Huazhu Group Limited (HTHT) Q2 2018 Earnings Conference Call Transcript

Huazhu Group Limited (HTHT -1.01%)
Q2 2018 Earnings Conference Call
August 22, 2018, 9:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Huazhu Group Q2 2018 earnings conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to ask a question, you will need to press *1 on your telephone. I must advise you that this conference is being recorded today, Wednesday, the 22nd of August 2018.

I would now like to turn the conference over to your speaker for today, Miss Ida Yu. Thank you. Please go ahead.

Ida Yu -- Senior Manager of Investor Relations 

Thank you, Ivy. Good morning, everyone. Thanks to all of you for dialing in today and welcome to our second quarter 2018 earnings conference call. Joining us today is Mr. Qi Ji, our Founder and Executive Chairman, Miss Jenny Zhang, our CEO, and Mr. Teo Nee Chen, our CFO. Jenny and Teo will present the strategy review and the Q2 results. Following their prepared remarks, management will be available to answer your questions.

Before we continue, please note that the discussion today will include forward-looking statements made under the safe harbor provision of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. Huazhu Group does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

On the call today, we will also mention adjusted financial measures during the discussion of our performance. Recalculations of the measures to comparable GAAP information can be found in the earnings release that was distributed earlier today. As a reminder, this conference call is being recorded. The webcast of this conference call as well as the supplementary slide presentation is available on the investor relations section of Huazhu Group's website at ir.huazhu.com.

Now, I would like to turn the call over to Jenny. Jenny, please.

Jenny Zhang -- Chief Executive Officer

Good morning, everyone. I'm pleased to report that Huazhu continues to deliver very strong second quarter results, both operationally and financially. As shown on page two of our presentation, our blended RevPAR continued to grow with double-digits at 13%. As a result, our net revenues increased by 26%.

With a better RevPAR and increasing scale, our operating income margin expanded by 4 percentage points, from 21.9% a year ago to 26.6%. Accordingly, our adjusted EBITDA margin also reached 38.3%, up from 35.7% a year ago. Later, Teo will provide more financial data.

Let me walk you through our progress in our strategic focuses this year. The three focuses as shown on page three are the fast expansion of midscale hotels and the focus on continuous growth in same-hotel RevPAR, and the innovation in the upscale hotel segment.

Let's take a look at the progress made in upscale hotel growth. Page four shows the fast expansion in our hotel comps and the room comps. At the end of Q2 this year, our mid and upscale rooms inventory increased by 39% from a year ago, accounting for 34% in total rooms in operation. As shown on the right-hand side of the page, our pipeline for mid and upscale rooms account for approximately 80% of the total number of rooms in the pipeline, up from 57% a year ago.

Our diversified mid and upscale hotel brand portfolio with very profitable hotel operating models continue to attract franchisees into our hotel network. Today, I would like to highlight two brands, Mercure and Crystal Orange. Let's take a look at Mercure first.

We not only have expanding Ji Hotel as our midscale flagship. We also successfully relaunched Mercure since we acquired the franchise rights of this brand early 2016. At the time, the brand only had 7 franchise hotels in operation and 2 in pipeline. As shown on page five, at the end of Q2, we have 28 Mercure hotels in operation and 44 in pipeline. We opened 5 Mercure hotels in August and we will open one more before the end of August, giving our total hotels opening of 6 within this month alone.

In the first half of 2018, the same-hotel RevPAR for the Mercure brand grew by 10%. In addition to a remarkable RevPAR performance, this brand has also been fully integrated into the Huazhu operating platform with the application of all the technologies and the procedures, which allow it to run with project-level efficiency. The staff-to-room ratio is currently at 0.2, representing a 40% savings in headcount and personnel costs compared with its original model.

And on page six, we also demonstrated a very successful integration of Crystal Orange. As you may recall, we consolidated Crystal Orange back office operation within 100 days after the acquisition. Since the beginning of 2018, more efforts have been made to drive higher revenue growth and improve the efficiency at a hotel-level. At the same time, we accelerated the expansion of this brand.

The same-hotel RevPAR grew by 8.7% in the first half of 2018, faster than 7.7% in the comparable period last year. The hotel development also accelerated. At the end of Q2 2018, we had 182 Crystal Orange hotels in operation, an increase of 44 hotels from a year ago. Meanwhile, the number of hotels in the pipeline also grew from 65 a year ago to 113 by the end of Q2 this year. Cost-wise, staff-to-room rate is reduced from 0.26 to 0.22.

Our sizable loyalty member base and strong centralized booking boost Crystal Orange's direct sales by 10 percentage points, from 62% to 72%. Clearly, we still further room for improvement going forward, but we are very excited about the first year results and are confident that we will achieve more with Crystal Orange in the next year.

In summary, on page seven, we have good progress in the midscale and upscale segments. As a result, the revenue contribution from our mid and upscale hotels have continued to increase. In Q2 2018, the revenue from mid and upscale hotels increased by 62% to ¥1.2 billion, accounting for 49% of our total net revenue, up from 39% a year ago.

With that note, let's shift to the second strategic focus area of growing the same-hotel RevPAR. The result in this front is attributable to three factors. The first one is, of course, the company-level effort and the second is the macro economy and the demand in this market. The third one would be the industrywide supply situation.

Recently, we have received a lot of questions over the slowing down in consumer retail sales. Investors also would like to understand how will that impact the lodging industry. I will try to share our view and observations while reporting our Q2 RevPAR performance, as they are related.

First of all, I'll take a few minutes to look at the consumer retail sales growth and the domestic travel expenditure growth from 2012 to 2017, as shown on page eight. As you can see, the domestic travel expenditure growth has consistently been much faster than consumer retail sales in China. In recent years, 2016 and 2017, the domestic travel expenditure growth significantly outperformed the consumer retail sales growth.

Therefore, we are confident that the total demand, as driven by general economy, increased affluence in the society, and a lifestyle change in this country will continue to grow robustly and exceed the growth rate in retail sales. Therefore, we are not significantly concerned about some of the recent trends in the consumer retail sales growth fluctuation.

Turning to page nine, Huazhu's same-hotel RevPAR performance has been growing in line with China's domestic travel expenditure growth. Although the last year, comparable RevPAR base was very high at 8.3%, we continued to report a 7.9% same-hotel RevPAR growth in Q2 this year.

If we take a deep dive of the same-hotel RevPAR growth number, we shall take a look at page 10. The main attribute is the ADR growth, as we continue to attract customers who are willing to pay a little bit more and are looking for better quality products. For the first time, we have our own occupancy performance shoulder to shoulder with the China industry average.

As you can see, our occupancy has been consistently high with some seasonal fluctuations from 86% to 96% during the past few years. The China hotels, as an industry, the occupancy has been fluctuating between 63% to 72%. Huazhu as a group has outperformed the industry by 17 to 24 percentage points among the different quarters.

I would like to reiterate that this result has been achieved with the background that Huazhu has been growing very fast with gross hotel openings of 737 and 665 in 2016 and 2017, respectively. We are confident that we will be able to maintain a very strong occupancy trend as well as growing our ADR going forward.

Recently, we received some further cautions on the RevPAR growth outlook and how will that impact Huazhu's financial performances. I want to share with you a little bit more of history to help you predict the future. Please turn to page 11.

The top part of this chart shows the same-hotel RevPAR growth history for Huazhu from 2011 to 2017. As I mentioned earlier, there are three factors impacting the same-hotel RevPAR growth. Number one, the company-level effort, number two, the macro economy and the demand situation, and number three, the industry-level supply situation.

As you can see, before 2015, the general demand has actually been strong. However, Huazhu was really focusing on expanding our network and was not really particularly making an effort in terms of improving the same hotel RevPAR growth. And the industry supply has been growing very fast for the economy hotels, which was the only segment we played a few years ago.

So, with that, you can see our RevPAR growth was not that great before 2016. However, since 2016, our effort has been shifted to better quality as well as more brand building efforts. That has significantly changed the trend of our same-hotel RevPAR growth. Therefore, there might be some fluctuation at a macro level, but as far as our strategy, it's steady and we continue to invest in the quality and brand building we believe we will outperform our competitors in terms of same-hotel RevPAR growth.

At the second level, if you look at the second part of this page, we also showed our EBITDA margin from 2011 through 2017. Despite the fluctuation of our same hotel RevPAR, the EBITDA margin actually has been quite consistently growing year after year, mainly because we have been adopting an asset-like model and that helps us to surf through different economic environments as well as fluctuations in supply and demand.

So, going forward, we will continue our asset-light model with a continuous focus on product innovation that meets evolving needs of our consumers and franchise owners.

Let's move to the third area, which is our innovation and exploration in the upscale segment. I'm happy to report our progress in this segment on page 12. Just a week ago, we announced a strategic acquisition of Blossom Hill Hotels and Resorts. Rooted in Zhejiang and a position as an upscale resort brand, Blossom Hill provides luxury boutique hotels and resorts with an authentic décor and culture touch. We see this acquisition as a win-win for both Huazhu and Blossom Hill.

With the addition of Blossom Hill to our hotel portfolio, we are able to offer more diversified choices to our over 100 million Huazhu Rewards members. At the same time, this acquisition will improve Blossom Hill's occupancy level, cost efficiency, and will also accelerate their expansion. By integrating Blossom Hill with our existing hotel portfolio and providing more choices for our customers, we aim to further strengthen Huazhu's presence in the upscale hotel and resort segment.

With that, I will turn the call over to Teo, who will walk you through our Q2 operational and financial results in more detail.

Teo Nee Chuan -- Chief Financial Officer

Good morning, everyone. Please turn to page 14. At the end of Q2 2018, our total number of hotels in operation has reached 3,903. During the first half of 2018, we opened 274 hotels, with 65% under the mid and upscale brands. During the same period, we closed 117 hotels. Considering the acquisition of Blossom Hill and our robust pipelines, the full-year target for Huazhu's hotel openings has been revised upwards from 650 to 700 to 680 to 730.

As part of our quality control exercise, we will also tighten up our quality control by terminating certain franchisees who fail to maintain the quality standards through further upgrades and procurement from the authorized suppliers through Huazhu's centralized procurement platform. In these connections, we will also revise up the full-year target for hotel closure, from 200 to 240.

Page 15 shows that our hotel pipeline has reached 839 at the end of Q2, a record high number. Those hotels in the pipeline are expected during the next 6 to 18 months. In these connections, we are confident of our hotel openings target for this year.

Turning to page 16, in Q2, our RevPAR grew by 13.2%. This was driven by an increase of ADR of 13.8% year over year, mainly due to the increasing mix of midscale hotels, RevPAR increased from better quality economic hotels.

Let's move on to financial results on page 17. Our net revenue grew by 35.9% year over year in Q2, keeping the high-end of our guidance. Breaking down the revenue growth in Q2, net revenues from our leased and operated hotels improved by 23% year over year and net revenues from our manachised and franchised hotels was up 37% year over year.

In Q2, revenues for manachised and franchised hotels accounted for 34.3%, up from 22.5% a year ago. With our asset-light growth model, we expect to see the contribution from manachised and franchised hotels will continue to grow going forward.

As demonstrated on page 18, our Q2 operating profits grew by 53.2% and the operating margin expanded by 4.7 percentage points year over year to 26.6%, mainly driven by operating efficiency and partially offset by increased pre-opening expenses. The hotel operating costs and other operating costs as a percentage of net revenue decreased by 2.3 percentage points year over year. This was mainly due to our improved RevPAR and better operating efficiencies from scale.

The pre-opening expenses as a percentage of net revenue increased by 2.1 percentage points, as there were more midscale hotels under construction compared to last year. The SG&A expenses and other operating income as a percentage of net revenues decreased by 0.3 percentage points year over year.

The other operating income in Q2 included ¥35 billion of compensation received from reselling shareholders as the final settlement on the sales and purchase transactions. Excluding this one-off compensation, the Q2 operating margin would have expanded by 3.3 percentage points instead of 4.7 percentage points.

The SG&A expenses in Q2 was mainly due to increase in personnel costs relating to new hotel developments, design teams for the midscale hotels, the team for information technology, and the quarterly accrual of a long-term profit bonus. In 2017, we accrued the entire sum of the long-term profit-sharing bonus in Q4 2017.

Turning to page 19, as mentioned in our Q1 conference call, the new accounting rules effective from January 1st, 2018 require companies reporting under the US GAAP to reflect the unrealized gains and losses from the fair value changes relative to the previously known available for sales investments in the income statements. The unrealized losses in Q2 from equities was due to the lower share price at the end of Q2 compared to those at the end of Q1.

These unrealized losses will have a significant impact on our GAAP net income going forward. To better reflect our core financial performance, we excluded the impact of these fair value changes in presenting our adjusted EBITDA and net income. However, the adjusted EBITDA and net income on this page has not excluded the effect of EBITDA received from a Accor, totaling ¥103 million and also a foreign exchange loss of ¥130 million, which is also related to our investment in Accor.

The strong RevPAR growth and better operating efficiency drives our profitability. In Q2, our adjusted EBITDA increased by 35% year over year to ¥965 million, while our adjusted EBITDA margin expanded by 2.6 percentage points from 35.7% to 38.3%. Our adjusted net income increased 39% year over year to ¥558 million, while the adjusted net income margin expanded from 20.1% to 22.1%. The adjustment mentioned on this page include the share-based compensation and I realize [inaudible].

Moving on to cashflow status on page 20, in Q2, our net cashflow operation reached ¥1.1 billion, while the CapEx will maintain this new development totaled ¥192 million. As a result, the free cashflow in Q2 was ¥948 million. In this quarter, we used this portion of our excess cash to repay ¥535 million of our US dollar syndication loss. At the end of Q2, we had cash and cash equivalents and restricted cash of approximately ¥4.5 billion.

Finally, our guidance on page 21 -- for the third quarter in 2018, we expect our net revenue to grow 10.5% to 12.5% and we also maintain our full-year revenue growth rate ranging from 18% to 22%. As for the hotel openings, as mentioned earlier, we have revised the full-year across hotel openings, from 650-700 up to 680-730 after considering the acquisition of the Blossom Hill hotels.

With that, let's open the floor for questions.

Questions and Answers:

Operator

Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question, please press *1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the # key. We'll pause for a moment to compile the Q&A roster.

Your first question comes from the line of Billy Nun from Bank of America Merrill Lynch. Your line is open.

Billy Wong -- Bank of America Merrill Lynch -- Analyst

Hi, good morning, management. I have two questions. The first one actually is just a follow-up with Jenny's comment regarding the macro economy slowdown. We saw that, as you described, like the company should be more defensive to this sector and the company should be able to grow that EBITDA even during a downturn. Can you share what you see so far in terms of the most recent RavPAR data? And also, in terms of franchisees' interest in opening more hotels, has the recent slowdown in the economy started to impact these two matrixes a little bit?

Jenny Zhang -- Chief Executive Officer

Honestly speaking, the travel industry is a lagging industry when there is any economic fluctuation. So, we haven't really seen any meaningful change in terms of the demand. There was some fluctuation in the first two weeks of July in the travel demand, mainly because quite a few provinces actually started the children's summer holiday much later than the regular year. That had some impact for a couple of weeks. Other than that, the demand situation we are seeing continues to be strong.

Billy Wong -- Bank of America Merrill Lynch -- Analyst

Okay. Thanks. Just to follow up on that, our Q3 revenue guidance growing 10.5% to 12.5%, what kind of RavPAR assumption growth factored in?

Jenny Zhang -- Chief Executive Officer

So, Q3 numbers are not released to the public yet. We will address that when we close to the quarter.

Billy Wong -- Bank of America Merrill Lynch -- Analyst

Okay. And then separate questions regarding the Blossom Hill acquisition -- can you tell us a bit more in terms of the valuation that will pay and the company's P&L, the target company P&L? Also, in terms of strategy, is there a possibility to bring this resort type of brand to a tier one city like Shanghai and Beijing?

Teo Nee Chuan -- Chief Financial Officer

Hi, Billy. This is Teo. The purchase valuation for the entire stake of the company is approximately ¥650 million. Excluding our [inaudible], we expect with a full realization of the revenue and cost strategy, we expect the EBITDA multiples would be approximately 13 times.

Billy Wong -- Bank of America Merrill Lynch -- Analyst

Okay. Thanks.

Teo Nee Chuan -- Chief Financial Officer

Coming to the way that we would explore the possibility of moving the brand into the tier one cities, this is definitely a possibility.

Billy Wong -- Bank of America Merrill Lynch -- Analyst

Okay. Thank you.

Operator

Your next question comes from the line of Justin Kwok from Goldman Sachs. Your line is open.

Justin Kwok -- Goldman Sachs -- Analyst

Thanks. Good morning. I have two broader questions, one on the strategic move to the upscale high-end hotels and another one on the margins. On the first side, you made a slide talking about the progress on the Mercure and also, now you have another Blossom Hill acquisition.

I wanted to get a sense on the strategic move to the upscale. Are you prepared to do a lot more M&A in the space or are you prepared to grow your own brands, like with Joya, Grand Mercure, Mercure into a much larger pie? In that line, are you prepared also to acquire more assets in order to build some flagships to showcase your brand? That's the first part.

The second question on the margins -- I think as Teo mentioned, excluding some of the one-off items, your operating margin is around 3+ percentage points on a year over year basis. How are you seeing this trend in the second half and also to the next two to three years? Is it more a sustainable try or are there other considerations we should look for? Thanks.

Jenny Zhang -- Chief Executive Officer

Okay. I will address your first question and ask Teo to address the second one. We see a clear trend of consumption upgrades in China. Therefore, we have been moving our portfolio and expanding in midscale and now into upscale segments. So, we are following our consumers in that growth strategy.

In terms of acquired brands and growing our own brand, those two strategies are combined in our practice. We would typically acquire a brand which is complementary to our existing portfolio and then use all the stress in development and in operational excellence and efficiency to strengthen that brand and grow it into a meaningful player in the market.

We have found that for quite a few brands already. If you look back, we did that for Ibis Styles. We talked about them in earlier quarters. We successfully did that for Mercure. We also achieved very good results with Crystal Orange. So, we will repeat that practice for Blossom Hill, which today is still very small, but we see a lot of potential in this brand.

At the same time, you can see our home-grown brands are also doing very well. Hanting continues to expand with very strong same-hotel RevPAR growth. Ji Hotel, phenomenal growth, together also with a good RevPAR performance. Our new [inaudible] like Manxin also receive very good reviews from the consumers, [inaudible] or new innovation in urban hotels.

So, we have actually been very successful in launching both our home-grown brands as well as expanding the acquired brands. We believe we are becoming the hub of brands in the hotel industry in China.

Teo Nee Chuan -- Chief Financial Officer

Hi, Justin. Let me address the second questions on margin. In the previous call, we had been mentioning that we've given our asset-light model and we've been increasing in scale in our centralized operating platform. We will continue to see improvement in our margin expansion. You would expect that [inaudible] percentage point increases net margins going forward as well. The RevPAR perform much better, then you add percentage points to our margins.

Justin Kwok -- Goldman Sachs -- Analyst

I see. Okay. Thanks.

Operator

Your next question comes from the line of Tallan Zhou from Deutsche Bank. Your line is open.

Tallan Zhou -- Deutsche Bank -- Analyst

Good morning, management. I have two questions. The first question -- I hear that July the school vacation has been delayed for one week. So, how does that actually impact your RevPAR growth? Second question -- in terms of the guidance, is it possible for us to break down a little bit, for example, how much will be contributed by the new hotel opening and how much be will found in the RevPAR growth? Thanks.

Teo Nee Chuan -- Chief Financial Officer

Let me answer your questions. I think we have not disclosed our monthly RevPAR as what the impact is. But what we have been seeing is that during the first two weeks of July, as mentioned by Jenny, there were some delays starting the holiday in some of the provinces in China. As a result, the RevPAR growth, I would say, was a bit slower at the beginning of two weeks, but in the second half of July and continuous into August, we see that the RevPAR has actually increased very strongly, back to a normal level. So, we are not disclosing the RevPAR numbers until we close our books in September.

Tallan Zhou -- Deutsche Bank -- Analyst

Okay. The second question is about your guidance. Any chance you can break down a little bit, for example, how much will be contributed by the new hotels?

Teo Nee Chuan -- Chief Financial Officer

We have quite a bit of new hotel openings in Q3 and Q4. But these hotels, they are mainly in the ramp up period, so the impacts are not expected to be significant.

Tallan Zhou -- Deutsche Bank -- Analyst

Okay. Thanks.

Operator

Your next question comes from the line of Juan Lin from 86Research. Your line is open.

Juan Lin -- 86Research -- Analyst

Hi, good morning. Thank you for taking my questions. My first question is on the plan of hotel closure. You mentioned the reason you are terminating the franchisees is related to quality standards and procurement process. Could you please elaborate on this issue? Are you expecting more hotel shutdowns due to a similar issue and are there any costs and expenses associated with this shutdown process?

The second question is related to the acquisition of Blossom Hill. Since that acquisition of Blossom Hill is quite different from your existing hotel portfolio, I wonder whether it means that you are shifting or expanding our focus into the holiday hotel and resort sector. What type of difficulties and synergies do you think you will have in operating Blossom Hill in the future? Thank you.

Jenny Zhang -- Chief Executive Officer

Of course, we have clear quality standards for each brand. If you look at the closure, the closure are mainly focused on a few brands. The first one is Hanting, which is mainly due to when the franchise agreement expires, we generally require the franchisee to invest into a renovation of their hotel. In the case where the franchisee refuses to do so, we will not continue to renew their contract. So, that has resulted in some numbers of closure for Hanting.

The closure for Starway, Elan, and Hi Inn are mainly due to our entry quality control in the past few years hasn't been strict as we are today. Therefore, as we raise the bar, some of the franchisees couldn't keep up with the new standards. Typically, it's after a friendly discussion, we agree in between the two parties to remove the flag from their property. So, those are the main closures due to quality issues.

In terms of Blossom Hill, number one, we clearly see very fast-growing demand for resort and holiday facilities for the Chinese consumers. Blossom Hill definitely has been a very well-established brand in that regard.

At the same time, we don't think a brand should be viewed as a wholly location-based brand. That means a brand that's starting with a resort product can also open their urban version. And an urban brand can also open their resort version. So, we don't really view Blossom Hill going forward as a pure resort brand. We also are going to use some of our other brands to enter into the resort market.

As you rightfully pointed out, the operation as well as the marketing of the resort property could present different demand on the capabilities going forward. We are working on that and we believe we will gradually become a leader and expert in that domain.

Operator

Once again, if you would like to ask a question, press * then the number 1 on your telephone keypad. Once again, if you would like to ask a question, press * then the number 1 on your telephone keypad. Your next question comes from the line of Carlton Lai from Daiwa. Your line is open.

Carlton Lai -- Daiwa Capital Markets -- Analyst

Thanks for taking my question and excellent results. I think the first question is regarding the staff ratio between mid-upscale hotels and economy hotels. I noticed that the Mercure brand is now at 20 staff per 100 rooms. I think to me, that looks pretty low for a midscale hotel brand. I think it's much lower than the Mercure hotels in other countries. I'm just wondering what's the difference between the staff ratios in your higher-end hotels and your economy hotels. How do you maintain the level of quality despite fewer staff?

My second question is regarding your debt levels. If I'm not mistaken your FCF, your free cashflow in the second quarter of '18 is a record high for a quarterly basis. So, can we expect faster paydown of debt going forward? Just lastly, I understand that Jenny, now you're part of the board of AccorHotels. I just want to see if there's anything specific that you're trying to achieve in terms of cooperation with AccorHotels Group in the future. Thank you.

Jenny Zhang -- Chief Executive Officer

Let me address the staff to room ratio first. As we discussed with the different analysts in the past, in the core of Huazhu, we are a very technology-driven company. So, in our operation in the hotel, we have adopted very advanced technology, including things like automatic check-in/check-out machines, and a mobile-based system to facilitate room cleaning and maintenance. So, we also have our own proprietary CRM, PMF systems.

So, we manage our operations, both frontline and back office, somewhat differently from the traditional operators to achieve a much higher level of efficiency. So, in summary, the secret recipe, I would say, is our continuous effort and the investment into technology.

Teo Nee Chuan -- Chief Financial Officer

This is Teo. To answer your question on debt level and the use of excess cash -- I would say almost all of our debt offshore is accurate the more you make out all the syndication loans in the US as far as margin financing in the euro/dollar. Most of the cash [inaudible] onshore. We have generally quite a bit of excess cash within China and we are working with the authorities on a number of ways to get approval so we can get cash out and approve of other uses or we would use some of the cash to pay down the debt.

Carlton Lai -- Daiwa Capital Markets -- Analyst

Thank you. Just last question on being on the board of Accor, are we expecting anything different going forward?

Teo Nee Chuan -- Chief Financial Officer

I'm sorry. Can you repeat the question?

Carlton Lai -- Daiwa Capital Markets -- Analyst

Sure. I think Jenny is now on the board of AccorHotels Group. I just want to see if there's anything that we're looking for specifically or are there going to be any differences going forward as far as cooperation with the AccorHotels?

Jenny Zhang -- Chief Executive Officer

Our cooperation with Accor has always been stable and healthy. So, as of today, we are continually working very well with Accor at many different fronts.

Carlton Lai -- Daiwa Capital Markets -- Analyst

Thank you.

Operator

Your next question comes from the line of Mr. [inaudible] from Morgan Stanley. Your line is open.

Unknown Analyst -- Morgan Stanley -- Analyst

Good morning, Qi Ji. Good morning, Jenny. Good morning, Mr. Teo. Thanks very much for the presentation. Congrats on good results. A couple questions from me -- first of all, the guidance of 10.5% to 12.5%. I see these numbers not being a good reflection in the future. So, hear me out here. Basically, in Q2, you gad a revenue growth of, let's say, 28%, but a majority of the growth came from the F&M business, which is very profitable, which grew at 37%, My question is would you be able to give us some guidance of your third quarter revenue growth in F&M business, please?

Teo Nee Chuan -- Chief Financial Officer

Disclosure, we do not usually give out the revenue from the franchise and manachise business as far as the leased and operated business. I would say that let me give a little more color on our revenue guidance for Q3. Now, Q3 has traditionally been our strongest quarter, but having said that, they are affected by the number of seasonality as well as the festivals. To give a little more color, during the first two weeks of July, as we mentioned earlier, there was a delayed commencement of holiday in some of the provinces in China. That actually resulted in a slower start for the Q3.

At the end of September, we have a multitude of festivals which actually have some impact on our [inaudible]. Last year, comparing in 2017, the festivals during the October holiday, the first week of October holiday, which impact is partially offset by the October holiday. So, actually, considering the impact of these festivals as well as the slower start in July, that affected our revenue growth guidance as 10.5% to 12.5% in this quarter.

Unknown Analyst -- Morgan Stanley -- Analyst

Understood. Thank you, Mr. Teo. I'm going to drill down a little bit more, if you don't mind. I know you can't answer this question. What we are trying to understand is that the room growth, because you have already given the guidance in terms of what will be number of hotels in third quarter and fourth quarter, if you see that, the growth will itself be more than 10%, just on number of rooms, and so, the fact that you are saying that your revenue will be only 10% to 12%, is just implies a RevPAR growth of a very small number, which is what everybody's asking you.

Considering that we understand the Moon Festival in July weakness, even then do you see the -- as Jenny mentioned, the demand is actually pretty robust excluding these things, do you expect the RevPAR growth above mid-single-digit because Q2 was so strong at 7.9%? If the demand is still strong, we should expect -- oh, by the way, this is like for like. The actual RevPAR is significantly higher because you are adding a significant number of midscale units, as you explained.

So, this number just doesn't tally. I don't know how to explain this, but it doesn't make sense to have a very low reported RevPAR number based on your guidance or you are lowballing your guidance so that you can beat in Q3. If that's the case, happy to hear that too.

Jenny Zhang -- Chief Executive Officer

I think in all the numbers, there's one factor that we need to keep in mind -- our growth, going forward, is mainly driven by the franchise and management business. Their revenue contribution is typically only one-tenth of our lease hotel. So, despite our room comp growth will be more than 10%, but the revenue contribution from the manachise hotels are going to be smaller proportionally to the lease hotels. That change will have very significant impact on the revenue growth number reported.

Unknown Analyst -- Morgan Stanley -- Analyst

Exactly why I asked the first question of knowing about F&M and growth. But I understand you can't understand. My other question is related to the Blossom Hill. Assuming that you mention ¥50 million or so of EBITDA. May I know is it related to the existing EBITDA and what occupancy level was that ¥50 million EBITDA?

If it is a lower occupancy and as you ramp it up, maybe you can make more money out of that. Secondly, if the ¥50 million do come in fourth quarter, why didn't you raise your guidance a little bit assuming that number should be embedded in the full-year? Thank you.

Jenny Zhang -- Chief Executive Officer

Let me address your question on Blossom Hill. Blossom Hill has been a very respected brand in the market. Across different markets, their RevPAR has been approximately ¥400 to ¥600. That's quite comparable to the upscale hotels in those markets. The occupancy level, because it's currently a pure resort play, the occupancy is not as high as the urban hotels we are running today.

Nevertheless, we believe after we connect them into our loyalty program, we will have a meaningful boost to their occupancy level. As you can see from the performance of Crystal Orange, we have a significant improvement in occupancy, especially the central reservations through connections into the loyalty program. So, we believe the improvements will also happen to Blossom Hill after we complete the integration.

Unknown Analyst -- Morgan Stanley -- Analyst

The question also was about did you not try to increase the guidance for full-year with the help of Blossom Hill a little bit or is it too small to matter?

Jenny Zhang -- Chief Executive Officer

Blossom Hill is very, very small. The room comp is, I think -- it's only 570 rooms as of today. So, I don't think it will have a material impact on our revenue guidance.

Unknown Analyst -- Morgan Stanley -- Analyst

Got it. Thank you. One last housekeeping question, if you may -- what was the percentage of revenue, EBITDA, and net income from Crystal Orange in Q2, please? I'm not sure if you already disclosed it.

Teo Nee Chuan -- Chief Financial Officer

It is approximately like 14%.

Unknown Analyst -- Morgan Stanley -- Analyst

For all three lines?

Teo Nee Chuan -- Chief Financial Officer

Sorry, combined together, Crystal Orange as a percentage of the total revenue.

Unknown Analyst -- Morgan Stanley -- Analyst

Okay. Thank you so much. Thanks again.

Jenny Zhang -- Chief Executive Officer

Thank you for your questions.

Operator

Your next comes from the line of Ming Yu Wu from CITIC Securities. Your line is open.

Yu Ming Wu -- CITIC Securities -- Analyst

Hi, management. I have a few questions here. The first is could you provide some updates on Hanting's [inaudible] operating process? How much of the economy of same-hotel RevPAR growth is contributed by the [inaudible]? And the second question is according to SDR industry-wise, the gross rate of supply has [inaudible] in June and July. Before Q2, in most cases, demand has outpaced the supply. So, can you share some insights on your understanding on supply and demand situation because the pipeline of Huazhu also reached a historical high? Thank you.

Teo Nee Chuan -- Chief Financial Officer

Sorry, I did not hear you clearly. Can you repeat your first question again?

Yu Ming Wu -- CITIC Securities -- Analyst

Okay. So, the first question is can you provide some updates on Hanting 2.0 operating process? How much of the Q2 economy hotel, same hotel RevPAR growth is contributed by the operating of Hanting 2.0?

Teo Nee Chuan -- Chief Financial Officer

Okay. The Hanting 2.0 is updates. It is currently running at approximately 45%. So, in this quarter, it is actually the busiest quarter. There will be more upgrades catching up maybe in the Q4 of this year. What we have been seeing is that the upgrades for the Hanting, as far as the quality is actually pushing up the RevPAR increase for both the existing hotel as well as the upgraded hotels. So, we think the overall Hanting RevPAR growth is approximately coming to 8%, which is very strong.

Yu Ming Wu -- CITIC Securities -- Analyst

Thank you. And the second question is can you shed some light on your understanding about the supply and the demand situation because according to the SDR global data, the gross rate of supply has exceeded that of demand in June and July. Before, in most cases, demand has outpaced supply.

Teo Nee Chuan -- Chief Financial Officer

I do not have access to those numbers that you currently have. But what we have been seeing is that there's a difference between the economic-centered hotel as well as the midscale hotel segment. What we have seen is that the brand concentration in the economy segment has been increasing. It is mainly due to the existing single-branded hotels in this segment.

On the other hand, the supply for the midscale hotels has been increasing at a very fast pace. Having said that, we do see that they are market capacity for this market segment, where currently, the supply is currently slower than the demand. As a result, we have been seeing that in our midscale hotels, we've been seeing our RevPAR increase more than 7%.

Yu Ming Wu -- CITIC Securities -- Analyst

Great. Thank you.

Operator

Excuse me presenters, please continue.

Ida Yu -- Senior Manager of Investor Relations 

Sorry for those still in the queue, due to the time limit, we have to conclude the call today. We are happy and open for those who want to communicate with Huazhu. We look forward to update you in the next quarter. Thank you.

Operator

Ladies and gentlemen, this concludes our conference for today. Thank you for participating. You may now all disconnect.

Duration: 62 minutes

Call participants:

Ida Yu -- Senior Manager of Investor Relations 

Jenny Zhang -- Chief Executive Officer

Teo Nee Chuan -- Chief Financial Officer

Billy Wong -- Bank of America Merrill Lynch -- Analyst

Justin Kwok -- Goldman Sachs -- Analyst

Tallan Zhou -- Deutsche Bank -- Analyst

Juan Lin -- 86Research -- Analyst

Carlton Lai -- Daiwa Capital Markets -- Analyst

Unknown Analyst -- Morgan Stanley -- Analyst

Yu Ming Wu -- CITIC Securities -- Analyst

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