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Huazhu Group Limited  (NASDAQ:HTHT)
Q4 2018 Earnings Conference Call
March 14, 2019, 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 Huazhu Group Limited Quarter Four 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. There'll be a presentation followed by a question-and-answer session. (Operator Instructions) And I must advise you that this conference is being recorded today, the 15th of March 2019.

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

Ida Yu -- Investor Relations Manager

Thank you, Richie. Good morning, everyone. Thanks to all of you for dialing in and welcome to our fourth quarter and full year 2018 earnings conference call. Joining us today is Mr. Qi Ji, our Founder and Executive Chairman; Ms. Jenny Zhang, our CEO; and Mr. Teo Nee Chuan, our CFO. Jenny and Teo will present the strategy review and the Q4 full year 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 provisions 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. Reconciliations of those measures to compatible 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 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?

Min Zhang -- Chief Executive Officer

Good morning, everyone. I'm pleased to report that Huazhu has delivered very strong results for 2018. To help all investors apprehend the scale of our business in different of leased and managed models, we introduced a new metric called hotel turnover, which for managed and the franchised hotels reflect the total revenue captured at hotel level instead of fees charged by Huazhu.

As shown on Page 2, our hotel turnover increased by 23% to RMB29.7 billion in 2018. Our net revenues stood at RMB10 billion, a year-over-year increase of 22%, exceeding the high end of our guidance. Our adjusted EBITDA grew by 37% with a margin of 32.5%, up 3.6 percentage points from 28.9% last year. The adjusted net income increased by 36% with a margin of 17%, up 1.7 percentage points from 15.3% last year. Teo will provide (technical difficulty) analysis later.

Our robust top line growth is driven by both hotel network expansion and RevPAR growth, as illustrated on Page 3. In 2018, Huazhu's number of hotels in operation expanded by 13% net to 4,230 hotels.. Our Group blended RevPAR increased by 10%, as a combined result of the RevPAR growth for mature hotel and the new hotel mix shift to midscale and upscale segment.

Looking forward into 2019, we remain confident that our hotel expansion will accelerate on the back of our strong pipeline growth. On Page 4, our pipeline reached a new record of 1,105 hotels at the end of 2018. This represented 26% of hotels in operation at the end of 2018 significantly higher than 19% at the end of 2017 and 14% at the end of 2016. Approximately 80% of rooms in pipeline are under midscale and upscale brands. Our asset-light model of manachised and the franchised have been our primary business model. Our powerful brand and the loyalty program continued to add value to our franchisees. We consistently grow our hotel portfolio with an increasing mix of manachised and the franchised hotels.

As shown on Page 5, at the end of 2018 our manachised and the franchised hotel rooms accounted for 79% in total rooms in operation, further up by 1% from previous year. About 72% of these rooms are in Tier 1 and Tier 2 Cities, where we believe there are more sustainable demand for both business and leisure travel purpose and that's more resilient in performance. The asset-light model has also reduced our business volatility and helped Huazhu sail through changing economic environment.

Page 6, illustrates the relationship between our same-hotel RevPAR growth and our financial performance. The top chart shows the same-hotel RevPAR growth from 2011 to 2018. The RevPAR growth fluctuates between the low of negative 3.6% to a high of 7.7% during this period. However -- however, you may notice from the chart below that Huazhu continue to expand its EBITDA amount and largely, the margin percentage year-over-year during the same period despite the volatility of the RevPAR growth rate.

Huazhu is able to continue deliver solid financial performance on the various economic environment because we have been growing with an asset-light model as explained earlier with continuous focus on product innovations that meet the evolving needs of our customers and the franchise owners. Before we get into more details of operations and financials, I would like to take a few minutes to review, how we have fulfilled our strategic focus in 2018.

Page 7, shows the summary of our strategic achievements this year. The first focus is the fast expansion for midscale hotels. For 2018, our mid-and-upscale hotel room count increased by 42%, which accounted for 38% of total rooms in operation at the end of 2018. In addition to 1,338 (sic) mid-and-upscale hotels in operation, we have 831 mid-and-upscale hotels in pipeline. Such strong opening and pipeline growth consist of the contributions from mature brands like JI and Crystal Orange, as well as our younger brands like Mercure and HanTing Premium. By leveraging Huazhu's centralized operational platform and over 100 million member loyalty program, these younger brands are poised to take off.

Secondly, our focus on continuous growth in same-hotel RevPAR through quality improvements. In 2018, the same-hotel RevPAR increased by 5.5% with a 5.6% growth in the economy segment and a 5.2% growth in mid-and-upscale segment. Our efforts to upgrade HanTing hotels continued in 2018. As a result, the HanTing operated room ratio increased to 50% at the end of 2018, up from 38% in the prior year, and expect to exceed 60% by 2019.

Thirdly, our focus on innovation in Upscale Hotel segment. The acquisition of Blossom Hill in late 2018 expanded Huazhu's footprint for leisure hospitality. We're also excited about three prime locations signed under Joya brand. I'll elaborate the above points more in the following pages.

Let's turn to Page 8. On the first point, growth of midscale and the upscale hotels. As you can see, our staff expansion in this segment is well on track. By the end of 2018, our mid and upscale hotel rooms inventory increased by 42% from a year ago. As shown on the right hand side of the page, our pipeline for mid and upscale rooms accounted for approximately 80% of the total number of rooms in the pipeline, up from 77% a year ago. Our diversified mid and upscale hotel brand portfolio with profitable hotel operating models continue to attract potential franchisees into Huazhu's hotel network.

On Page 9, to help our investors to better understand our midscale brand and their respective development stage, we categorized these brands according to their scale and the city coverage. In the very next column, in stage I Debut, we have Mercure, HanTing Premium, Manxin and Novotel. Each has fewer than 100 hotels in operation and a coverage fewer than 50 cities, but moving rightward with strong pipeline. This relatively younger brands offer a very unique value proposition to our guests and franchisees.

Stage II Grow, between 100 to 500 hotels and covering 50 to 100 cities. Those brands categorized in the grow stage include Starway, Crystal Orange and Orange Select , Ibis and Ibis Styles combined. They are becoming our new growth (technical difficulty).

The Stage III Flourish represents hotel count of 500 to 2000 and a city coverage of 100 to 400. Thanks to great guest experience and a profitable operating model, JI hotel held 553 hotels in operations at the end of 2018 and 282 in pipeline. The strong growth momentum of JI will continue in 2019. We are optimistic about the industry prospects and the confidence in our quality brand to outperform competition.

In the long run, we anticipate that we will have multiple midscale brands to reach or exceed 2,000 hotels. It is defined as Stage IV Establish in our life cycle analysis. In addition, a few of our midscale brands will grow to over 500 hotels.

I would like to visualize the growth for two brands in the next few pages to help you get a flavor. First of all, JI brand. At the end of 2018, JI hotels covers 132 cities with more than 500 hotels. In 2018, JI brand registered 5% same-hotel RevPAR growth, a very strong momentum. Given JI brand's characteristic design and a superior profitability, we believe that JI brand will continue to accelerate its growth in years to come. The next milestone will be to hit 1,000 hotels and that's expected to be achieved in 2020.

The second example is Mercure. At the end of 2018, we have 39 Mercure hotels in operation and 69 in pipeline. In 2018, the same-hotel RevPAR for Mercure brand grew by 9.6%. In addition to a remarkable RevPAR performance, this brand has been fully integrated into Huazhu operating platform, which allow it to run with Huazhu's efficiency standard and to leverage Huazhu's loyalty program. For example, the staff-to-room ratio is currently at 0.2, represent a 40% saving in headcount and the personnel cost compared to its original model with the staff-to-room ratio of 0.35. We expect Mercure brands to hit its 100-hotel milestone next year.

As mentioned in the last two pages, we have a good progress in the midscale segment. As a result, the revenue contribution from our mid-and-upscale hotels has continued to increase. As shown on Page 12, in 2018, the revenue from mid-and-upscale hotels increased by 52% and account for 50% of total net revenues.

Turning to Page 13. our Q4 same-hotel RevPAR stood at 3.9% resulting in a 5.5% growth for the full year. After six quarters of phenomenal same-hotel RevPAR growth since Q1, 2017 partly due to a low comparable base. The third and the fourth quarter of 2018 reported same-hotel RevPAR growth of 4.2% and 3.9%, which we believe is healthy, and also it represents a more sustainable level of growth. The same-hotel RevPAR growth was mainly driven by ADR growth, as we continue to attract customers, while looking for product innovation to satisfy their needs.

On Page 14, similar to what we shared with you on previous calls, our quarterly occupancy remains at high level of 87% for mature hotels and 90% for the full year outperforming the China industry average by 20 percentage points relatively consistently. For the first two months in 2019, we continue to see a positive trend of same-hotel RevPAR growth.

Finally, please turn to Page 15. I'm pleased with our footprint into upscale resort brand by acquiring Blossom Hill in late 2018, positioned as an upscale lifestyle and resort brand, most of Blossom Hill's hotels are located in typical scenic spots. In 2019, we are going to showcase its new urban hotels at downtown landmark in Shanghai. We also decided to convert VUE Hotel in Beijing Hou Hai, center of the city into a Blossom Hill hotel. This include a conversion from VUE Hotel that will be done near -- near term. This hotel with 80 guest rooms is housed in a costly Historical building featuring a casual cafe, a splendid Spanish restaurant and a bar overseeing Hou Hai.

Last but not the least, heading into 2019, we will continue to focus on a few strategic aspects. As shown on Page 16, first, we will continue the fast expansion of our hotel network. Secondly, we will focus on the Innovative application of technologies to improve guest experience and operational efficiency. Third, we will make steady progress in Upscale Hotel segment. We expect to bring you more exciting news in the next earnings call.

With that, I will hand over the call to Teo, who will provide you a more detailed analysis on operational and financial results. Teo, please.

Nee Chuan Teo -- Chief Financial Officer

Thank you, Jenny. Good morning, everyone. Please turn to Page 18. We are thrilled to report that we continued with our fast expansion growth path in 2018. We opened two hotel every day with a total of 723 new openings in 2018. At the end of 2018, the total number of hotels in operation has reached 4,230. We have achieved a total gross openings of 723 hotels on a net of 484 hotels in 2018. The net openings of 484 hotels represent a 13% growth in hotel count. As Jenny mentioned earlier, we are confident to further accelerate our hotel expansion in 2019 given our increasing pipeline.

Turning to Page 19. In Q4, our Group blended RevPAR grew by 8.1%. This is mainly driven by an increase of ADR of 9.2% year-over-year. The increase in our blended RevPAR was driven by a 6.3% year-over-year increase in mature hotels RevPAR and the increasing mix of mid and upscale and upgraded hotels.

For the full year of 2018, our Group blended hotel RevPAR increased by 10%. The ADR increased by 11.2% and the increase was partially offset by a 1 percentage point decrease in occupancy. You may notice that the absolute level of our occupancy was very high at 87%. This 87% occupancy takes into account of all of our 4,200 hotels in total with 723 new hotels opened in 2018. A significant number of these newly opened hotels are recently completed and are still at the ramp-up stage with a lower occupancy.

Moving on to the financial results on Page 20. Our net revenues grew by 20.6% in Q4 and 22.3% for the full year of 2018, exceeding the high end of our previous guidance. Breaking down the revenue growth in 2018, the net revenues from our leased and operated hotels improved by 18%; and net revenue from our manachised and franchised hotels was up 37% year-over-year. In 2018, the net revenue contributed by our asset-light manachised business model accounted for 25.1% in total revenue, up 2.6 percentage points from 22.5% in 2017. We expect the contribution from the franchised business will continue to increase going forward.

As demonstrated on Page 21, we are referring to the box on the bottom left corner, the hotel operating costs and other operating costs, as percentage of the net revenues decreased by 4.7 percentage points year-over-year. This is mainly due to our improved blended RevPAR -- sorry, a better operating efficiencies from scales. In 2017, we booked impairment loss of RMB169 million in hotel operating costs and RMB35 million in 2018. Excluding the impact of this impairment loss in both 2017 and 2018, the hotel operating costs and other operating costs, as percentage of net revenues would have been reduced by 3 percentage points.

The pre-opening expenses as percentage of net revenues was 2.5% the same as last year. The SG&A expenses and other operating income, as percentage of net revenues decreased by 1.3 percentage points year-over-year. In 2018, there are certain one-time gains recorded in other operating income, such as compensation received and reversal of losses related to the termination of lease hotels totaling RMB130 million; and in 2017, such one-off amount was approximately RMB30 million (ph).

Our full year operating margin expanded by 6 percentage points year-over-year to 23.3%, driven mainly by better operating leverage and improved RevPAR, as well as hotel network expansion and certain one-off gains mentioned above. Excluding the above mentioned one-off gains in both 2017 and 2018, the operating margin would have been improved by 3.3 percentage point in 2018.

Turning to Page 22. In 2018, we record a strong growth in our core earnings driven by both strong RevPAR growth and a better operating leverage. The non-GAAP adjustment mentioned on this page, including the unrealized loss from the fair value changes of equity securities relating to our investment, such as Accor shares and (inaudible) totaling RMB914 million, as well as share-based compensation of RMB83 million in 2018. Excluding these non-GAAP adjustments in 2018, our adjusted EBITDA increased by 37% to RMB3.3 billion, while our EBITDA margin expanded from 28.9% to 32.5%. The adjusted net income increased 36% year-over-year to RMB1.7 billion. While the adjusted net income margin would have expanded from 15.3% to 17%.

Moving on to the cash flow status on Page 23. In 2018, we generated RMB3 billion of net cash from operations. After the capital expenditure on maintenance and new developments is totaling approximately RMB1.2 billion. The free cash flow generated in 2018 totaled RMB1.6 billion. In 2018, we draw down -- we drew down our US dollar syndication loan bank treaty and also raised a margin financing totaling RMB4.3 billion to finance the budget of Accor shares. We invested approximately RMB5.15 billion in total for the Accor shares, for the acquisition of Blossom Hill and some small investments in hotel-related funds. At the end of 2018, we had cash and cash equivalents of RMB4.9 billion.

Turning to Page 24. In 2018, we declared a cash dividend of US$100 million equivalent to US$0.34 -- 34 cent -- US$0.34 per share. This dividend is more than double than the 2017 dividend. Thanks to the tax planning arrangement, we were able to reduce the withholding tax on dividends, we thought (ph) that are out from China from 10% to 5%, thereabout we were able to double the dividend payment, while maintaining the withholding tax amount paid to the tax authorities. We expect to maintain the current level of dividend going forward.

Turning to Page 25. We will implement a new lease standard ASC 842 effective from January 1st, 2019. This will affect our lease, which are on a fixed payment basis with a term greater than 12 months. We estimate that the adoption of this standards will result in the recognition of right of use assets and lease liabilities of approximately US$2 billion to US$2.2 billion (ph) respectively, as of January 1st, 2019.

In the absence of any impairment, there would be no material change of any rent recognized in the income statement. However, given the materially higher right of use assets on our balance sheet, any lease impairment, if any, may be higher, which will negatively impact the operating profit in the year of impairment. Please note that the prior year results will not -- will not be restated with the impact -- impact of this accounting change, and therefore comparative periods remain as reported historically. Upon adoption of this accounting -- of this standard, we do not expect there -- any change in our cash flow statement.

Finally, our guidance on Page 26. In 2019, we plan to accelerate our gross opening to 800 hotels to 900 hotels, 75% of which are midscale-and-upscale hotels. For the revenue guidance, we expect to achieve a net revenue growth rate of 13% to 15% in Q1, 2019. For the full year in 2019, we expect a net revenue growth of 15% to 17%.

With that let's open the call for questions.

Ida Yu -- Investor Relations Manager

Operator, we are ready to take any questions from the investors.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) There are currently no questions at this time. I'll now let's hand the conference back to today's presenters. Please continue.

Min Zhang -- Chief Executive Officer

Operator, we have been noticed that some of the analysts actually pressed, but maybe the system is not working. Can you check?

Operator

Yes. All right. So the first question is from the line of Justin Kwok. Your line is now open.

Justin Kwok -- Goldman Sachs -- Analyst

Hi, thanks for taking my question. Perhaps I'll -- I'll shoot in two question, one on the growth guidance; and the other one on margins. So I think you have a very good finish on 2018 and now your full year guidance is 15% to 17% on the net revenue growth. Can I check? What kind of RevPAR assumption you're baking into this set of forecast?

And on the other hand, have you been baking in the focus for the development or the grooming up of the soft brands, which you have probably announced back in the December -- Huazhu conference anyway (ph) so whether the soft brands would start to kick in any meaningful or small impact in 2019?

The second question on margins is that now in 2018, you got faster rapid growth and also some lower base effect on the G&A because of these long-term share based compensation booking. Into 2019, would there any guidance on the margins outlook moving forward? Thank you.

Nee Chuan Teo -- Chief Financial Officer

Hi, Justin this is Teo. Regarding the growth assumptions, we -- right now, we built in approximately 3% growth in the same-hotel RevPAR, and we have not built in the -- the revenue from our soft brand yet, as the main reason is because that we are still in incubating stage, and we had to -- we had to see that how -- how quickly can we grow this business.

On the second question -- second question is on the margin, we expect that the -- the hotel business will continue to generate a certain amount of margin expansion. However, as mentioned in the last quarter calls, as well as, we'll actually continue to invest some of the margin expansion to build some of the new business, as well as the our software -- as well as the soft brand. In addition, we'll also, as mentioned by Jenny earlier, we'll put in some money, we also invest in some of the experimentations on the upscale brand, so that may insulate some of the -- our margin expansions.

Justin Kwok -- Goldman Sachs -- Analyst

All right. Thanks. Any color on the progress of the soft brand as a follow-up? Thanks.

Min Zhang -- Chief Executive Officer

Yeah. We have deployed a concentrated development team to accelerate the growth of our soft brands. Most of the brands are existing brands that are already in the market for a few years, such as Starway, Elan, Hi Inn. We are also going to launch new brand called Madison in the next couple of weeks, which is going to accelerate our growth in the Upscale segment, In generally (ph) speaking, we are happy with the launch of the expansion acceleration program yet because we are still in the early stage, we don't want to provide unreliable prediction about how much revenue they are going to generate within this year. We will keep you guys updated in our next earnings call.

Justin Kwok -- Goldman Sachs -- Analyst

Thank you.

Operator

Thank you. The next question we have is from the line of Praveen Choudhary. Your line is now open.

Praveen Choudhary -- Morgan Stanley -- Analyst

Thank you. Thanks for taking my call. Hi, Jenny. Hi, Mr. Teo. Very quick question from me. You mentioned about the full year guidance of 15% to 17% revenue growth, it's baking around 3% like-for-like RevPAR growth. Considering Q1 revenue growth is smaller 13% to 15%, is that because your RevPAR assumption for Q1 is much less as in 1% to 2%? Or is it just a function of less number of new openings?

Nee Chuan Teo -- Chief Financial Officer

Okay. The reason why we think that we -- we built in the 13% to 15% obviously because that there was -- number one is that -- that last year, the -- due to the timing of the Chinese New Year is that -- that is actually a high base in the Q1 last year. In addition to that is that we -- from the trend that we see right now, we see that the -- the traffic has been picking up after the Chinese New Year. So we would like to -- we think that the -- the momentum will actually bring in higher revenue growth in -- in the coming quarters. Plus that you may -- actually you may already know is that Q1 is the most volatile season because the -- the traffic has been low -- is the lowest in -- in a entire year. So we -- we would like to built in the -- this assumption, so that we will see how it goes in the next couple of quarters.

Praveen Choudhary -- Morgan Stanley -- Analyst

Okay. Got it. Thank you. Can I also ask that in Q1 of '19, Crystal Orange will be part of like-for-like RevPAR. And the second related question is, when you give us like-for-like RevPAR for full year 3%, what could be the -- what could be the total RevPAR growth. For example, in Q4, you had RevPAR increase of 8.1% versus the same-store sales of 3.9%, so there's a gap because of the mix improvement, right? Just trying to understand, if there was any guidance on the full year number for the total RevPAR not just like-for-like in your growth assumption?

Nee Chuan Teo -- Chief Financial Officer

The blended RevPAR is usually like 3% -- right around 3% -- 3% to 4% increase higher than the same-hotel RevPAR growth. As you -- as you rightly mentioned, this is mainly due to the mix change.

Praveen Choudhary -- Morgan Stanley -- Analyst

And Q1, would you be putting like-for-like -- it's Crystal Orange inside like-for-like ?

Nee Chuan Teo -- Chief Financial Officer

Right. Definitely. Yeah. We will -- we will include the Crystal Orange hotels in like-for-like in Q1.

Praveen Choudhary -- Morgan Stanley -- Analyst

Okay, great. Maybe one last question from me if I can. This whole RevPAR improvement is because of the mix, market wanted to -- our investors wants to understand how long this mix improvement can last. I mean, clearly your pipeline is very much skewed toward midscale. Can you talk about this supply demand scenario in midscale? And if the economy slowdown that we saw in fourth quarter and up to Chinese New Year impacts your midscale supply, demand, occupancy or any such thing? Thank, you.

Min Zhang -- Chief Executive Officer

I think the mix shift will continue. Number one, we are still growing our midscale business very fast. Secondly, even within the midscale, you know, we are accelerating the growth of the upper midscale part of the business. Certainly, we are also putting more efforts into the growth of our upscale business. So all those factors are going to continue, and we expect a long runway for our blended RevPAR growth to continue.

Praveen Choudhary -- Morgan Stanley -- Analyst

Very helpful, Jenny. And again, thank you and congratulations for great set of results.

Min Zhang -- Chief Executive Officer

Thank you.

Operator

Thank you. The next question we have is from the line of Mr. Alan Dang (ph) from CARA (ph). Your line is now open, sir.

Alan Dang -- CARA -- Analyst

Yeah. Hi, thank you. Thank you management for -- for the call and vision. And can I ask you -- on the follow-up on the first quarter assumption. What have you seen for January and February RevPAR growth are same for like-for-like and the blended RevPAR?

And can I also understand that you have mentioned in that you had -- you'll see some -- there is some margin leverage for the hotel business, but put more investment into soft brands and new brands. And would that be -- would that mean that the brand -- the margin for -- blended margin for this year will not expand as much as last year or will -- actually, you will invest on the margin expansion for the investment? Thank you.

Nee Chuan Teo -- Chief Financial Officer

Hi, Alan, let me answer your first question. First in the January and February is that we are still growing on a same-hotel RevPAR growth basis that we are still in a positive territory in the low single digits. But on your following questions, can you repeat that, perhaps one question at a time.

Alan Dang -- CARA -- Analyst

Yeah. So the margin, you -- you mentioned there'll be some margin expansion still for the hotel business, and you'll put more investment into new brand, the soft brands recognition (ph). And as the end result, will we still see margin expansion overall for the Company? Or are we going to see a flat margin more likely for 2019?

Nee Chuan Teo -- Chief Financial Officer

Okay. On this question is that we expect the margin expansion to continue, and then we will spend some money in -- investing in not only the soft brands, but also the new -- some of the new business, as well as on the -- the upscale hotels. We expect that the impact of that, I think very uncertain because we -- we are still at a very early stage on how exactly -- how much money we would need to spend on these investments. So we would see supporting that in the coming quarters.

Alan Dang -- CARA -- Analyst

Sure. Thank you. Another follow-up question on the new hotel openings. Given this -- the macro economy is weaker and then would that impact your hotel openings quite especially the franchisees, the willingness of opening new hotels?

Min Zhang -- Chief Executive Officer

Well, so far, the signing and opening are well on track. And when we look at our business by segment, we see the majority of our business, especially economy hotels and our core and midscale brands actually performed quite strongly in today's (ph) economic environment. So we don't expect the signing and the opening of new hotels will experience any major slowdown.

Alan Dang -- CARA -- Analyst

Okay. Thank you.

Operator

Thank you. The next question we have is from the line of Mr. Billy Ng from Bank of America. Your line is now open, sir.

Billy Ng -- Bank of America -- Analyst

Hi, good morning and congratulations on a very strong set of results. I have two questions. One is, can you give us a little bit more color because when we look at the STR data, January was kind of weak probably because of the timing of Chinese New Year, but it's -- can you provide a little bit more color, what happened after Chinese New Year's and what kind of same-store RevPAR we are seeing roughly speaking in the last few weeks?

And my second question is just can you provide any color or outlook of the M&A market right now. Like in 2019, we looked at some of the public equities, multiple has compressed, but would that become a bit easier or is -- is still quite challenging to find new opportunities within China at this point?

Min Zhang -- Chief Executive Officer

This is Jenny. On the question about the recent performance trend, we have seen January and February combined, we continue to see positive growth of the same-hotel RevPAR, which we believe in today's economic environment, this is a positive indicator. We will discuss the performance in more detail when it comes to our quarterly end disclosure.

And on acquisitions, you know, as you have seen, we have been a active rather cautious acquirer of various brands to reach our strategic goal of creating a strong and full range brand portfolio. So we will continue actively looking into various opportunities, but take a very rational perspective in doing those deals.

Billy Ng -- Bank of America -- Analyst

Thank you.

Operator

Thank you. The next question we have is from the line of Mr. Dylan Chu from CLSA. Your line is now open.

Dylan Chu -- CLSA -- Analyst

Thanks, management for the presentation and congratulations on the good result, good '18. I've got couple of questions, so I'll ask one by one. Firstly, which is in terms of manachised and franchised effective take rate, thanks for sort of disclosing the turnover metric. If my calculations are right, it seems like 4Q, '18 effective take rate on manachised and franchised operations increased both sequentially and on a year-over-year basis. Could you please share some color just in terms of the drivers? Should we consider this sort of signal or actually sustainable? And any sort of guidance on sort of take rate going forward into this year would be very helpful.

Nee Chuan Teo -- Chief Financial Officer

Okay. The take rate -- the effective take rate from the manachised and franchised business has actually gone up -- ticked up a little bit. This is what you observe is correct. This is actually mainly driven by the increasing contributions from the -- our centralized reservation systems. It means that the -- the customer that we push through to -- to our franchisees, so because we charge a percentage based on that -- the traffic that we charge to the franchisees. So the increasing traffic to the franchisees are from our centralized reservation systems will actually contribute positively to our take rate. And we -- it's also our continuous effort to increase the percentage of room night that is contributed by our -- from a direct sales channel. So we -- we hope that this trend will continue, and then is that we will continue to -- to have a higher take rate going forward.

Dylan Chu -- CLSA -- Analyst

Thank you, Teo. That's very helpful. Secondly, just in terms of historical costs, last quarters costs, hotel operating expenses were actually a very strong outcome overall. Could you please just give us a little bit more color in terms of driver of that very strong cost control. And specifically why other hotel operating expenses actually declined -- declined about RMB200 million last quarter -- last year to about RMB150 million despite quite strong revenue outcome. Just any color in terms of costs, would be very helpful.

Nee Chuan Teo -- Chief Financial Officer

Okay. The -- the hotel operating costs, as percentage of revenue has declined, as I mentioned earlier. The main reason -- there are -- there are two -- two main reason behind that. Number one is that the -- we actually run a better operating leverage without increasing number of scales, as well as the increasing contribution from the manachised and franchised business is number one.

And number two, I -- as mentioned earlier in my presentation is that in 2017, there is actually impairment loss of RMB169 million that was recorded in hotel operating costs added, whereas this -- in this year, in 2018, the impairment loss recorded in this line is only RMB35 million. So there is actually a drop of around RMB130 million due to that. So the -- the lower operating costs, as percentage of revenue, it -- it was helped by the reduction in the impairment loss recorded.

Dylan Chu -- CLSA -- Analyst

Great. Thanks. Just question number three, just in terms of openings and quite strong guidance. Just related to this, could you please share and update in terms of CapEx and dividend for 2019, please?

Nee Chuan Teo -- Chief Financial Officer

Okay. Our capital expenditure, we expect to increase our capital expenditure to -- I would say that coming to around RMB1.9 billion -- RMB1.9 billion to RMB2 billion in 2019. The main reason is because number one is that our -- our new hotel capital expenditure is expected to be approximately RMB1.2 billion; and then is that our repair -- our maintenance and upgrade will be approximately RMB400 million. And we will spend -- we would -- we're actually budgeted to spend approximately RMB200 million, as part of the payment for our headquarters, our construction costs.

Dylan Chu -- CLSA -- Analyst

Thanks. Just last question, just sort of operationally. Our -- the hotel pipeline has reached a historical height as well. Just sort of, what sort of the capacity utilization rate of our sort of development team, let's say by end of this year, the pipeline were to increase toward maybe, 1,300 or 1,500, will we need to increase headcount (ph) or sort of our current capability is already enough?

Nee Chuan Teo -- Chief Financial Officer

Okay. Now, I suppose is that you may see that the result of the higher pipeline this year, it was actually our investment in some of the development team that we started off last year. And in the Q2, there was a question of why there was an increase in the G&A expenses, and this is a result of which -- of which. So in fact -- that are (ph) -- this is no. So what we have been seeing is that the productivity from our development team has not been fully released yet. So there may be some benefit in terms of like increasing pipelines from our existing team. However, is that if you go beyond a certain stage, then we may need to increase the -- our development teams further.

Dylan Chu -- CLSA -- Analyst

Yeah, yeah. I understand sir. So I guess my question would be, just given our investments last year around second quarter, so -- so they still have some actual capacity?

Nee Chuan Teo -- Chief Financial Officer

I'm sorry. Can you repeat your question?

Dylan Chu -- CLSA -- Analyst

So yeah I think I got your question -- I got your answer. So -- so that's all from my side. Thanks very much.

Nee Chuan Teo -- Chief Financial Officer

Thank you.

Operator

Thank you. We have the next question from the line of Aras Poon from Citigroup. You may now ask your question.

Aras Poon -- Citigroup -- Analyst

Good morning, management. This is Aras from Citi. So thanks for taking my question. Perhaps can you give us a little bit more colors in terms of the operating trends that you see in Tier 1 and 2 cities and also the lower tier cities? I mean, you have a very strong portfolios in Tier 1 and Tier 2 cities, but given the Company's continue to expand and increase your hotel counts, we are -- should we expect you gradually have more exposures in the lower tiers. So would like to get a sense of how do you see the growth opportunity there and how do you see the trends there? When you say 3% like-to-like RevPAR growth that you are looking for. Do you see a huge difference between the higher tier cities and the lower tier cities? Thank You.

Min Zhang -- Chief Executive Officer

We actually see growth opportunities across all tiers of cities, from Tier 1 to Tier 3. So we are actually going to deploy our development teams to capture the full range of the opportunities. Currently, we don't have a deep penetration into the Tier 3 cities yet, but we see few of our mature brands, such as HanTing, JI hotel, plus with a few others actually have demonstrated strong business case in Tier 3 cities, which give us the confidence to accelerate the growth in those markets. And in terms of the upscale hotels, we also feel, there are demand across all tiers.

Aras Poon -- Citigroup -- Analyst

Do you see the RevPAR trends are fairly different in -- in the higher tier cities and the lower tier cities?

Min Zhang -- Chief Executive Officer

Actually, it's not -- it's little bit difficult to categorize by tier because China's economy has been growing unevenly from region to region. For example, you know, even in Tier 1 cities, Beijing in the recent couple of years has been continuously very strong, but the Shanghai may experience a little bit more fluctuation depending on how the exhibition activities going on from year-to-year. So it's a little bit difficult to just generalize by tier of cities. It's more relevant to think about this region-by-region or city-by-city.

Aras Poon -- Citigroup -- Analyst

Okay. That's very helpful. Thank you.

Operator

Thank you. And we have the next question from the line of Lina Yan from HSBC. You may now ask your questions.

Lina Yan -- HSBC -- Analyst

Hi, management, thanks very much for taking my questions. My first question is regarding your pipeline. You have reached a peak pipeline in 2018. And my question is, do you think this pipeline will continue to grow, maybe you can give us some color from a top down point of view. For example, like for the growing market, midscale-and-upscale, how do you think the market can grow into -- like in terms of total number of midscale-and-upscale hotels. And what's your market share in this market segment?

And then for the more mature economic -- like limited service hotel segment, what do you think the market share consolidation opportunity will help you grow your pipeline in the future? And also like related to the discussion on city tier like exposure. If you talk about a potential growth in pipeline, what kind of opportunity, do we see in Tier 3 cities? And do you still have expansion opportunities in the big four cities? That's my first question.

Min Zhang -- Chief Executive Officer

We have seen -- we have actually conducted a survey recently to understand what kind of market share we are having in China. And according to gross market value, you know, we are only somewhere between 3% to 4% of the total China hotel market (technical difficulty) sort of look into. So number one, we feel we have a lot of room for market share gain in China. And secondly, if you break down into the city-by-city data, we will see the consolidated level of cities varies, but are generally low.

You can see for Tier 3 cities, most of the cities at consolidation level is less than 10%, and the Tier 1 cities are also only between 10% to 25%. So this kind of consolidation level also represents across -- opportunities, you know, across the different tiers of cities. So with that, you know, we believe with our increased efforts and the investment into the development team, we will continue to see our pipeline and opening to grow in the coming few years.

Lina Yan -- HSBC -- Analyst

Okay. That's very helpful. But just a follow-up like for midscale-and-upscale like in three years time, do you think what's the market capacity for that like a total number of midscale-and-upscale limited service hotels?

Min Zhang -- Chief Executive Officer

As you can see in our pipeline, we are going to open a significant number of midscale-and-up hotel -- upscale hotels each year. This year, I believe for midscale-and-upscale alone, we are going to open more than 700 hotel.

Lina Yan -- HSBC -- Analyst

Okay. Thank you very much. And I also have a second question like upgrade is also a very important driver for your overall portfolio. Can you give us the guidance and the progress of upgrade? And what kind of like upgrade are we expecting this year?

Min Zhang -- Chief Executive Officer

As you have seen, we have increased the rental leases (ph) or new product ratio for HanTing to 50% by the end of last year. And we expect to grow it further into 60% by the end of this year. This trend will continue into the next few years.

Lina Yan -- HSBC -- Analyst

Okay. Thank you. But like for this upgrade, we'll -- will we see a structural change like is the upgrade to HanTing 3.0 or even to like a higher -- like a midscale like a kind of upgrade, is there like a further shift in this upgrade?

Min Zhang -- Chief Executive Officer

Most of the HanTing will be upgraded into HanTing new version or HanTing Premium within the same brand portfolio. A small percentage of the upgrade will change HanTing into JI Hotel.

Lina Yan -- HSBC -- Analyst

Okay. Thank you very much. And I have a like last question is on the pipeline. Can you give us more like details on the gross opening. What's the breakdown between owned and leased and franchised and managed. And for closure, what is the breakdown between these two business models? Thank you.

Nee Chuan Teo -- Chief Financial Officer

Sorry. Can you repeat the questions?

Lina Yan -- HSBC -- Analyst

So for 2019 gross opening guidance and closure guidance, what is the breakdown by business models, owned and leased and franchised and managed? Or like what's the gross opening for owned and leased and closure for owned and leased?

Nee Chuan Teo -- Chief Financial Officer

Yes. Our gross opening, we expect to be at 800 hotels to 900 hotels, of which approximately like 40 hotels to 50 hotels will be leased and operated. Whereas for closures is that, we plan to close approximately in the -- in a range of around 200 hotels, maybe in the range of maybe 20 hotels to 25 hotels -- 20 hotels to 30 hotels will be leased and operated.

Lina Yan -- HSBC -- Analyst

Okay. Thank you. Thank you. And would it be possible for you to share with us, what is the same-store RevPAR growth in December last year? And that's my last question. Thank you very much.

Nee Chuan Teo -- Chief Financial Officer

I'm sorry, because the same-hotel RevPAR -- there -- there is statistics of same-hotel RevPAR growth in the 6-K.

Lina Yan -- HSBC -- Analyst

Okay. Thank you.

Operator

Thank you. I would now like to hand the conference back to today's presenters, please continue.

Min Zhang -- Chief Executive Officer

Thank you. Thank you, everyone for taking time today, and we look forward to talking to you in the next earnings call. Bye-bye.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may now disconnect.

Duration: 61 minutes

Call participants:

Ida Yu -- Investor Relations Manager

Min Zhang -- Chief Executive Officer

Nee Chuan Teo -- Chief Financial Officer

Justin Kwok -- Goldman Sachs -- Analyst

Praveen Choudhary -- Morgan Stanley -- Analyst

Alan Dang -- CARA -- Analyst

Billy Ng -- Bank of America -- Analyst

Dylan Chu -- CLSA -- Analyst

Aras Poon -- Citigroup -- Analyst

Lina Yan -- HSBC -- Analyst

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