Edited Transcript of GHG.N earnings conference call or presentation 23-Aug-18 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 second quarter results. After our successful listing on the New York Stock Exchange on March 27 this year, we have continued to execute our organic growth strategies in the second quarter. We now operate 2,434 hotels across 8 different brands from economy, mid-scale to business to mid-to-up-scale limited services segment of the market. We continue to grow our pipeline and are on track to open more new hotels in the second half of the year. We are also actively searching for appropriate acquisition opportunities, which we believe will build a stronger hotel operating platform and create long-term shareholder value.

In the second quarter of 2018, our total revenue grew 20.3% year-over-year to reach RMB 233.4 million, gross profit increased 23.1% to RMB 167.7 million. Non-core GAAP adjusted EBITDA rose 21.2% to RMB 139.2 million. And the non-GAAP core net earnings increased 24.7% year-over-year to RMB 110.9 million. We were able to continue to improve margins as well. Gross margin improved from 70.2% to 71.9%. Adjusted EBITDA margin improved from 59.2% to 59.6%. And the core net margin improved from 50 -- 45.9% to 47.5% compared to a year ago. These results were driven by continued organic growth in our F&M hotel network and improved operating performance at our existing hotels.

During the quarter, we opened 104 new hotels with almost 2/3 of these new open hotels in our mid-scale brand and close to 30% in the economy brands. Our pipeline of new hotels increased from 306 at December 31, 2017, to 477 at June 30, 2018. Approximately 1/4 of our pipeline is in the business to mid-to-up-scale hotels, including Gme, Gya and VX, which we launched late last year.

We continue to spread our geographic footprint further across China. We now cover 267 cities up from 263 cities at end of last year. We believe opening hotels in new cities is very important to increase growth, especially in Tier 2 and other cities in China. We believe this will further enhance our brand image in those new cities and will attract new business and leisure travelers from those cities.

In terms of our operating performance, we saw steady progress across the board. Average daily room rate, or ADR, for the quarter increased to RMB 164 from RMB 156, which was a 5.1% up from the same quarter of last year. Occupancy rate had a slight decrease of 0.6% to 82.6% from 83.2% last year, which was related to accelerating new hotel openings in the first half of 2018. And revenue per available room increased 4.6% from RMB 130 in the second quarter last year to RMB 136. One of the biggest drivers of both our steady incremental improvements in operating performance and our high overall profitability is our loyalty program. We now have 24 million individual loyal members and over 930,000 corporate members. Out of the 24 million members, over 19 million of them have joined our premium paid membership program. Our strong brand and direct relationship with so many valued customers allowed us to sell direct instead of relying on selling through OTAs, which is more expensive.

In the most recent quarter, we sold approximately 95.4% of our room nights through our direct sales channels.

M&A is one of our key growth strategies. We are actively searching for appropriate M&A targets post-IPO. We prefer targets which are brand as well as geographic complementary to our existing hotel portfolio. We believe the right acquisition as well as smooth post-acquisition integration will help accelerating our planned long-term expansion.

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

With that, I will pass the call over 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 Operations & Director [4]

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Thank you, Alex. If you are following along on our slides, I will skip over to you on Slide 5 and go straight to Slide 6. 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 steadily increasing their contribution to our overall revenues. In the second quarter, the percentage reached 71%, which was an all-time high.

Let's turn to Slide 7. Another critical area of our business is our loyalty program. Our program differs considerably from most of hotel business in the West. We have a paid program to which people sign up to enjoy our loyalty 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 payout and the marketing fees and expenses. And our GreenTree members are very sticky customers. Overall, we now have about 24 million members in our loyal program along with 930,000 corporate clients, up from approximately 22 million and 860,000 as of March 31, 2018, and approximately 21 million and 820,000 as of December 31, 2017. Around 95.4% of room nights were sold through own direct channel, which increased our individual loyal members and corporate members.

Moving on to Slide 8. You can see our RevPAR chart here. Q2 is generally one of the high seasons during the year. In the 2 charts, at the bottom of this page, you can see that on a year-over-year basis, RevPAR for L&O increased by 8.4% from RMB 131 to RMB 142. And RevPAR for F&M hotels increased by 4.7% from RMB 129 to RMB 135 for second quarter of 2018. Both segments showed healthy growth over the second quarter and first half 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 second quarter, we added 31 hotels to our pipeline, while opening 104 hotels. In particular, we are trying to boost the growth and at that time to diversify our portfolio by adding more hotels at the high-end and economy segment of the market.

Currently, 84.7% of our hotels, really is the core of our business, serves the middle end of the limited service 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 4 new GreenTree Eastern and 1 VX hotel, which primary serve business and leisure travelers in the business to mid-to-up-scale segment of the market. So the number of hotels in this segment increased to 2.5% of total portfolio. Meanwhile, the network of hotels in the economy segment grew to 12.8% with an addition of 31 economy hotels across our Vatica and Shell brands in the second quarter of 2018. We have developed and continue to grow our 3 new brands at the mid-to-up-scale end of the market as part of our strategy to strengthen our portfolio.

On Slide 10, you can see these brands, which we have name G-M-E, Gme; G-Y-A, Gya, and VX. We are costing around same price points 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 markets. Gme hotels are designed to be traditional Latin American-European style for business travelers, whereas Gya, we are much more elegantly designed and fashionable. And VX will be relaxing and artistic, preferably with music and bar services inside the hotel. We have solid pipeline with more of these hotels opening in the coming months.

With that, I will pass the call over to Jasmine who will review our financials.

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Xinyue Geffner, GreenTree Hospitality Group Ltd. - CFO [5]

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