GreenTree Hospitality Group Ltd. (GHG) Q4 2018 Earnings Conference Call Transcript

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 of 2018, total revenue grew 21.4% year-over-year to reach RMB945 million. Gross profit increased by 22% to RMB664.1 million. Non-GAAP adjusted EBITDA rose 30.5% year-over-year to RMB609.7 million, and the non-GAAP core net income rose 31.8% year-over-year to RMB445.3 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 a continued growth in our hotel network under improved operating performance through IT improvement to our existing hotels. During the quarter, we opened 224 newest hotels, with around 12.5% of this in our mid-to-upscale brands, around 49.1% in the economy brand and around 38.4% in the mid-scale brand.

Our pipeline of new hotel increased from 306 at December 31st, 2017 to 430 at December 31st, 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 three 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 products 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 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 RMB164. 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 RMB132. For the full year, ADR increased by 4.5% year-over-year to RMB164. Occupancy had a slight decrease of 0.5% to 82.1% and the revenue per available room increased 3.8% year-over-year to RMB135.

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 as of December 31st, 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 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% of our room nights were 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 PMS.

As of December 31st, 2018, our app was ranked second overall in terms of user activity on the Intelligent Mobile Observatory in hotel sector. M&A and 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 talents.

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 10000 students are enrolled in this college. Ginko is currently ranked as China's number one hospitality university by the Gaosan Web Association, a website with introductions to and rankings of universities in China. Our two 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 eight mid-scale to upscale brand, with footprints mainly in Southwest China, Southeast China and some hotels in Southeast Asia. Argyle's highly distinguished brand portfolio and geographic coverage are highly complementary to GreenTree's business.

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

Finally, on January 22nd, 2019, we announced the payment of cash dividends of $0.30 for ordinary shares or $0.30 per 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 gross 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?

Megan Wang -- Director of IT Department

Thank you, Alex. If you are following along on our slides, I'll skip the overview on Slide 5 and 6, and go straight to Slide 7. Once again, the franchised-and-managed model remains our primary strategic focus. In fact, 98.5% -- 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 revenues. 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 programs. 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 came 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. Although we now have about 29 million members in our loyalty program, along with 1,270,000 corporate members up from approximately 26 million and 1,20,000 as of September 30th, 2018 and approximately 21 million and 820,000 as of December 31st 2017. In the fourth quarter of 2018 around 94.5% of room nights were sold through our own direct channels, which include our individual loyal members and the corporate members.

Moving on to Slide 9, you can see our RevPAR trends here. Q4 is typically one of the low seasons during a year. In the two charts at the bottom of the page, you can see that on a year-over-year basis, RevPAR for L&O increased by 1.5% to RMB137 and the RevPAR for F&M hotels increased by 2.3% to RMB132 for the fourth quarter of 2018. Both segments showed healthy growth over the fourth quarter and the full year 2018, mainly due to higher ADR.

On Slide 10, you can see that we worked very hard this past year to further boost our pipeline of new hotels. During the fourth quarter, our pipeline is 430, while we opened 224 hotels. In particular, we're trying to boost growth and at the same time, to diversify our portfolio by adding more hotels at the higher-end and economy segments of the market.

Currently, 79.2% of our hotels, really the core of our business, serve the middle end of the limited services market. In line with this strategy, during this quarter, we added 14 new GreenTree Easterns, seven GME, and seven VX hotels, which primarily serve business and the leisure travelers in the mid-to-upscale segment of the market.