GreenTree Hospitality Group Ltd. (GHG) CEO Alex Xu on Q3 2021 Outcomes – Earnings Name Transcript


GreenTree Hospitality Group Ltd. (NYSE:GHG) Q3 2021 Results Earnings Conference Call January 12, 2022 8:00 PM ET

Company Participants

Rene Vanguestaine – Investor Relations, Chairman and Chief Executive Officer for Christensen

Alex Xu – Founder, Chairman of the Board of Directors, Chief Executive Officer

Megan Huang – Vice President of Sales and Marketing

Selina Yang – Chief Financial Officer

Conference Call Participants

Billy Ng – Bank of America

Dan Xu – Morgan Stanley

Simon Cheung – Goldman Sachs


Hello, ladies and gentlemen and thank you for standing by for GreenTree’s third quarter 2021 earnings conference call. At this point, all participants are in a listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. As a reminder, today’s conference 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 Matt. Hello everyone and thank you for joining us. GreenTree’s earnings release was distributed earlier today and is available on our IR website at, 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 GreenTree are Mr. Alex Xu, Chairman and Chief Executive Officer, Ms. Selina Yang, Chief Financial Officer, Ms. Megan Huang, Vice President of Sales and Marketing and Mr. Nicky Zheng, IR Director. Mr. Xu 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 would 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 it’s industry, are forward-looking statements.

Such statements are based upon management’s current expectations and current market and operating conditions and will lead 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 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.

Alex Xu

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 meaningful comparison.

No let’s turn to slide five of the presentation. We are glad to report a satisfactory performance in the third quarter, given the resurgence of COVID in various part of China throughout the quarter. Compared with Q3 2020, RevPAR decreased 1.4% to RMB118. Total revenues increased 16.3% to RMB310.4 million. Income from operations decreased 45.6% to RMB54.9 million with a margin of 17.7%. Net income decreased 61.5% to RMB33 million with a margin of 10.6%. Non-GAAP adjusted EBITDA decreased 33.5% to RMB73.7 million with a margin of 23.7% and earnings per share decreased 59.3% to RMB0.33.

Slide six 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 and RevPAR recovered to 84.3% and 79.1% respectively of their 2019 level, a better performance than the industry average.

Slide eight shows historical weekly RevPAR performance and compares it with 2019. During the third quarter, RevPAR decreased in July, due to the worsened COVID-19 situations in Nanjing city and Jiangsu Province. Fortunately, by the middle of September, RevPAR 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 level 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 our 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 RevPAR 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 3 and lower cities. And 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 lot 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 this segment 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 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 pipelines are located in such cities and we will further capitalize on the substantial opportunities in such locations. We currently thrive 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 will get through the current the pandemic wave, thanks to our business model, the experience that our team and franchisee have accumulated while combating COVID.

Now let me turn to the call over to Megan, who will summarize our business operations in the third quarter. Megan, please go ahead.

Megan Huang

Thank you Alex. Please turn to slide 14 which highlights the year-over-year rebound in our operating metrics from the impacts of COVID-19. Blended ADR increased 7.7% to RMB163. Occupancy rates decreased 6.7% to 7.24%. And the RevPAR decreased 1.4% to RMB118. We opened one 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 operating or LO hotels and 4,564 were franchisee-managed or FM hotels. While the mid-scale segment remains the core for 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 upscale and the luxury hotels accounted for 11.2% of all our total portfolio, while the economy segment remained stable at 25.9%. As Alex mentioned, we also solidified our already dominant position in Tier 3 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 hotel opened in the third quarter were in the mid to upscale and the luxury segments of the market. The company closed 98 hotels, 59 due to noncompliance 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 trend of our quarterly operational performance. For year-over-year comparison, in the third quarter, RevPAR for our LO hotels increased to RMB146. RevPAR for our FM hotels decreased to RMB117. ADR [indiscernible] increased to RMB223 and ADR for our FM hotels increased to RMB161. 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 program, which accounted for most of the 91.3% in direct sales in the third quarter. Individual members grew to 66 million, up from 32 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 nights booked by corporate and individual members in the industry.

With that, I will pass the call over to our CFO, Selina Yang.

Selina Yang

Thank you Megan. Please turn to slide 19. Total revenues increased to 16.3% year-over-year to RMB310.4 million. Total revenue for our FM hotels was RMB194 million, almost the same as the same quarter last year, while total revenue from LO hotels increased 59.4% to RMB106.5 million.

On slide 20, you can see that total hotel operating costs were RMB258.8 million, a 48.3% year-over-year increase. In the third quarter, hotel operating costs were RMB172.8 million, up 60% year-over-year. The increase was mainly attributable to the opening of 34 LO 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 ramp-up costs. Excluding the impact of newly opened LO hotels in the year 2021, hotel operating costs increased to 10.3% year-over-year.

Selling and marketing expenses were RMB16.5 million, a year-over-year decrease of 22.7%. The decrease was mainly attributable to our lower advertising expenses. General and administrative expenses were RMB68.8 million, up 53.6% compared with the Q3 2020. The increase was mainly attributable to the opening of 24 LO hotels since the beginning of the year 2021 and increased onetime consulting fees for the capital markets advice. Excluding the impact from the newly opened LO hotels and onetime consulting fees, our general and 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 RMB54.9 million, 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 LO hotels in the year of 2021 during their ramping up operations. Excluding the impact of newly opened hotels, the income from operations was RMB88.5 million, a year-over-year decrease of 12.3% with a margin increase to 31.5%.

On the same slide, net income is RMB33 million with a margin of 10.6%. Adjusted EBITDA decreased to 33.5% to RMB73.7 million and adjusted EBITDA margin decreased to 23.7%. Core net income decreased to RMB50.2 million with a margin of 16.2%. These decreases in net income adjusted EBITDA are mainly attributable to the increased number of our LO hotels, both newly opened and in the pipeline. Excluding the impact of newly opened hotels, adjusted EBITDA was RMB107.3 million with a margin of 38.2%.

Please turn to slide 22. Net income per ADS was RMB0.33, that’s $0.05. Core net income per ADS, basic and diluted non-GAAP, was RMB0.49, that’s %0.08.

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 RMB1,192.1 million compared to RMB1,291 million as of June 30, 2021. The decrease from the prior quarter was primarily attributable to the acquisition cost of our LO hotels, loans to franchisees and property investments, offset by drawing 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 prepared remarks. Operator, we are now ready to begin the Q&A session. Thank you.

Question-and-Answer Session


[Operator Instructions] Our first question will come from Billy Ng with Bank of America. Please go ahead.

Billy Ng

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 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 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?.

Alex Xu

I will take this question. Okay. Thanks for the question. During the last year, we noticed that the pace of opening of the hotels, the speed is slower because there is factor number one. And during the COVID impact period, the construction, the labor as the planning of them is unexpectedly affected by that. And secondly, we have the higher now the requirement for opening of hotels and is higher than before. Thirdly, we also have sometimes the franchisees are negotiating with the landlord for an extension of the free rent period and also the lack of certain materials and the investment slowdown this opening pace. Nonetheless, we expect our next year’s opening of hotels to be about 700 to 800. We want to maintain at that level.

Billy Ng

Thank you.


[Operator Instructions]. Our next question will come from Dan Xu with Morgan Stanley. Please go ahead.

Dan Xu

Thank you and good morning, Alex, Megan 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 90 hotels and we have other than those that with property issues, we have 58 due to noncompliance. We just want to have some guidance on 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 of 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.

Alex Xu

Okay. Dan, the closure of this period, the more closure of hotels in this period resulted in a noncompliance of our standard due to two reasons. I think the first, as we explore the further capital markets, I think our standard on the requirement of hotels holding all the license is higher. As a result, the hotels not holding all the necessary license, I think, we will properly require the hotels to obtain all of them. And if not, we may not continue to operate those hotels. That’s one reason.

The second is, because of the COVID impact, some, a lot of the hotels that once deferred the capital improvement on the hotels. Now if the deferred maintenance impact the service quality of the hotels then we will also trying 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 it into consideration of the situation. And if the hotel owners decided to use the cash to do something else since they are 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 RevPAR impact of the COVID-19 is lesser than the average of the industry.

So in the future, we believe with our stabilization of RevPAR and unless there is a further bigger impact from the COVID and I think our closure rate will not be more than what we experienced in 2021.

Dan Xu

Thank you Alex. My second question is regarding our expansion plan on the L&O hotels. Should we expect a number of more of L&O hotels expansion in the future? Or we should be expecting more like a single digit kind of opening in the L&O? And probably can I ask one quick question is regarding potential partnerships with other hotel groups. And for example, we used to have a partnership. I think we used to have some investment on New Century, which is another upscale luxury hotel. 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.

Alex Xu

Okay. So, Dan, the expansion of LO hotels in the first quarter of 2021 is to help ourselves to expand into the area traditionally we have a weak presence such as Southern part of China, South Western part of China and also in Central part of China. Now with our presence over there, is boosted by the opening of those LO hotels and the newly developed franchise hotels. I think our purpose of doing our 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 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 plan or what we have done in the past. So that’s from LO 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 Shaanxi, such as Hunan province. We will continue to seek local strong operator to partner with them in the responsive way to benefit both company’s operation to further expand our network looking into lower Tier 3 and the lower tier cities.

Dan Xu

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


Our next question will come from Simon Cheung with Goldman Sachs.

Simon Cheung

Hello. Thanks all for taking my question. I just have one quick question. In relation to your margin trends, I have seen quite a noticeable drop off this quarter, arguably because of your increase in the LO exposures. I wanted to get a sense. 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 lease norms is actually loss making? Thank you.

Selina Yang

Well, thank you Simon. I will take this question. In the third quarter, the newly opened 24 hotels since the beginning of 2021, actually brought us a loss of RMB32 million. So that resulted in the drop of our margin of EBITDA and also drop the margin of our net income. If we exclude 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%.

Simon Cheung

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

Selina Yang

Among the 24 newly opened hotels, about half of them are still occurring loss.

Simon Cheung

Okay. Thanks a lot. Thank you.

Selina Yang

Thank you Simon.


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


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

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