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

Good day and welcome to the Green Tree second quarter 2020 earnings conference call. All participants will be in 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, please press star then one. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Rene Van Gestein. Please go ahead.

Thank you, Rachel. Hello, everyone, and thank you for joining us. GreenTree's 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 this call, we are going to refer to this presentation, so please make sure you open it now. Thank you. On the call from Green Tree, I'm Mr. Alex Xu, Chairman and Chief Executive Officer, Ms. Celina Yang, Chief Financial Officer, Ms. Megan Wang, Vice President of Sales and Marketing, and Mr. Nicky Jang, our IR Manager. Mr. Xu will present the company's Q2 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 that will follow. 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 terminology such as may, will, Expects, anticipates, aims, future, intends, plans, believes, 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. Further 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 call, are current as of today's date. The company does not undertake any obligation to update any forward-looking statement 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 Xu. Mr. Xu, please go ahead.

Thank you, Rene, and thanks, everyone, for joining our second quarter earnings call today. Let's start with the slide five. During the quarter, our performance as that of the hospitality industry as a whole continued to be impacted by the COVID-19 with reductions in both business and leisure travel. Overall, though, and despite some local resurgence of infections in June, our business continued to recover. Our blended ADR decreased 17.4% year-over-year to 142 RMB. Our occupancy rate dropped to 63.4%, and the raw power decreased 35.4% to 90 RMB. If we exclude hotels under requisition, temporary closures, and impact from consolidated entities, the raw power for the same hotel price 22.2% to 112 RMB. Nonetheless, we continued to expand our market presence across China. By the end of the quarter, we had grown our geographic coverage to 343 cities across China with 111 new hotels opened and reached a new milestone exceeding the 4,000 mark, with 4,066 hotels in operation. We ended the quarter with 1,087 hotels in our pipeline, up 82.4% year over year. Total revenues were 216 million RMB, a 21.4% decrease compared to the second quarter of 2019. Gross profit decreased 38.2% to 121.1 million RMB. Net income decreased 26.3% to 93.7 million RMB. Non-GAAP adjusted EBITDA decreased 47.2% to 91.4 million RMB. Net income per ADS decreased 19.7% to 1.01 RMB, and the core net income per ADS decreased 40.9% to 0.72 RMB. Let's now turn to slide seven for further update on the impact of COVID-19. China effectively contained the spread of COVID by second quarter of 2020, albeit with some restrictions on certain consumer-related activities. So our business was inevitably affected by some business closures and travel restrictions imposed by governments that continued throughout the second quarter, especially during the June. As COVID-19 came under control and the restrictions, were gradually lifted, we saw a return at domestic tourism and business travelers. According to the SDR data, occupancy rate, ADR, and the rare power of hotels in China improved steadily during the second quarter, partially offsetting the decline observed in the first quarter. Once again, Green Tree's overall performance was better than the average performance across the hospitality industry in China, i.e. around a 20% less of a decrease of raw power. This is thanks to the tireless work and dedication of our hotel staff and franchisees and the strong support of our loyal individual and corporate members. During June and July, New COVID-19 cases were reportedly in several cities, including Beijing and Dalian. Total measures, including strict travel restrictions, temporary closure of entertainment places, and many other leisure places, were reimposed, helping to bring the resurgence of COVID-19 quickly under control. Now let's turn to slide eight. We continue to act quickly and strategically to ensure that we are providing as much support as possible to all our franchisees and employees to protect the long-term health of our business. With the resumption of business travel and domestic tourism, we increased our cooperation with our corporate clients and provided additional sales support to our franchisees. During the quarter, we expanded our cooperation with a number of travel management companies to attract more corporate clients and business travelers. Also, every one of our hotels is expanding joint promotion programs and cooperation with local merchants. With all these efforts and assistance from Green Tree Central Office, the performance of our hotel has quickly improved. even with a slight dip in June due to the resurgence. Our occupancy rate increased from a low of 21.5% at the end of January to averaging 65% during the second half of May, to exceed 75% on the second half of July, and to exceed 82% further during the first two weeks of August. With these encouraging trends, we are confident that we can achieve our revenue target during the third quarter of 2020. I am proud of the Q2 result we achieved, especially considering the difficult environment that we operated under as a result of the COVID-19. Through it all, our business remained resilient and highly adaptable. We quickly adjusted our operation and marketing campaigns to meet involving consumer preferences and weaker market conditions. We protected our margins thanks to our flexible cost structure and the measures we implemented over recent quarters and that we will continue to implement for the rest of the 2020. As a result, our sales recovered and we returned to profitability for this quarter. With the Chinese government's efforts to bring the spread of COVID-19 under control, domestic tourism and business is gradually bouncing back. On July 15, 2020, the Ministry of Culture and Tourism lifted restrictions on intra-provincial travel. The lifting of these restrictions is stimulating business travel and summer travel and helping the hospitality sector to deliver steady and improved performance. After the lifting of the restrictions, we have observed another 10% increase of our occupancy with assistance and support from the government and our business partners. Together with our core strengths, such as our large, loyal membership base and the strong operational capabilities and our proprietary technologies, we are well positioned to deliver another year of outstanding service to our guests, strong performance to our franchisees, and sustainable growth to our shareholders. I will now pass the call to Megan Huang, Megan, please go ahead.

Thank you, Alex. Moving to slide 10. At the end of the second quarter, we had 4,666 hotels in operation, 37.6% higher than a year ago. Thirty-five of these hotels were leased and operated, or ARO hotels, and 4,031 were franchised and managed, or FM hotels. while the mid-scale segment remains the core of our business with almost 64.2% of all of our hotels. Last year, we expanded more into both the higher-end and economy segments. As a result, by the end of the second quarter, the number of hotels in the mid- to upscale and luxury segments increased to 7.8% of the total portfolio, and the economy segment grew to 28%. 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 the smaller cities. As a result, 66.8% of our hotels were in these cities and at the end of the second quarter. On slide 11, you can see that we opened 111 hotels. compared to 134 in second quarter 2019, a 17.2% drop. One hotel was in a luxury segment, 28 were in the mid to upscale segment, 50 in the mid-scale segment, and 32 in the economy segment. Five were in Tier 1 cities, 34 in Tier 2 cities, and the remaining 72 were in Tier 3 in the smaller cities in China. More than 26% newly opened hotels were luxury and led to upscale hotels. Meanwhile, we closed 43 hotels, five due to brand upgrade, 20 due to noncompliance with our brand and operating standards, and 18 due to property-related issues. So net-net, we added 68 hotels to our portfolio in the second quarter. Flight 12 shows the growth in our pipeline of new hotels. Despite COVID-19, our pipeline increased from 1,025 on March 31, 2020 to 1,087 on June 30, 2020. Around 40% of these hotels are in the mid-scale segment, about 35% in the economy sector, and around 25% in the mid- to upscale and the luxury segments. Slide 14 summarizes the impact of COVID-19 on our second quarter operating performance. The red power decreased year over year due to COVID-19 to 90 RMB. However, excluding the impact of Argyle and Urban, our red power was 95 RMB. Our FM hotel ADR decreased 17.4% to 142 RMB. Occupancy rate dipped 17.6 to 64%. And the real part decreased 35.2% to 90 RMB. While our L.O. Hotels ADR decreased 19.7% to 173 RMB. Occupancy rate dipped 24% to 47%. And real part decreased 47.1% to 80 RMB. The L.O. Hotels performance was impacted by both COVID and as well as recent and ongoing renovations that were delayed due to COVID. Two of them will be completed this quarter. Slide 16 shows the quarterly Red Park change. As you can see, Red Park for our LO hotels decreased 47.1% year-over-year to 80 RMB, and Red Park for our FM hotels decreased 35.2% to 90 RMB. but rare parts rebounding from the first quarter level. Slide 16, we now have about 49 million very loyal individual members and 1.56 million corporate members, up from approximately 46 million and 1.52 million as of March 31st. During the quarter, around 93.2% 7% of all room nights were sold directly, primarily due to our individual and corporate members. With that, I'll pass the call over to our CFO, Celine Yang.

Thank you, Megan. Please turn to slide 17. Total revenues decreased by 21.4% year-over-year to 216 million RMB. Total revenues for FM hotels decreased by 22.7%, to 165.7 million RMB, while total revenue from ARO hotels decreased 16.8% to 50.3 million RMB. The decrease was primarily due to the impact of COVID-19, which resulted in declined wrap-up of ARO hotels and FM hotels. Renovation of five ARO hotels, delay in new hotel opening, as well as partial reduction and expansion of public income recognition. Slide 18 shows that hotel operating costs were 94.9 million RMB, up 20.2% year-over-year. The increase was mainly attributable to higher rents, higher depreciation and amortization, and the consolidation of operation costs from Argyle and Urban. Argyle's cost increased compared to one year ago, primarily due to rent for two Aero hotels in development. Excluding the impact from acquired entities, hotel operating costs for this quarter decreased 6.2%, which was primarily due to a decrease in salaries of hotel staff and regional general managers, and decreases in utilities, consumables, food and beverage, which resulted from the lower occupancy rate. Selling and market expenses were 12 million RMB, a decrease of 26.6% year-over-year. The decrease was mainly attributable to sustainable reduction in cost for advertising and the meals. Excluding arbor and urban expenses, selling and marketing expenses in this quarter decreased 37.6%. Interim administrative expenses were 48.1 million RMB up 21.1% year-over-year. The increase was primarily attributable to higher depreciation and amortization for our property and equipment, increased the consulting fees, and the consolidation of expenses from Argyle and Urban. Additionally, a one-time bed debt returning to account receivable due to COVID-19 was accrued, Excluding impacts from acquired entities and accrued benefits, our G&A expenses decreased by 21.6%. Overall, total operating costs and expenses grew 14.8% year-over-year to 155.1 million RMB. Excluding impacts from acquired entities our total operating costs and expenses decreased 6.4% compared with one year ago. On slide 20, you see that cost profit decreased 38.2% year-over-year to 121.1 million RMB in this quarter. Growth margin decreased from 71.3% to 56.1%. Net income decreased 26.3% to 93.7 million RMB. And net margin decreased from 46.2% to 43.4%. This year-over-year decreases were primarily due to the impact of COVID-19. On slide 21, we can see that adjusted EBITDA decreased 47.2% year-over-year to 91.4 million RMB, and adjusted EBITDA margin decreased to 42.3%. Core net income decreased 40.2% to 34.6 million RMB, and core net margin was 34.6%. Please turn to slide 22. Net income per ADS decreased 19.7% to 1.01 RMB. That's equal to $0.14 a year. While our core net income per ADS, basic and diluted non-GAAP, decreased 40.9% to 72 RMB. That's equal to 10 cents US dollars. Let's now look at slide 23. As of June 13, 2020, the company had a total balance of cash and cash equivalents, restricted cash, short-term investment, investment in equity securities, and handy parties of 1.7 billion RMBs. as compared to 1.6 billion RMB as of March 31st, 2020. The increase from first quarter was primarily attributable to cash inflow from operating activities, changes in fair value of active securities, proceeds from disposal of investments, and offset by loans to franchisees and investment on upgrade declaration. The cash and cash equivalents provide us with ample resources as we continue to evaluate potential investments and to support our franchisees. On slide 24, as Alex mentioned, COVID-19 had significant impact on our business as a result We expect it to try into the revenues of 10% to 15% for the full year 2020 as compared to 2019. This concludes our prepared remarks. 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 touch-tone phone, If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Your first question comes from Justin Kwok from Goldman Sachs. Please go ahead.

Hi, Morning Management. Thanks for taking my question. I hope everyone is safe at the moment. Perhaps I'll have three broader questions. The first one is in terms of your, with reference to the guidance that you made on the third quarter and then also on the full year, can I get a sense on a like for like basis, where are you seeing on your ref bar for the 3Q and then 4Q where compared to that of 2019, how much would that be recovered? That's the first question. The second question is on the level of competition that you are seeing in the market, especially on the sign-up of the new franchisees. It's nice to see that your pipeline has actually grown to over 1,000 hotels now. Do you have a sense that you guys are taking more market share, or what level of competition that you are seeing? And I think the last question is a hot topic now in the market. It's about the secondary listings. back to Hong Kong or other markets. What's your view? What are your considerations on that? Thank you.

Thank you, Justin. This is Alex. I'm going to pick up trying to answer as much as I can, and Selena and Megan, you two can supplement. So regarding the guidance for the like-to-like for the third quarter and the fourth quarter. We are very, you know, bullish and we are very optimistic and encouraged by the lifting of the restrictions on July 15th by the government for interprovincial travels. Even though we still think the travel right now mainly probably concentrated on the Business travel, you know, really required business travel. Those are really hard demand that less of a leisure because people are still a little bit concerned about, you know, travels as of same period of last year. So we believe our business model are very resilient because we have a very loyal base of individual corporate members As a result, our occupancy, you can see, the first two weeks of August already achieved 82% overall. But we also observed that there is more competition from different classes of hotels. which will compress the ADR, such as the competition from the luxury segment, resort types of four or five-star hotels. I think their demand is still softer than ours. And we see many, many higher-end hotels reducing their ADR rate to attract the business. There is ADR pressure on the third quarter. We believe the ADR will be a lag indicator, and so our occupancy will catch up with a little bit lower ADR. So our internal expectation of the third quarter, we should be on the raw product base, perhaps 10% to 15% lag-to-lag. and compared with the same period a year ago. And that the first quarter, I think, will pretty much probably arrive 5% or 5% or so below to 10% below last year. Or roughly on the optimistic side, we perhaps will see the same raw power at the same period of last year. So that's my first question. I want to give this opportunity to Celina and Megan to add to see whether this is the right, our CFO knows the numbers more than I do, I think better than I do. So, Celina.

Thank you, Alex. Thank you for the question. Indeed, during the first two weeks, we have observed a quick recovery, especially in our occupancy rate. So with this encouraging trend, we expect our revenues for our third quarter to be down 8% to 13% year-over-year. If we talk about like-to-like record, we think our ADR decrease will be in the range below 10%. So if there is no major COVID cases happening, During the second half of 2020, hopefully that in the fourth quarter of revenue will recover gradually to last year's level. So at least our yield will decrease, will be less than 5%. And hopefully our RAPA yield decrease will be in the range of around 5% as well. So in line with this, we expect a decline in total revenue of 10% to 15%. Okay.

So, Justin, regarding the second question, thanks, Selena. Regarding the second question regarding the pipeline and whether we are gaining or losing market share, the first and second quarter, what we find is that our velocity of adding contracts is the same and considering that our business developers are still not able to travel in all over China for instance right now like in Xinjiang area there's still some quarantine I think just some cities get lifted and so without the travel you know the free travel freedom of travel Our signing up, we have the same velocity of last year. For instance, based on second quarter, we added about 173. So that's equivalent to about 700 hotels new addition per year. But we have not observed that our franchisees are still not totally becoming that energized and adding the new hotels, expanding in the second quarter, first quarter, because they're a little bit concerned, including for the hotel opening. And it took some time to get a better preparation work done, because if you open the hotel during the COVID period, the ramp-up period is too long. And the ramp-up period, you have a higher cost. So some of our franchisees and choose to take a little bit more time. So we understand, we support them. But also a lot of our franchisees were prepared to grow, but they were also a little bit more cautious during the first and second quarter. But I believe in the third quarter, we should be able to see a much more higher speed of of our development in terms of contract signing and that in terms of increasing to a higher speed of growth in the third and fourth quarter. because they have already experienced in the green trees business model, we are more resilient and that's illustrated in the first quarter and second quarter. We are also overall has supported our franchisee the most with the least amount of fees and cost. So you can see from our number of closures, you know, the hotel closures, We are still leading, and in other words, 99% of our hotel's franchisees are, you know, confident to continue to operate the hotels with profitability in mind. So I think our pipeline, and we're pretty confident that we think that with the July 15th lifting of the restrictions and also that the occupancy has rapidly increased, the third quarter, first quarter, and we should be able to see our franchisee, our developers are able to you know, getting a better deal in the marketplace because we will see more of the existing hotel, some of the other, you know, that independent or some other local branded hotel owners are not able to make it and that they probably are more incentivized to and the cell to convert. So we see a really big kick in that end. So that's regarding the pipeline. And so I want to also give the microphone to Selina and Meg to see whether you have anything else to add.

Thank you, Alex. I'd like to share some thoughts of the franchisees from our discussion with them. We observed that our existing franchisees now are capturing good opportunities to open more hotels targeting different customer tastes, especially when they overcome COVID-19 and then can find more cost-effective properties with fair rents. As for our potential franchisees, they are more focused on the return of investments. They are more cautious to declaration costs, operational capabilities, customer resources, and the system efficiency, which are all related to their cost of control, and we think they are all of Green Tree's strengths. So that's why they have confidence there. as the industry covers, we may face more opportunities and we can capture these opportunities. Thank you, Alex.

So, Justin, regarding the third question of yours, we understand there is a potential risk there and that we're trying to comply with the regulation from both countries. On the other side, we're also talking with our advisor, evaluating options. And for us, I think there are probably more options available for us because two years ago, when we first got our IPO, as everybody knows, our liquidity, we only offered 10%. And our corporate office, our parent company, hold 90%. We never really, I think, sold one share. But if there is a dual listing, we can further increase our liquidity and complete our first round and not complete the portion of the job. And secondly, give the company a little bit more freedom, financial resources to further explore the opportunities available in the marketplace. And we also see Just as you said, there may be more individual hotel availability. In the third, first quarter, we also see some local hotel chains smaller to mid-sized hotel companies and may be ready to do some joint ventures or being consolidated. So we have a little bit more resource in that end. So we are evaluating and our advisors are working on that. And so we are confident that we are able to find a solution and satisfactory to everybody. Also, mostly it's a win-win for the company and win-win for the shareholder.

Thanks for all the discussion. Maybe just one very quick follow-up. Any color on the pre-booking status for the upcoming October 1st Golden Week? Thank you.

Okay. Right now, the pre-booking for the October 1st, I think, is a little bit less than the pre-booking of last year. And for a couple of reasons. One is there is ample hotels available at that time. And secondly, that people are still a little concerned about the dynamics and the condition at that time. But I think that from the information we got, we still have a very strong demand for for the pipeline. The pipeline is very close to that of last year. And Megan and Selina, whether you guys can add.

Yeah, yeah. Typically, our guests start booking hotels for October since the middle of August. And we're happy to observe that the booking rate around autumn festival and the nation of Spain now is nearly doubled in the normal level. Yes, that's what I can show with everyone. Thank you, Justin. Thank you, Alex.

Thank you.

Thank you. Your next question comes from Dan Zhu from Morgan Stanley. Please go ahead.

Thank you. Good morning, Alex, Selena, and Megan. Can you hear me?

Very clear. Thank you.

Thank you. I have two questions. The first question is on the competition, which is from another angle, as some of the other hotel companies have talked about. I think into the lower tier cities, which Green Tree has 70% of their hotels in tier 3 city and below. Do you see any competition, increasing competition, or have they gone into any of existing franchisees or potential franchisees? That's my first question, competition. My second question is about this long – are these bets that are – accrued of $9.5 million. Maybe can you comment a little bit more on that? What is it about? And is it due to the franchisee loan as well? Thank you so much.

Okay. So regarding the competition, because I'm involved with the development in a daily, weekly basis, And so I can provide a very, I think, clear observation in that end. I think at this moment, what we see is less of a competition in the third and fourth, third tiers and the lower tier cities, because a lot there were last year's competition was fierce because there are so many including some of the OTAs, also sponsors some of the so-called soft brand and also that new brand that are from local and from the other companies. And even including from a company from India. So they are going everywhere. This year, I think a lot of them, we see them either close the business and exit from the industry. and or have a seriously reduced and the staff reduction of staff. And so we actually see the competition become healthier than that of last year. So that's from the competition from third and fourth-tier city side. And I think that that's because we, in July, we typically, I think, will bill our four years of system service fees. And that's provision for a bad debt for the one time, those yearly system service fees that we do not know whether there will be a portion of our franchisees financial burden is too much that they may not be able to pay in time. I believe that's the reason we have a provision, just a precautious action and placed amount over there. And that may or may not happen. So I'm going to defer that to Selena.

Thank you, Alex. And for a question, competition in lower cities. Also, we think that the world, I mean, for each single market in lower cities, the earlier you enter in this market, the more opportunities we can capture in the single lower cities. And secondly, also for the hotels in the lower cities, we think it's very important for the management capabilities including the capability of remote control and the quality of the general managers. And so that's why when going to it, we can train a team of the general managers. So that's why we can also send qualified general managers to the remote cities. And so that's why we can get the – they get a good result in tier three and even smaller cities. And for the second question, I think Alex has explained very in detail because many franchisees in the COVID-19 ever applied for the extension of some fees, including the center of the region fees and the system attendance fees. Thank you, Dan.

Thank you so much. I appreciate your answers.

Thank you. Your next question is from Billy from Bank of America. Please go ahead.

Hi. Good morning. I have one question. Just wonder, maybe Alex and Selena, have you noticed any change in terms of the business clients and business demand I guess, as you mentioned, the recovery is largely led by the business travelers. And I guess initially, maybe there are quite a lot of pent-up demand due to the fact that many of them have not seen their clients for quite some time. But any of the companies or corporates have indicated that in the medium, longer term, They may travel less or in terms of the way they travel, they have some change or they're demanding more lower corporate rate in a way. And also in terms of distribution to these clients, are there any major changes? I'm just thinking about like the next six to 12 months and and try to see what kind of business demand will be out there eventually.

Billy, thank you so much for the question. That was a great question. Not only applicable to China, Asia Pacific, but also applicable in other places. And we are observing the long-term impact due to the short-term COVID pandemic. such as the corporate travel trend. And so the factor is affecting the corporate travel decision-making. So we are lucky. We are positioning our hotels in the price segment. that a lot of what we consider the hardcore need from the distance travelers, such as construction, engineering, sales, marketing, you know, all of those essential travelers that could not, the work that could not be done remotely. And so they are also very, corporate are also very concerned about the budget because everybody will be having a lower budget overall, and concerned about the safety, concerned about the worker being quarantined in a certain area. Both the loss of the time and also the health factors. But our segment, and I think the demand is there. And we will see, and, you know, just like in July, from July 15th to almost now for the past one month, interprovincial, you know, that restrictions lifting. And we see another bump right now over already over 80%. So the demand from our segment of the business traveler, which is we have 80%, clearly indicated that they need to – they need the – They need to conduct the business. But on the higher-priced business travelers, we are not quite sure because they may have a lot of other ways of conducting their businesses. So the hotel industry, you have a large amount of fixed costs. So unless you really design the fixed cost and operating structure to begin with, and for many, many hotels, they are not able to reduce their ADRs, reduce their REC rate below a certain rate. Otherwise, the hotel will lose money regardless. So I believe we have a really – a competitive advantage in that area because our cost structures and we design, along with our franchisees, we're really trying to be the most efficient by deploying the technology and our interactions between our general managers and the managers with our technology that we are able to to provide a low-cost and still very pleasant environment for the business travelers. And I think that's what we feel our strength, and that's how we see our side of the business demand. And the leisure demand, I think, will come back at a later time. Always, I think, the leisure travels, other than pent-up demand to the nearby suburban area, travels the weekend leisure travelers. The interprovincial leisure travels will follow will lag behind the hardcore need of the business travelers. So at this moment, we're really encouraged to see that our price, that the segment and the demand is there.

Thank you.

And Megan, any comments?

Yes, during this quarter, we expanded our cooperation with a number of travel companies to attract more corporate clients and business travelers.

Yes, indeed, because we observed the contribution from corporate members increased, have increased 1% every month since the COVID-19 pandemic. Because we know the total contribution of our individual members, corporate members, has exceeded 80%. So it's not an easy job for the corporate clients to increase even 1% or 2% every month. But we have observed this trend, so it's very good news. And we also observed that the trial... companies, maybe I had just mentioned, can charge lower commissions and encourage direct connection between the corporate members and our hotels. And thirdly, regarding the business demand, we have a very small survey with our business travelers. They are more cautious to the safety, and not only the safety of staying in hotels, but only the safety of the good when on their business travel. So we think that the cooperation with our food business, food and beverage, and with hotels also help our hotels to accommodate our, to serve our guests the better than ever before. Thank you, Billy. Thank you for your question.

And Megan appreciated that. Also, Billy, you probably can see that in order to assist our franchisee better, we actually have placed more weight on Megan's role to be coordinating the entire company's sales and marketing activities and have a direct connectivity with all the companies major businesses, and at the result of this concerted effort, as Selina reported to you, they see an increased contribution, increased reservations from our businesses, from our business travelers.

Thank you. I have a lot of questions regarding to ADL. And so right now, I think we are about 15% or 17% below the level of last year's in terms of ADL. Occupancy seems to have recovered quite well. But in terms of ADL, can you elaborate a little bit more what dragged the ADL in terms of whether it's because there are a lot of promotional packages out there or actually the regular the rackets actually coming down as much. And my follow-up question on that is, how long does it take to get back to the normal level? Like, do we need to see, like, for 15% decline in the past, if we look at other downturns, once the rate is down, it will take a few, a couple years or even longer just to get it back to where it was But this situation could be different. Do you think there's a chance to get back to where they were very quickly once the demand there, or do you still need to take a gradual approach to bring the ADL back up?

Billy, that's a great question. We studied this because clearly from the PPT page 7, the number, that's the page I discussed, If you look at that chart, it's quite interesting. Supposedly, we have the worst quarter in Q1. Yet, if you see the Q1 ADR by the industry, I'm just talking about by STR monthly data, the Q1, the ADR dropped only 17%. But we're supposed to have a Q2 recovery. However, the Q2 of the entire industry the ADR dropped almost 30%. And that's very natural for the hospitality industry because the entire industry sometimes takes time to respond to this shock. And in the first quarter, I think the industry, a lot of hotel managers said, probably have not responded quickly by adjusting the ADRs to attract the customers. Even some of the thinking behind it is, even if you lower the ADR, you are still not able to get the guests. So the adjustment of the ADR as a tool to compete online and offline, and slowly, it was slow. By second quarter, during the recovery, you see a reduced demand. This is very elastic. And sometimes when you take the demand, 5%, the ADR sometimes drops 10%. And I think our industry still have that tradition and that we have to lower the ADR to compete. And all it will take is for one hotel to lower the ADR, lower the rate to attract the business from the other, started the price war. And we are trying to hold on because we always have a value price to products and services. I think that that's why you can see that our ADR compression is much lower than that of industry and by basically just two-thirds. And we are 33%. lower in terms of impact and less impact than the rest of the industry but unfortunately believe that's the industry's trend and that tradition and we are not able to stand alone to reverse that course because our competition reduced the rate and that our customers were naturally, including our individual members and also corporate members, said, okay, what can Green Tree give to us? Because they do compare and so do the price shoppings. So we have to compete in the industry and we hope the entire industry will quickly adjust back to ADR, but That is why I said earlier in the third and fourth quarter, we should be able to see our occupancy recovery more rapidly than the ADR recovery. Only when the occupancy achieved, the entire industry achieved to the same level or similar level of that of last year, then I think we'll see the other hotels will increase the rate as a whole, and the industry's ADR will be lifted. And for the time being, we have to be sensitive to the needs of our corporate clients and of our individual travelers. And so you brought up a really great point. dilemma for the industry, and we're all fighting for that, Billy. So that is our analysis of that ADR dilemma.

During the down cycle when the occupancy rate is low, we think hotels are more likely to reduce the room rate. to attract more guests. This is the economical rule caused by supply and demand. And our green trees hotels are also affected and ruled by this rule. But different from most hotels in the industry, as Alex just mentioned, green trees ADR decrease was less than the average industry level. I think there are three reasons. The first one, according to its individual members and corporate clients, contributed more than 80% of our room night sales. So the room rates to our members are always lowest, fairest, and most stable. And from the viewpoint of our hotel, our franchisees, If the cost of hotel operating is too high, so there's little room for the hotels to adjust their room rate. And the green trees cost is more competitive in the industry. So even we have a little discount on the room rate, the hotels can even make break even or money. And secondly, hotel room rate setting and the participation in campaigns are all organized and supervised by our company sales and the marketing department. That's why our ADR are more stable than the average industry level. And finally, I would think whose effective occupancy recovers faster and whose room rate may recover faster as well. Thank you, Billy.

Thanks a lot. Thanks, Anic and Selena and Megan. Really appreciate your insights.

Thank you. Your next question comes from Bruce May from UBS. Please go ahead.

Good morning, management. I only have one question about numbers. So could you please give us a breakdown of the rail park rules by city tiers and different hotel segments?

Yes, Bruce, this is Lina. In terms of city tiers, We observed hotels in tier 3 and smaller cities resumed faster than others in the second quarter. We think primarily due to two reasons. First one, different from big cities, whose major guests are cross-provincial business travelers. The hotels in the smaller cities accommodate more local and short-distance guests mainly. So these kinds of deaths were affected the least during the COVID-19. And secondly, impacted by the new cases happened around the middle of June. Some big cities operation performance were impacted as well.

Selena, can I interrupt for a second? that do you have the, just happen to have a numbers breakdown by those tier, by the first, second, third tier cities, the raw power change, that change percentage, and you can share that with Bruce.

Sure. The raw power change in tier three, the over year decrease was 27%. And in tier two cities, the Red Park decrease was 42%, and in Tier 1 cities, the yield rate decrease was 50%.

Okay, thank you. Can I also know the different Red Park goals for the hotel segment, different hotel segments, such as mid-scale, up-mid-scale, and economy?

Sure. For the red part, year-over-year decrease for economy segment was 39%. And for our middle scale, the year-over-year decrease was 30%. And for the middle to upper scale, the year-over-year decrease was 29%. And for the luxury hotel, the year-over-year decrease was 54%.

Thanks, Carly. Thank you.

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Selina Yang for any closing remarks.

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 plans to visit us please contact us. Thank you, everyone.

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