GreenTree Hospitality Group Ltd. (NYSE:GHG) Q4 2022 Earnings Call Transcript

GreenTree Hospitality Group Ltd. (NYSE:GHG) Q4 2022 Earnings Call Transcript April 7, 2023

Operator: Hello, ladies and gentlemen. Thank you for standing by for GreenTree’s Second Half and Fiscal Year 2022 Earnings Conference Call. . 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 Vanguestaine of Christensen, GreenTree’s Investor Relations firm. Please proceed, Rene.

Rene Vanguestaine: Thank you, Andrea. Hello, everyone, and thank you for joining us. We have posted a PowerPoint presentation that accompanies our comments to our IR website at ir.998.com. On the call today from GreenTree are Mr. Alex Xu, Chairman and Chief Executive Officer; Ms. Selina Yang, Chief Financial Officer; and Ms. Megan Huang, Vice President of Sales and Marketing. Mr. Xu will present the company’s performance overview of the second half and the full year of 2022, 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 that 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 Litigation Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995.

These forward-looking statements can be identified by terminologies such as may, will, 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 expectation and current market and operating conditions and relate to events that involve known and unknown risk, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company’s control, which may cause the company’s actual results, performance or achievements to differ materially from those in the forward-looking statements.

You should not place undue reliance on these forward-looking statements. Further information regarding these and other risks, uncertainties or factors is included in the company’s filings with the U.S. Securities and Exchange Commission. All information provided, including the forward-looking statements made during this conference call are currently — 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 Xu. Mr. Xu, please go ahead.

Alex Xu: Thanks, Rene. Hello, everyone, and thank you for joining us today. First, I do want to make apology to you because of the delays of the posting of the PPT, the meeting was delayed for the 15 minutes. We thank you for your understanding. So 2022 was a year of — full of change and challenges. During the first half, COVID-19 outbreaks in many parts of the country resulted in lockdown in many cities especially in Shanghai. As we enter the third quarter, transportation restrictions were relaxed and RevPAR recovered. However, October and November brought a fresh wave of outbreaks, slowing down of our recovery once again. And to our relief, thanks to the lifting of the anti-pandemic measures early December, RevPAR recovered at the end of the year to more than 95% of its pre-pandemic levels.

Regardless of these external environmental changes, we continued to execute our long-term strategic growth plan that strives to assist franchisees in maintaining quality operations, extending our hotel networks and delivering stable operating profitabilities and maintaining a healthy cash flow. Please turn to Slide 5. Compared with the second half of 2021, RevPAR decreased 4.2% to RMB 112. Total revenues decreased to 21.1% to RMB 487.8 million. The decrease was partially due to the deconsolidation of Argyle since June 2022 and the disposal of our interest in Urban on November 25, 2022. Excluding these impacts, organic revenues decreased 15.7% compared to 1 year ago. Income from operations increased to RMB 20 million, a margin of 4.1%. Excluding this, income from purely operating activities decreased 17.6% to RMB 85 million, with a margin of 17.4%.

And the net income was negative RMB 48.3 million with a margin of negative 9.9%. Adjusted EBITDA as non-GAAP decreased to 21.2% to RMB 118.3 million with a margin of 24.3%. Cash provided by operating activities were RMB 151 million. Slide 6 shows detailed numbers for total revenues, operating income, net income and adjusted EBITDA. On Slide 7, operating performances was continuously impacted by COVID outbreaks during the second half of 2022. RevPAR was at 80.3% and 80.7% of the 2019 levels in the third and the fourth quarter, respectively, exceeding the industry average. Slide 8 shows the weekly RevPAR performance in 2022 and the first quarter of 2023 compared with 2019. In the second half of 2022, due to the resurgence of COVID-19, RevPAR fluctuated in the third quarter and was slowing down once again in October and November.

RevPAR gradually recovered to more than 95% of its pre-pandemic levels in the last week of 2022. RevPAR recovery slowed again during the first half of January due to the rapid involvement of pandemic after pandemic control were lifted in China. However, it recovered to around 90% of its pre-pandemic levels over the Chinese New Year, thanks to family reunions. During this festival, according to the Ministry of Culture and Tourism, the number of tourists recovered to 88.6% and the domestic tours and revenues recovered to 73.1% of the levels in the same period of 2019. Such a recovery continued to increase in February, exceeding the levels of 2019. However, it pulled back a little bit in March due to outbreaks of Influenza A in certain cities.

Now starting with Slide 10. Let’s talk about the strategy and the execution with the further expansion in the mid-to-upscale segment under Tier 3 on the lower cities in South China as well as recent development in 2023 Q1 regarding the acquisition of Da Niang Dumplings and Bellagio, 2 leading restaurant chains in China from our controlling shareholder. Let’s take a look at Slide 11. We have been continuously growing our mid-to-upscale segment over the past few years. For a like-to-like comparison, we have excluded the Argyle and Urban hotels in the past few years. By the end of the second half of 2022, we had 426 hotels. That’s 10.5% of our total hotel portfolio in this segment, up from only 50 in 2017. I will plan to open more in this year.

Please turn to Slide 12. Over the past 5 years, most of our newly — new hotels have been in China’s thriving Tier 3 in the lower cities. In addition, hotels in some lower-tier cities are performing well, and we continue to execute our strategic plan. 72.6% of the hotels in our current pipelines are in such locations and will further capitalize on the substantial opportunities in such locations. As a testament to the soundness of this strategy, over the past 3 years, our business in such cities was much more resilient under the impact of the COVID panned other cities. However, in the first quarter of 2023 with the resumption of trade shows and the government investment promotion and commissions, the recovery in Tiers 1 and Tier 2 cities outpaced the recovery in the lower Tier 3 cities.

Since Q4 of 2020, we have been building flagship on all hotels in strategic locations, especially in Central China and the Southeast and Southwest market. During the first quarter of 2023, we opened 4 LO hotels in east high-speed Railstation, Chongqing Jiangbei International Airport and Fuzhou high-speed Railstation. Our expansion footprint covers Chongqing as well as Hubei, Yanxi, Shanghai and other premises, all well located around transportation hubs, central business districts or government centers. By showcasing our brand and operating standards, we believe these hotels will also help us to attract more high-quality franchisees, further accelerating our growth in these areas. On Slide 13, let me now say a few words about the acquisition of affiliated food and restaurant business.

We completed the acquisition of Da Niang Dumplings and Bellagio during the first quarter of 2023. Da Niang Dumplings is a quick service restaurant chain in China with restaurant covering 236 locations in 35 cities as of December 31, 2022. The chain had 99 operated — self-operated restaurants and 137 franchised restaurants. Bellagio is a casual dining restaurant chain with a restaurant covering 36 locations in more than 14 cities as of December 31, 2022, including in Mainland China, Macau and the Southeast Asia. At the end of the last year, the chain had 27 self-operated and 9 franchised restaurant. For the year of 2022, these 2 brands generated a combined unaudited revenue of about RMB 509 million. Since demand for such healthy and affordable fast food and casual dining services should be more stable and less dependent on discretionary spending compared with our existing hotel services, we expect this acquisition business to provide a more stable revenue stream that may offset cyclical aspects of our hotel businesses.

The restaurant and hotel businesses are also complementary in nature as we witnessed increasing demand for food-related services in the local communities, and we expect cross-selling opportunities from the 2 businesses. We also expect the integration to leverage upon synergies between our respective team within our company’s unique ecosystem, sharing common resources, achieving economy of scales and improving company’s overall operating performance as demonstrated by our stable profit margin and the cash flow. With the recovery of the industry, we will focus on providing — improving operating management efficiency, launching products with expedited recreation and higher cost, higher operating performance, widely and safely upgrade IT system and deploy robotic system and ultimately enhancing the profitability of our franchisees.

The road to recovery is full of hope and also full of challenges. But with the support of our shareholders, franchisees and employees, we are confident we’ll bring better products and services and create greater value for all. Now let me turn the phone call to Megan.

Robert Kneschke/Shutterstock.com

Megan Huang: Thank you, Alex. Please turn to Slide 15, which highlights the growth in a number of hotels and the year-over-year rebound in our operating metrics from the impact of COVID-19. Blended ADR of the fourth quarter in 2022 decreased 2.9% to RMB 165. Occupancy rate decreased , and the RevPAR decreased 11.6% to RMB 104. Moving to Slide 16. For an apple-to-apple comparison, we have excluded the Argyle and Urban hotels and presented the number of the organic hotels only. At the end of the fourth quarter of 2022, we had 4,059 organic hotels in operation, 5.2% more than the year before. 61 of these hotels were leased and operated, or LO hotels and 3,998 were franchised and managed for FM hotels. While the mid-scale segment remains the core of our business with 72.8% of all our hotels, we continued our expansion into the higher-end segment.

By the end of the fourth quarter, mid-to-upscale hotels accounted for 10.5% of our total portfolio, but the apartment segment remained stable at 15.8%. We solidified our already dominant position in Tier 3 and lower cities, where 68.2% of our hotels were located at the end of 2022. On Slide 17, you can see that we opened 136 organic hotels in China, less than planned due to COVID-19 compared to 265 in the second half of 2021. 15 were in the mid-to-upscale segment, 88 in the mid-scale segment and 32 in the apartment segment. 12.1% of these new hotels were in the mid-to-upscale segment of the market, 9 were in Tier 1 cities, 23 in Tier 2 cities and the remaining 104 in Tier 3 and lower cities. We closed 11 hotels, and we added a net 125 hotels to our portfolio.

Slide 18 shows the trend of our quarterly operating performance. In the fourth quarter of 2022, RevPAR for our LO hotels increased to RMB 130. RevPAR for our FM hotels decreased to RMB 103. ADR for our LO hotels decreased to RMB 208 and ADR for our FM hotels decreased to RMB 163. Occupancy at our LO hotels decreased to 62.4% and occupancy at our FM hotels decreased to 63%. Entering the first quarter of 2023, RevPAR continued to recover for both LO hotels and FM hotels. Slide 19 highlights the growth in our membership programs, which accounted for most of our direct sales in the first half of the year. Individual membership grew to 78 million, up from 69 million a year ago and corporate members grew to 1.94 million, up from 1.85 million a year ago.

We have one of the highest percentage of room nights booked by corporate and individual members in the industry. With that, I will pass the call over to our CFO, Selina.

Selina Yang: Thank you, Megan. Please turn to Slide 20. In the second half of 2022, total revenues decreased 21.1% year-over-year to RMB 487.8 million. The decrease was primarily due to the consolidation of Argyle and the disposal of our interest in Urban, and the impact of COVID-19 which resulted in lower RevPAR at LO hotels and FM hotels. Excluding the impact of Argyle and Urban, the total revenues decreased by 15.8% and total revenues from FM hotels were RMB 315.2 million, down 16.8% year-over-year. While total revenues from LO hotels decreased 23.6% to RMB 167.2 million. Also excluding the impact of Argyle and Urban, total revenues from FM hotels decreased to 16.3% and total revenues from LO hotels decreased to 13.6% year-over-year.

On Slide 21, you can see that total costs and expenses decreased 3.5% year-over-year to RMB 66.8 million. Excluding the impact from our newly opened lease operated hotels and other general expenses, the costs and expenses from ordinary cost of our operating business decreased 9.1% year-over-year. Total costs and expenses are composed of hotel operating costs and expenses, selling and marketing expenses, general and administrative expenses. Hotel operating costs were RMB 286.3 million, down 21.5% year-over-year. The decrease was mainly due to the deconsolidation of Argyle and the disposal of our interest in Urban as well as disposal of lease operating hotels. Selling and marketing expenses were RMB 19.7 million, a year-over-year decrease of 27.4%.

The decrease was mainly attributable to lower advertising expenses and staff-related expenses due to less business travel caused by pandemic and deconsolidation of Argyle and disposal of our interest in Urban. General and administrative expenses were RMB 111.2 million in the second half of 2022, down 13.9% compared with second half of last year. The decrease was mainly attributable to the reduction in consulting fees and the consolidation of Argyle and disposal of our interest in Urban. Our general expenses were RMB 65 million in the second half of 2022, which included provisions for loan receivables related to franchisee loans and impairments for certain fixed assets. Turn to Slide 22. Income from operations was RMB 20 million with a margin of 4.1%.

Excluding other general expenses mentioned above, income for operating activities were , with a margin of 17.4%. And net income was negative RMB 23.9 million with a margin of negative 2.5%. Adjusted EBITDA decreased 21.2% to RMB 118.3 million, and margin was same as last year. Core net income was RMB 67.7 million with a margin of 39%. The decrease was primarily due to the impact of newly opened hotels. Excluding the impact of newly opened and pipeline hotels, adjusted EBITDA, non-GAAP for the second half of 2022 was RMB 146 million with a margin of 34.6%. And core net income non-GAAP was RMB 422 million with a margin of 30%. Please turn to Slide 23. Net income per ADS was negative RMB 0.48, negative USD 0.07. And core net income per ADS basic and diluted non-GAAP was RMB 1.17.

That is USD 0.25. Let’s now take a look at Slide 24. As of December 31, 2022, the company had total cash and cash equivalents, restricted cash, short-term investments, investments in equity securities and term deposits of RMB 1,055.5 million compared to RMB 1,079.5 million as of June 30, 2022. The decrease was primarily attributable to the repayment of bank loans offset by cash from operating activities. On Slide 26. Taking into account the recovery in long-term trends and short-term industry fluctuations, we expect total revenues of total hotel business for the full year of 2023 to grow 30% to 35% over the 2022 levels and grow 5% to 9% over the year of 2019 levels. Furthermore, considering the merger of the restaurant business into the group and their revenue contribution from restaurant business, we expect total revenues of the whole company for the full year of 2023 to grow 90% to 95% over the 2022 levels.

That is 50% to 55% over the 2019 levels. This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session. Thank you.

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Q&A Session

Operator: . Our first question will come from Jane Wang of UBS.

Jane Wang: So my first — I have two questions in total. The first is that we’ve seen the deconsolidation of Urban and in Argyle. So do we have further merchant acquisition plans in the future? And what would be the strategic difference? And the second question would be, we see that the current pipeline isn’t quite high at the moment. And do we receive any pressures for new hotel expansions at the moment from hotel investors?

Alex Xu: Okay, Jane. Thank you so much for reaching the question. Great questions. I will pick up those questions. Selina, okay. So with regard to the deconsolidation of Argyle and the disposal of the interest in Urban, that has not changed our strategy. I think we’ll continue to explore new opportunities of merger and acquisitions. And the reason is now, we also have many other smaller investments in the local strong operating teams and local companies. And we have gained valuable experience and lessons during the last 4 years of growth plan. And so with this kind of valuable experience, I think that will help us to identify more accurately, more suitable partners that will further help both companies to grow our business together and to create value for both of the shareholders.

So that is our merger and acquisition plan to supplement our main growth of organic growth. And — but we’ll not lose our focus on the organic growth, which is still the main driver of our business. And we have accumulated a great amount of experience during the challenging time, how to maintain a healthy operation, healthy margin. Just to give you a perspective of the — our audience, the last 3 years, especially 2022 was the toughest year for the tourism and hotel industry. Just giving a perspective. The total tourism revenue for the 2019, that’s a benchmark year, was RMB 6 trillion. And by 2020, because the first half of 2020 is a lockdown, so the full year of 2020, the tourism revenue is roughly RMB 3 trillion. So that’s like a 60% drop, okay?

And then 2021 recovered back to RMB 2.8 trillion, and 2022 brought back to roughly just a little bit over RMB 2 trillion for the tourism industry. So — and with that amount of the tourism numbers and tourism revenue drop, we have been able to maintain a healthy, stable cash flow and operations with the organic growth. So we’re focusing on that, leveraging of the healthy and quick recovery of the industries. But meanwhile, we will not forget about M&A market because we still have capitals to be deployed in a more disciplined way to enhance our growth rate and enhance our returns to our shareholders, okay? So, however, and we’ll be more disciplined and more careful and selecting the right team with a truly complementary resources compared with organic growth and helping us to penetrate into those our wide space and lower coverage area, and the team also have more financial discipline and have the experience in managing the business in the professional or in a systematic way.

So that’s our M&A plan considering the deconsolidation and the disposal of the interest of Urban. With regard to the second question of the new pipeline and a growth rate for the new year. We have observed the 2023, the recovery in the first 3 months are very rapid, and we’re really glad the industry resumed back to a very healthy level. But even with the quick recovery, we saw the culture and the tourism, ministry’s forecast for this year, for the entire industry’s revenues to be RMB 4.5 trillion. So that’s about 75% of the 2019 levels, and the per capita expenditures is about RMB 900 per person compared with a little bit of close to RMB 1,000 per person in 2019 levels. So the budget for individual and business and the government traveling are still under a very tight control.

So this year, our growth is going to be focusing on penetrating to areas where we’re still having a slower — we have a lower coverage and also moving into the first second-tier city seems to be mid-to-upscale segments and that we did observe due to the last 3 years of pandemic. And there’s a lack of adequate capitals for the franchisees. And there are more — a little bit more cautious than before the 2019 levels. So we will have to provide a demonstration of our business models, the resiliencies and the operating efficiency and our supporting capabilities to our franchisees to encourage them to open, to start upgrading their existing hotel portfolios. And we are confident, I think, this year, we’ll resume back to close to levels 2019 and will be substantially higher than that of 2022.

So thanks, Jane, for your questions.

Operator: The next question comes from Dan Xu of Morgan Stanley.

Dan Xu: I have two questions. The first question is regarding your guidance for full year 2023. May I get some more guidance on the RevPAR that you are assuming for the total revenue of hotel business of 30% to 35% year-on-year growth, your RevPAR assumption? And secondly, on the assumption of hotel opening because after the deconsolidation and also the disposal of Urban, I think our hotel number dropped to around 4,000 hotels. So what are our plans for 2023, our hotel number as well? That’s my first question.

Alex Xu: All right. Thanks, Dan. We discussed thoroughly internally our RevPAR recovery of 2023 and also comparing the first quarter increase. And we believe we estimated — we forecast this year our RevPAR we hope will be the same as of 2019. So we’re back to normal levels. And for the several reasons, the total towards the industry’s revenue as we just reported to you — shared with you by the ministry is that 75% of the 2019 level. So in theory, the RevPAR should not be higher. They should be lower than that of 2019 level. However, I think the branded operator, especially the nationwide such as GreenTree have a much higher capital rate of the demand. And therefore, I think that our recovery has always been much better than that of the industry.

So the first quarter, we observed the first or second-tier city, we recovered more than the pre-pandemic levels. We believe that’s due to the many, many travel needs for — accumulated for the past 3 years. For instance, family reunions, many people have not seen their family for 3 years. And then government have a great initiative for investment promotion, so many trade shows and the investment promotion programs are spread in the countries, especially going to Shanghai, Beijing, Guangzhou and Shenzhen area. And the recovery for the first, second-tier city is much quicker, and we believe that’s the main driver. And that driver will gradually, I think, back to normal. And the third and fourth-tier cities because the evolvement of the pandemic was a slower — was trailing to the first- and second-tier cities.

So during the first quarter of 2023, we also see the impact by the third, fourth-tier city by the pandemic as well as the influenza and also the driving forces of the convention facilities in those third and fourth-tier city are not as many. So the third and fourth-tier cities recovery is not as quick as the first and second tier. But we believe that during the second quarter, third quarter, especially during the travel seasons, and many, many of those cities will recover much quicker. So overall, we do expect a stronger second, third quarter from accumulated demand from the past 3 years. So overall, the — our projection of the recovery of the RevPAR is 100% at 2019 levels. And we hope the — with this year’s transition of the economy and the many, many businesses are starting to reposition themselves, so the 2024 would be a much stable for business travelers and for the leisure travelers.

And with regard to the hotel openings, we have a conservative estimate depending on the second and the third and fourth quarters recovery. In the first quarter, the first one in January, February was still impacted by the rapid transition from the pre-COVID and from the — sorry, from pandemic control period to the policy and the control policy being lifted during the third transition to be impacted a little bit. And our assigning speed right now is about 600 to 800 levels per year of the new hotel contracting speed. So we are also adding teams for the development, and we are able to travel a lot more. And comparing with the last year, many, many cities are locked down and prevented our business developers traveling, helping our franchisees, and that we think that we’ll have — recover the new hotel contracts and opening speed to close to pre-pandemic levels.

And meanwhile, we are also going to enhance our existing portfolio’s renovations. We have slowed down quite a bit in the last 3 years. We initially had a renovation plan for the 2019 and 2020, and 2021, but the reality is those 3 years are much tougher for front floor, the franchisees to renovate hotels. And for lack of the adequate confidence and the picture are not clear in terms of when the pandemic will be lifted. Secondly, that the lack of the travels and the quarantine — period of quarantine made it difficult for the hotel to be upgraded. Thirdly, we also have many hotels periodically under the government demand for being used at quarantine hotels. So for those reasons, we really have not had very strict policies for our existing hotels to be upgraded, to be renovated.

But with the lifting of the pandemic measures, we are right now aggressively, proactively working with our franchisees and of a wide spread, products, renovation and upgrade programs. With that in place, I think we will have many, many more new fresh hotels, both on the newly opened as well as the existing hotel upgrade. I think this and next year will give us a great boost in the growth and our planned revenue both from the new hotels and from the existing hotels. So thanks, Dan.