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

Good day and welcome to the Green Tree Hospitality Group third quarter 2024 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad, and to withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Rene Vangerstein. Please go ahead.

Thank you, Rocco. Hello, everyone, and thank you for joining us. Green Trees 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, I'm Mr. Alex Hsu, Chairman and Chief Executive Officer, and Ms. Celina Yang, Chief Financial Officer. Mr. Hsu will present the company's performance overview for the third quarter of 2024, and Ms. Yang will then discuss financials and guidance. They will be available to answer your questions during the Q&A sessions 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. These forward-looking statements can be identified by terminology such as may, will, expects, anticipates, aims, future, intends, plans, believes, estimates, continue, target, is or are likely to, going forward, confident, outlook, and similar statements. Any statements that are not historical facts, including statements about the company and its industry, are forward-looking statements. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known as well as 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 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 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, Renee. Hello, everyone, and thank you for joining us today. I'm pleased to report that our hotel business improved in the third quarter over the first two quarters of this year as the economy continued to recover. Travel patterns have normalized following last year's surge, which has influenced year-over-year comparisons. We're back to a more positive environment, focusing on growing our pipeline and upgrading numerous hotels across our portfolio. We are confident that we are on the right track and will benefit from the ongoing stimulus measures implemented by the government. Our restaurant business net income remained positive for a second consecutive quarter as we continued to grow the number of franchised three stores and stores with stable consumer traffic. Such stores now accounted for 55.5% of our store count, compared to 44.6% a year ago. Following the closing of unprofitable stores over the past year, the number of restaurants in operation had stabilized at 182 at the end of the quarter. We are now focusing on growing that number. Please turn to slide five. Compared with the third quarter of 2023, hotel raw power was 135 RMB, a decrease of 13.6. And the restaurant, ADS, was 4,891 RMB, a decrease of 25.6%. Total revenues were 357 million RMB, a decrease of 22.5%. Hotel revenues were 286.9 million RMB, a decrease of 15.4%, mainly due to a 13.6% year-over-year decrease in real power and the closure of all hotels. partially offset by new openings. Income from operations decreased to 106.4 million RMB with a margin of 29.8%. Net income was 65.2 million RMB, a decrease of 44.4% with a margin of 18.3%. Adjusted EBITDA non-GAAP was 122.5 million RMB, a decrease of 32.1% with a margin of 34.3%. Slide 6 shows detailed numbers for total revenues, income from operations, net income, and adjusted EBITDA. Slide 7 shows the trend in our quarterly operating performance. In the third quarter, compared to a year ago, raw power for our LO hotels decreased by 7.5% to 196 RMB. Raw power for our FM hotels decreased by 13.8% to 133 RMB. ADR for our LO hotels decreased by 3.6% to 258 RMB, and ADR for our FM hotels decreased by 6.1% to 179 RMB. Occupancy at our LO hotels decreased to 75.9% from 79%. And occupancy at our FM hotels decreased to 74.6% from 81.3%. Slide eight highlights the growth in our membership programs, which accounted for most of our direct sales. Individual memberships grow to $100 million, up from $88 million a year ago. And corporate memberships grow to $2.1 million, up from $2 million a year ago. Slide nine shows the operating performance of restaurant with ADS decreased year-over-year to RMB 4,891, but increased sequentially from quarter two. Starting with slide 11 to slide 13, I will review our strategic execution across our businesses. In our hotel business, we further expanded in the mid to upscale segment and in Tier 3 and the lower cities, especially in South China. We also added more hotels in the Tier 2 cities. As you can see on slide 12, we continued to grow our mid to upscale segment with 527 hotels. That's 12.1% of our total portfolio at the end of the quarter. While the mid-scale segment remains the core of our hotel business at 68.4%, we continue our expansion into the higher end segments. We also continue to grow our economy segment, ending the quarter at 19.5%. Please turn to slide 13. Both of our current pipeline and the hotel operations are growing in the tier two cities. On slide 14, we continued to turn around our restaurant business to ensure that it is sustainably profitable going forward by focusing on areas with greater food traffic. We have closed all stores and opened the FM stores, completing the strategic transformation to our new business model. As a result, FM restaurants accounted for 87.9% at the end of the quarter compared to 74.8% a year ago. And the street stores accounted for 48.9% compared to 38.6% a year ago. Next, Selena will review operating and financial highlights.

Thank you, Alex. I will first review our hotel business. Please turn to slide 16. In the third quarter, Total hotel revenues decreased 15.4% to 286.9 million RMB, compared to the third quarter of 2023. Total revenues from RO hotels were 118.2 million RMB, a decrease of 22.2% year-over-year. The decrease was primarily attributable to a 7.5% year-over-year decrease in the power of air hotels, the closing of six hotels, and the reduction in sub-lease revenues, mainly due to the disposal of property in the second quarter. Total revenues from FM hotels decreased 9.7% to 167.9 million RMB primarily due to a 13.8% decrease in RAPA partially offset by new openings. On slide 17, total hotel operating costs and expenses decreased the 4.9% year-over-year to 201.9 million RMB. Operating costs decreased the 4.8% to 152.3 million RMB year-over-year. Costs decreased less than revenues because of the costs associated with the clothing of ILO hotels. Selling and marketing expenses were 12.9 million RMB, a year-over-year decrease of 1.4 million RMB. The decrease was mainly due to lower advertising expenses. General and administrative expenses were 35.3 million RMB, up 32.5% compared with the same quarter of last year. The increase was mainly due to an increase of 11 million RMB in bad debt provisions for long-age account receivables. Turning to slide 18, the decline in revenue resulted in a decrease in profitability for our hotel business, despite lower operating costs and expenses. Income from hotel operations decreased from 127.5 million RMB to 99.5 million RMB year-over-year. Net income was 58.6 million RMB compared to 108.5 million RMB in the third quarter of 2023. Adjusted EBITDA decreased 32.8% to 110.5 million RMB, and core net income decreased 21.4%. to 86.9 million RMB year over year. Next, let me review our restaurant business. Please turn to slide 19. In the third quarter, as Alex mentioned, we substantially completed the strategic transformation of our business model. Total revenues were 70.6 million RMB, a decrease of 42% year over year, many due to lower ADS and the closure of aero stores. Total cost expenses decreased for 2.8% year-over-year to 63.9 million RMB due to bad cost management of personal expenses and sales channel commissions. And on slide 20, income from operations for restaurant business was 6.9 million RMB Adjusted EBITDA was 9.4 million RMB. Next, I will review the probability of our group. Please turn to slide 21. Group net income at 65.2 million RMB compared to 117.4 million RMB a year ago. That was negatively impacted by a foreign exchange loss of approximately 33 million RMB. Group net income per ADS, that's basic and diluted, decreased by 44% to 65 cents RMB. And core net income per ADS, basic and diluted, non-GAAP, decreased by 26.1% to 92 cents RMB. Let's now take a look at slide 22. As of September 30, 2024, The company had total cash and cash equivalents, restricted cash, short-term investments, investments in equity securities, and had deposits of 1,883.9 million RMB compared to 1,737.2 million RMB as of 2-30-2024. The increase was mainly attributable to continued operating cash inflow and repayments of loans from franchisees. On slide 23, we now anticipate revenue for our hotel business for the full year 2024 to decrease 8% approximately compared to the year of 2023. This is based on our operating performance so far this year, in particular lower than expected travel in the third quarter, and a strategic review of our LO hotels that led to the net closure of nine hotels by the end of third quarter, and contributed nearly half of the decline. This concludes our prepared remarks. Operator, We are now ready to begin the Q&A session. Thank you.

Thank you. If you would like to ask a question, please press star then 1 on your telephone keypad. If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. Once again, ladies and gentlemen, that's star then 1 to ask a question, and we'll pause for just a moment to assemble our roster. And our first question today comes from Kevin Wong with Spiker Capital. Please go ahead.

Good evening. Thank you for taking my question. I'd like to have two, if I may. The first one is, can you talk about the trend of the industry? How does the company's performance in the third quarter compare to other peers? And my second question is about the restaurant business. It seems that the business turned profitable in Q2 and turning even better in Q3. What do you expect for Q4, Dennis?

Okay, Kevin, this is Alex. Thanks for the two questions. In terms of the trend in the hospitality industry for the year, we have compared like-to-like, I think, our portfolio has higher percentage of aged hotels, legacy hotels. So as a result, that our raw power impact during the downward trend is more severe compared with the newly opened hotels portfolio. And we noticed our newly opened hotels has a much better performance than the aged hotels. And we have a track record of 20 years. So we have accumulated more legacy hotels in that end. So the downward pressure is more noticeable after the mid-August, like August 15th, and we see a more downward trend in the travel industry. But in October, we have also happily observed an improvement in the occupancy trend. So we expected the fourth quarter will be performing better than the third quarter. And with the more and more newer hotels adding to our portfolio, we think our trend is will be reversed and will be outperforming the average of the industry in one year or two with our substantial new products coming online. So that's on the hospitality side. On the restaurant, we have worked really, really hard on trying to reposition our business model. The past, our store are located in, for instance, in supermarket anchored shopping malls. which severe drop of the food traffic. And the substantial number of those are closed, repositioned into street stores. And secondly, we also made improvement in the supply chain side, because in the restaurant, the business model heavily relied on the food traffic, the supply chain, the management system, and also the team. So as a result, I think we have performed better than the industry average in the restaurant chain side. We're happy to see a continued profitability, and we will continue to select new locations to add the new stores at our own pace. So to make sure that, as I pointed out to you, the profitability can be sustained. So we have all business segments contributing to the bottom line. So, Kevin, that's the... this trend in the restaurant. And we are still optimistically cautious about the restaurant business because we will see how the consumer trend will change, will shift. and how we can deliver more value at a more affordable price. And that's, I think, what the majority of the consumers are looking for. So we'll continue to improve our restaurant operating model. Thank you so much for these two questions.

Very clear. Thanks.

Thank you. And as a reminder, to ask a question, please press star then 1. We'll pause for just a moment to assemble our roster. And once again, let's start in one to ask a question. Today's next question comes from Betty Du with UBS. Please go ahead.

Thank you for giving me this chance to ask questions. I also have two questions, and the first might be, Could you give us some more color on your expectations for the sector's supply and demand landscape going forward? Would the current fast supply expansion continue in 2025? And my second question would be, what measures are the company planning to take in the next one to two years to further improve your rapid and mid-current macro conditions? Thank you very much.

Thanks, Betty. The industry's competition intensified a great deal, but we are getting into a more normalized period. Last year, there was a big surge after the pandemic finishes. So this year, I think we'll see a normalized competing environment. However, there are a lot more new hotels, new brands, and on the supply side, And the demand side, I think, has not caught up. As a result of that, we'll see, you know, the downward industry-wide raw power decrease. And you can see from our all hotels segment. The downward pressure was not as much as our franchise hotels because our franchise hotels has a lot more older models there. So we are pretty confident our new products in the new locations and are going to be a lot more competitive. So we expect a better performance in 2025 for the year, both on the rural part as well as our hotel openings, because we see we'll have many, many new hotels in the pipeline. And not only in the third tier city, We also had substantially more new hotels in the pipeline in the second tier city. The second tier city consists of primarily the regional economic centers and the provincial capital cities. I think that those locations that once we have newer hotels, we'll better showcase our hotels' presence in those regions. We'll further help to improve our Tier 3 cities' hotels' performance. So overall, we are very optimistic about our own 2025 outlooks and performance. In terms of raw power, as I said to Kevin earlier, we see an improvement in the Q4 of this year already. However, it is really, I think, difficult to project the travel pattern next year because the light of the right now, the economic environment, But the green crease business model has been more resilient. For instance, as you can see from our mixed up portfolio, we may be hurt a little bit in the company side because when you have more hotels in the second and third tier cities, Our raw power is not as high in the first tier city. So as a result, our fee incomes, other related incomes are not as high as comparing with some of the tiers, which has a large hotel portfolio in the first tier city. However, the second and third tier cities has a higher profit margin than the first-tier cities. The first-tier cities, basically, you have higher rent, higher personnel cost, and as a result, the profit margin is much smaller than the second, third-tier cities. So our franchisee has a lot more room to grow, and we expect that our profitability and the raw power for the second and third tier cities will be stable, to say the least, or at least will withhold the pressure, withstand the pressure from the market fluctuations. So hopefully back here I answered your questions regarding our 2025. Thank you.

Thank you.

Thank you. And as a reminder, if you would like to ask a question, please press star then 1 on your telephone keypad. Our next question today comes from Lewin Liu with China Security. Please go ahead.

Okay, thank you for taking my question. I have two questions. The first is about, as we see, the third quarter financial portfolio OTAs like Seacraft and Dongcheng, we still see they can achieve double-digit growth in the hotel industry despite the situation. What do you think about the bugging power as a hotel side? Like for see for for for the following like for for next year. And this is my first question. And the second question is about I see that we have like an investment or a new project like in which old probably like for I think to call this very slow that can you tell them color on this project. Yeah.

Thanks, Levin. With regard to the OTAs and online travel agencies taking more market shares, I think that's really understandable because we are moving into the digital period. And I think that the double digital growth is taking the shares from the offlines. and not necessarily in terms of the overall industry, hotel, hospitality demand increased a double digit. And we are working closely with all of the reputable online travel agencies. I think as long as they're mutually profitable, we can bring in their business with affordable commission costs. I think that will become... you know, the new ecosystem and the new win-win situation. And that we are, you know, we think that that trend, the average consumer become younger and younger and that they will use their, you know, digital tools to make the reservations. And so we're basically taking notice of that trend and working closely with them With regard to the Guizhou project, we have strategic partners in the four or five-star hotels, which we potentially will bring into the group in the future. there there is a noticeable well-known projects over there that's ideal for a showcase four star five star hotels there and the local government has sought our corporations help to reposition that asset and to make it workable, reopen that, reposition, reopen that in the near future. So we're really happy to have the opportunity to work with the local government and to make the non-performing asset work.

Thank you. Thank you for your answer, yeah.

Thank you. Thank you. And once again, to ask a question, please press star then 1. We'll pause for just a moment to assemble our roster. And once again, that's star then 1 if you have a question. Today's next question comes from Victor Lee with DMHY. Please go ahead.

Good evening, management. Thank you for taking my question. I have two questions. The first one is about the dividends. The dividends were announced in the second quarter, and now we see the performance in the third quarter is lower than expected. So do you have any plan to continue to pay the dividends in the future? And my second question is about the liquidities. Can you tell us how you plan to improve the liquidity in the capital market? Since the company has previously mentioned that the company is considering several paths to boost the liquidity, so is there any progress or timetable now? Thank you.

Thanks, Victor. I will answer the question, and Selena, you can always jump in. With regard to the dividend, Victor, even though we see the third quarter net income dropped and looks like a large number of drops, like 44%, However, we are pretty confident because some of the cost of the drop, as Selena mentioned to you in the report, 33 million of that drop is really a paper loss of the foreign currency. Because we have a portion of the deposit is in U.S. dollars. I think the third quarter, the beginning of the end, the conversion, basically there is a $33 million people lost there. Then I think there is $11 million, a bad debt provision for the long-age accounts receivable. We're pretty also confident that a lot of them eventually will be worked out. We're given the opportunity for the franchisee to work out their hotel performance, improve the hotel performance a little bit better and slowly improve. And some of those will be paid back. So in addition, we have legacy hotels being improved. And that's resulted because we have a large percentage in the legacy hotels. So resulted of the rail product decrease and more than the industry. We also see that a large number of newly opened hotels had a better performance. So on the going forward basis, we think our operating income and EBITDA will also improve significantly. As a result, our dividend policy will continue and Like we stated in the past were not, you know deviate from the past plan and the strategy we have announced and regarding to the liquidity We have, I think, also shared with our analysts and investors that our company is going through reorganization. And as a result, the parent company will... merged with our GHD as a result of that and some of the shareholders in the parent company will become direct shareholders of the GHD and therefore will increase the liquidity and hopefully that will help and boost our liquidity in the long run. I think that's our that's our current, we are still on schedule, but because there are a number of approving, you know, approval process, so hopefully that will be completed soon. And thanks, Victor. Thank you.

Thank you for your answer. Thank you. And as a reminder, if you'd like to ask a question, please press star then 1 at this time. And ladies and gentlemen, as a final reminder, if you'd like to ask a question, please press star then 1. This concludes our question and answer session. I'd like to turn the conference back over to Selina Yang for closing remarks.

Thank you, operator. 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. Thank you. This concludes today's conference call. We thank you all for attending today's presentations. You may now disconnect your lines and have a wonderful day or evening. Thank you.