Edited Transcript of GHG.N earnings conference call or presentation 24-May-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 2019 first quarter results.

Please turn to Slide 5. During this quarter, we continued to expand our geographic coverage to 292 cities across China at end of the March. That's up from 290 cities at the end of last year. We now operate 2,829 hotels across 10 different brands spanning the economy, mid-scale and mid-upscale limited services segment of the market, including our apartment business. We opened 102 new hotels and continue to grow our pipeline. Finally, we continue to explore appropriate value-enhancing acquisition opportunities to help strengthen our hotel platform.

Total revenue grew 20.1% year-over-year to RMB 235.3 million. Gross profit increased 17.5% to RMB 155.3 million. Non-GAAP adjusted EBITDA rose 20% to RMB 133.9 million. Net income increased 58.8% to RMB 134 million. And non-GAAP core net income rose 18% year-over-year to RMB 92.3 million. Gross profit margin and adjusted EBITDA margin decreased from 67.5% to 66% and from 57% to 56.9%, respectively. Selina Yang will explain to you the reason for the decrease later on, but net margin jumped up from 43.1% to 56.9%. Core net margin decreased from 39.9% to 39.2% compared to a year ago. These results were driven by continued growth in our hotel network and higher operating performance at our existing hotels.

Out of the 102 new hotels opened, 13.8% are in our mid-to-upscale brand and 43.1% in each of our economy and mid-scale brands. At the same time, our pipeline of new hotels increased from 430 at December 31 last year to 481 at March 31. Approximately 1/4 of these hotels are mid-to-upscale, including our Gme, Gya and VX. We opened 9 hotels under these 3 brands in the first quarter of 2019.

In terms of operating performance, we saw a steady progress across the board. Average daily room rate increased by 3.9% year-over-year to RMB 162. Occupancy rate had a decrease of 1.1% to 78.1%, and revenue for available room increased 2.5% year-over-year to RMB 127.

Now let me talk about a few recent developments that you can find on Slide 6. This year, we intend to develop more hotels under the Wumian and GreenTree apartment brands to meet the taste of young business travelers. In the first quarter, we also integrated our loyalty program with Yibon Hotel. Yibon is a hotel operator focusing on the economy hotel segment in China and also is one of our accretive investees. By integrating Yibon's CRS and PMS customers with ours, Yibon's customers are able to join our paid membership program and enjoy the same benefit as GreenTree members. As a result, during the first quarter, over 1 million new paid members were added to the GreenTree loyalty program. We plan membership program expansion and system integration with Argyle Hotel Group with expanded network of corporate and individual members will benefit all of us.

M&A and strategic investments are key growth drivers for GreenTree. On May 1, 2019, we announced an agreement to acquire 70% equity stake in the Urban Hotel Group. The Urban Hotel Group is a leading franchised hotel operator with a strong brand portfolio and geographic coverage in China. It has more than 600 hotels in the economy to mid-scale segment in Eastern and Northern China. We plan to complete the transaction subject to customary closing conditions later.

In conclusion, we are pleased with our team's performance in Q1. We are confident in our business model, strategic positioning and long-term growth strategies. We will continue to invest in our people, brands, systems and technology in order to better serve our customers and our franchisees and to ensure the long-term healthy growth of our hotel network.

With that, I'll pass the call over to Megan, who will discuss our business operations to you.

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Qing Huang, GreenTree Hospitality Group Ltd. - Director of IT Department [4]

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Thank you, Alex. If you're following along on our slides, I'll skip the overview on Slides 5 and 6 and go straight to Slide 7.

Once again, the franchise and managed model remains our primary strategic focus. 98% -- 98.9% of our hotels fall under this category. And as you can see on the chart on the right, our F&M hotels now generate almost 77.7% of our overall revenue.

Let's move on to Slide 8. Another critical area of our business is our loyalty program. Ours is a paid program in which members enjoy a variety of premium perks and benefits. More importantly, through this program, we can start a closer relationship 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 loyalty members are very sticky customers. Overall, we now have about 33 million individual members in our loyalty program, along with 1.32 million corporate members, up from approximately 29 million and 1.27 million as of December 31, 2018.

In the first quarter, around 94.2% of all room nights were sold through our own direct channels primarily due to our individual as well as corporate members.

Slide 9 shows our RevPAR trend. Q1 is generally one of the weaker quarter during the whole year. But as you can see, on the 2 charts at the bottom of this page, on a year-over-year basis, RevPAR for L&O hotels increased by 2.1% to RMB 119 and RevPAR for F&M hotels increased by 2.5% to RMB 127. Both segments showed healthy growth over the first quarter of last year mainly due to higher ADR.

On Slide 10, you can see the growth in our pipeline of new hotels. We opened 102 hotels, while our pipeline rose to 481 hotels. At the same time, we are diversifying of our portfolio by adding more hotels at both the higher end and economy segments of the market. Currently, 77.7% of our hotels, really the core of our business, serve the middle end of the limited service market. In line with this strategic strategy, during this quarter, we added 5 new GreenTree Eastern, 4 Gme, 3 Gya and 2 VX hotels, which primarily serves (inaudible) and major travelers in the business to mid-to-upscale segment of the market. So the number of hotels in the segment increased to 4.3% to -- of the total portfolio.

And on Slide 11, you can see we had 27 Gme, 28 Gya and 22 VX hotels in the pipeline as of March 31, 2019.

With that, I'll pass the call over to Selina Yang, who will review our financials

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Yiping Yang, GreenTree Hospitality Group Ltd. - CFO & Director [5]

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Thank you, Megan. We delivered a fifth solid quarter of operating and financial results.

Moving on to Slide 13. We now have a total of 2,829 hotels, with 225,757 rooms. On a year-over-year basis, we increased our hotel numbers by 20.2%. We opened 102 new hotels compared to 18 new hotels in Q1 2018, 14 of this were in the mid-to-upscale segment, 44 were in the middle scale segment and 44 were in the economy segment. 6 hotels were in Tier 1 cities, 20 in Tier 2 cities and the remaining 76 in smaller cities in China. We closed 30 hotels, 16 due to their noncompliant with our brand and operating standards and 14 due to property-related issues, including rezoning, returning of government-owned properties and expiry of leases. So net-net, we added 72 hotels to our portfolio.

Slide 14 summarizes some of our key operating metrics. During the quarter, we continue to see improved operating performance across the board. The key numbers to look at here are the orange bars representing the performance of our F&M hotels. These hotels make out the biggest part of our business. Our F&M hotels ADR improved by 3.9% to RMB 162, RevPAR increased by 2.5% to RMB 127, while the occupancy rate slightly decreased 1.