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 GreenTree's second quarter 2021 earnings conference call. At this point, 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 call is being recorded. I would now like to turn the meeting over to your host for today's call, Mr. Rene Vengestein of Christensen, GreenTree'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. 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. Celine Hayang, Chief Financial Officer, Ms. Megan Huang, Vice President of Sales and Marketing, and Mr. Nicky Zhang, IR Director. Mr. Xu will present the company's Q2 2021 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 Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. The forward-looking statements can be identified by terminology, such as may, will, expect, anticipate, aims, future, intent, 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 the 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.

Thanks, everyone, for joining our call today. Before we begin, Let me mention that because of the impact of the COVID-19 on our operations during the second quarter of 2020, for this reason, we will occasionally during this call provide Q2 2019 numbers where we believe they provide a meaningful comparison. Please turn to slide five. We are glad to report that our strong performance continued in the second quarter. Compared with Q2 2020, growth power increased 49% to 134 RMB. Total revenues increased 60.7% to 347.1 million RMB. Income from operations increased 42.5% to 89.3 million RMB with a margin of 25.7%. Net income decreased 14.4% to 80.3 million RMB with a margin of 23.1%. Non-GAAP. Adjusted EBITDA increased 44% to 111.2 million RMB with a margin of 32.1%. And the earnings per share decreased 22.1% to 0.79 RMB. Total revenues exceeded Q2 2019, however, income from operations, net income, and adjusted EBITDA were around two-thirds of Q2 2019. This is due to the fact that for this year, during the first half, we opened 23 LO hotels, generating a loss of RMB 33.7 million during this ramp-up period. Twenty of these new LO hotels were added during the second quarter and are mostly located in Chengdu and Chongqing. As both cities are key development areas and our hotels are in premium locations, we expect that they will turn profitable in the not too distant future. Slide six provides more detailed numbers for total revenues, income from operations, net income, and adjust the EBITDA. Now, let's turn to slide seven. The second quarter saw a robust recovery in occupancy rate and the raw power compared with Q2 2020. This performance has been helped greatly by our continuous expansion into third-tier cities. In addition, the tireless efforts of our franchisees and employees and our local partners have helped us gain even more loyal customers who value and trust our brands. During the second quarter, our occupancy rate and world power had recovered to 96.9% and 96.2%, respectively, of their 2019 levels, a better performance than the industry average. Slide 8 reflects historical weekly vol-par performance and compares with 2019. During the second quarter, Travel demand gradually resumed as the pandemic was better contained and the life returned to normalcy. Especially during the Tom's Weekend Day and the Labor Day Festival, raw power recovered substantially month over month in April, May, and June. However, the recovery and the business moment Momentum were negatively impacted during the third quarter and in October. There were some resurgence of COVID-19 cases in Nanjing City and Jiangsu Province at the end of July lead to tightened travel restrictions, which inevitably negatively impacted the travel in the region. As a result, during the first week of August, Floral Park dropped to about 60.7% of its 2019 level, down from 106% of 2019 levels at the end of June. Recent COVID-19 outbreaks in several cities in China have similarly impacted domestic travel again. resulting in a drop in flow power during the first week of November to about 81.3% of its 2019 level, down from 99.9% of the 2019 levels in the second week of September. Now, starting with slide 10, let's talk about strategy and execution. First, We are adding more MED to upscale LO hotels in the strategic locations. Secondly, we are further expanding our hotel network into Tier 3 and the lower cities. Thirdly, we are investing in information technology innovation, creating smarter hotels. And finally, as we mentioned, we are also trying to penetrate to the fast-developing regions such as Southwest and the southern part of the China. Now, let's take a look at the slide 11. During the quarter, we accelerated our expansion into the mid-range and higher-end market in Central, Southeast, and Southwest China. We opened 20 OO hotels. This year, like previous year, we were able to secure choice locations at economically attractive rent price. All of these L.O. hotels are situated within popular transportation hubs, central business districts, or government centers. We believe they will act as anchor hotels and will attract new franchisees to our network, and they will act in the future as our model hotels. Now please turn to slide 12. We have been continuously growing our high-end segment over the past few years, and by the end of the second quarter, hotels in this segment had increased to 9.9% of our total portfolio, compared with only 2.2% in 2019. We plan to open even more hotels in the mid to upscale and the luxury segment this year. Please turn to slide 13. Over the past four years, the vast majority of our new hotels openings have been trying to slide into tier three and the lower cities with 70.6% for all new hotels in our current pipelines located in such cities. As a testament to the soundness of this strategy, the pace of recovery at our hotels in such cities has been faster than in other cities in most quarters. The combination of our existing footprint and our strong performance in these cities have given us a real competitive advantage to capture future opportunities in China's booming hospitality industry. Slide 14 highlights our innovative IT process. We are in earlier movers. We are earlier movers in our industry in upgrading to an integrated cloud-based management and AI-driven platform. I strongly believe that this is a solid foundation we need moving forward to ensure that personal data is securely managed in accordance with privacy laws and regulations. We are fully focused on developing smart and digital hotels to improve operating efficiencies for our hotel general managers and staff, ensure the reliability of our booking system, and deliver excellent customer service. The esports industry is now coming to China. We have established a strategic cooperation partnership with Tencent Games to further diversify our esports business. I believe that we have now more than 10 esports hotels in operation and also growing. Slide 15 shows higher growth in both our individual and corporate membership programs, which accounted for most of our 91.1% in direct sales in the second quarter. Individual memberships grow to 62 million, up from 49 million year-over-year, and the corporate memberships grow to 1.8 million. up from 1.6 million year over year we have one of the highest the percentage of room lag booked by corporate and the individual members in response to china's five-year plan for social and economic development initiatives we're exploring how the concept of wellness and the royal revitalization might be applied in our business, especially in terms of the senior cares and community care. We are determined to have a positive impact and contribute to communities by creating employment opportunities and raising the standard of living in these developing regions. In closing, I would like to thank our team franchisees, and the shareholders for their support. I would like to especially thank our local partners. Many of them have worked very hard during the pandemic period. They are Argyle, Urban, Kyrie, Manly, and all their team efforts. We have a strong pipeline and expect our positive recovery continue as effective government measures contain the resurgence of COVID-19. Moving forward, we are well positioned with our resilient business model to meet the renewed demand for domestic travelers. I will now pass the call to Megan, who will summarize our business operations in the second quarter. Megan, please go ahead.

Thank you, Alex. please turn to slide 17, which highlights the year-over-year rebound in our operating measures from the impact of COVID-19. Blended ADR increased 20.2% to 171 RMB, and the red part increased 49% to 134 RMB. We accelerated the expansion of our footprint across China, opening 201 new hotels in the second quarter. Moving to slide 18, at the end of the second quarter, we have 4,542 hotels in operation, 11.8% more than the year before. 63 of these hotels were leased and operated, or LO hotels, and 4,479 were franchised and managed, or FM hotels. while the mid-scale segment remains the core of our business with 64.2% of all our hotels. We continued our expansion into the higher-end segment. By the end of the second quarter, mid- to upscale and luxury hotels accounted for 10% of our total portfolio, while the economy segment remained stable at 25.8%. As Alex mentioned, We also solidified our already dominant position in Tier 3 and lower cities, where 67.7% of all our hotels were located at the end of the second quarter. This strategic advantage significantly enhanced our cross-market efforts. On slide 19, you can see that in the second quarter, we opened 201 hotels in China. compared to 111 in the second quarter of 2020. Two hotels were in the luxury segment, 43 in the mid- to upscale segment, 137 in the mid-scale segment, and 19 in the economy segment. Ten were in Tier 1 cities, 49 in Tier 2 cities, and the remaining 142 in Tier 3 and lower cities. 22.7 0.4% of hotels opened in the second quarter were in the mid to upscale and luxury segment of the market. The company closed 123 hotels, 83 due to noncompliance with the company's brand and operating standards. The remaining 40 were closed due to property-related issues. The company added 78 hotels to its portfolio. The number of hotel closures in increased due to hotels' noncompliance with the company's brand and license standards. Slide 20 shows the change of our quarterly operating performance. In the second quarter, Red Power for our LO hotels increased to 160 RMB. Red Power for our FM hotels increased to 133 RMB. ADR for our LO hotels increased to 219 RMB. and ADR for our FM hotels increased to 169 RMB. Occupancy at our LO hotels increased to 78.8%, and occupancy at our FM hotels increased to 72.9%. As Alex mentioned earlier, performance in the second quarter was positively impacted by gradually resuming travel demand as the pandemic was better contained. and life returns to normalcy, especially during the Tom's Weekend Day and the Labor Day festivals. With that, I'll pass the call over to our CFO, Linan Yang.

Thank you, Megan. Please turn to slide 21. Total revenues increased 60.7% year-over-year to 347.1 million RMB. The increase was primarily due to the sustained recovery in hotel operations from the impact of COVID-19 and our newly opened ARO hotels. Total revenue from FM hotels increased 37.3% to 217.7 million RMB, while total revenue from ARO hotels increased 132.2% to 116.9 million RMB. On slide 22, total hotel operating costs were 259.9 million RMB, a 67.6% year-over-year increase, and a 92.4% increase compared with second quarter 2019. In the second quarter hotel operating costs, were 164.4 million RMB, up 108.3%, compared with second quarter 2019. The increase was mainly attributable to the opening of 20 Aero hotels since the beginning of 2021, which resulted in higher rents, higher stock headcount and compensation, higher depreciation and amortization, higher utilities and consumer births, and higher rent-up costs. Besides, hotel operating costs in the second quarter of 2021 included costs from urban that were not consolidated in the second quarter 2019 numbers. Excluding the impact from newly opened air hotels in 2021, Our hotel operating costs increased 21.9% year-over-year. Selling and marketing expenses were 21.7 million RMB, a year-over-year increase of 18.9%, an increase of 32.7% compared with second quarter 2019. The increase was mainly attributable to higher staff headcount and compensation as well as the opening of 23 air or hotels since the beginning of 2021, which resulted in higher advertising expenses and travel expenses. General and administrative expenses were 71 million RMB, up 78.6% compared with the second quarter 2019. The increase was mainly attributable to the opening of 23 air or hotels since the beginning of 2021. Increased one-time consulting fees for exploring financial or investment alternatives as well as for capital market advice. And G and A expenses from urban which were not consolidated in the second quarter of 2019. Excluding the impact from newly opened air or hotels and one-time consulting fees, general administrative expenses increased 0.5%. Turning to slide 23, income for operations, defined as revenue minus total operating costs and expenses, was 89.3 million RMB, representing a year-over-year increase of 42.5%. The increase was mainly attributable to the sustained recovery RAPA, but was partially offset by the operating loss of our newly opened air or hotels in 2021, as there were our ramping up operations. Operating margin was 25.7%, compared to 29% a year ago. Compared with second quarter of 2019, income for operations decreased by 55.7%. And operating margin decreased from 51.4% to 25.7%. On the same slide, net income is 18.3 million RMB with margin of 23.1%. Adjusted EBITDA increased 44% to 111.2 million RMB Adjusted visa margin decreased to 32.1% year-over-year. Core net income decreased to 78.9 million RMB with margin of 22.7%. This decrease in net income, adjusted visa, and core net income are mainly attributable to the increased number of air-owned hotels, both newly opened and in the pipeline. Please turn to slide 24. Net income for ADS was 0.79 RB, that's US dollars, 12 cents. Core net income for ADS basically diluted. Now debt was 0.77 RB, that's US dollars, 12 cents. Let's now take a look at slide 25. As of June 30, 2021, The company had a total cash and cash equivalents. Restricted cash, short-term investment, investment in equity securities, and time deposits of 1.3 billion RMB, compared to 1.7 billion RMB as of March 31, 2021. The decrease from the prior quarter was primarily attributable to acquisition costs for our AeroHotels, loans to our franchisees, and property investments, offset by joining down bank facilities. We will continue to execute our growth strategy, including potential acquisition and further support to our franchisees. On slide 26, we didn't expect the significant impact which COVID-19 has had on our business in the second half of this year. So we expect total revenues for the full year of 2021 to grow 25% to 30% over 2020 levels, and 70% to 12% over the level of 2019. This concludes our prepared remarks. Operator, 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 one on your touch-tone phone. If you are using a speaker phone, please pick up your hands up before pressing the keys. If at any time your question has been addressed and you'd like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question will come from Billy Ong with Bank of America. Please go ahead.

Good morning, everyone. I just have one question. First of all, congratulations on the results, but I'm just curious in terms of profitability. As some of the slides suggest that the lease and operating hotel have tracked the profitability when we compare our earning back to 2019 level, even though revenue and number of hotel and RAFPA already back to 2019 level or in terms of number of hotels already exceeding 2019 level, our earnings is still lower than that. It seems like it's mainly because of the lease and operate hotel. My question is for those newly opened lease and operate hotel, What stage are they in? Are they still in the ramp-up? And how much improvement can we expect in the next one to two years to see the margin and rough part and profitability to be positively contributed to the bottom line?

Billy, thank you so much. I want to give you a general direction of the status of those hotels and the reason we added, and I think that the ramp-up period will be likely affected by also the COVID as well as our further... We need to make even further some improvement to those hotels. Now... In the 2017 to 2019, all the way to 2020, the hotel market has been very hot. It is very difficult to secure great locations with the affordable price to set up our model hotels, especially in those areas where we are having a lower penetration, such as the southeast and the southern part of China. And so these newly added hotels with a very attractive rental price, and most of them are in existing hotels, and we needed to convert into our standard hotels. But whenever you take over those And there is a change of the operation and the staffing and all of those necessary so-called preparation work. And we expected typically those will be six to nine months. And some of them could be after a year. And we are doing the improvement in operation and capex and also the repositioning at the same time. So we expect that in the six months to a year, those hotels will back into operation. you know, that creating a positive impact to the bottom line and also creating a model hotels in those cities. And for instance, we added hotels in Shanghai Nanjing Road, which is very difficult to find in the past. And we also added a few in Chengdu, such as the Bejes Road, Chunxi Road, So those are great locations I think can, in the future, can use as a showcase for our development.

One last question is that if we compare, if we use Rathpaw, what's the Rathpaw number for those newly opened lease and operate hotel? And what's the target of those WAPA, let's say, if we are talking about one year from now?

Hi, Billy. This is Selena. Actually, you can find in this quarter, our WAPA for ARO hotels was higher than the WAPA of our franchise SM hotels. And for the newly opened hotels, that the average reptile for them was 116. Okay.

Thank you.

Our next question will come from Yogesh Modak with ClearBridge. Please go ahead.

Hi there. Can you hear me? Yes, very clearly. Why is the reporting so late? Like, I was checking when Q2 of 2020 was announced, and I think it was announced a good two months before you announcing this Q2. Why is the reporting so late?

Thank you. Thank you for the question. Actually, in the second quarter, we spent more time completing the audit process But due to the acquisition of our newly opened hotels, we acquired 20 single hotels. So that's the major reason. And accordingly, we plan to complete our third quarter earnings call by the end of this year. I will try our best. Thank you.

Okay. The next question I have is, you know... In a year's time, the current investment in L&O hotels is supposed to be breakeven or profitable. But by then, you might acquire many more. So is the company entering an investment phase? You have a lot of capital available on the balance sheet. And it sounds like you think the opportunity to invest is good. So are you going to enter an investment phase where there will be a protracted period of a couple of years, let's say, or more, of depressed margins as you keep investing in properties. And associated with that, you know, in the past, you've had a very capitalized business. But if you're going to start investing capital in L&O hotels, have you thought about what kind of returns you're expecting to generate? How long are the leases? So I'd be interested in both those things as to is there an investment phase coming? How low will margins go? How long will margins stay depressed? And what kind of return hurdles and these lengths are you looking at?

That's a great question. I would like to address to you that our current strategy has not been changed, that we'll continue to focus on the franchise and manage that business model. We'll continue to improve our products and the customer service experience, our franchisee support system, and also the smart and digital hotel concept, and also penetrating to the fourth and third and fourth tier city. So that strategy will be focused and continued. And in addition, we also found that many local partners and that they're very, very great option teams that we can work together, empower them to do great development. As I mentioned, our Argyle Group, our Urban Group, our Jiangxi Sima Lv Group, and our Wuhan Sky Lv Group, those are our strategic partners. they are also developing focusing on franchise and managed business model. And we'll use the cash to just penetrating to those weak area where we need to showcase our brand and locations. So that's our primary strategy on the going forward. So that's our, again, that's our current focus. And the last quarter we have, this year, we may have added some LO hotels, and primarily because we find those transportation hub areas, those great locations, and it's going to be very hard to find during the normal time under the price and the rent will be higher. So I hope that answers your question regarding our future business plan.

Thank you. Again, if you have a question, please press star then one. Our next question will come from Dan Zhu with Morgan Stanley. Please go ahead.

Thank you. Good morning, Alex and Selina and Megan. This is Dan from Women's Sandy. Thanks for the presentation. I have two quick questions, both relating to the L&O hotel openings. So I think the first question was for Selina. On page 22, My question is for the $67 million this quarter. that's relating to the newly opened L&O hotels. And does it mean that it accounts for all three months of operations for all these newly opened hotels? And is there any one-off? So my question is more about how recurring is this 67 million? Should we expect the number to go higher in the next few quarters? That's my first question.

Okay, thank you, Dan. Actually, the $67 million cost for the hotels will not keep increasing in the future for the already existing 23-hour hotels. Because for the $67 million, they included our depletion, amortization for these hotels, rental, and personnel costs for our disoperated hotels as well as some advertising fees for promotion of our newly opened of these hotels. When past the ramp-up period, all these hotel costs will keep stable, mainly include the rent and personnel costs. So that's why we don't think the hotel operating costs will keep increasing for our existing hotels.

Thank you. Thank you, Selina. That's very clear. My second question is on page 25. So for the cash outflows for investment and hotel acquisition, that's around $370 million. Does it mean that this is the cost that we use for the 20 hotels that we acquire? What are the valuations that you use for these hotel acquisitions? Can we get a rough idea on how do you value on the hotels that you buy per room basis, or do you look at the other multiples?

Thank you. Then we use the, in different locations, we use different numbers. It depends also the current hotel's location, the property conditions, the remaining, you know, the tenancy period. So for some very newly hotels, we may we primarily use the cost base, the per room basis, instead of the future revenue because the last quarter, we identified that most of those hotels during the first quarter of this year under the operating performance was negatively impacted by the COVID-19 pandemic. And so we are able to secure those hotels in the significantly below the cost of replacing the bases.

Thank you. Thank you, Mr. Xu. Thank you. That's it for me.

Again, if you have a question, please press star then 1. As there are no more questions, this concludes our question and answer session. I would like to turn the conference back over to Ms. Zelina Yang for any closing remarks.

Thank you. 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 feel free to contact us. Thank you all.

Thank you. Thank you all.

Thank you. Bye bye.

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