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

Hello, ladies and gentlemen, and thank you for standing by for Green Tree's third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question and answer session. As a reminder, today's conference is being recorded. I would like now to turn the meeting over to your host for today's call, to Mr. Rene Vangestein of Christensen, Green Tree's investor relations firm. Please proceed, Rene.

Thank you, Matt. Hello, everyone, and thank you for joining us. Green Tree'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. We also posted a PowerPoint presentation that accompanies our comments on the same IR website. On the call from Green Tree, Mr. Alex Xu, Chairman and Chief Executive Officer, Ms. Celina Yang, Chief Financial Officer, Ms. Megan Huang, Vice President of Sales and Marketing, and Mr. Nicky Zheng, IR Manager. Mr. Xu will present the company's third quarter 2020 performance overview, followed by Ms. Huang, 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 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 and 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, intends, 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. 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 conference call, are current as of today's date. The company does not undertake any obligation to update the 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 third quarter earning call today. Let's start with the highlights on slide number five. Our business continued to recover during the third quarter despite some resurgence of the infections in certain regions. Compared with the second quarter 2020, raw power increased 32.9% to 120 RMB. Total revenues increased 23.6% to 266.9 million RMB. Non-GAAP adjusted EBITDA increased 46.6% to 134 million RMB with margins improved to 50.2%. Core net earnings non-GAAP increased 23.8% to 92.4 million RMB with margin 34.6%. We expanded our need for upskills and the Luxie brand further. Of all new openings this quarter, 28.4% were made to upscale and luxury hotels. That's a historical high for quarterly new hotel openings. This year has been like no other in the history of the Green Tree. While year-over-year comparisons are always important, a look at a few key metrics for the first three quarters will help to realize to considerate progress we have made since the pandemic hit our businesses back in January. Let's take a look at slide number six. Total revenues, income from operations, adjusted EBITDA and non-GAAP, and the core net earnings. Non-GAAP all increased consistently for three consecutive quarters since the lows in Q1 with improving margins. Let's look at slide seven. Our blended ADR decreased 12.9% year over year to 151 RMB. Occupancy dropped to 79.1%. And raw power decreased 19.8% to 120 RMB. If we exclude hotels being used for quarantine, Ropar for same hotels decreased 16.3% to 125 RMB. Nevertheless, we continued to extend our market presence across China. We opened 162 new hotels during the third quarter for a total of 4,195 hotels in operation. We ended the quarter with 1,110 hotels in our pipeline, up 70.2% year over year. Total revenues for the quarter were 266.9 million RMB, a 8.6% decrease compared to the third quarter of 2019. Gross profit decreased 22.5% to 158.8 million RMB. Net income decreased 16.2% to 85.6 million RMB. A non-GAAP adjusted EBITDA decreased 24.3% to 134 million RMB. Net income per ADS that's basic and diluted decreased 20% to 0.81 RMB and the core net income per ADS decreased 32.1% to 0.90 RMB. Let's now turn on slide number nine for an update on the impact of the COVID-19. China has been balancing pandemic controls and the economic recovery with targeted measures introduced to help the company safely restart the business and the people get back to their normal daily lives. As a result, we have seen a sustained recovery in domestic tourism and business, leading to improved occupancy rate, ADR, and well-parl during the third quarter. Thanks to the tireless work and dedication of our staff and franchisees, and the strong support of our loyal members. In third quarter, Green Tree again outperformed the hospitality industry in China, and our operating performance continued to recover. Further, thanks to government policies designed to encourage domestic consumptions, China showed a strong signs of economic rebound in fourth quarter. For an example, The October Golden Week saw over 637 million domestic tourists, or 79% of the last year's level, which generated $466.6 billion in revenue, a 69.9% of last year's level, according to China's Ministry of Culture and Tourism. These figures point to a considerable improvement compared to June's three-day Dragon Boat Festival, which brought only 48.8 million tourists, or roughly half of last year's level. Let's turn to slide number 10. Riding on the recovery, we continued to optimize our brands, products, and technology to capture domestic travel demand. we focused on better serving our guests and supporting our franchisees. We strengthened our cooperation with travel management companies and expanded the joint promotions with the local merchants. As a result, our occupancy rate approached 85% during the October Golden Week, nearly the same level as last year. In November, our occupancy rate rebounded to nearly the same level as of last year. And the growth part recovered to almost 95% of last year's level. That's for both October and continued recovery till November. In summary, we were glad to see a meaningful improvement in the third quarter of 2020. As we returned to our more normal economic activities and living conditions in mainland China, we continued to serve and protect our guests, our employees, constantly adapting our operations and marketing campaigns to the evolving conditions, while still managing to increase income from operations, net income, and adjust EBITDA. Our margin continues to rise thanks to our flexible cost structure and the measures we have implemented since the outbreak of COVID-19. Having gone through the challenges of the first nine months of 2020, we believe we continue to execute our growth strategy and further enhance our partnership with our franchisees because we have accumulated extensive experience We are well prepared should the pandemic last much longer, and we are more confident in our ability to consistently achieve a profitable growth and create long-term value for our shareholders. I will now pass the call over to Megan Huang, who will summarize our business operations for the third quarter. Megan, please go ahead.

Thank you, Alex. Moving to slide 12, at the end of the third quarter, we had 4,195 hotels in operation, 35.2% higher than a year ago. 37 of these hotels were lead-in operating, or LR hotels, and 4,185 were franchised and managed, or FM hotels, while the mid-scale segment remained the core of our business with almost 64% of all our hotels. Last year, we began to expand into both the higher-end and economy segments. This expansion continued in the third quarter, during which the number of mid- to upscale and luxury hotels increased to 8.5% of the total portfolio, and the economy segment grew to 27.5% of the total portfolio. We have also increased our dominant position in Tier 3 and smaller cities. which were home to 67.3% of our hotels at the end of the third quarter. These strategic moves enhance our ability to cross-market our different brands and locations. On slide 13, you can see that in the third quarter, we opened 162 hotels, compared to 181 in the third quarter 2019. One hotel was in luxury segment, 55 in the mid- to upscale segment, 80 in the mid-scale segment, and 36 in the economy segment. Six were in Tier 1 cities, 31 in Tier 2 cities, and the remaining 125 in Tier 3 and smaller cities in China. Nearly 30% of newly opened hotels in the third quarter were luxury and mid- to upscale hotels. During the third quarter, we also closed 33 hotels, three due to brand upgrades, 26 due to noncompliance with our brand and operating standards, and four due to property-related issues. So that meant we added 129 hotels to our portfolio in the third quarter. Slide 14 shows the growth in our pipeline of new hotels. Despite COVID-19, our pipeline increased from 652 on September 30, 2019 to 1,110 on September 30, 2020. Around 41% of these hotels are in the mid-scale segment, about 34% in the economy sector, and around 25% in the mid- to upscale and luxury segments. Slide 16 shows the quarterly operation performance trends. As you can see, compared to the second quarter, Red Power for our LO hotels increased to 121 RMB. Red Power for our FM hotels increased to 120 RMB. ADR for our LO hotels decreased to 171 RMB. ADR for our FM hotels increased to 151 RMB. occupancy for our LO hotels increased to 17.6% and occupancy for our FM hotels increased to 79.3%. As Chairman Hsu noted, Red Car continued to rebound from second quarter levels. In addition to COVID, our LO hotel performance was impacted by six LO hotels in ramp-up data. Turning on slide seven, we now have about 52 million loyal individual members and 1.61 million corporate members, up from 49 million and 1.56 million as of June the 30th. During the quarter, around 92.5% of all reunites were sold directly, primarily due to our individual and corporate members. With that, I'll pass the call over to our CFO, Suning Yang.

Thank you, Megan. Please turn to slide 18. During the third quarter, total revenues decreased 8.6% year-over-year to 266.9 million RMB. Total revenue from FM hotels decreased 8.9% to 200 million RMB, while total revenue from Aero hotels decreased 7.9%. to 66.8 million RMB. The decrease was primarily due to the impact of COVID-19, which resulted in lower red costs, as well as partial reduction and substantial sub-ase income refinances. Nevertheless, this represents a 23.6% substantial increase over the second quarter total revenues. Time rate due to RAPTAR goes from 90 RMB in Q2 to 120 RMB in Q3. Turning to slide 19, third quarter hotel operating costs were 108 million RMB, up 23.8% year-over-year. The increase was mainly attributable to higher rents, higher depreciation and amortization and consolidation of operation costs of urban, which was acquired in November of 2019. In the third quarter, there are three ARO hotels newly opened in operation and five ARO hotels under construction, which accounted for the main increase of hotels' operating costs. Excluding ARO hotel operating costs, Costs related to FM hotels and others increased 0.8%. Primary due to the expansion in our business and the number of FM hotels. Hotel operating costs increased 13.8% over Q2 levels, mainly due to more RO hotels coming into development. Selling and marketing expenses were 21.3 million RMB in the third quarter, a year-over-year increase of 2.3%. The increase was mainly attributable to the company's first attempt to cooperate with Internet social platforms, which became prevalent because of COVID-19. Excluding the above-mentioned advertising fees, Standard marketing expenses in this quarter decreased 40.4% year-over-year and increased 3.3% quarter-over-quarter. Q3 general and administrative expenses were 44.8 million RMB, up 12.3% year-over-year. The increase was primarily attributable to higher depreciations and amortization of our property and equipment, increased investment in research and development, higher consulting fees, and consolidation of expenses from Argo and Urban. Compared with second quarter, GMA expenses decreased by 7%. Overall, total operating costs and expenses grew 17.9% year-over-year to 174.5 million RMB. Excluding the RO hotel operating costs, total operating costs and expenses increased 6% compared with one year ago. On slide 21, you see that gross profit decreased 22.5% year-over-year to 158.8 million RMB in this quarter. Gross margin decreased from 17.1% to 59.1%. Net income decreased 16.2% to 85.6 million RMB, and net margin decreased from 35% to 32.1%. All these year-over-year increases were primarily due to the impact of COVID-19. Compared with Q2, gross profit increased by 31.2%, and gross margin increased from 56.1% to 59.5%. Net income decreased by 8.6% quarter-over-quarters, and the margin decreased from 43.4% to 32.1%, mainly due to the decline in gains from investment in equity securities compared with the second quarter. On slide 22, you can see that adjusted EBITDA decreased 24.3% year-over-year to 134 million RMB. and just the EBITDA margin decreased to 50.2%. Core net income decreased 31.5% to 92.4 million RMB, and core net margin was 34.6%. Compared with Q2, just EBITDA increased by 46.6%, and just EBITDA margin increased from 42.8% to 50.2%. The core net income increased by 23.8%, and core net margin was 34.6%. Please turn to slide 23. Third quarter net income for ABS was RB.81, that's US dollars, 12%. Down from early... per ADS of RMB 1.01 one year ago and down from RMB 1.01 in the second quarter of 2020. That's mainly due to the decline in cash flow investment equity securities since the second quarter. Core net income per ADS, basic and diluted, not yet, was RMB 0.90, that's US dollar, 13 cents. down from RMB 1.32 a year ago, up from RMB 0.72 of the second quarter of 2020. Let's now take a look at slide 24. As of September 30, 2020, the company had total cash and cash equivalents, reduced cash, short-term investments, investment equity securities, and high deposits of 1.8 billion RMB, compared to 1.7 billion RMB as of June 30, 2020. The increase from the second quarter was primarily attributable to cash inflow from operating activities, changes in sale value of active securities, and dividends from active securities. an offset by loans to franchisees, investment in the decoration of air or hotels, and cash outflow for acquisition fees. The cash and cash equivalents provide us with ample resources as we continue to evaluate potential investments and to support our franchisees. On slide 25, As Alex mentioned, COVID-19 has had a significant impact on our business. So far, in 2020, our operations are in line with our previous forecast. Assuming the pandemic remains out of control in China in Q4, we expect decline into the revenues of 12% to 15% for the full year 2020 compared to 2019. This concludes our prepared remarks. Operators, we are now ready to begin the Q&A session. Thank you.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchstone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Justin Kwok with Goldman Sachs. Please go ahead.

Hi, good morning. Thanks for taking my question. Perhaps I'll have three questions, one on the opening, the other on REFA, and the last one on the M&A side. Perhaps the first question on the opening. It seems that the number of openings during the third quarter was not as high. Would you mind to give some color on the fourth quarter opening or the net opening side and also your plan for the coming year in 2021, given that now you have over 1,000 number in your pipeline? The second question regarding the REF, it's very nice to see that. As you mentioned, in the month of November, the occupancy is already back to where you were before the COVID. But on the room rate side, where are we at the moment? And what's your outlook for the fourth quarter on the room rate? And whether you think that into 2021, we are already back to the pre-COVID level and we should be looking for some growth in RESPA from the 2019 level already. And the last one on M&A, I think, as you mentioned, you still have 1.8 billion RMB of resources. We are now like 10 months into the COVID. Are you actually seeing more targets coming out or you think that the government measures have been helping the situation too much that there's actually no fire cell or no viable target for you to look for at this stage? Thank you.

Okay, Justin. In terms of later, I would like to ask you a little bit more clarification on the second question. Regarding the first question, the third quarter openings is a little bit soft for several reasons. Green Tree has always been a responsible company. We want to build long-term opportunities mutually beneficial relationships with our franchisees. We want to build a continued long-term goodwill with our franchisees. And that we are not going to sacrifice franchisees' profitability and increase their risk for the sake of adding hotels to our portfolio. You know, our portfolios consist of primarily standardized hotel products and services. That requires a considerable amount of investment from the franchisees. And knowing second quarter, third quarter, the revenue, the raw power was still 20% down and close to that of the normal level. And if you put the hotel open at that time, you know, they are not going to generate generate enough yield. And so I think that if you can push the openings, I think that may create not a good relationship in the long run. So we've been very considerate in that end. We're trying to, to the extent that we don't have to open, we typically do not entice or encourage and push them open. And to the extent that they are able to negotiate an extension with the owners, to the extent that they're leaving the hotels, or if they own the asset, then they can take a little bit more time. So that's our position and philosophy. And so we try to maintain a higher successful rate, a success rate for our franchisees, And so that is why I think in the first, second, third quarter, you will see that our opening is a little bit soft. And the green tree has always been the one that probably got the reputation of the market. We're trying to pay attention to the franchisees' financial health. Having said that, and that there are hotels and they already leased, sooner or later they're going to open. So I think that at this moment, we projected in the fourth quarter, we're probably opening more than 200, more or less probably 220 in that plus or minus range. And if there is no really resurgence of the cases. And so now I think that with our operation, with the green cheese operation, especially on the November's performance. In October and November's performance, we'll continue to see a dramatic increase over our third quarter. Third quarter was still down like 16% to 19%, depending on how you looked it down the world part. But in the fourth quarter, we're already only, I think, in less than 5% consistently, and already achieving 95% or more over the same period of last year. So we're more confident that we are able to help the franchisee to realize a good return, a normalized profitability. So that's the hotel opening of the first quarter. Now, Justin, on the world part, so can you rephrase your question so that I'm able to provide a better answer to you?

Sure. First, thanks for the colour on the opening. On the rapid side, as you mentioned that the occupancy for November is already back to the pre-COVID level on a year-over-year basis. Where are we for the room rate? Are we still double digit down on the room rate at this stage? What are you looking at or what are you expecting for the room rates into the later part of the year or early 2021? Because I think overall there are some investors concerned that given the international travel is still closed, with the high-end hotels, the room rate still down easily 20% year-over-year, all the way to the mid-end or to the economy, there will still be some pricing pressure, at least for the next couple of months. What are your expectations on the room rate? Thank you.

Okay, Justin, on the raw power side, in our occupancy rate, we see a pretty much very close to resume for the last year's level as a green tree portfolio. And the raw power, we are down about 5%, less than 5% on the same period. That's primarily resulted from the decrease in ADR. So the room rate was about 5% down from last year, so the same level. And so, in other words, the room rate recovered to 95%. And occupancy almost recovered in our hotel portfolio to 100% of last year's number. So we, at this moment, we expected, you know, the same trend will continue to the year end. I think thanks to the rigorous regulations you know, that the pandemic control policy and procedures by the government, I think that they have done, I think that our Chinese government has done a great job in controlling the spread. And so for the next year, it is our best hope that you know, that China will continue to recover. And with the domestic consumption resumed to the normal level, what we're lacking is the international cross-border tourism. And so I think that room rates may, because the five-star luxury hotels may be depressed a bit, which will also depress the rest of the world spread to the rest of the hotel segment. But we are confident that the domestic consumption, and especially at our price range of a value-priced hotel, will be robust. And we're looking forward to really a great year of next year for domestic China. For the surroundings, for Southeast Asia, for other countries, we have a few hotels. We do not have a lot. we think it will take a while off because it takes the vaccine for quite some time to penetrate the larger population and to increase the opening of the cross-border travels and tourism and the cross-border trade. So that's our every single internal projection. And also maybe anything else to add. Okay. And so regarding the third question you have, Justin, that we are open. And I think that we believe there are smaller local brands that are running into issues. I think people are still taking wait and see. And the hotels opened this year and the last year. our continued experience pressure from the return of the investment, and so especially for a smaller regional brand or smaller hotel groups. So we keep our eye open for that. We have to wait and see, but we think that there will be opportunities for us to explore. And this pandemic created some uncertainties. And I think we'll benefit, we'll typically will benefit for those companies that are putting this very disciplined approach.

Our next question comes from Bruce Mee with UBS. Please go ahead. Bruce, your line might be muted.

Sorry, I muted my line. Thanks, management, for taking my questions. So I have one question on the long-term hotel openings. So I see some other major Chinese hotel groups, they listed their hotel openings for the next three years, and even some companies, they plan to double the number of hotels in operations in the next three years. So My question is, will GreenTree also speed up the openings? And if yes, which segment or which brand will be the main ghost driver? Thanks.

Bruce, thanks. The hotel openings is our main focus even in the past two years and in the future. As I said, we want to be a responsible company that we want to open the hotels, only the possible hotels for our franchisees because we're focused on the long-term relationship, long-term growth, long-term relationship with our franchisees. And we have a four-year, four and a half years plan by 2024. We also plan, I believe, through the... organic growth and through our M&A, we would like to also, we think through our natural growth and that our franchisees continue the opening of new hotels and also double our hotel portfolio and trying to grow to 10,000. But again, we want to maintain our the beauty of our responsibility to our franchisees, long-term profitability. As you can see, our success rate in the hotel openings and by matching the hotel closure, because every time you close a hotel, it's an active impact to the relationship with the franchisees. And then you also waste a lot of the expenditures and assets. And it's a bad impact to the environment as well. And it's just wasteful. So we're trying to be very responsible in that end. And through that process, I believe we can easily, if we maintain this responsible approach, our portfolio will increase also in a very, very meaningful way. So... So to summarize our growth plan, so that's by 20, you know, in four years, that's where we want to be. Thank you.

Our next question comes from Zhisheng Ou with CLSA. Please go ahead.

Alex, Selena, Megan, and Nikki for taking the question. I have two questions, and I'll go one by one. First one is on your quarter 20 franchise hotel take rate. So I think you mentioned that your franchise revenue this quarter was declining by 20%. But I think in terms of average number of hotels, year-over-year basis, your number of rooms increased also by 20%. such a 10% franchise revenue yield decline if our take rate was stable. So I was wondering if you have done any more waiver on franchise management fee during the quarter. Thank you.

I think that, okay.

Hello, Jicheng. Hi, this is Selina. Yeah, it's a good question. Yet, considering our franchisees are facing more difficulties in the COVID-19, some of them are planning to lower their take rates or raise their take rates. Here now, we have some criteria when we are receiving such kind of applications. For those franchisees which have done a good job in the previous years and and has a standard hotel decoration, we are considering to extend some of their franchise fees and ongoing fees. That's why the tip rate since the second quarter and this quarter looks a little bit lower than before the COVID-19.

Okay. Okay, sure, thanks. Could you maybe elaborate more on what the criteria are and is there any differences across your brands and do you plan to get the franchisees pay what they should over the next years or are they just one-off waivers that will not be recurring fees going forward?

Thank you. To our statistics, Most of the applications coming from the brands including Green Tree Inn and some mid-trap-scale hotel brands including Green Tree Eastern and GME, GYA, and VX, especially for those hotels newly opened during the COVID-19. Secondly, in their daily operation, they have some standards and the rules to follow. And for those hotels, especially for those hotels that have a life more than one year, above one year, according to their historic performance, if they did a good job, so for those kind of hotels, they're more likely to get approval for the extension of their ongoing fee. So those are basically two criteria for their application.

Okay, so what it means is that the waiver is an extension, right? Not another waiver, actually.

Let me add a couple of things. I think the revenue for Netherlands is not dropped to 20%. The revenue for the franchise, I think, only dropped about 10%. So there's about roughly 10% of the gap. And that is attributed to... A few reasons. One is there is a number of newly opened hotels. We have a waiver because they are not profitable. We encourage them to open. And the second reason is because we also have our hotel consolidated have a lower flow power. And the mix changes. a bit so a combination of them resulted in uh it would not you know that the 2020 are full offset so again so that's uh uh one of uh you know several reasons that factors contribute to that okay oh thanks yeah uh so maybe i'll go to the second question i have so um

according to what you said just now on the call, I think your red hot recovery in November was actually and what our peer companies say. So may I understand if this is related to the differences across different city tiers? For example, maybe tier three, tier four cities are recovering better in November compared to October. So is that related to that or do you see any that could support anything on a peer comparative basis that you are performing better than your peers?

I can add some color to that because we analyzed that our recovery, I think that across the board. And we have... For instance, you know, we indicated we take a number of measures on the sales and marketing side, thanks to Megan's team, that they are more aggressive, you know, like travel management companies, and also that increased our sales and marketing in certain online, including the, you know, with certain internet companies cross-promotion. So all of them, I think, resulted in a better occupancy in the November. So depending, you know, the tourist cities have breakdowns. I'll leave that to you.

Thank you, Alex. Yes, exactly like as you mentioned, Jisha, our year-over-year decrease in November was almost the same year-over-year decrease as the October, and it didn't differ too much. In terms of the city tiers, I'd like to share our statistics. In the third quarter, our real-time decrease in Tier 3 was least, and that's about 8.8%. Talking about November? Yeah, I see. For the November and December, the same trend, that the real rate decrease in tier 3 Three was still the least amount of all the CD tiers. And four, in terms of the segment, real-power decrease in the middle two up still was least for our organic branch.

Okay, great, thanks. I may have a follow-up just on the previous question, and I may go back to the queue afterwards. So just when Alex, you mentioned that you have a long-term, let's say, target for 2024, to have 10,000 hotels that means actually you may need to reach more than 1,000 hotel net openings per year to hit that target so that actually implies that you would be increasing your hotel openings per year over the next four years so you are saying also that you are a responsible company that you don't want your franchisees to take on too much leverage or any risks before opening the hotel so Actually, you are also bringing your guidance, so what is the confidence behind that, and where do you see the key growth drivers over the next four years?

Thank you. Thanks, Vincent. We just looked at the hotels in the pipeline, and we also recently observed another trend, We have not focused on the so-called soft brand conversion. We have observed and we also have some industries demand in that end because our technology systems, our overall franchise and management fees, ongoing management fees, are still the lowest in the industry. So we're the most valued brand. And so the next few years, I think especially the next year, we should be able to see some more demand from the newly constructed hotels require the brand support, technology support, and the sales and marketing support. So we think there will be more coming from that end. And secondly, that we already have a lot in the pipeline. And so we are also evaluating adding more franchise developers. And so I think the market is – the depth of market is huge. there's so many hotels, you know, non-branded. We still think that the market, especially on the many second, third tier cities, there's still so many local and non-branded hotels there. And we do the statistics all the time because we have franchise developers in all major cities. Every day we accumulate the data And that even in the second, third tier cities, in the block of hotels, you see typically that even in the second tier cities, you see 50% of them are no brand. And third tier cities, you see that 60%, 70% are no brand. And the hotel operation, I believe in the future, is going to be more and more brand-centric because The technology for a successful hotel operation and the connectivity it requires is beyond an independent hotel operating approach. So we believe our value proposition is right there. And we want to be responsible for our franchisees' profitability, but also the demand is there. The demand that we are, you know, we are, I think we are in the past two or three years, we're improving all the platform technology connectivities. And you can, I think we are very glad to see October, November's performance demonstrated. All of them are paying off as we become, you know, the recovery become more normalized.

Our next question comes from Billy Ng with Bank of America. Please go ahead.

Thanks. Good morning. I think, first of all, congratulations on the solid results. And I just have one follow-up question. I think some of your peers mentioned about the competition dynamic change. In particular, supply for the overall industries has come down. Have you seen or have you seen any data or have you seen anything on ground that suggests that supply coming down, competition become a little bit less and also in terms of signing new franchisees, have you seen the requirement, the attitude different and whether as many suggest that they want to team up with a big franchise company or brand company like you guys.

Okay, Billy. When you say supplies coming down, you mean supplies of new hotels, that's for sure. We have just like that in Israel. Without COVID, we probably had a lot more supplies and more opening of hotels. The franchisees, hotel owners are more cautious right now. And so I think the rent of the hotels is also coming down a little bit. So... that will create a little bit more pressure probably on the hotels, at least last year or the year before. And so the supply of hotels is definitely, I think, that is less than compared without COVID. But that also means the supplies for new hotels are standardized of products that it's also become less. So I think the investors may feel less comfortable to spending more to build new hotels. So we have a different dynamics in terms of brand competition, competition between the branded company the demand for support in terms of certain CE waivers. For instance, the initial application fees and also the first year opening during the ramp-up period fees also have an impact in that end. But overall, we believe the dynamics change to favor to more establish the company with more resources. And we see, we also have observed a lot of smaller company, local brand, that either run into major loss or close down. So that the market conditions favors to the larger and more established platform for the near future. If the situation, I think the next year will probably continue to be in the not fully recovered mode. And so the opportunity will be there for us to take more opportunities.

I see. And just one follow-up question. Actually, when I ask supply, I also mean including the existing hotel infantry across the the different companies and across the nation, do you see overall number of hotels coming down too? Obviously not Printree, but overall maybe non-branded or other smaller branded hotels?

That's a great question. That's a great observation, by the way. Yes, indeed. So in the past 20 years, there are many, many properties before that are zoned for industrial or warehouse, and they're being converted into hotel use. but the regulation of the looming becomes tightened quite a bit. In a lot of cities, after your initial permit expires, they no longer extend. The city no longer extends this permit. So those hotel properties that are zoned differently, especially the industrial and the warehouses and the offices, they may have to be closed permanently and go back to the normal use. So we see that kind of shrinkage in that end. And on the other side, there's, you know, the suburban area new development. The city may also require the certain developers to having a portion of their development to be used for the hotel and the apartment. So we are also trying to partner with some of the real estate developers in China, and with a strategic partnership where we can even, when they build a new development, and they can supply us, have given us the first right of refusal to do the hotels there. So that's a very, very good observation, Billy. And it started with, I think, the major cities. I think that trend will continue. So the zoning regulation will be more strict, which is really beneficial to hotel industry in general. Thanks.

Our next question comes from Nate Deng with China Renaissance. Please go ahead.

Hi, management. Thanks for taking my question, and congratulations to the strong result in the third quarter. I just have a small question regarding the recovery of leisure segment because I think the business customer segment is recovering pretty good. So what is the current breakdown between leisure segment and business segment in terms of room distribution and how does it compare with the normal years like 2019?

Do you have the specific numbers for So we didn't, because our leisure travelers are not, you know, didn't consist of a major component in our portfolio. But we did observe, you know, in cities where we have like Huangshan, The previous three quarters, the previous two quarters, quarter one, quarter two, the performance was, you know, that was quite, I mean, suffered quite a bit. And the third quarter recovered sharply, but still, and that subdued, and the impact is a lot more, I think, is worse, still continue to be worse than, let's see, the major cities and the third, fourth tier cities in the, for the business travelers or for the essential business travelers. And so that's, we don't, I didn't have that number right now in front of us.

Thanks, Alex. So actually you mentioned the occupancy rate has already caught up with last year's level. So may I assume this is because of more business travelers in the recent months and looking into the future if the leisure segment is also recovering. So we are expecting actually a better accuracy rate versus the 2019. Can I think this way?

We do not know how that's the leisure side because I think that the... the travel from our market readings the leisure side is always a little bit lagging behind and that our unless the cases are totally under control worldwide we still think that the leisure travels will continue to be impacted

Thank you, Alex. Thanks for management.

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

In closing, on behalf of the entire Green Tree Management team, we thank you for your interest and participation in today's course. If you require any further information or have plans to visit us, please contact us. Thank you all.

Thank you.

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