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GreenTree Hospitality Group Ltd. (GHG -1.72%)
Q2 2020 Earnings Call
Aug 13, 2020, 9:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day, and welcome to the GreenTree second-quarter 2020 earnings conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Rene Vanguestaine. Please go ahead.

Rene Vanguestaine -- Investor Relations

Thank you, Rachel. Hello, everyone, and thank you for joining us. GreenTree's earnings release was distributed earlier today and is available on our IR website at ir.998.com, as well as on PR Newswire services. As a reminder, we also posted a PowerPoint presentation that accompanies our comments to the same IR website.

On this call, we are going to refer to this presentation, so please make sure you open it now. Thank you. On the call from GreenTree are Mr. Alex Xu, chairman and chief executive officer; Ms.

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Selina Yang, chief financial officer; Ms. Megan Huang, vice president of sales and marketing; and Mr. Nicky Zheng, our IR manager. Mr.

Xu will present the company's Q2 2020 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 that will follow.

Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as may, will, expects, anticipates, aims, future, intends, plans, believes, estimates, continue, target, is or are likely to, going forward, confident, outlook and similar statements. Any statements that are not historical facts, including statements about the company and its industry, are forward-looking statements.

Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known 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 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 -- Chairman and Chief Executive Officer

Thank you, Rene, and thanks, everyone, for joining our second-quarter earnings call today. Let's start with Slide 5. During the quarter, our performance, as that of the hospitality industry as a whole, continued to be impacted by the COVID-19 with reductions in both business and leisure travel. Overall, though, and despite some local resurgence of infections in June, our business continued to recover.

Our blended ADR decreased 17.4% year over year to RMB 142. Our occupancy rate dropped to 63.4%, and RevPAR decreased 35.4% to RMB 90. If we exclude hotels under requisition, temporary closures and the impact from consolidated entities, RevPAR for same hotel decreased 2.2% to RMB 112. Nonetheless, we continued to expand our market presence across China.

By the end of the quarter, we had grown our geographic coverage to 343 cities across China with 111 new hotels opened and reached a new milestone, exceeding the 4,000 mark with 4,066 hotels in operation. We ended the quarter with 1,087 hotels in our pipeline, up 82.4% year over year. Total revenues were RMB 216 million, a 21.4% decrease compared to the second quarter of 2019. Gross profit decreased 38.2% to RMB 121.1 million.

Net income decreased 26.3% to RMB 93.7 million. Non-GAAP adjusted EBITDA decreased 47.2% to RMB 91.4 million. Net income per ADS decreased 19.7% to RMB 1.01, and the core net income per ADS decreased 40.9% to RMB 0.72. Let's now turn to Slide 7 for further update on the impact of COVID-19.

China effectively contained the spread of COVID by second quarter of 2020, albeit with some restrictions on certain consumer-related activities. So our business was inevitably affected by some business closures and travel restrictions imposed by governments that continued throughout the second quarter, especially during June. As COVID-19 came under control and restrictions were gradually lifted, we saw a return of domestic tourism business travelers. According to the STR data, occupancy rate, ADR and RevPAR of hotels in China improved steadily during the second quarter, partially offsetting the decline observed in the first quarter.

Once again, GreenTree's overall performance was better than the average performance across the hospitality industry in China, i.e., around 20% less decrease of RevPAR. This is thanks to the tireless work and dedication of our hotel staff and franchisees and the strong support of our loyal individual and corporate members. During June and July, new COVID-19 cases were reported in several cities, including Beijing and Dalian. Total measures, including strict travel restrictions, temporary closure of entertainment places and many other leisure places, were reimposed, helping to bring the resurgence of COVID-19 quickly under control.

Now let's turn to Slide 8. We continue to act quickly and strategically to ensure that we are providing as much support as possible to all our franchisees and employees to protect the long-term health of our business. With the resumption of business travel and domestic tourism, we increased our cooperation with our corporate clients and provided additional sales support to our franchisees. During the quarter, we expanded our cooperation with a number of travel management companies to attract more corporate clients and business travelers.

Also, every one of our hotels is expanding joint promotion programs and cooperation with local merchants. With all these efforts and assistance from GreenTree's central office, the performance of our hotels quickly improved, even with the slight dip in June due to the resurgence. Our occupancy rate increased from a low of 21.5% at the end of January to averaging 65% during the second half of May to exceed 75% on the second half of July and to exceed 82% further during the first two weeks of August. With these encouraging trends, we are confident that we can achieve our revenue target during the third quarter of 2020.

I am proud of the Q2 result we achieved, especially considering the difficult environment that we operated under as a result of the COVID-19. Through it all, our business remained resilient and highly adaptable. We quickly adjusted our operation and marketing campaigns to meet evolving consumer preferences and weaker market conditions. We protected our margins, thanks to our flexible cost structure and the measures we implemented over recent quarters and that we will continue to implement for the rest of 2020.

As a result, our sales recovered, and we returned to profitability for this quarter. With the Chinese government's efforts to bring the spread of COVID-19 under control, domestic tourism and business is gradually bouncing back. On July 15, 2020, the Ministry of Culture and Tourism lifted restrictions on interprovincial travel. The lifting of these restrictions is stimulating business travel and summer travel and helping the hospitality sector to deliver steady and improved performance.

After the lifting of the restrictions, we have observed another 10% increase of our occupancy. With assistance and support from the government and our business partners, together with our core strengths, such as our large, loyal membership base and the strong operational capabilities and our proprietary technologies, we are well-positioned to deliver another year of outstanding service to our guests, strong performance to our franchisees and sustainable growth to our shareholders. I will now pass the call to Megan Huang. Megan, please go ahead.

Megan Huang -- Vice President of Sales and Marketing

Thank you. Thank you, Alex. Moving to Slide 10. At the end of the second quarter, we had 4,066 hotels in operation, 37.6% higher than a year ago.

Thirty-five of these hotels were leased-and-operated, or L&O, hotels, and 4,031 were franchised-and-managed, or F&M, hotels. While the mid-scale segment remains the core of our business with almost 64.2% of all local hotels, last year, we expanded more into both the higher-end and economy segments. As a result, by the end of the second quarter, the number of hotels in the mid-to-upscale and the luxury segments increased to 7.8% of the total portfolio, and the economy segment grew to 28%. Our entry into these segments will enhance our ability to cross-market our different brands.

We have also increased our dominant position in tier-3 and smaller cities. As a result, 66.8% of our hotels were in these cities end -- at the end of the second quarter. On Slide 11, you can see that we opened 111 hotels, compared to 134 in second quarter 2019, a 17.2% drop. One hotel was in the luxury segment, 28 were in the mid-to-upscale segment, 50 in the mid-scale segment and 32 in the economy segment.

Five were in tier-1 cities, 34 in tier-2 cities, and the remaining 72 were in tier 3 and the smaller cities in China. More than 26% newly opened hotels were luxury and mid-to-upscale hotels. Meanwhile, we closed 43 hotels, five due to brand upgrades, 20 due to noncompliance with our brand and operating standards and 18 due to property-related issues. So net-net, we added 68 hotels to our portfolio in the second quarter.

Slide 12 shows the growth in our pipeline of new hotels. Despite COVID-19, our pipeline increased from 1,025 on March 31, 2020, to 1,087 on June 30, 2020. Around 40% of these hotels are in the mid-scale segment, about 35% in the economy sector and around 25% in the mid-to-upscale and the luxury segment. Slide 14 summarizes the impact of COVID-19 on our second-quarter operating performance.

The RevPAR decreased year over year due to COVID-19 to RMB 90. However, excluding the impact of Argyle and Urban, our RevPAR was RMB 95. Our F&M hotels ADR decreased 17.4% to RMB 142. Occupancy rate dipped 17.6% to 64%, and the RevPAR decreased 35.2% to RMB 90.

While our L&O hotels ADR decreased 19.7% to RMB 173, occupancy rate dipped 24% to 47%, and RevPAR decreased 47.1% to RMB 80. The L&O hotels' performance was impacted by both COVID and as well as recent and ongoing renovations that were delayed due to COVID. Two of them will be completed this quarter. Slide 15 shows the quarterly RevPAR change.

As you can see, RevPAR for our L&O hotels decreased 47.1% year over year to RMB 80, and the RevPAR for our F&M hotels decreased 35.2% to RMB 90. But RevPAR is rebounding from the first-quarter level. Slide 16. We now have about 49 million that are loyal individual members and 1.56 million corporate members, up from approximately 46 million and 1.52 million as of March 31.

During the quarter, around 93.7% of all room nights were sold directly, primarily due to our individual and corporate members. With that, I'll pass the call over to our CFO, Selina Yang.

Selina Yang -- Chief Financial Officer

Thank you, Megan. Please turn to Slide 17. Total revenues decreased 21.4% year over year to RMB 216 million. Total revenue from F&M hotels decreased 22.7% to RMB 165.7 million, while total revenue from L&O hotels decreased 16.8% to RMB 50.3 million.

The decrease was primarily due to the impact of COVID-19, which resulted in declined RevPAR of L&O hotels and F&M hotels, renovation of five L&O hotels, delay in new hotel openings, as well as partial reduction and extension of sublease income recognition. Slide 18 shows that hotel operating costs were RMB 94.9 million, up 20.2% year over year. The increase was mainly attributable to higher rents, higher depreciation and amortization and the consolidation of operation costs for Argyle and Urban. Argyle's costs increased compared to one year ago, primarily due to rents for two L&O hotels in development.

Excluding the impact from acquired entities, hotel operating costs for this quarter decreased 6.2%, which was primarily due to a decrease in salaries of hotel staff and regional general managers and decreases in utilities, consumable, food and beverage, which resulted from the lower occupancy rate. Selling and market expenses were RMB 12 million, a decrease of 26.6% year over year. The decrease was mainly attributable to sustainable reduction in costs for advertising and meals. Excluding Argyle's and Urban's expenses, selling and marketing expenses in this quarter decreased 37.6%.

General and administrative expenses were RMB 48.1 million, up 21.1% year over year. The increase was primarily attributable to higher depreciation and amortization for our property and equipment, increased consulting fees and the consolidation of expenses from Argyle and Urban. Additionally, a one-time bad debt regarding to account receivable due to COVID-19 was accrued. Excluding the impact from acquired entities and accrued bad debt, our G&A expenses decreased by 21.6%.

Overall, total operating costs and expenses grew 14.8% year over year to RMB 155.1 million. Excluding impacts from acquired entities, our total operating costs and expenses decreased 6.4% compared with one year ago. On Slide 20, you see that gross profit decreased 38.2% year over year to RMB 121.1 million in this quarter. Gross margin decreased from 71.3% to 56.1%.

Net income decreased 26.3% to RMB 93.7 million, and net margin decreased from 46.2% to 43.4%. These year-over-year decreases were primarily due to the impact of COVID-19. On Slide 21, we can see that adjusted EBITDA decreased 47.2% year over year to RMB 91.4 million. Adjusted EBITDA margin decreased to 42.3%.

Core net income decreased 40.2% to RMB 74.6 million, and core net margin was 34.6%. Please turn to Slide 22. Net income per ADS decreased 19.7% to RMB 1.01. That's equal to USD 0.14, while our core net income per ADS basic and diluted non-GAAP decreased 40.9% to RMB 0.72.

That's equal to USD 0.10. Let's now look at Slide 23. As of June 30, 2020, the company had a total balance of cash and cash equivalents, restricted cash, short-term investments, investments in equity securities and time deposits of RMB 1.7 billion as compared to RMB 1.6 billion as of March 31, 2020. The increase from first quarter was primarily attributable to cash inflow from operating activities, changes in fair value of equity securities, proceeds from disposal of investments and offset by loans to franchisees and investment on upgrade decoration.

The cash and cash equivalents provide us with ample resources as we continue to evaluate potential investments and to support our franchisees. On Slide 24, as Alex mentioned, COVID-19 had a significant impact on our business. As a result, we expect a decline in total revenues of 10% to 15% for the full-year 2020 as compared to 2019. This concludes our prepared remarks.

Operator, we are now ready to begin the Q&A session. Thank you.

Questions & Answers:


[Operator instructions] Your first question comes from Justin Kwok from Goldman Sachs. Please go ahead.

Justin Kwok -- Goldman Sachs -- Analyst

Hi. Morning, management. Thanks for taking my question. Hope everyone is safe at the momnet.

Perhaps I'll have three broader questions. The first one, it's in terms of your -- with reference to the guidance that you made on the third quarter and then also on the full year. Can I get a sense on a like-for-like basis what are you seeing on your RevPAR for the 3Q and then 4Q when compared to that of 2019? How much would that be recovered? That's the first question. The second question, it's on the level of competition that you are seeing in the market, especially on the sign-up of the new franchisees.

It's nice to see that your pipeline has actually grown to over 1,000 hotels now. Do you have a sense that you guys are taking more market share? Or what level of competition that you are seeing? And I think the last question is a hot topic now in the market. It's about the secondary listing back to Hong Kong or other markets. What's your view? What are your consideration on that?

Alex Xu -- Chairman and Chief Executive Officer

Thank you, Justin. This is Alex. I'm going to pick up, trying to answer as much as I can. And Selina and Megan, you, too, can supplement.

So regarding the guidance for -- the like-for-like RevPAR for the third quarter and the fourth quarter, we are very bullish, and we are very optimistic and encouraged by the lifting of the restrictions at July 15 by the government for interprovincial travels, even though we still think that travel right now, mainly probably concentrated on the business travel, really required business travel, those are really hard demand but less of leisure because people are still a little bit concerned about travel as of same period of last year. So we believe our business model are very resilient because we have a very loyal base of individual corporate members. As a result, our occupancy, you can see the first two weeks of August already achieved 82% overall. And -- but we have observed that there is more competition from different classes of hotels, which will compress the ADR, such as the competition from the luxury segment, resort types or four- or five-star hotels.

I think their demand is still softer than ours, and we see many, many higher-end hotels reducing their ADR per-hotel rate to attract business. So there is ADR pressure on the third quarter. We believe that ADR will be a lag indicator, and so our occupancy will catch up and with a little bit lower ADR. So our internal expectation of the third quarter, we should be on the RevPAR base perhaps 10% to 15% like for like and compared with the same period a year ago and that the fourth quarter, I think, will pretty much probably arrive at 5% or so below to 10% below last year or roughly.

And on the optimistic side, we, perhaps, will see the same RevPAR at the same period of last year. So that's the -- my first question. And I want to give this opportunity to Selina and Megan to add to see whether this is the right -- my -- our CFO knows the numbers more than I do, I think better than I do. So Selina?

Selina Yang -- Chief Financial Officer

OK. Thank you, Alex. Thank you, Justin, for the question. Indeed, during the first two weeks, we have observed a quick recovery, especially in our occupancy rate.

So with this encouraging trend, we expect our revenues for our third quarter to be down 8% to 13% year over year. If we talk about like-to-like RevPAR, we think our ADR decrease will be in the range below 10%. So if there is no major COVID cases happen during the second half of 2020, hopefully that, in the fourth quarter, our revenue will recover gradually to last year's level. So at least our year-over-year decrease will be less than 5%.

And hopefully, our RevPAR decrease will be in the range -- the decrease will be in the range of 5% -- around 5% as well. So in line with this, we expect a decline in total revenue of 10% to 15%.

Alex Xu -- Chairman and Chief Executive Officer

OK. So Justin, regarding the second question -- thanks, Selina. Regarding the second question regarding the pipeline and whether we are gaining or losing market share, the first -- the second quarter, what we find is that our velocity of adding contract is the same. And considering that our business developers are still not able to travel in all over China, for instance, right now, like in Xinjiang area, there's still some quarantine.

I think just some cities got lifted. And so without the travel, the free travel -- freedom of travel, our signing up, we have the same velocity of last year, for instance, that based on second quarter, we added 173. So that's equivalent to about 700 hotels new addition per year. And -- but we have not observed that our franchisees have still not totally become that energized and adding the new hotels, expanding in the second quarter or first quarter because they're a little bit concerned, including for the hotel opening.

And they took some time to get a better preparation work done because if you open a hotel during the COVID period, the ramp-up period is too long. And in your ramp-up period, you have a higher cost. So our -- some of our franchisees choose to take a little bit more time. So we understand.

We support them. And -- but also, a lot of our franchisees were prepared to grow, but they were also a little bit more cautious during the first and second quarter. But I believe in the third quarter, we should be able to see a much more higher speed of our development in terms of contract signing and that in terms of the -- in terms of increasing to a higher speed of growth in the third and fourth quarter because they have already experience and that GreenTree's business model, we are more resilient, and that was demonstrated in the first quarter and second quarter. We also, overall, have supported our franchisee the most with the least amount of fees and costs.

So you can see from our number of closures, the hotel closures, we are still leading. And in other word, 99% of our hotels franchisees are confident to continue to operate the hotels with profitability in mind. So I think our pipeline -- and we're pretty confident that we think that with the July 15 lifting of the restrictions and also that the occupancy has rapidly increased, the third quarter and fourth quarter, and we should be able to see our franchisee. And our developers are able to getting a better deals in the marketplace because we will see more of the existing hotel, some of the other that, independent or some other local branded hotel owners, are not able to make it.

And they probably are more incentivized and sell to convert. So we see a -- really a bit tick in that end. So that's regarding the pipeline. And so I want to also give the microphone to Selina and Megan to see whether you have anything else to add.

Selina Yang -- Chief Financial Officer

Thank you, Alex. Yes, I'd like to share some thoughts of franchisees from our discussion with them. We observed that our existing franchisees now are capturing good opportunities to open more hotels, targeting different customer tastes, especially when they overcome COVID-19 and then can find more cost-effective properties with sale rents. As for our potential franchisees, they are more focused on the return of investments.

They are more cautious to decoration costs, operational capabilities, customer resources and the system efficiency, which are all related to their cost control. And we think they are all of GreenTree's strengths. So that's why we have confidence that as the industry recovers, we may -- we face more opportunities, and we can capture these opportunities. Thank you, Alex.

Alex Xu -- Chairman and Chief Executive Officer

So Justin, regarding the third question of yours, we understand, and there is a potential risk there and that we're trying to comply with the regulation from both countries. On the other side, we're also talking with our advisor evaluating options for us. So I think there are probably more options available for us because, two years ago, when we first got our IPO, and as everybody knows, our liquidity, we only offered 10%. And our corporate office, we -- our parent company hold 90%.

We never really, I think, sold one share. But if there is a dual listing, then we can further increase our liquidity and complete our first round and not complete the portion of the job. And secondly, it gives the company a little bit more freedom financial resources to further explore the opportunities available in the marketplace. And then we also see, Justin, as you said, that there may be more individual hotel availabilities in the third and fourth quarter.

We also see some local hotel chains, smaller to medium -- midsized hotel companies, may be ready to do some joint ventures or being consolidated. So we have a little bit more resource in that end. So we are evaluating, and our advisors are working on that. And so we are confident that we are able to find a solution that's satisfactory to everybody.

Also mostly, it's a win-win for the company and win-win for the shareholder.

Justin Kwok -- Goldman Sachs -- Analyst

Maybe just one very quick follow-up. Any color on the prebooking status for the upcoming October 1 Golden Week?

Alex Xu -- Chairman and Chief Executive Officer

OK. The -- right now, the prebooking for the October 1, I think, is a little bit less than the prebooking of last year and for a couple of reasons. And that the -- one is there's ample hotels available at that time. And secondly, that people are still a little concerned about the dynamics and the condition at that time.

But I think that from the information we got, we still have a very strong demand for the -- in the pipeline. The pipeline is very close to that of last year. And Megan and Selina, whether you guys can add?

Selina Yang -- Chief Financial Officer

Yes, yes. Typically, our guests start booking hotel -- have those hotels for October since the middle of August, and we're happy to observe that the booking rate around autumn festival and the nation's day now is nearly double the normal level. This is what I can share with everyone. Thank you, Justin.

Thank you, Alex.

Justin Kwok -- Goldman Sachs -- Analyst

Thank you.


Your next question comes from Dan Xu from Morgan Stanley. Please go ahead.

Dan Xu -- Morgan Stanley -- Analyst

Can you hear me?

Alex Xu -- Chairman and Chief Executive Officer

Very clear, Thank you.

Selina Yang -- Chief Financial Officer

Yes, yes. Thank you.

Dan Xu -- Morgan Stanley -- Analyst

I have two questions. The first question is a follow-up on the competition, which is on top -- from the -- another angle is some of the other hotel companies have talked about going into the lower-tier cities, which GreenTree has 70% of their hotels in tier-3 cities and below. Do you see any competition, increasing competition? Or have they gone into any of existing franchisees or potential franchisees? That's my first question, competition. My second question is about this loan -- this bad debt accrual of CNY 9.1 million.

Maybe can you comment a little bit more on that? What is it about? And is it due to the franchisee loan as well?

Alex Xu -- Chairman and Chief Executive Officer

OK. So regarding the competition, because I'm involved with the development in a daily, weekly basis, and so I can provide a very, I think, clear observation in that end, I think at this moment, what we see is less of a competition in third and fourth -- third tiers and the lower-tier cities because a lot -- there were -- last year's competition was fierce because there are so many, including some of the OTA also sponsors some of the so-called soft brand and also that new brand there and from local and from the other companies. So -- and even including from -- the company from India. So they are going everywhere.

This year, I think a lot of them, we see them either close their business and exited from the industry and/or have a seriously reduced the staff -- reduction of the staff. And so we actually see the competition become healthier than that of the last year. So that's from the competition from the third- and fourth-tier city side and I think that that's because our -- we -- in July, we typically -- I think we will bill our full-year system service fees, and that provision for bad debt for the one-time, those yearly, those system service fees that we do not know whether there will be a portion of our franchisees' financial burden is too much that they may not be able to pay in time, I believe that's the reason we have a provision, just a precautious action and have placed the amount over there. And that may or may not happen, so I'm going to defer that to Selina.

Selina Yang -- Chief Financial Officer

Thank you, Alex. And thanks, Dan, for your question, the competition in lower cities, also, we think that the -- I mean, for each single market in lower cities, the earlier entry in this market, the more opportunities still we can capture in the single lower cities; and secondly, also for the hotels in the lower cities, we think it's very important for the management's capabilities, including the capability of remote control and the quality of the general managers. And so that's why in GreenTree, we have -- we can train a team of the general managers. So that's why we can also then qualify those general managers to those remote cities.

And so that's why we can get the good result in smaller -- in tier 3 and even smaller cities. And the second question, I think Alex has explained very in detail, because many franchisees in the COVID-19 have applied for the extension of some fees, including the central renovation fees and the system maintenance fees. Thank you, Dan.

Dan Xu -- Morgan Stanley -- Analyst

Thank you so much. Appreciate the answers.


Your next question is from Billy Ng from Bank of America. Please go ahead.

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

Hi. Good morning. I have one question. Just wonder, maybe Alex and Selina, would you -- have you noticed any change in terms of the business clients and business demand? I guess, like, as you mentioned, the recovery is largely led by the business travelers.

And I guess, initially, maybe there are quite a lot of pent-up demand due to the fact that many of them have not seen their clients for quite some time. But any of the companies or corporates have indicated that in the medium and longer term, they may travel less? Or in terms of the way they travel, they have some change? Or are they demanding more lower corporate rates in a way? And also, in terms of distribution to these clients, are there any major changes? I'm just thinking about like the next six to 12 months and try to see what kind of business demand will be out there eventually.

Alex Xu -- Chairman and Chief Executive Officer

Billy, thank you so much for the question. That's a great -- that was a great question, not only applicable to China, Asia Pacific, but also applicable to other -- in other places. And we are observing the long-term impact due to the short-term COVID pandemic, such as the corporate travel trend and so -- a factor affecting us -- the factors affecting the corporate travel decision makings. So for the -- we are lucky, we are positioning our hotels -- we have positioned our hotels in the priced segment that a lot of what we consider the hard-core need from the distance travelers such as construction, engineering, sales, marketing, all of those essential travelers that could not leave their work, that could not be done remotely.

And so -- and they are also very -- those corporates are also very concerned about the budget because everybody will be having a lower budget overall and concerned about the safety, concerned about the being -- the worker being quarantined in a certain area, both in the loss of the time and also the health factors. So -- but our segment, and I think the demand is there. And we will see -- and just like in July, from July 15 almost to now, for over the past one month, interprovincial -- the restrictions lifting. And we see another bump right now over -- already over 80%.

So the demand from our segment of the business traveler, which is we have 80%, clearly indicated that they need the -- to travel. They need to conduct the business and that the -- but on the higher-priced business travelers, we are not quite sure because they may have a lot of other ways to conducting their businesses. And that -- so the hotel industry, you have a large amount of fixed cost. So unless you really designed the fixed costs and operating structure to begin with, and for many, many hotels, they are not able to reduce their ADRs, reduce their rec rate below a certain rate, otherwise, the hotel will lose money regardless.

So I believe we have really a competitive advantage in the area because of our cost structures. And we design -- along with our franchisees, we're really trying to be the most efficient by deploying the technology and our interactions between our general managers and the managers with our technology that we are able to provide low cost in a still very -- that plagues the environment for the business travelers. So -- and I think that's what we feel our strength, that's how we see our side of the business demand. And the leisure demand, I think, will come back at a later time with -- always, I think the leisure travels, other than pent-up demand to the nearby suburban area travels, the weekend leisure travelers, the interprovincial, I think, leisure travelers will follow once a little -- will lag behind the hard-core need of the business travelers.

So at this moment, we are really encouraged to see that our priced, that the segment and the demand is there.

Selina Yang -- Chief Financial Officer

Yes. So -- I'll -- and Megan has some comment.

Megan Huang -- Vice President of Sales and Marketing

Yes. During this quarter, we expanded our cooperation with a number of travel companies to attract more corporate clients and business travelers.

Selina Yang -- Chief Financial Officer

Yes, yes, indeed, because we observed the contribution from corporate members increased -- have increased 1% every month since the COVID-19 and because we know that the total contribution of our individual members, corporate members have exceeded 80%. So it's not an easy job for the corporate clients to increase even 1% or 2% every month, but we have observed this trend. So it is very good news. And we also observed that the travel management companies, Megan has just mentioned, can charge lower commissions and encourage direct connection between the corporate members and our hotels.

So -- and thirdly, regarding the business demand, we have talked with -- as a weight, a very small sway with our business travelers. They are more cautious to the safety, and not only the safety of staying in hotels, but only the safety of the goods on their business travel. So we think that the cooperation with our food business, food and beverage and with hotels also helped our hotels to commit our -- to serve our guests better than ever before. Thank you.

And Billy, thank you for your question.

Alex Xu -- Chairman and Chief Executive Officer

And Megan, appreciated that. Also, Billy, and you probably can see that we -- because in order to assist our franchisee better, we actually have placed more weight on Megan's role to do -- to be coordinating the entire company's sales and marketing activities and have a direct connectivity with all the major businesses. And the result of this concerted effort that Selina reported to you, and this year, the increased contribution, increased reservations from our businesses -- from our business travelers.

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

I have other questions regarding to ADR. And so right now, we -- I think we are about 15% or 17% below the level of last year in terms of ADR. Occupancy seems to have recovered quite well. But in terms of ADR, can you elaborate a little bit more what drive the ADR in terms of whether -- because of there are a lot of promotional package out there or actually, the regular room rates, the rate is actually coming down as much.

And my follow-up question on that is how long does it take to get back to the normal level? Like do we need to see like for a 15% decline in deposit when you look at other downturns? Once the rate is down, it will take a few -- a couple of years or even longer just to get back to where it was. But the situation could be different. Do you think there's a chance to get back to where they were very quickly once the demand there? Or do you still need to take a gradual approach to bring the ADR back up?

Alex Xu -- Chairman and Chief Executive Officer

Billy, that's a great question that we studied this because we -- clearly, from the PPT, Page 7, the number -- that's the page I discussed. If you looked at that chart, it's quite interesting. Supposedly, we have the worst quarter in Q1. Yet, if you see the Q1 ADR by the industry, I'm just talking about the STR monthly data, for Q1, the ADR drop is only 17%.

But we're supposed to have a Q2 recurring. However, the Q2, the entire industry, the ADR dropped almost 30%. And that's very natural for the hospitality industry because we're kind of -- our management -- the entire industry sometimes takes time to respond to the shock. And in the first quarter, a lot of -- I think in the industry, a lot of hotel managers probably have not responded quickly by adjusting their ADRs to attract the customers.

Even -- some of the thinking behind this, even if you have lowered your ADR, you are still unable to get the guests. So the adjustment of the ADR as a tool to compete online and off-line and slowly -- was slow. By second quarter, during the recovery, you see a reduced demand. This is very elastic.

And sometimes when you take the demand 40%, the ADR sometimes drop 10%. And there's -- I think our industry still have that tradition and that we have to lower the ADR to compete. And all it will take is for one hotel to lower their ADR, lower the rec rates to attract the business from the others, starting then the price war. So -- and we are trying to hold on because we always have a price -- value-priced products and services.

I think that's why you can see that our ADR compression is much lower than that of the industry and by basically just two-thirds. And we are 33% lower in terms of impact and less impact than the rest of the industry. But unfortunately, Billy, that's the industry's plan and tradition. And we are not able to stand alone to reverse that course because our -- with our competition reduce their rate and that our customers will naturally, including our individual members, now so corporate members said, "OK, and that what can GreenTree give to us?" Because they do compare and so do the price shopping.

So we have to compete in the industry, and we hope the entire industry will quickly address back the ADR. But that is why I said earlier, in the third and fourth quarter, we should be able to see our occupancy recovery more rapidly than the ADR recovery. And the -- only when the occupancy achieved -- the entire industry achieve to the same level or similar level last year -- of the level last year, then I think that we see the other hotels will increase their rates. And as a whole, the industry's ADR will be lifted.

And for the time being, we have to be sensitive to the needs of our corporate clients and for individual travelers. And so -- and that's -- you brought up really a great dilemma for the industry, and we're all fighting for that, Billy. So that's our analysis of that ADR dilemma.

Selina Yang -- Chief Financial Officer

Yes. Thanks, Alex. Yeah. During the down cycle, when the occupancy rate is low, we think hotels are more likely to reduce some room rates to attract more guests.

This is the economical rule caused by the supply and demand. And our GreenTree hotels are also affected and ruled by this rule. But the difference from most hotels in the industry, as Alex just mentioned, GreenTree's ADR decrease was less than the average industry level. I think there are three reasons.

The first one, GreenTree's individual members and corporate clients contributed more than 80% of our room night sales. And so the room rates to our members are always lowest first and most stable. And from the viewpoint of our hotel -- of franchisees, if a cost of hotel operating is too high, so there is little room for there -- for the hotels to adjust their room rates. And GreenTree's cost is more competitive in the industry.

So even we have a little discount on the room rate, the hotels can even make breakeven or earn money. And secondly, hotel room rates setting and the participation in campaigns are all organized and supervised by our company sales and marketing department. That's why our ADR are more stable than the average industry level. And finally, I would think, of course, if effective occupancy recovers faster, those room rates may recover faster as well.

Thank you, Billy.

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

Thanks a lot, Alex, Selina and Megan. Really appreciate your insights.


Thank you. Your next question comes from Bruce Mi from UBS. Please go ahead.

Bruce Mi -- UBS -- Analyst

Good morning, management. I only have one question about numbers. So could you please give us a breakdown of the RevPAR growth by city tiers and different hotel segment?

Selina Yang -- Chief Financial Officer

Yes. Bruce, this is Selina. In terms of city tiers, we observed hotels in tier-3 and smaller cities resumed faster than others in the second quarter, we think primarily due to two reasons. First one, different from big cities whose major guests are cross-provincial business travelers.

The hotels in the smaller cities accommodate more local and the short-distance guests mainly. So this kind of guests were affected the least during the COVID-19. And secondly, impacted by the new cases happened around the middle of June. Some big cities' operating performance were impacted --

Alex Xu -- Chairman and Chief Executive Officer

Selina, Selina, can I interrupt for a second? Do you have the -- just happen to have the numbers breakdowns by those tier by the first-, second-, third-tier cities, the RevPAR change, that changed percentage, and you can share it with Bruce.

Selina Yang -- Chief Financial Officer

Sure. The RevPAR change in tier 3, the year-over-year decrease was 27%. And in tier-2 cities, the RevPAR decrease was 42%. And in tier-1 cities, the year-over-year decrease was 50%.

Bruce Mi -- UBS -- Analyst

OK. Can I also -- may I know the different RevPAR growth for the hotel segment, different hotel segment such as mid-scale, up to mid-scale and economy?

Selina Yang -- Chief Financial Officer

Sure. For the RevPAR, year-over-year decrease for economy segment was 39%. And for our middle scale, the year-over-year decrease was 30%. And for the mid to upscale, the year-over-year decrease was 29%.

And for the luxury hotel, the year-over-year decrease was 54%.

Bruce Mi -- UBS -- Analyst

Thanks, Alex. Thank you.


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

Selina Yang -- Chief Financial Officer

Thank you, operator. In closing, on behalf of the entire GreenTree management team, we thank you for your interest and participation in today's call. If you require any further information or have plans to visit us, please contact us. Thank you, everyone.


[Operator signoff]

Duration: 70 minutes

Call participants:

Rene Vanguestaine -- Investor Relations

Alex Xu -- Chairman and Chief Executive Officer

Megan Huang -- Vice President of Sales and Marketing

Selina Yang -- Chief Financial Officer

Justin Kwok -- Goldman Sachs -- Analyst

Dan Xu -- Morgan Stanley -- Analyst

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

Bruce Mi -- UBS -- Analyst

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