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

Hello, ladies and gentlemen. Thank you for standing by for Green Tree's first half 2023 earnings conference call. At this time, all participants are in 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 Vangersteen of Christensen, Green Tree's investor relations firm. Please proceed, Rene.

Thank you, Ashley. 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 the call from Green Tree are Mr. Alex Xu, Chairman and Chief Executive Officer, Ms. Celina Yang, Chief Financial Officer, Ms. Megan Huang, Vice President of Sales and Marketing, Mr. Bill Zhu, Financial Director of the Restaurant Business. Mr. Xu will present the company's performance overview of the first half of 2023. followed by Ms. Wang and Mr. Zhu, who will discuss business operations, and Ms. Yang and Mr. Zhu will then discuss financials and guidance. They will all 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, is amended and is 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, expect, anticipate, aims, future, intents, plans, beliefs, estimates, continue, target, is or are likely to, going forward, confidence, 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 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 Hsu. Mr. Xu, please go ahead.

Thanks, Renee. Hello, everyone, and thank you for joining us today. 2023 marked a new start of the post-COVID recovery in the economy across China. Flow-par compared to the same period of 2019 reached more than 120% at the beginning of February, exceeding our expectations as demand for business travel rebounded after the spring festival. During the second quarter, especially during the National Labor Day holiday early in May, it reached more than 115%. And during the summer vacation, it was almost stable at 110% as the tourism further expanded. As we did throughout the pandemic, we continued to execute our long-term strategic growth plan that strives to assist the franchisees in maintaining quality operations, extend our hotel network, deliver stable operating profitability, and maintaining healthy cash flow. Please turn to slide five. Compared with the first half of 2022, hotel raw power was 130 RMB, up 35.8%, and the restaurant ADR, that is average daily sales per store, was 6,213 RMB, up 22.9%. Total revenues were 794.2 million RMB, up 12.1%. The increase was partially due to the recovery in Royal Park, the increase in the number of hotels and the increase in the restaurant average daily sales, partially offset by the closure of the 64 restaurants. Income from operations turned positive at 150.9 million RMB with a margin of 19%. Net income was 177.3 million RMB with a margin of 22.3%. Adjusted EBITDA non-GAAP was 226.9 million RMB, up 137.8%, with a margin of 28.6%. Core net income non-GAAP was 136.1 million RMB, with a margin of 17.1%. Cash provided by operating activities was 313.1 million RMB. Slide six shows detailed numbers for total revenues, income from operations, net income, and adjusted EBITDA. On slide seven, operating performance greatly improved during the first half of 2023. Royal Power was 120 RMB and 141 RMB in the first and second quarter, respectively. At the bottom of the slide, you can see the weekly Royal Power performance in the first half of 2023 compared with 2019. In the first half of 2023, due to the recovery from COVID-19, Royal Power exceeded 124%, of its pre-pandemic levels after Spring Festival. Thanks to the stable recovery in demand and in the economy, Royal Park gradually recovered to more than 120% of its pre-pandemic levels in the Labor Day Golden Week of 2023. While the Royal Park recovery slowed during the Dragon Boat Festival, It resumed a growth and stable development trend again in the summer vacation as travel soared. Slide 8 shows operating performance of the restaurants. ADS had a good trend in the first half of 2023. Now, starting with the slide 10, let's talk about the strategy and the execution of hotels with the further expansion in the mid to upscale segment on the Tier 3 and the lower cities in South China. Besides, we are continuously adding LO hotels in strategic locations. Let's take a look at the slide 11. We have been continuously growing our mid- to upscale segment over the past few years. For an apple-to-apple comparison, we have excluded the Argyle and urban hotels. By the end of the first half of 2023, we had 438 hotels, 10.7% of our total portfolio in the mid to upscale segment, up from only 50 in 2017, and we plan to open more this year. While the mid-scale segment remains the core of our business with the 71.4% of all of our hotels, we continued our expansion into the higher end segments. By the end of the second quarter, mid- to upscale hotels accounted for 10.7 percent of our total portfolio, while the economy segment remained stable at 17.9 percent. Please turn to slide 12. Over the past five years, most of our new hotels have been in China's thriving tier three and the lower cities. In addition, hotels in some lower tier cities are performing well. As we continue to execute our strategic plan, 73.3% of hotels in our current pipelines are in such cities and will further capitalize on the substantial opportunities in such locations. On slide 13, During the first half of 2023, we opened three LO hotels at Chongqing North Railway Station, Chongqing Jiangbei International Airport, and Shenzhen Futian Huaqian North. All of our LO hotels are located around transportation hubs, central business districts, or government centers. By showcasing our brand and operating standards, We believe that these hotels will help us attract more high-quality franchisees, further contributing to growth. Slide 14, our strategy for our restaurant business focuses on increasing profitability with the closing of unprofitable stores and expansion in the proportion of franchised and managed restaurants. and growing the numbers of street stores. On slide 15, during the first half of 2023, we closed 64 restaurants in areas of decreased economic activities and reduced the food traffic, helping improving the overall profitability of our restaurant businesses. On slide 16, you can see the growth in the proportion of franchised and managed restaurants following the acquisition of Dao Nian Companies and Bellagio during the first quarter of 2023. Slide 17 shows that currently most of our restaurants are in the shopping malls. However, we believe there is substantial potential for street stores and we intend to develop more in this format. I want to emphasize that in the new area, we're strategically focusing on growing high-quality hotels and restaurants to build a better and stronger foundation for future growth. Now, let me turn the call over to Megan and Mr. Joe.

Thank you, Alex. Please turn to slide 18. to start reviewing the operating and financial highlights. Slide 19 shows the trend in our quarterly operating performance. In the second quarter of 2023, red power for our LO hotels increased to 190 RMB. Red power for our FM hotels increased to 139 RMB. ADR for our LO hotels increased to 265 RMB. and ADR for our SM hotels increased to 179 RMB. Occupancy at our LO hotels increased to 74.6%, and occupancy at our SM hotels increased to 77.9%. Slide 20 highlights the growth in our membership programs, which accounted for the most of our direct sales. Individual memberships grew to 84 million, up from 74 million a year ago. And corporate memberships grew to 1.99 million, up from 1.91 million a year ago.

Now please turn to slide 21. In the restaurant business, the number of individual members grew to 2.67 million, up 2.3% year-over-year. ABS increased 57.3% to 6,371 RMB in the second quarter of 2023 compared to one year before. With that, I will pass the call over to our CFO, Selina Yang.

Thank you, Bill. First, let's review our hotel business. Please turn to slide 22. In the first half, total hotel revenues increased to 23.1% year-over-year to 563.2 million RMB. The increase was primarily due to the recovery in Red Park and increase in the number of hotels. Total hotel revenues increased 23% to 310.6 million RMB in the second quarter of 2023 and compared with the first quarter. Total revenues from FM hotels were 347.4 million RMB, up 26.1% year-over-year, while total revenues from RO hotels increased 24.7% to 213.6 million RMB. On slide 23, total hotel operating costs and expenses decreased 54.7% year-over-year to 416.6 million RMB. Excluding other general expenses, total hotel operating costs and expenses also decreased 2.8% year-over-year. And total hotel operating costs and expenses increased 5% to 213.3 million RMB in the second quarter compared with the first quarter. Total costs and expenses are composed of hotel operating costs, selling and marketing expenses, general and administrative expenses. Operating costs were 284.4 million RMB, down 7.6% year-over-year. The decrease was mainly due to the deconsolidation of Argyle and dispose of our interest in urban and partially offset by higher consumables, higher utilities due to the recovery from COVID-19, and higher rents with lower exemptions compared to last year. Operating costs increased 11.8% to 150.1 million RMB in the second quarter compared with the first quarter. Selling and marketing expenses were 24.8 million RMB, a year-over-year increase of 31.8%. The increase was mainly attributable to higher sales channel commissions, higher sales stock salaries, and higher travel expenses. The selling and marketing expenses increased 24.3%, to 13.8 million RMB in the second quarter of 2023 compared with the first quarter. General administrative expenses were 19.5 million RMB in the first half of 2023, down 9.2% compared with the first half of last year. The decrease was mainly due to consolidation due to the deconsolidation of Argyle and disposal of our interest in urban, and partially offset by higher consulting fees and higher staff-related expenses. The G&A expenses decreased 3.6% to 44.4 million RMB in the second quarter of this year, compared with the first quarter. Turning to slide 24, income from hotel operations. was 160.4 million RMB. And income from hotel operations increased 108.7% to 108.5 million RMB in the second quarter of 2023 compared with the first quarter. Net income of hotels was 191.8 million RMB. Net income of hotels increased 138.4% to 135.1 million RMB in the second quarter of 2023, compared with the first quarter. Adjusted EBITDA increased 127.5% to 212.2 million RMB, and Core Net Income increased 42% to 150.4 million RMB. Now, let me turn this call over to Bill, our Financial Director of Restaurant Business.

Now let's review our restaurant business. Please turn to slide 25. In the first half of 2023, total restaurant revenue were 127.2 million RMB and 104.9 million RMB in the first and second quarter of 2023 respectively. You can also see the revenue breakdown for FM restaurant and LO restaurants. On slide 26, total operating costs and expenses decreased 9.9% year-over-year to 242 million RMB. And the total restaurant operating costs and expenses decreased 9.7% to 114.9 million RMB. In the second quarter of 2023, compared with the first quarter, you can also observe the downtrend in material costs, personal costs, and the rent. Turning to slide 27, income from restaurant operations was netting 9 million RMB in the first half of 2023. Income from restaurant operation was 0.6 million and negative 9.6 million RMB in the first quarter and the second quarter of 2023, respectively. Net income was negative 14.1 million RMB in the first half of 2023. Net income decreased to negative 11.9 million RMB in the second quarter of 2023, compared with negative 2.2 million RMB of the first quarter. Adjusted EBITDA increased 473.1% to 15.2 million RMB. Core net income was negative 13.9 million RMB. Next, Selina. please introduce the probability of our group.

Please turn to slide 28. Group net income per ADS, basic and diluted, was 1.79 RMB. Group core net income per ADS, basic and diluted, non-GAAP, was 1.33 RMB. Let's now take a look at slide 29. As of June 30, 2023, the company had total cash and cash equivalents with strict cash, short-term investments, investments in equity securities, and time deposits of 1,440.1 million RMB compared to 1,119.4 million RMB as of December 31, 2022. The increase was primary due to cash from operating activities, repayment from franchisees, proceeds from disposal of subsidiaries, and partially offset by the repayment of bank loans and investment in properties. On slide 30, taking into account the recovery long-term chance and short-term industry fluctuations, we expect total revenues of organic hotels for the full year of 2023 to grow 30% to 35% of the 2022 levels. Total revenues for our restaurant business and our organic hotel business for the full year of 2023, I expect to grow 15% to 20% over the 2022 levels. This concludes our pre-tailored remarks. Apurita, we are now ready to begin the Q&A session. Thank you.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Your first question comes from Zhao Zhu with Xizhan Capital. Please go ahead.

Hello, management. As we know, in March, catering was incorporated into the listed company. Can you introduce the recovery of catering? Thank you.

Okay, thank you for your question. Our financial director, Bill, will answer this question.

Hello. The restaurant sales compared to 2019 sales recovered 18%, and compared to 2022, the sales recovered 100.7%. Thank you.

Once again, if you have a question, please press star then 1. We will now pause momentarily to allow questioners to enter the queue. Once again, if you have a question, please press star then 1. Thank you. Your next question comes from Bessie Zhu with UBS. Please go ahead.

Hi. Hello, government. Hello, the management. So could you give us some color and guidance on the red part in Q4 2023 and 2024? Thank you.

Thank you. Thank you for your question. So let me first answer your question. Just as Alex introduced just now, in the summer vacation, the RAPA in July and August kept stable about 110% of the 2019 levels. And we see that, yes, in September, the RAPA decreased a little bit due to the similarity So for the fourth quarter, yes, we forecasted a rapid recovery, also keeps the stable level of the 2019 levels. That is about 10 percent increase by the 2019 levels. For the next year, I think it's a little bit difficult for us to forecast for the long term. But for the long term trend, yes, we can see a good trend because of the recovery of the industry and especially for some locations in the year of 2023. Thank you.

So let me add a couple more comments here. The Q3, the performance is better than Q2 based on the first two and a half months. That's July, August, and September. A substantial improvement over the Q2. The trend in the Q4 will stabilize because our hotel portfolio focuses primarily on the have a lot more on the Tier 3, Tier 4 cities. I think the Tier 3, Tier 4 cities' performance are very stable. They are stable during the past three years of COVID control period. And so their performance, we expect to be continuously improving and stable over the next few years. especially the China's policy has been focusing on rejuvenation of the countryside and also encouraging job growth in those two, you know, tier three, tier four cities. So even though the recovery after the post-COVID period, we see the performance much better in the first tier cities. because there is new, you know, many, many new conventions and people have been traveling to the, you know, first-tier cities for business and for, you know, exchange. But we think the trend for the future growth will continuously, you know, reach out to the Tier 3 and Tier 4 cities.

Thank you very much.

Thank you. Your next question comes from Adam Su with China Cinder Securities. Please go ahead. Adam Su, your line is now live. Please proceed with your question. Once again, if you have a question, please press star then 1. Thank you. Your next question comes from Simon Chung with Goldman Sachs. Please go ahead.

Hi, Alex and Selina and thanks for the presentation. I got a couple questions, one just on the hotel. I saw that, you know, you did a decent 38% EBITDA margin for the business. And I remember before COVID, you were hovering at about 50%. Just wanted to get a sense, you know, the difference between the two. I know there's actually some mixed change and closure or deconsolidation of some of the business, but wanted to get a sense whether you feel that Once your reply, and by the way, your reply is already over 100% anyway, do you feel that you can go back to 50% on the hotel business? That's the first question. And then the second question is on hotels. So you have been closing down, call it 50, 60 restaurants every six months, and that you finally get to an even level. Then I guess the question is how many closure... Or do you have any targets as to how many restaurants you're going to be running and, you know, when are you – what's our profitability level you feel comfortable maybe in a one or two-year time? Thank you.

Okay. Thank you.

Thank you, Simon.

Thank you for your question. So this is Selena. Let me introduce the background relating to your first question about the EBITDA margin of the hotel business. Yes, you are very correct. Previously, our EBITDA margin was as high as 50%. but in the first half of this year, our EBITDA margin was about 38%. Even though it recovered greatly from the COVID-19, however, still lower than before. There are two reasons. The first one is due to our newly opened lift-operated hotels during the COVID-19. So according to our calculations, the impact of our newly opened hotels was negative 10% of the EBITDA margin. So that means if we're excluding the impact for our unprofitable newly opened hotels, our EBITDA margin was about 48.7%. Okay, that's higher than now. Okay.

Simon, let me add a couple of more points to Helena's answers. Compared to the pre-COVID area, that we have the margin we see a dip because our take rate is also a little bit reduced from the pre-pandemic levels for the following reasons. One, the competition is heating up in order to support the franchisees. We lowered overall our CRS fees, potentially, and so that's one. Secondly, because the last three years we have not really forced the standardization of the renovation of the older hotels, And so with the 2023 post-COVID, we started actually enforcing and starting the renovation of hotels. And during the renovation, we typically gave six months to a year of free, you know, the waiving of certain fees, especially if they upgrade to a different version. So, and then... Those two factors also added a little more reduced of the top line, even though the raw power on the group that recovered more than the 2019 levels. So that's also added to the reduction of the margin. Okay. With regard to the restaurants, I'll leave, you know, April the opportunity to answer these questions.

Okay. From this year, I think the adjustment of our restaurant strategy change is almost done. So maybe next year we will try to start to find a partner to open more restaurants for the dunking restaurants and our restaurant business.

Thanks, Simon. This is a good question that... The consumer trend has been rapidly changing. For instance, in the past, a substantial number of dine-in dumplings restaurants are located in supermarket malls, you know, the street shopping malls anchored by the supermarket. And we see the food traffic to the supermarket mall have substantially reduced. I think this leads to the closure of most of the 64 restaurants. And we are actually finding the new consumer patterns of consumption and finding the strategic located, for instance, the street-fronted stores. And they're trying to we organize our team, especially the developers, and that because the trend has been shifting, and then with that new format, then we are able to open more and develop more restaurants in this new format. Thanks, Simon.

Sorry, can I quickly follow up? It's just on the two respective segments, hotel and restaurant. Do you have a sense or can you give us a target of, you know, the addition of the stores? You know, for example, for the full year, how many hotels you are expecting to add? And equally for the restaurants, I saw obviously it has dropped a lot. Do you have indications maybe in medium term, what sort of store count are you expecting?

For the hotel side, we have actually moved to more focusing on those high-quality hotels, and we think that will build a better foundation for the future. So this year, I think the signing of the new contracts is going to be more than 600, but because the openings take more time, And we calculated in the pipeline the number of new stores, new hotels can be around 420 for the year of 2023. And for the bill, for the new restaurants.

For new restaurants, we have targets like 20 to 30, restaurant for this year.

Thank you. And for the restaurant side, it's easy to add more. I think that we're focusing on more high-quality growth and making sure it doesn't burn a lot of cash and to make sure that we can catch the consumer trend on the inside of just growing the number of locations. And so... That's our strategy for the remaining of the next year, Simon.

Thanks a lot, Alex. Thanks.

Once again, if you have a question, please press star then 1. We will now pause momentarily to allow questioners to enter the queue. Once again, if you have a question, please press star then 1. Your next question comes from Adam Su with China Cinder Securities. Please go ahead.

Hello, management. Can you hear me? Yes, very clearly, Adam. Okay, okay, okay. Well, sorry for the bad line. My first question is how do you like the competition and the market structure of the lower tier city market? For the first reason is that I hear the saying that the recovery of the lower tier city market is not that good, I assume. as tier one city this year. And for the second reason, this year I saw so many players coming into this lower tier city market. And how do you like the competition in this market? And for my second question, is that what is the attitude from our franchisee partners over the past seven or eight months? Is there any changes from their ICUs? That's all. Thank you.

Okay. Thanks, Adam. The competition in the lower tier cities has been growing stronger in the past few years. But we do not see it become stronger this year. I think that some players went to the third tier, fourth tier cities. I think the performance, due to the challenge of managing them closely and effectively, we see some changes of the brand, a change of the, you know, closure. We see more closures and changes of the brand in the tier three, tier four cities. But I think our strength has always been managing remotely. We're managing third and fourth-tier cities very effectively. So our hotels have been performing really well during the COVID and after the COVID, and they've been very stable and generating substantial cash flows to our franchisees. We think that our strength has been there, leading players in those diversified, booming lower tier cities. In terms of attitude, our franchisees, it takes a little bit more time for our franchisees to adapt to the new environment because the first the first few months, they have many, many issues we have to solve that accumulated during the pandemic era. And secondly, that we also have experienced substantial boom in the number of travelers, especially in the first and second tier cities. And so we've been busy in terms of our franchisees have been busy in terms of forgetting everything getting our people, along with Green Tree, hired, retrained to meet the new demand. So the first few months has been very busy. But I think that I will use the word. It takes a little bit more time for a franchisee's attitude towards expansion and growth compared with the pre-pandemic levels. But we see the more and more confidence coming to the market, especially on the hotel side. I think the restaurant, because the trend has been shifting very quickly, especially the food traffic has been changing. And so we do see the franchisee a little more reserved, conservative in the restaurant segment. But in the long run, we have been pretty confident that our franchisees, we already see some existing franchisees started reaching out to researching additional properties and working with us. So we have a lot more product in the pipeline. and especially high-quality ones. On the competition of the property side, that is a little bit less, which is good for our franchisees because the rent pressure is somewhat reduced compared with 2019 levels. So, Adam, those are the sentiments that we have experienced.

Once again if you have a question please press star then 1. We will now pause momentarily to allow questioners to enter the queue. Once again if you have a question please press star then 1. There are no further questions at this time. This concludes our question and answer session. I would like to turn the conference back over to Ms. Selina Yang for any closing remarks.

Thank you. In closing, on behalf of the entire green tree management team, we thank you for your interest in green tree and your 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, operator.

Thank you.

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