GreenTree Hospitality Group Ltd. (GHG) Q3 2021 Earnings Call Transcript

GreenTree Hospitality Group Ltd. (GHG -6.13%)
Q3 2021 Earnings Call
Jan 12, 2022, 8:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Hello, ladies and gentlemen, and thank you for standing by for GreenTree's third quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, there will be a question-and-answer session. As a reminder, today's conference is being recorded.

I would now like to turn it over to your host for today's call, Mr. Rene Vanguestaine of Christensen, GreenTree's investor relations firm. Please proceed, Rene.

Rene Vanguestaine -- Investor Relations, Christensen & Associates

Thank you, Matt. Hello, everyone, and thank you for joining us. GreenTree's earning 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 the call from GreenTree are Mr. Alex Xu, chairman and chief executive officer; Ms. Selina Yang, chief financial officer; Ms. Megan Huang, vice president of sales and marketing; and Mr.

Nicky Zheng, IR director. Mr. Xu will present the company's Q3 2021 performance overview followed by Ms. Huang who will discuss business operations, and Ms.

Yang will then discuss financials and guidance. They will be available to answer your questions during the Q&A session, which follows. Before we begin, I'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 conference call, are current as of today's date. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or otherwise, except as required under applicable law.

It is now my pleasure to introduce our chairman and chief executive officer, Mr. Alex Xu. Mr. Xu, please go ahead.

Alex Xu -- Chairman and Chief Executive Officer

Thanks, Rene. Thanks, everyone, for joining our call today. Before we begin, let me mention that because of the impact of COVID-19 on our operations in Q3 2020, we will, occasionally, during this call, provide Q3 2019 numbers where we believe this provides a more meaningful comparison. Now let's turn to Slide 5 of the presentation.

We are glad to report a satisfactory performance in third quarter given the resurgence of COVID in various parts of China throughout the quarter. Compared with Q3 2020, revpar decreased 1.4% to RMB 118. Total revenues increased 16.3% to RMB 310.4 million. Income from operations decreased 45.6% to RMB 54.9 million with a margin of 17.7%.

Net income decreased 61.5% to RMB 33 million with a margin of 10.6%. Non-GAAP adjusted EBITDA decreased 33.5% to RMB 73.7 million with a margin of 23.7%, and earnings per share decreased 59.3% to RMB 0.33. Slide 6 provides more detailed numbers for total revenues, income from our operations, net income, and adjusted EBITDA. Please turn to Slide 7.

Operating performance was similarly impacted compared with the last quarter. Our occupancy rate on revpar recovered to 84.3% and 79.1%, respectively, after 2019 levels, a better performance than the industry average. Slide 8 shows historical weekly revpar performance and a comparison with 2019. During the third quarter, revpar decreased in July due to the worsened COVID-19 situations in Nanjing City and Jiangsu Province.

Fortunately, by the middle of September, revpar rebounded quickly to around 100% of its 2019 level. But due to the resurgence of outbreak of cases in different cities nationwide, it dropped to about 81.3% of its 2019 level during the first week of November, but then recovered gradually, reaching 98.5% of its 2019 level in the past -- in the last week of December with the help of a resilient business model, well-segmented and a robust brand portfolio, and the loyalty of our members. As in the last few quarters, the impact on our occupancy and revpar has always been lesser than the average of other hotels in China. Now starting with Slide 10, let's talk about strategy and execution.

First, we are further expanding our hotel network in the mid- to upscale segment and into the Q3 and the lower cities. And second, we continue to optimize our management and operating system constantly. Now let's look at Slide 11. We have been continuously growing our mid- to upscale and luxury segment for the last past few years.

By the end of the third quarter, hotels in this segment had increased to 11.2% of our total portfolio compared with only 2.2% in 2017. We plan to open more hotels in these segments this year. Please turn to Slide 12. Over the past four years, the vast majority of our new hotel openings have been in China's rising tier 3 and the lower cities, where the pace of recovery at our hotels has been faster than in other cities in most quarters.

As we continue to execute our strategic plan, 68.7% of all new hotels in our current pipeline are located in such cities and will further capitalize on the substantial opportunities in such locations. We constantly strive to optimize our management and operating system, including design, technology features, sales, and marketing programs to improve hotel quality and opting performance. Our ongoing efforts in researching and testing property improvement materials allows us to lower our transaction costs that also ensure hotel quality and excellent customer experience. This has been an extraordinarily tough period, but it is one that has been shared across the industry.

As for ourselves, we feel certain that we will get through the current pandemic wave, thanks to our business model, the experience that our team and our franchisee have accumulated while combating COVID. Now let me turn the call over to Megan, who will summarize our business operations in the third quarter. Megan, please go ahead.

Megan Huang -- Vice President of Sales and Marketing

Thank you, Alex. Please turn to Slide 14, which highlights the year-over-year rebound in our operating metrics from the impact of COVID-19. Blended ADR increased 7.7% to RMB 163. Occupancy rate decreased 6.7% to 72.4%, and the revpar decreased 1.4% to RMB 118.

We opened 182 new hotels in the third quarter, less than planned due to the impact of COVID-19. Moving to Slide 15. At the end of the third quarter, we had 4,626 hotels in operation, 10.3% more than the year before. Sixty-two of these hotels were leased and operated or L&O hotels, and 4,564 were franchised and managed or F&M hotels.

While the mid-scale segment remains the core for our business with 62.9% of all our hotels, we continued our expansion into the higher-end segment. By the end of the third quarter, mid- to upscale and the luxury hotels accounted for 11.2% of all our hotels -- all our total portfolio, while the economy segment remained stable at 25.9%. As Alex mentioned, we also solidified our already dominant position in tier 3 and lower cities where 67.7% of our hotels were located at the end of the third quarter. On Slide 16, you can see that in the third quarter, we opened 182 hotels in China, compared to 201 in the second quarter 2021.

Two hotels were in the luxury segment, 70 in the mid- to upscale segment, 83 in the mid-scale segment, and 27 in the economy segment. Twelve were in tier 1 cities, 52 in tier 2, and the remaining 118 in tier 3 and lower cities. 39.6% of hotel opened in the third quarter were in the mid- to upscale and the luxury segments of the market. The company closed 98 hotels, 59 due to noncompliance with the company's brand and operating standards.

The remaining 39 were closed due to property-related issues. The company added a net 84 hotels to its portfolio. Slide 17 shows the trend of our quarterly operational performance. For year-over-year comparison.

In the third quarter, revpar for our L&O hotels increased to RMB 146. Revpar for our F&M hotels decreased to RMB 117. ADR hotels increased to RMB 223, and ADR for our F&M hotels increased to RMB 161. Occupancy at our L&O hotels decreased to 65.2%, and occupancy at our F&M hotels decreased to 72.6%.

Slide 18 highlights the higher growth in both our individual and corporate membership program, which accounted for most of the 91.3% in direct sales in the third quarter. Individual members grew to 66 million, up from 32 million year over year. And corporate membership grew to 1.8 million, up from 1.6 million a year ago. We have one of the highest percentage of room nights booked by corporate and individual members in this industry.

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

Selina Yang -- Chief Financial Officer

Thank you, Megan. Please turn to Slide 19. Total revenues increased to 16.3% year over year to RMB 310.4 million. Total revenue for F&M hotels was RMB 194 million, almost the same as the same quarter last year, while total revenue from L&O hotels increased 59.4% to RMB 106.5 million.

On Slide 20, you can see that total hotel operating costs were RMB 258.8 million, a 48.3% year-over-year increase. In the third quarter, hotel operating costs were RMB 172.8 million, up 60% year over year. The increase was mainly attributable to the opening of 24 L&O hotels since the beginning of 2021, which resulted in higher rents, higher utilities and consumables, higher staff headcount and compensation, higher depreciation and amortization, and higher ramp-up costs. Excluding the impact of newly opened L&O hotels in the year of 2021, hotel operating costs increased to 10.3% year over year.

Selling and marketing expenses were RMB 16.5 million, a year-over-year decrease of 22.7%. The decrease was mainly attributable to our lower advertising expenses. General and administrative expenses were RMB 68.8 million, up 53.6% compared with the Q3 2020. The increase was mainly attributable to the opening of 24 L&O hotels since the beginning of the year of 2021 and increased the one-time consulting fees for the capital market advice.

Excluding the impact from the newly opened L&O hotels and one-time consulting fees, our general and administrative expenses increased by 16.6% year over year. Turning to Slide 21. Income from operations, defined as revenue minus total operating costs and expenses, was RMB 54.9 million, representing a year-over-year decrease of 45.6% with a margin of 17.7%. The decrease was mainly due to the operating loss at newly opened L&O hotels in the year of 2021 during their ramping up operations.

Excluding the impact of newly opened hotels, the income from operations was RMB 88.5 million, a year-over-year decrease of 12.3% with a margin increase of 31.5%. On the same slide, net income is RMB 33 million with a margin of 10.6%. Adjusted EBITDA decreased to 33.5% to RMB 73.7 million, and adjusted EBITDA margin decreased to 23.7%. Core net income decreased to RMB 50.2 million with a margin of 16.2%.

These decreases in net income-adjusted EBITDA are mainly attributable to the increased number of our L&O hotels, both newly opened and in the pipeline. Excluding the impact of newly opened hotels, adjusted EBITDA was RMB 107.3 million with a margin of 38.2%. Please turn to Slide 22. Net income per ADS was RMB 0.33.

That's $0.05. Core net income per ADS, basic and diluted non-GAAP, was RMB 0.49. That's $0.08. Let's now take a look at Slide 23.

As of September 30, 2021, the company had total cash and cash equivalents, restricted cash, short-term investments, investments in equity securities, and time deposits of RMB 1,192.1 million, compared to RMB 1,291 million as of June 30, 2021. The decrease from the prior quarter was primarily attributable to the acquisition cost of our L&O hotels, loans to franchisees, and property investments, offset by drawing down of bank facilities. We will continue to execute our growth strategy, including potential acquisitions, and further support our franchisees. On Slide 25, given the continuing outbreak of COVID in various parts of China, we expect total revenues for the full year of 2021 to grow 25% to 30% over the 2020 levels and 7% to 12% over the level of 2019.

This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session. Thank you.

Questions & Answers:

Operator

We will now begin the question-and-answer session. [Operator instructions] At this time, we will pause momentarily to assemble our roster. Our first question will come from Billy Ng with Bank of America. Please go ahead.

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

Hi. Good morning. Thanks a lot for taking my question. I only have one quick question.

We noticed that the -- actually, the pipeline continued to increase and now the company has about -- or over 1,300 of hotels in the pipeline. Does that mean like we can expect, in the next 12 months, the company will be able to open around that number of hotel given that, historically speaking, the conversion from pipeline to operating hotel normally takes less than a year, sometimes takes like six to nine months? So, can you give us some outlook or comment on the opening expectation for the next few quarters?

Alex Xu -- Chairman and Chief Executive Officer

I'll take this question. Hey, thanks for the question. We -- during the last year, we noticed that the pace of opening of the hotels, the speed really decelerated, is lower because of various factors, number one. And during the COVID impact, the period of the construction, the laborers, the planning of them is unexpectedly affected by that.

And secondly, we have, you know, the higher of -- now the requirement for opening the hotels and is higher than before. Thirdly, we also have a -- sometimes the franchisees are negotiating with the landlord for an extension of the free rent period and also the lack of certain materials and the investment slowdown this opening pace. Nonetheless, we expect our next year's opening of hotels to be about 700 to 800, we want to maintain at that level.

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

Thank you.

Operator

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

Dan Xu -- Morgan Stanley -- Analyst

Thank you. Good morning, Alex, Selina, and Megan. Thank you for taking my question. I have two quick questions.

The first question was about hotel closures. We observed that in this quarter, we closed around -- we closed 90 hotels. And we have, other than those that with property issues, we have 58 due to noncompliance. We just want to have some guidance on the management.

How should we look at the closure annually in the future, say, 2022, 2023? Should we -- because 2021, we have, more than before, more than in the past, kind of closure of 300, we estimate for this year. So, should we expect this number to go down in the future? That's my first question. Thank you.

Alex Xu -- Chairman and Chief Executive Officer

OK, Dan. The closure of this period, the more closure of hotel office purely resulted in the noncompliance, our standard, due to two reasons. I think the first, as we explore further the capital markets, I think our standard on the requirement of hotels holding all the license is higher. As a result, the hotels holding -- not holding all the necessary license, I think, we will properly require the hotels to obtain all of them.

And if not, we may not continue to operate those hotels. That's one reason. The second is, because of the COVID impact that some -- a lot of the hotels that once deferred the capital improvement on the hotels. Now if the deferred maintenance impact the service quality of the hotels, then we will also try to properly close down.

And those are the two major factors. And we understand the hotel is lack of certain cash flow to maintain the quality of the standard, but we will take it into consideration of the situation. And if the hotel owner decided to use the cash to do something else instead of maintaining the hotels, then we wouldn't want to continue to maintain those hotels in our portfolio to ensure the consistent hotel quality. I think that's one of the reasons.

Our revpar impact of the COVID-19 is lesser than the average of the industry. So, in the future, we believe with our stabilization of revpar and, unless there is a further bigger impact from the COVID, and I think our closure rate will not be more than what we experienced in 2021.

Dan Xu -- Morgan Stanley -- Analyst

Thank you. Thank you. My second question is regarding our expansion plan on the L&O hotels. Should we expect a number of more of L&O hotels expansion in the future? Or we should be expecting more like a single-digit kind of opening in the L&O? And probably can I add one little -- one quick question is regarding potential partnerships with other hotel groups.

And for example, we used to have a partnership. I think we used to have some investment on New Century, which is another upscale, luxury hotels. Should we expect the partnership with New Century to stop because of the delisting? Or are we actively are looking for partnership on the upscale side as well? Thank you.

Alex Xu -- Chairman and Chief Executive Officer

OK. So, the -- Dan, the expansion of L&O hotels in the first quarter of 2021 is to help ourselves to expand into the area. Traditionally, we have a weak presence and that -- such as Southern part of China, Southwestern part of China and also in central part of China. Now with our presence over there is boosted by the opening of those hotels and the newly developed franchise hotels.

I think our purpose of doing the L&O hotels is substantially completed. And we will not plan to do a lot more of those L&O hotels unless the opportunity arise in such an area that we have a weak presence. But we -- now we looked at the nationwide, we do not see a -- it's a big need for opening new hotels. But again, if there are opportunities such as in high-impacted area, high-speed train station or so that will boost our local presence and sales, we will plan to do -- but not -- is going to be more than what we planned or what we have done in the past.

So, that's from the L&O hotels. Regarding the potential partnership with other hotel groups. And in the last year, we formed a couple of partnerships with local strong operators, again, to boost our presence in those areas such as Xiangxi, such as, you know, Hunan province. We will continue to seek local, strong operator to partner with them in the responsive way to benefit both company's operation and to further expand our network looking into lower tier 3 and the lower-tier cities.

Dan Xu -- Morgan Stanley -- Analyst

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

Operator

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

Simon Cheung -- Goldman Sachs -- Analyst

Hello. Thanks for taking my questions. I just have one quick question. In relation to your margin trends, I've seen quite a noticeable drop-off this quarter, arguably because of your increase in the L&O exposures.

I wanted to get a sense, do you have some sort of margin breakdown between the two segments? And that -- you mentioned that there were obviously some new hotels still running at losses, can you give us a sense how much of that -- how much of your hotel, leased and owned, is actually loss-making? Thank you.

Selina Yang -- Chief Financial Officer

Thank you, Simon. I will take this question. In the third quarter, the newly opened 24 hotels since the beginning of 2021, actually brought us loss of RMB 22 million -- sorry, RMB 32 million. So, that resulted in the drop of our margin of EBITDA and also drop the margin of our net income.

If we exclude the impact of these newly opened hotels, our EBITDA margin will increase to 38.5%, and our margin of net income will increase to 23%.

Simon Cheung -- Goldman Sachs -- Analyst

And on the second question, in relation to how much of your hotel in the leased and owned have been still loss-making. Or maybe give us a sense, how much of -- what is the scale of the losses, if possible?

Selina Yang -- Chief Financial Officer

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

Simon Cheung -- Goldman Sachs -- Analyst

OK. Thanks a lot.

Selina Yang -- Chief Financial Officer

Thank you, Simon.

Operator

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

Duration: 37 minutes

Call participants:

Rene Vanguestaine -- Investor Relations, Christensen & Associates

Alex Xu -- Chairman and Chief Executive Officer

Megan Huang -- Vice President of Sales and Marketing

Selina Yang -- Chief Financial Officer

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

Dan Xu -- Morgan Stanley -- Analyst

Simon Cheung -- Goldman Sachs -- Analyst

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