GreenTree Hospitality Branches Out From the Midscale Segment

China-based GreenTree Hospitality Group (GHG 2.71%) generated double-digit top-line expansion in its third quarter of 2019, as it extended its footprint within Chinese cities and added a slew of new properties to its franchise and management (F&M) roster. The company also progressed in its initiative to extend past its midscale concentration into the luxury and economy segments.

Note that all comparable numbers that follow refer to those of the prior-year quarter.

GreenTree results: The essential metrics

Data source: GreenTree Hospitality Group.

Highlights from the quarter

Image source: Getty Images.

• Total revenue was paced by the addition of 181 hotels to GreenTree's system. At quarter's end, the company counted 30 leased and operated (L&O) properties and 3,072 F&M properties in its portfolio.
• Revenue from L&O hotels improved by 23% to $10.1 million, which management attributed to improved RevPAR (revenue per available room).
• Revenue from F&M hotels increased by 19.2% to $30.7 million. This growth was primarily a function of new hotel additions. 
• The company's total RevPAR rose 2.7%, as a higher average daily rate (ADR) offset a slight dip in occupancy.
• GreenTree scaled its geographic coverage by 11%, finishing the period with a footprint spanning 309 cities, against 278 cities in the prior-year period.
• While 92 of the company's new hotel additions fell within its core midscale focus, GreenTree also added 20 properties in the upper-midscale segment, three luxury hotels, and 66 economy hotels to its portfolio during the quarter.
• GreenTree's development pipeline reflects a similar broadening of segment focus. Out of a pipeline of 652 hotels, the company has positioned 258 properties as midscale, 128 as upper-midscale, 47 as luxury hotels, and 219 as economy properties. 
• While one-time items from the prior year and losses on equity investments in the current quarter decreased the comparability of net earnings between periods (as shown in the table above), adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) improved by 9% to $24.2 million.
• The company added 3 million members to its loyalty program from the end of the previous sequential quarter, bringing total loyalty members to 39 million. GreenTree reported that a full 93% of room nights last quarter were sold directly (as opposed to sales through third-party channels).

Management's comments

In GreenTree's press release, CEO Alex Xu discussed the hospitality operator's efforts to expand despite toughening conditions in China, which is transitioning from a manufacturing economy to a consumption economy while it engages in a trade war with the United States. Of course, most global hoteliers would be quite happy with GreenTree's double-digit revenue growth, so these are relatively difficult conditions. As Xu said:

We are pleased with our solid operating and financial performance in the third quarter, especially in the light of the weak service sector numbers observed recently. During the quarter, we further increased market share by exploring new regions and improving the quality of our hotels across all brands. We remain optimistic about the rest of 2019 despite the slowed-down growth momentum of the industry, as we have already shown that GreenTree's business model is able to deliver substantial growth through the variety of options for our franchisees and customers, while generating strong and sustainable cash flow for any future development.

A brief bit of guidance

Despite Xu's caution, GreenTree Holdings provided a single item of 2020 guidance that speaks to its bright prospects. The company maintained its expectation that full-year revenue will advance by 20% to 25% over 2018. But perhaps investors in this consumer discretionary stock could benefit from a more detailed outlook to firm up expectations: Shares are down 21% cumulatively since the company's March 2018 U.S. initial public offering.