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 third quarter 2021 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 now like to turn the meeting over to your host for today's call, Mr. Rene Vungestein 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 Green3 are Mr. Alex Hsu, Chairman and Chief Executive Officer, Ms. Celina Yang, Chief Financial Officer, Ms. Megan Huang, Vice President of Sales and Marketing, and Mr. Nicky Jang, IR Director. Mr. Hsu will present the company's Q3 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 follows. Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. The 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 a 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 findings with the US 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 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.

Thanks, Rene. 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 in Q3 2020, we will occasionally during this call provide Q3 2019 numbers where we believe this provides a more meaningful comparison Now let's turn to slide five of the presentation. We are glad to report a satisfactory performance in third quarter, given the resurgence of COVID in various parts of China throughout the quarter. Compared with Q3 2020, raw power decreased 1.4% to 118 RMB, Total revenues increased 16.3% to 310.4 million RMBs. Income from operations decreased 45.6% to 54.9 million RMBs with a margin of 17.7%. Net income decreased 61.5% to 33 million RMBs with a margin of 10.6%. Non-GAAP adjusted EBITDA decreased 33.5% to 73.7 million RMB with a margin of 23.7%. And earnings per share decreased 59.3% to 0.33 RMB. Slide 6 provides more detailed numbers for total revenues, income from operations, net income, and adjusted EBITDA. Please turn to slide seven. Operating performance was similarly impacted compared with the last quarter. Our occupancy rate on raw power recovered to 84.3% and 79.1%, respectively, after 2019 levels, a better performance than the industry average. Slide eight shows historical weekly raw power performance and the comparison with 2019. During the third quarter, raw power decreased in July due to the worsened COVID-19 situations in Nanjing cities and Jiangsu province. Fortunately, by the middle of September, raw power rebounded quickly to around 100% of its 2019 level. but due to the resurgence of outbreak of cases in different cities nationwide, it dropped to about 81.3% of its 2019 levels during the first week of November, but then recovered gradually, reaching 98.5% of its 2019 level in the last week of December. with the help of a resilient business model, well-segmented and robust brand portfolio, and the loyalty of our members. As in the last few quarters, the impact on our occupancy and raw power has always been lesser than the average of other hotels in China. Now, starting with slide 10, let's talk about strategy and execution. First, We are further expanding our hotel network in the mid to upscale segment and into the tier three and the lower cities. And the second, we continue to optimize our management and operating system constantly. Now, let's look at slide 11. We have been continuously growing our mid to upscale and luxury segment over the past few years. By the end of the third quarter, hotels in this segment had increased to 11.2% of our total portfolio, compared with only 2.2% in 2017. We plan to open more hotels in these segments this year. Please turn to slide 12. Over the past four years, The vast majority of our new hotel openings have been China's thriving Tier 3 and the lower cities, where the pace of recovery at our hotels has been faster than in other cities in most quarters. As we continue to execute our strategic plan, 68.7% of all new hotels in our current pipeline are located in such cities, and will further capitalize on the substantial opportunities in such locations. We constantly strive to optimize our management and operating system, including design, technology features, sales and marketing programs, to improve hotel quality and operating performance. Our ongoing efforts in researching and testing property improvement materials allows us to lower our construction costs that also ensure hotel quality and excellent customer experience. This has been an extraordinarily tough period, but it is one that has been shared across industry. As for ourselves, we feel certain that we'll get through the current pandemic wave thanks to our business model, to experience that our team and franchisee have accumulated while combating COVID. Now, let me turn the call over to Megan, who will summarize our business operations in third quarter. Megan, please go ahead.

Thank you, Alex. Please turn to slide 14, which highlights the year-over-year rebound in our operating metrics from the impact of COVID-19. Landed ADR increased 7.7% to 163 RMB. Occupancy rate decreased 6.7% to 72.4%. And the red part decreased 1.4% to 118 RMB. We opened 182 new hotels in the third quarter, less than planned due to the impact of COVID-19. Moving to slide 15, at the end of the third quarter, we had 4,626 hotels in operation, 10.3% more than the year before. 62 of these hotels were leased and operated, or LO hotels, and 4,564 were franchised and managed, or FM hotels. while the mid-field segment remained the core of our business with 62.9% of all our hotels. We continued our expansion into the higher-end segment. By the end of the third quarter, mid- to up-field and luxury hotels accounted for 11.2% of all our total portfolio, while the economy segment remained stable at 25.9%. As Alice mentioned, we also solidified our already dominant position in tier three and lower cities, where 67.7% of our hotels were located at the end of the third quarter. On slide 16, you can see that in the third quarter, we opened 182 hotels in China, compared to 201 in the second quarter 2021. Two hotels were in the luxury segment, 70 in the mid- to upscale segment, 83 in the mid-scale segment, and 27 in the economy segment. 12 were in Tier 1 cities, 52 in Tier 2 cities, and the remaining 118 in Tier 3 and lower cities. 39.6% of hotels opened in the third quarter were in the mid- to upscale and luxury segments of the market. The company closed 98 hotels, 59 due to non-compliance with the company's brand and operating standards. The remaining 39 were closed due to property-related issues. The company added a net 84 hotels to its portfolio. Slide 17 shows the chain of our quarterly operating performance. For year-over-year comparison, In the third quarter, REPA for our LO hotels increased to 146 RMB. REPA for our FM hotels decreased to 117 RMB. ADR for our FM hotels increased to 223 RMB, and ADR for our FM hotels increased to 161 RMB. Occupancy at our LO hotels decreased to 65.2%, and occupancy at our FM hotels decreased to 72.6%. Slide 18 highlights the higher growth in both our individual and corporate membership programs, which accounted for most of the 91.3% in direct sales in the third quarter. Individual members grew to 66 million, up from $52 million year-over-year. And corporate membership grew to $1.8 million, up from $1.6 million a year ago. We have one of the highest percentage of room nice books by corporate and individual members in the industry. With that, I'll pass the call over to our CFO, Milia.

Thank you, Megan. Please, turn to slide 19. Total revenues increased 16.3% year-over-year to 310.4 million RMB. Total revenue from FM hotels was 194 million RMB, almost the same as the same quarter last year. While total revenue from ARO hotels increased 59.4% to 106.5 million RMB. On slide 20, you can see that total hotel operating costs were 268.8 million RMB, a 48.3% year-over-year increase. In the third quarter, hotel operating costs were 172.8 million RMB, up 60% year-over-year. The increase was mainly attributable to the opening of 24 ALO hotels since the beginning of 2021, which resulted in higher rents, higher utilities and consumables, higher staff headcount and compensation, higher depreciation and amortization, and higher rent-up costs. Excluding the impact of newly opened ARO hotels in the year of 2021, hotel operating costs increased 10.3% year-over-year. Selling and marketing expenses were 16.5 million RMB, a year-over-year decrease of 22.7%. The decrease was mainly attributable to our lower advertising expenses. General administrative expenses were 68.8 million RMB, up 53.6% compared with Q3 2020. The increase was mainly attributable to the opening of 24 hotel since the beginning of the year of 2021 and increased the one-time consulting fees for the capital market at once. Excluding the impact from the newly opened air or hotels and one-time consulting fees, our general administrative expenses increased by 16.6% year-over-year. Turn to slide 21. Income from operations defined as revenue minus total operating costs and expenses was 54.9 million RMB. representing a year-over-year decrease of 45.6%, with a margin of 17.7%. The decrease was mainly due to the operating loss at newly opened air hotels in the year of 2021, during their ramping up operations. Excluding the impact of newly opened hotels, the income for operations was RMB 88.5 million, a year-over-year decrease of 12.3%, with a margin increase to 31.5%. On the same slide, net income is 33 million RMB, with a margin of 10.6%. Adjusted EBITDA decreased 33.5% to 73.7 million RMB, and adjusted EBITDA margin decreased to 23.7%. Core net income decreased to 50.2 million RMB with a margin of 16.2%. These decreases in net income adjusted EBITDA are mainly attributable to the increased number of our ARO hotels, both newly opened and in the pipeline. Excluding the impact of newly opened hotels, adjusted EBITDA was RMB 107.3 million, with a margin of 38.2%. Please turn to slide 22. Net income per ADS was 0.33 RMB, that's US dollars, five cents. Core net income per ADS, basic and diluted, not GAAP, was 0.49 RMB, that's US dollars, eight cents. Let's now take a look at slide 23. As of September 30, 2021, the company had total cash and cash equivalents, restricted cash, short-term investments, investments in equity securities, and time deposits of 1,192.1 million RMB, compared to 1,291 million RMB as of June 30, 2021. The decrease from the prior quarter was primarily attributable to the acquisition costs of our AeroHotels, loans to franchisees and property investments, offset by a drilling down of bank facilities. We will continue to execute our growth strategy, including potential acquisitions, and further support our franchisees. On slide 25, Given the continuing outbreak of COVID in various parts of China, we expect total revenues for the full year of 2021 to grow 25% to 30% over the 2020 levels and 7% to 12% over the level of 2019. This concludes our preliminary 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 touch-tone 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 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from Billy Ung with Bank of America. Please go ahead.

Hi, good morning. Thanks a lot for taking my question. I only have one quick question. We noticed that actually the pipeline continued to increase and now the company has about or over 1,300 of the hotels in the pipeline. Does that mean like we can expect in the next 12 months the company will be able to open around that number of hotels, given that historically speaking, the conversion from a pipeline to operating hotel normally takes less than a year, sometimes takes like six to nine months. So can you give us some outlook or comment on the opening expectation for the next few quarters?

I'll take this question. Thanks for the question. We, during the last year, we noticed that the pace of opening the hotels, the speed, is slower. It's slower because the because there is factors. Number one, during the COVID impact period, the construction, the laborers, the planning of them is unexpectedly affected by that. And secondly, we have the higher, now the requirement for opening the hotels is higher than before. Thirdly, We also have sometimes the franchisees are negotiating with the landlord for an extension of the free-win period and also the lack of certain materials and the investment slow down this opening case. We expect our next year's opening of hotels to be about 700 to 800 that we want to maintain at that level.

Thank you.

Again, if you have a question, please press star then 1. Our next question will come from Dan Zhu with Morgan Stanley. Please go ahead.

Thank you. Good morning, Alex, Maiden, and Selina. Thank you for taking my question. I have two quick questions. The first question was about hotel closures. We observed that in this quarter we closed around – we closed 90 hotels and – I thought we have other than those that with property use issues, we have 58 due to non-compliance. We just want to have some guidance from the management. How should we look at the closure annually in the future, say 2022, 2023? Should we, because 2021 we have more than before, more than in the past, kind of closure over 300, we estimate for this year. So should we expect this number to go down in the future? That's my first question. Thank you.

Okay, Dan. The closer of this period, the more closure of this period resulted in noncompliance, our standard, due to two reasons, I think. The first, as we explore the capital markets, I think our standard on the requirement of hotels holding all the licenses is higher. As a result, the hotels are not holding all the necessary license. I think that we will properly require the hotels to obtain all of them. If not, we may not continue to operate those hotels. That's one reason. Because of the COVID impact, a lot of the hotels that want to defer the capital improvement on the hotels. Now, if the deferred maintenance impacts the service quality of the hotels, then we will also try to properly close down And then those are the two major factors. And we understand the hotel is lack of certain cash flow to maintain the quality of the standard. But we will take into consideration of the situation. And if the hotel owner decided to use the cash to do something else instead of maintaining the hotels, then we wouldn't want to continue to maintain those hotels in our portfolio to ensure the consistent hotel quality. I think that's one of the reasons our overall impact of the COVID-19 is lesser than the average of the industry. So in the future, we believe... with our stabilization of raw power, and unless there's a further, you know, bigger impact from the COVID, and I think our closure rate will not be more than what we experienced in 2021.

Thank you. My second question is regarding our extension plan on the L&O hotels. Should we expect a number of more of L&O hotels extension in the future or we should be expecting more like a single-digit kind of opening in the L&O? And probably can I add one little, one quick question is regarding our potential partnerships with other hotel groups. And, for example, we used to have partnership, I think we used to have some investment on New Century, which is another upscale luxury hotels. should we expect the partnership with New Century to stop because of the delisting, or are we actively looking for partnership on the upscale side as well?

Thank you. Dan, the expansion of all hotels in the first quarter of 2021, is to help ourselves to expand into the area traditionally we have a weak presence, such as the southern part of China, southwestern part of China, and also in central part of China. Now with our presence over there is boosted by the opening of those L.O. hotels and the newly developed franchise hotels. I think our purpose of doing the LO hotels is substantially completed and we will not plan to do a lot more of those LO hotels unless the opportunity arise in such an area that we have a weak presence. But now we looked at the nationwide we do not see a big need for opening new LO hotels. But again, if there are opportunities such as in a high impacted area, high speed train station or so that will boost our local presence and sales, we will plan to do but not going to be more than what we planned or what we have done in the past. So that's from the all hotels. Regarding the potential partnership with other hotel groups, in the last year, we formed a couple of partnerships with the local strong operators, again, to boost our presence in those areas such as Xiangxi, such as Hunan Province, we will continue to seek local strong operators to partner with them in the responsive way to benefit both companies' operations and to further expand our network into lower tier cities, tier three and lower tier cities,

Thank you so much, Alex, for your interest. I have no other questions.

Our next question will come from Simon Zhang with Goldman Sachs. Please go ahead.

Hello, thanks for taking my questions. I just have one quick question. In relation to your margin trends, I've seen quite a noticeable drop off this quarter, arguably because of your increase in the LO exposures. I wanted to get a sense, you know, Do you have some sort of margin breakdown between the two segments? And you mentioned that there were obviously some new hotels still running at losses. Can you give us a sense how much of your hotel, at least an ounce, is actually loss-making? Thank you.

Thank you, Sanna. I will take this question. In the third quarter, they newly opened 24 hotels since the beginning of 2021. actually brought us a loss of 32 million RMB. So that resulted in the drop of our margin of EBITDA and also dropped the margin of our net income. In fact, we excluded the impact of these newly opened hotels. Our EBITDA margin will increase to 38.5%. and our margin of net income will increase to 23%.

And on the second question in relation to how much of your hotel in the lease and own are being still loss-making, or maybe give us a sense, what is the scale of the losses, if possible?

Among the 24 newly opened hotels, About half of them are still occurring lost.

Okay. Thanks a lot. Thank you.

Thank you, Kenneth.

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