Edited Transcript of GHG.N earnings conference call or presentation 14-Mar-19 12:00pm GMT

It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Alex Xu. Mr. Xu, please go ahead.

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [3]

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Thank you, Rene, and thanks, everyone, for joining our earnings call today.

I'm pleased to report our 2018 fourth quarter and the full year result that you can see on Slide 5 of the PPT we presented for you. During this quarter, we continued to expand our geographical coverage across China, covering 290 cities at the end of December 2018. We now operate 2,757 hotels across 10 different brands from economy, mid-scale to mid-upscale limited services segment of the market, including our newly-started apartment business.

In the fourth quarter, we opened 224 new hotels and continued to grow our pipeline. As of December 31, 2018, we had opened a total of 554 new hotels for the full year 2018. We are on track to open more new hotels in the coming years.

In the fourth quarter of 2018, our total revenue grew 20.8% from the same quarter of 2017 to reach RMB 249.9 million. Gross profit increased by 19% to RMB 175.8 million. Non-GAAP adjusted EBITDA rose 35.2% to RMB 160.1 million, and the non-GAAP core net income rose 33.4% to RMB 115.9 million. While gross margin changed slightly from 71.4% to 70.3% in the quarter, adjusted EBITDA margin improved from 57.3% to 64.1%, and the core net margin improved from 42% to 46.4% compared to a year ago.

For the full year 2018, total revenue grew 21.4% year-over-year to reach RMB 945 million. Gross profit increased by 22% to RMB 664.1 million. Non-GAAP adjusted EBITDA rose 30.5% to RMB 609.7 million, and the non-GAAP core net income rose 31.8% year-over-year to RMB 445.3 million. While gross margin improved slightly from 70% to 70.3%, adjusted EBITDA margin improved from 60% to 64.5%, and the core net margin improved from 43.4% to 47.1% compared to a year ago.

These results were driven by continued growth in our hotel network and the improved operating performance through IT improvement at our existing hotels.

During the quarter, we opened 224 new hotels with around 12.5% of this in our mid-to-upscale brand, around 49.1% in the economy brand and around 38.4% in the mid-scale brand.

Our pipeline of new hotels increased from 306 at December 31, 2017 to 430 at December 31, 2018. More than a quarter of our pipelines is in the mid-to-upscale hotels, including Gme, Gya and VX, which we launched late last year. We are accelerating our new hotel openings under these 3 new brands, with 14 new openings in the fourth quarter of 2018 and 21 new openings for full year 2018.

To further diversify our existing product portfolio, we added one more brand, called Wumian Hotels, in the mid-scale segment during the third quarter. Wumian aims to provide comfortable, intimate, simple and a stylish space to business travelers for a deep sleep experience. Also, during the second half year of 2018, we started our apartment business and opened one apartment in 2018.

Across all brands, full year 2018 new openings increased by 30.4% from 425 to 554. In terms of operating performance, we saw steady progress across the board. Average daily room rate, or ADR, for the quarter increased by 3.8% from the same quarter of 2017 to RMB 164. Occupancy had a slight decrease of 1% to 80.4%, which was related to accelerating new hotel openings, and revenue per available room increased 2.3% from the fourth quarter to RMB 132. For the full year, ADR increased by 4.5% year-over-year to RMB 164. Occupancy had a slight decrease of 0.5% to 82.1%, and revenue per available room increased 3.8% year-over-year to RMB 135.

One of the biggest drivers of both our steady incremental improvement in operating performance and our high overall profitability is our loyalty program. We now have approximately 29 million individual loyal members, up by 38.1% from approximately 21 million members as of December 2017; and over 1.27 million corporate members, up by 54.9% from approximately 820,000 at -- as of December 31, 2017. Out of the 29 million members, approximately 21 million of them have joined our premium paid membership program. Our brand and the direct relationship with the many valued customers allowed us to sell directly. In the most recent quarter, we sold approximately 94.5% of our room nights through our direct sales channel. And for the full year 2018, approximately 95.0% of our room night was sold through our direct sales channels.

Now let me talk about a few important business developments in 2018 and first quarter of 2019 that you can find on Slide 6. To enhance our customer satisfaction and bring more convenience to customers, we have been improving our app functionality, including the interconnections between app and the PMS. As of December 31, 2018, our app was ranked second overall in terms of user activity on the Intelligent Mobile Observatory in hotel sector.

M&A and the strategic investments are key growth strategies for us. We have identified several appropriate targets that are complementary to our existing hotel portfolio, geographic coverage and professional comments.

First, on January 18, 2019, we invested in Gingko, a public company listed on the Hong Kong Stock Exchange. In the 2017 to 2018 school year, approximately 10,000 students are involved in this college. Gingko is currently ranked as China's #1 hospitality university by the Gaosan Web Association, a website with introductions to and the ranking of the universities in China. Our 2 companies will work together to cultivate professional talents for ourselves and for the hospitality industry in China.

Second, on January 28, 2019, we announced a strategic investment to become a majority shareholder in Argyle. The Argyle hotel network consists of 8 mid-scale to upscale brands with footprints mainly in Southwest China, Southeast China and some hotels in Southeast Asia. Argyle's highly distinguished brand portfolio and their geographic coverage are highly complementary to GreenTree's business.

And the third, on March 11, 2019, we acquired 4.95% in New Century Hotels in their initial public offering as a Cornerstone investor. New Century is also a public company listed in the Hong Kong Stock Exchange. New Century operates and manage 150 hotels ranging from mid-scale to upscale brands, with over 34,000 hotel rooms in 22 provinces in China. Our 2 companies will explore opportunities for future strategic operations.

Finally, on January 22, 2019, we announced a payment of cash dividend of USD 0.30 for ordinary shares or USD 0.30 for ADS. We plan to pay a cash dividend of $0.20 per share in the near future, assuming no immediate cash need for the company's growth or M&A opportunities, in order to create long-term value and benefit for our shareholders.

In conclusion, we are pleased with our team's performance in 2018. Although there is more hard work to be done in the coming years, we are confident in our business model, strategic positioning and the long-term growth strategies. We will continue to invest in our people, brand, system and technology in order to better serve our customers and franchisees and to ensure the long-term healthy development of our hotel network.

With that, I will pass the call over to Megan and Selina, who will discuss our business operations, company's highlights. Megan?

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Qing Huang, [4]

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Thank you, Alex. If you are following along on our slides, I will skip the overview on Slides 5 and 6 and go straight to Slide 7. Once again, the franchised and managed model remains our primary strategic focus. In fact, 98.9% of our hotels fall under this category.

And as you can see on the chart on the right, F&M hotels have been kept steadily contribution to overall revenue. In the fourth quarter, the percentage reached around 77.3%. The percentage was 77.4% in the full year 2018.

Let's turn to Slide 8. Another critical area of our business is our loyalty program. Our program differs considerably from most hotel businesses in the West. We have a paid program to which people sign up to enjoy a variety of premium perks and benefits. More importantly, we found that this program had allowed us to foster closer relationships with our guests. Members can book directly with us, which has helped us and our franchisees to reduce sales and marketing fees and expenses, and our GreenTree members are very sticky customers.