would you record just below the line?

We do not. How many hotels, Selena, we basically will, if they have given steam time, we'll record to the other revenue, and we do not record as the subsidies from the government. So if that's hopefully answer your question.

Yeah, yeah, that's very clear. Thank you. That's all my questions.

Great. Thank you.

And our next question will come from Bruce Mee with UBS. Please go ahead.

Good morning. Thanks Alex, Selina and Megan for taking my questions. I just have one small question. So could you please share with us about your hotel opening plan for this year and next year? And also could you give us a rough breakdown by the three tiers and hotel segments?

Thanks. Okay. We have a stronger pipeline historically right now, a record pipeline, more than 1,025. So we, even in the first quarter, in light of the COVID, we still developed more than 100 hotels. We opened 62, I think, that we continue to add to the pipeline. So, this year, we plan really to open six, you know, initially 700, because that's 567. And so, we're trying to push to see whether we can achieve that number. However, we also understand that we are sensitive to the concerns of the franchisees. because a lower occupancy and a lower demand in the second quarter. So we do not really want to, you know, convince or encourage our franchisee to open the hotels at this moment. But if they're ready, you know, everything's ready, then we definitely will help them because we have a longer ramp-up period. So... So we will, you know, counting, we are very optimistic in third quarter, first quarter. I think we're opening, our opening will catch up. But our plan originally is about 700. I think the first quarter, second quarter, we made, you know, short of 100. If we can't catch up, then we're probably about 600 plus. And that really depends on how quickly the economy rebound in the third, fourth quarter. and then we're probably achieving our goal because our company always has been very disciplined in achieving our plan and achieving our budget. And in terms of the mix, we continue to see like a pyramid, 10%, we hope, 5% to 10% in first year. and then 20% to 30% in the second tier, and then 50% to 60% third tier. And in terms of the brand, then we have upper to mid-upper and to luxury, and we'll plan really 5% to 10% dead-end, then mid-skilled high and to about 15% to 15% And then mid-scale is about, you know, 50, 40 to 50%, then the balance of 25 to 30% economy. So that's our just the ballpark strategic focus. And again, development is we try to have an organic development as possible. So also depending on the team, the development team, where the opportunity emerged. So we're focusing a little bit more. So that's our ongoing and the future plan. Next year, and we really want to speed up to open all the hotels in the pipeline. And so we will, because now we have two more fully, you know, operating divisions, that's Argyle and Urban. And I think our two teams really have done, tried very hard. And both Aga and Urban and the CEO, Kevin Zhang, and also Ms. Chen, they are all day and night trying to speed up their development and their openings. So next year, we should be able to see a much higher, I think, growth rate than this year.

And our next question will come from Lydia Ling with Citibank. Please go ahead.

Hi, management. Thanks for taking my questions. And my first question, do you want to follow up on the store opening? And can we have some idea on the store opening pace so far for the second quarter to date? And we also want to get more idea about how about the sentiment of our franchise so far as we recover versus the first quarter. And also what kind of the support we may get further get support to our franchisees. And my second question goes to actually I think in general we were expecting more consolidation to happen in second quarter. I think large platforms in the hotel segment will actually want to explore this industry consolidation opportunity. Any plans from our company side to provide more attractive terms to those independent players to join our terms? actually targeted to those independent players. So, thank you.

Selina, I'll pick up the questions and then you supplement. Okay. Lydia, thank you so much for those three questions. The opening of the second quarter, our openings, Also, we have a number planned in June, and then somewhere I will give you a little bit larger range because we, as we said, as I said to you, that we want to respect to our, to make sure that our franchisees in the hotel and the fuel are as comfortable as possible when they open it. We also want to design it, so that we have a quicker ramp-up period. So I would say in 100 to 150 numbers in that range, the openings in the second quarter. And then the second question you have talked about the sentiment of the franchisees, definitely not as bullish as the previous year. However, as I said, Green Tree's franchisees are in much better financial conditions. And so in the last two years, we have asked our franchisees to be more disciplined because the market was really hot. Everybody's trying to get the property at a very high lease rate, property lease rate, and spend tons of money borrowing with a lot of – loaded with – with the debt or the private borrowing to open the hotels and even to a higher end. And there's a lot more supplies in those areas. So we have educated, we forcefully educated, trained our franchisees that in any very good time, you have to anticipate that there is a correction. We never really expected that a correction would come in in this COVID-19 form. But nonetheless, it came. It came. and in such an unexpected way. But our end result is our franchisee are much more, you know, prepared. So we have a much better sentiment. That is one of the reason a lot of our franchisees are still exploring trying to open the hotel, trying to, you know, signing up the leases or purchase the properties, signing up with Green Tree, various brand. So I'm, you know, I think the sentiment is not as good as overall industry, but our green tree group that knows still is performing really well, the sentiment among our franchisees. So that's also because we have, we provide this financial support. You can see the first quarter we already opened and our connections with our lenders and also with our own cash. And we continue to have these capabilities. With the second quarter, we don't have the refund issues that, you know, the prepaid central reservations and also all of that in place. I think that we even have more cash from the operations from the lenders to support our franchisees. What they most needed is, you know, If they have a great deal, we have ample financial support for them. And that is the advantage of working with Green Tree because we'll always prepare ourselves to support our franchisees. And the third, your third issue is more consolidation. Definitely we see the smaller to medium and there are so many. smaller regional hotel brand, the most important issue is the consolidation has to be responsible ones because a lot of the smaller hotel chains, Lydia, from our point of view, they have several issues that products may not be consistent and that the management may not be consistent. Secondly, the thirdly, And the number of years they left on the original lease term varies. So how do we make sure that when we consolidate, it's not purely a number game, but also increase overall our quality of our, you know, the quality of the products and the quality of the service. So that's one major concern. Secondly, whether the management team We see it have the same philosophy, have the same culture, because not every management team have the same goal. And that's the most important criteria and more important than anything else. So in the past, what we have talked for a long time with Kevin of Argyle and Ms. Chen in the urban, I think we share the same philosophy. They're all hard workings and trying to make the brand a valuable resource for the hotel owners. And that if, you know, we think that third quarter, fourth quarter, there'll be more. And we are open, you know, our arms are fully open. Also, if you have any certain opportunity, please recommend to us. We think in this particular environment and our strategic partnership with them will definitely strengthen both parties. Unless we create a win-win, we don't get the deal. So that's our criteria idea. So that's my quick answers to your three questions.

Thanks, Alav.

Selena?

No comments.

Thank you, Alex.

Okay. This concludes our question and answer session. I would like to turn the conference back over to Ms. Selina Yang for any closing remarks. Please go ahead.

Thank you, operator. In closing, on behalf of the entire green tree management team, we thank you for your interest and participation in today's call. If you require any further information or have any interest in visiting us in China, please don't hesitate to contact us. Thank you all.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Thank you, operator. Thank you, Chuck.