Edited Transcript of GHG.N earnings conference call or presentation 19-Nov-18 1:00pm 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 third quarter result. During this quarter, we remain committed to a steady and stable growth strategy as we explore the growing consumption trend in the second- and the third-tier cities and expand our geographical coverage across China. Now we're covering 278 cities at the end of September 2018. We now operate 2,558 hotels across 9 different brands from economy, mid-scale to mid-to-upscale limited services segment of the markets.

During the third quarter, we opened 146 new hotels and continued to grow our pipeline. We are on track to open more new hotels in the remaining part of the year. We also started to explore ways to grow our service apartment business recently. Finally, we continue to explore appropriate value-enhancing acquisition opportunities to help strengthen our hotel platform and increase long-term shareholder value.

In the third quarter of 2018, our total revenue grow 21.6% year-over-year to reach RMB 256.8 million. Gross profit increased 19.5% to RMB 180.7 million. Non-GAAP adjusted EBITDA rose 24.2% to RMB 156.5 million. Net income increased 36.3% to RMB 152.4 million, and the non-GAAP core net income rose 30.3% year-over-year to RMB 125.3 million, while gross margin trimmed slightly from 71.7% to 70.4%.

Adjusted EBITDA margin improved from 59.6% to 60.9%. Net margin improved from 52.9% to 53.3%, and the core net margin improved from 45.5% to 48.8% compared to a year ago. These results were driven by continued growth in our hotel network and improved operating performance at our existing hotels.

In the quarter, we opened 146 new hotels with half of these new open hotels in our mid-scale brand, around 35.6% in economy brands and around 14.4% in the mid-to-upscale brand. Our pipeline of new hotels increased from 306 at end of last year to 504 at September 30, 2018. Approximately 1/4 of our pipelines is in the mid- to upscale hotels, including Gme, Gya and VX, which we launched late last year. We opened 6 under the new 3 brands in the third quarter of 2018. We continue to spread our geographic footprint further across China. We now cover 278 cities, up from 263 cities at end of last year.

In terms of our operating performance, we saw steady progress across the board. Average daily room, or ADR, for the quarter increased by 4.4% year-over-year to RMB 167. Occupancy rate had a slight decrease of 0.2% to 87.2%, which was related to accelerating new hotel openings in the first 9 months of 2018 and the third quarter of 2018. And the revenues per available room increased 4.3% year-over-year to RMB 146.

One of the biggest driver of both our steady incremental improvements in operating performance and our high overall profitability is, again, our loyalty program. We now have 26 million individual loyal members and over 1.02 million corporate members. Out of the 26 million members, over 20 million of them have joined our premium paid membership program. Our strong brand and direct relationship with so many valued customers allowed us to continue to sell direct instead of relying on online travel agencies, which is more expensive to our hotels. In the most recent quarter, we sold approximately 94.9% of our room nights through our direct sales channel.

M&A is one of our key growth strategies in the near future. We are actively searching for appropriate M&A targets and are focused on brands and geographic areas that are complementary to our existing hotel portfolio. We believe the right acquisitions as well as smooth integration will help accelerate our planned long-term expansion.

In conclusion, we are pleased with our performance so far this year. Although there's 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. And we'll continue to invest in our people, brand, system and technology in order to better serve our customers and franchisees and ensure the long-term healthy development of our hotel network.

Lastly, in the last quarter of 2018, we noticed there were some market headwind. We have already implemented franchisee support programs, including reduction of central reservation fees from RMB 10 to RMB 20 per reservations to approximately RMB 8 per room nights to ensure that every franchisee will continue to do well during the quarter and next year.

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

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Yiping Yang, GreenTree Hospitality Group Ltd. - VP of Finance & IR and Director [4]

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Thank you, Alex. If you are following along our slides, I will skip the overview on Slide 5 and go straight to Slide 6.

Once again, the franchised-and-managed model remains our primary strategic focus. In fact, 98.8% of our hotels fall under this category. And as you can see on the chart on the right, F&M Hotels have been steadily increasing their contribution to our overall revenues. In the third quarter, the percentage reached almost 70%.

Let's turn to Slide 7. 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 has 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 the marketing fees and expenses, and our GreenTree members are very sticky customers.

Overall, we now have about 26 million members in our loyalty program along with 1,020,000 corporate members, up from approximately 24 million and 930,000 as of June 30, 2018, and approximately 21,820,000 as of December 31, 2017. Around 94.9% of room nights were sold through our own direct channels, which includes our individual loyal members and corporate members.

Moving on to Slide 8. You can see our RevPAR chart here. The third quarter is generally one of the high seasons during the year. In the 2 charts at the bottom of the page, you can see that, on a year-over-year basis, RevPAR for L&O increased by 4.8% to RMB 152, and RevPAR for F&M hotels increased by 4.3% to RMB 145 for the third quarter of 2018. Both segments showed healthy growth over the third quarter and first 9 months of last year mainly due to higher ADR.

On Slide 9, you can see that we worked very hard this past quarter to further boost our pipeline of new hotels. During the third quarter, our pipeline grew to 504, while we opened 146 hotels. In particular, we're trying to boost the growth and, at the same time, to diversify our portfolio by adding more hotels at the higher end and the economy segments of the market.

Currently, 82.8% of our hotels, really the core of our business, serves the middle end of the limited services market. This ratio continued to trend down this year from 86.6% at the end of 2017. In line with this strategy, during this quarter, we added 15 new GreenTree Eastern, 2 Gme, 1 Gya and 3 VX hotels, which primarily serves business and leisure travelers in the middle to upscale segment of the market. So the number of hotels in this segment increased to 3.2% of the total portfolio.

Meanwhile, the number of hotels in the economy segment grew to 14% with the addition of 52 economy hotels across our Vatica and Shell brands in the third quarter of 2018. We continue to roll out our 3 new brands at the middle to upscale end of the market as part of our strategy to strengthen our portfolio.

On Slide 10, you can see these brands, which we have named Gme, Gya and VX. They are costing around same price point for all 3 hotels, but the decor and positioning of each will be quite different as we cater to the taste of different segments of the market. Now we have 36 Gme, 21 Gya and 24 VX hotels in the pipeline as of September 30, 2018.