Moving on to Slide 12. We now have a total of 2,434 hotels with 200,000 -- 201,275 rooms. On a year-over-year basis, we increased our hotel numbers by 19.6%. During the quarter, we opened 104 new hotels, 68 in the mid-scale segment, 5 in the business to mid-to-up-scale segment and 31 in the economy segment. Of this, we opened 7 hotels in Tier 1 cities, 22 in Tier 2 cities and the remaining 75 in other cities in China. In Q2 2017, we opened 97 hotels, while for full year 2017, we opened 425. Therefore, you could see that we accelerated our hotel openings in Q2 2018 as well as first half of 2018.
During the quarter, we only closed 24 hotels. So net-net, we added 80 hotels to our portfolio. We closed 16 hotels due to their noncompliance with our brand and operating standards. We continue to demonstrate our ability to run profitable hotels. We also closed 8 hotels due to property-related issues, including rezoning, returning of the government-owned properties and expiry of leases, et cetera.
On Slide 13, you can see some of our key operating metrics. During the quarter, we continued to see improvements in our operating performance across the board. The key numbers focused here are the orange bars representing the performance of our F&M hotels. These hotels make up the biggest part of our business. The performance of our L&O hotels skewed a bit higher because we converted 5 L&O hotels to the F&M model after the first quarter of 2017. And we opened our high-end GreenTree Eastern hotel in Shanghai in June 2017.
In terms of our F&M hotels, our ADRs improved to RMB 163 from 100 -- I'm sorry, from RMB 155 in the second quarter of last year. RevPAR increased to RMB 135 from RMB 129, while the occupancy rate for F&M hotels had a slight decrease of 0.6% to 82.9%, which was due to the acceleration of new hotel openings in the quarter.
On Slide 14, you can see that total revenues grew 20.3% year-over-year to reach RMB 233.4 million. The year-over-year increase was primarily attributable to 4 factors: First, the increase of F&M hotels in our network; second, the opening of a GreenTree Eastern L&O hotel in Shanghai in mid-2017; third, improved RevPAR for both F&M and L&O hotels; and four, growth in our loyal memberships. This was partially offset by the conversion of 5 L&O hotels to F&M model after the first quarter of 2017. Total revenues from F&M hotels for the second quarter rose 23.3% to RMB 165.5 million. Meanwhile, revenue from L&O hotels rose 5.7% to RMB 49.7 million, which again shows the impact of the converted hotels. And finally, revenue from membership fees came in at RMB 18.1 million, a 43.5% year-over-year increase.
On Slide 15. During the first half of 2018, total revenues rose by 21.7% to RMB 438.3 million. Total revenues from F&M hotels for the first half of 2018 were RMB 309.4 million, grew by 25.5% year-over-year. Total revenues from L&O hotels in the same period were RMB 93.9 million, increased by 5.7% year-over-year. Membership fees totaled RMB 35 million, a 40.6% year-over-year increase.
Moving over to the expense side of the P&L. On Slides 16 and 17, you will get a sense of our operating efficiencies. Please look at the 3 graphs on the right-hand side of Slide 16. Hotel operating costs for the second quarter of 2018 were RMB 55.6 million. The year-over-year increase of 13.7% was mainly attributable to 3 factors: First, the increased number of general managers in our hotel network; second, other costs associated with the expansion of F&M hotels; third, higher rental costs for the GreenTree Eastern L&O hotel and other L&O hotels. This was partially offset by reduced rental cost, depreciation and amortization, and operating costs related to the conversion of the 5 L&O hotels.
Selling and marketing expenses for the second quarter of 2018 were RMB 11.6 million. The year-over-year increase of 22.9% in the second quarter of 2018 was mainly attributable to model room construction, exhibition and other advertising and promotion expenses related to our 3 new business to mid-to-up-scale brands, increased personnel, compensation and other costs, i.e. travel expenses of business development personnel, as a result of the increased opening of hotels.
General and administrative expenses for the second quarter of 2018 were RMB 25.2 million. The year-over-year increase of 38.6% in the second quarter of 2018 was primarily attributable to increased headquarters staff costs, increased share-based compensation expenses and new IT program expenses. Overall, other total operating costs and expenses grew 19.6% year-over-year to RMB 102.4 million. They grew more slowly than revenues in the second quarter of 2018.
On Slide 17, total operating costs and expenses grew 16.2% year-over-year to RMB 199.4 million in the first half of 2018.
As a result, as Slide 18 shows, we have been able to further improve margins. During the second quarter of 2018, gross margin grew by 1.7% to 71.9%. Adjusted EBITDA margin grew by 0.4% to 59.6%. And core net profit margin grew by 1.6% to 47.5%. Overall, gross profit grew 23.1% year-over-year to RMB 167.7 million.
Adjusted EBITDA increased 21.2% year-over-year to RMB 139.2 million. And core net income increased 24.7% to RMB 110.9 million. Basic and diluted core net income per ADS non-GAAP came in at RMB 1.09, equivalent to USD 0.16 in the second quarter of 2018 versus RMB 0.97 in the same period a year ago.
On Slide 19, we show consistent growth and healthy margins during the first half of 2018.
Moving on to Slide 20. Our IPO has bolstered our balance sheet further, which was already strong given our ability to consistently generate strong cash flow from operations. During the first half of 2018, operating cash inflow was RMB 199.4 million, cash and equivalents balance increased to almost RMB 1.9 billion. This provides us more resources to consider and evaluate additional capital investments and potential acquisitions.
Lastly, in terms of guidance, we reaffirm a 20% to 25% year-over-year growth in total revenues for the full year 2018.
This concludes our prepared remarks.
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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [6]
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Operator, we are now ready to begin the Q&A session. Thank you.
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Questions and Answers
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Operator [1]
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(Operator Instructions) The first question today comes from Billy Ng with Bank of America Merrill Lynch.
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Hay Ling Ng, BofA Merrill Lynch, Research Division - Research Analyst [2]
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I have 2 questions. The first question actually regarding the opening pipeline and also the opening schedule. We noticed that I think in the second quarter there is some slowdown in opening compared to what we expect. But at the same time, the company's full year revenue guidance remains the same. So does that mean we can expect the company can catch up in the second half in terms of the opening pace? And also if you can, please, explain in a little bit more detail what happened in the second quarter and why there was a slowdown in -- not slow down to be exact because it's still open a bit more than 1Q, but slower than expected compared to what we have in mind with about 100 openings. So what happened in 2Q? And are there any measures or any ways for the company to catch up? That's my first question.
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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [3]
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Okay. Great. Let me answer this question. Good questions. We have 2 things here. First, our pipeline continues to increase to another 71 hotels to 477 hotels in the pipeline, and that's up from 312 at the beginning of the year. So we did experience a slight delay of opening for the second quarter for several reasons: number one, construction delays that little bit longer than we anticipated. We are increasing our construction management staff to help our franchisees to deal with the construction delays. Secondly, the government becomes more and more regulation wise that more responsible to enforce the safety and fire safety regulation as well as zoning compliance. So this will add, I think, that a little bit more delay in inspection and obtaining the necessary certificates. And so we believe -- and we believe that we are able to catch up those in the near future. So -- as can be seen in the added pipeline, we have 477. I think that's the highest number in our pipeline in the past. So I hope that I answered your question.
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Hay Ling Ng, BofA Merrill Lynch, Research Division - Research Analyst [4]
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Yes. But just following up on that. Do you think some of the things that you mentioned, inspection take a little bit longer and -- are those more like a structural thing going forward, all the new opening will take longer? Or it's more like a temporary thing?
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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [5]
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We believe the -- our government becomes really more and more smart in terms of making sure that the properties compliance, zoning compliance, fire safety. So just as a permitting process, I think, it will be a little bit different. And we think this will add probably some -- add some time to the constructions. So we are working. In the long run, they should be evened out. And in the -- when the regulation, let's see, takes effect and sometime will skew the numbers to the later part of the year or to the next year. So we do -- we think with zoning compliance and the fire safety, all of those, our government is going to pay more and more closer look and attention in the future.
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Hay Ling Ng, BofA Merrill Lynch, Research Division - Research Analyst [6]
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Okay. And my second question, maybe, Alex, want to get your view is like given the macro situations and outlook may not be as strong as like, let's say, a few months ago. Do you find M&A opportunities in -- particularly in China, within China. Do you see the validation become a bit lower than before and as a result, may be easier to get some M&A done in the near future? Or you haven't seen anything change there? And also if you can provide any color or update on the M&A front that would be appreciated too.
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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [7]
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Okay. So those are 2 questions that you want. One is the current, our plan at domestic and macroeconomic environment, the impact to our business and also the -- our M&A landscape. The first question is, we are -- we have received some inquiries from our investors, shareholders regarding the current domestic macroeconomic conditions, but we have not observed any -- that impact to our hotel development and growth. So our Q2 performance continue -- they continue to improve as we planned. And they are really consistent with our past plan and the strategy. So we believe there's 2 factors. One, our Chinese government continue to manage the economy rather well. And secondly, we have gone through -- GreenTree have gone through several cycles in the hospitality in China that give us valuable experience that we constantly factor in our evolving strategies. So our strategy is to design our -- to meet the demand for the hardcore business travelers and to making sure there is healthy gross margin for our hotel franchisees to weather any kind of changes in the economy. And thirdly, we believe our strong and growing memberships program ensure our substantial loyalty to our brands and that -- and finally, our efficient and cost-effective asset-light business model. We are not only talking about our higher gross margin will help GreenTree to weather the storm, we're also factoring in our franchisee also have a very healthy gross margin. So with all those 4 factors, we believe that we will not going to experience any impact in this marketing environment.
And lastly, I mean, it is possible and we cannot voice for other companies opinion, if other companies believe they have to be cautious in terms of, let's see, that have a tighter traveler budget or trading down. Then GreenTree will be benefited from those kinds of activities, because, as I mentioned repeatedly before, our strategy for our brand positioning is to provide value for the hardcore and value-conscious, price-conscious business travelers and leisure travelers. So that's the current macroeconomic condition. So we believe so far and combined with GreenTree strategy in the past, we have not observed impacts to our growth strategy.
The second question regarding the current M&A landscape. The M&A is our -- the strategy to grow. And we will -- we will review, evaluate possibilities in the marketplace with very disciplined approach because it's very easy to get into that for the sake of expanding our portfolio by acquiring. And -- however, as you point out, this market perception may create some further opportunities for GreenTree's M&A. Occasionally, we are -- from time to time, will be under discussion with potential M&A company targets. So we feel M&A will help GreenTree significantly to build a more larger scale increase competitiveness in the near future.
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Operator [8]
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(Operator Instructions) The next question comes from Praveen Choudhary with Morgan Stanley.
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Praveen Kumar Choudhary, Morgan Stanley, Research Division - MD [9]
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One question for me only about the growth prospects in the future. My question is, if your openings have been somewhat delayed, meaning, in the second half, you will open more hotels than first half, and assuming that economic outlook has not changed, i.e. your RevPAR growth remains similar to what we have seen, then should we assume that in the second half your growth in profit or EBITDA be better than first half?
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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [10]
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Okay. Praveen, I missed that -- the part of the question. You said assuming there is a delayed opening and also assuming the same growth of the RevPAR? So I'm a little bit -- I didn't get the question clearly. So I apologize.
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Praveen Kumar Choudhary, Morgan Stanley, Research Division - MD [11]
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Yes, I'll ask again. My point was that, second half unit growth is faster than the first half, because you're opening more hotels, and your RevPAR growth is similar in the first half. So I'm assuming that in the second half your growth, both in revenue and profit, should be faster, meaning you're accelerating your growth in the second half. Is that fair to assume?
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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [12]
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I believe so, even though we have not break down into those numbers. Because the construction delays is going to be across the board, but we should anticipate there will be catch up in the second half of the year. And just to look at the pipeline in the beginning of the year is 312, the mid of the year is 477. And with -- the RevPAR, I think that the growth we should anticipate could be in line with our plan. So with those assumption, I would say it is safer to assume that.
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Praveen Kumar Choudhary, Morgan Stanley, Research Division - MD [13]
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One more question, if I may. About you M&A strategy. The question I have is, if you were to acquire another company tomorrow, would you use your extra cash that you have generated from business as well as from listing? Or would you use equity to do acquisitions? And also if I may ask, will the acquisition be mostly focused in China or overseas?
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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [14]
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Thanks, Praveen. And I'll take this question again. Yes, I'm actually personally in charge with my team for the M&A. And so we will use our cash preferably unless our -- the potential target preferred part of the mosaic -- the equity, because we want to use -- we think -- the cash on the balance sheet should be primarily used for M&A. So that is our preference. But we also want to respect some of our -- the desire from our future partner and the future team members. So we are very sensitive because that's affecting our post-acquisition integration and management. GreenTree will be very responsible to make sure that when we acquire companies, investment companies, we have a similar culture and there will be less integration risk. And as I said, that we'll be very disciplined.
And the second question, yes, our -- all our focuses right now are primarily focused in domestic China. We are very confident the growth prospect of the domestic business and leisure travelers. So that -- but if the surrounding countries and regions have that potential targets, we wouldn't rule out the possibility to evaluate them, but then still those are company's plan right now.
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Operator [15]
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(Operator Instructions) The next question comes from David Li with Lizard Investors.
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David Li, [16]
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I want to ask you about just the franchisee fees, F&M fees. I saw membership fees up quite significantly. Can you explain what really drove that membership piece, other than maybe pricing, and obviously, I'm assuming membership growth as well? And also within the franchise, outside the initial fees, the recurring fees, is there any mix shifts in that recurring fees?
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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [17]
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Do you want to pick that? Or you want me to pick that?
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Yiping Yang, GreenTree Hospitality Group Ltd. - VP of Operations & Director [18]
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David, Jasmine. Our -- you could probably see that on our press release that we have a breakdown of the initial franchise fee and recurring franchise fee. Our initial franchise fee increased due to our acceleration of gross openings of 104 hotels in the second quarter 2018 as compared to 97 hotels opened in the second quarter of 2017. Then the recurring franchise management fees, that's primarily due to RevPAR growth of 4.7% and also growth in central reservation system usage fees, annual IT marketing fees, hotel management fees, et cetera. This is all because of a result of the increased numbers of hotel and hotel rooms in operation.
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David Li, [19]
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Okay. And also just the -- but the membership fees, in general, that's up quite -- that was up 44% year-on-year. Any -- I'm curious any price increases across these different fee structures?
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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [20]
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Good question. I'll take that up, David. Great observation. The membership has a compound, I believe, growth rate over there. And the first, we have more hotels who generate membership. So the hotel numbers increase. There -- you can see the revenue, I think, on the F&M increased 25%, as a sector. The L&O increased 7%. So the hotel number increased, I think, roughly about 20% or so. And meanwhile, each hotel, the membership mix depend on the customers, the types of -- we have 3 levels of premium paid memberships: regular and gold and platinum. And we did observe there is an increase in the demand for gold and platinum memberships. So as a result, the revenue for both of our franchisees and -- as well as to GreenTree also increased. If you recall, I think we reported here in the past, we split -- we shared the membership fees with our franchisees, 70% actually goes to the franchisees and 30% goes to GreenTree. So we always experienced higher growth rate of the membership growth than the -- than our hotel number growth.
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David Li, [21]
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Okay. Great. And also can you may be going back just talk a little bit about -- I mean, couple of analysts asked this question already. But what are your thoughts on this in general. Obviously, industry is seeing a little bit of slow down, some of it Tier 1 cities, some of the others, maybe, higher mid-scale or up, right? Can you just talk a little bit about, like, what are some of the things your competitors are seeing that sort of not applicable to you? Obviously, the beauty of your model is that you don't have to deal with a lot of the issues. You don't see that directly in your P&L. Can you just help us understand, like, what -- any of the issues that's really kind of unique to some of the peers, but not really affecting you and what might -- what caused for that?
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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [22]
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David, that's a great question, again. We are very different in the way from most of the other players, I think, that first of all, our geographic coverage that we are growing more naturally, organically. So we have more weathered the kind of a match with the economic shift, condition shift. So our portfolio is more balanced between the first, the second and the third and the other tiers. And so the -- even if there is a 1 small sector that has, let's say, Tier 1 experience, certain regions experience slow down, we may not get that much impacted, and that's the first. The second is, even in the first tier city, second tier city, we still have a lot of properties over there. But if you recall, we have mentioned earlier that when we select the properties, we balance the ADR with rental cost. So we pay close attention to the operating margins -- operating leverage to our franchisees to ourselves. So our location -- hotel location, even among the top tier city, first or second-tier cities, we believe are strategically located. So they will be less impacted by, let's say, the prime location properties pricing changes or slowdowns, so that's the second that the -- the second difference. And the third, we use also value pricing, and we want to make sure that to our loyal memberships, GreenTree's pricing means value to them and they can return. We will have a more repeat business from them. And so you can see, even if -- even though our membership volume seems to be 24 million, it's a little bit smaller than some of our peers. However, our direct sales is 95.4%. So that number really means that our loyal members are very, very frequent visitors. So -- and that -- they will -- their visit will be less impacted by the change in terms of any geographic or -- and economic condition shift. So we have -- that -- I think, those factors contributed to -- were less sensitive or were less get affected by this current reported concerns or changes.
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David Li, [23]
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Okay. Great. And I've another question about the CapEx. I understand you guys -- it was an opportunistic purchase. When should we see CapEx coming down significantly because, I think, the first half is over RMB 100 million, right? And this quarter is over RMB 50 million. When should we see that sort of coming down dramatically?
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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [24]
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What?
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Xinyue Geffner, GreenTree Hospitality Group Ltd. - CFO [25]
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The capital expenditure.
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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [26]
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David, that -- can you repeat the question?
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David Li, [27]
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Yes. When are you going to see -- because I understand the CapEx is due to an opportunistic purchase of a property, right? And -- just kind of curious when is that -- when is the CapEx going to come down sharply? Is it in the next -- in the second half or next year?
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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [28]
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The CapEx will come down -- I wasn't -- the capital expenditures in those kind of opportunity -- opportunistic investment purchases may or may not come down, David. Because those kind of purchases, I think, are concurrent with our L&O model direct leases, which provide really a very, very favorable returns to our shareholders and can weather also the kind of -- there are some concerns, there's foreign currency, the exchange rate changes. So we believe those properties will -- first of all, will financially perform well. Secondly, the -- they are in a very -- a transportation hub that provide great advertising for the company. And thirdly, those assets will appreciate -- we believe those assets will appreciate very nicely in the future. So when we see those opportunities in the future, I think we'll continue to see those for our shareholders. And you are referring to a couple of properties we purchased at -- near second-tier city, it's important, like, in the transportation hub, which overall cost, I think, roughly less than, I believe, the first-floor commercial space is less than RMB 5,000 per square meters in a great location. So it is just a rare opportunity. So we do not know, but we strongly recommend. I even recommend to the board and shareholders when we see those opportunities, we should seek those.
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David Li, [29]
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Okay. And one last one, sorry I didn't mean to hold the line. You have total about 8 brands now. Sort of medium term, do you feel like 8 brands are enough for you to keep growing or for you to double? At what point of the size of the business in terms of units would you need more than 8 brands?
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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [30]
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We believe, we should have 15 brands. So we still have 7 more to go in the past. So because the -- we -- as a brand, we should really target different price range, and then we're not even talking about decor just like Selina said. But if we combine the basically the brand that should consist of 2 major components, I think one is the price range, exactly what our travelers and customers can afford; secondly, what kind of taste. So there are 2 dimensions to the brand. So with 2 dimensions, there may be even more variety and -- but we will -- and the M&A will take that into consideration, David. So as our team internally we all know, the M&A target would have to be both brands as well as a geographic coverage. They have to be complementary to GreenTree and the existing brand and portfolio. We do not want to do something that cannibalize each other.
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Operator [31]
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The last question comes from Xin Chen with UBS.
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Xin Chen, UBS Investment Bank, Research Division - Director and Research Analyst [32]
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I have a question. My question is about, may I know the second quarter RevPAR growth Tier 1, Tier 2 and lower cities separately, and trend in the second half of this year?
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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [33]
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Do you have the number? No, the past -- the current quarter. Do you have the number? Selina Jasmine. Jasmine will have the second quarter, Tier 1, Tier 2, Tier 3 cities RevPAR growth.
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Yiping Yang, GreenTree Hospitality Group Ltd. - VP of Operations & Director [34]
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Yes. In our second quarter 2018, our Tier 1 cities the RevPAR growth is low double digit, primarily driven by ADR growth. Our Tier 2 -- Tier 2 cities is in -- around 7% in Tier 2 cities; in Tier 3 and lower cities, is in low single digit. Does that answer your question?
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Xin Chen, UBS Investment Bank, Research Division - Director and Research Analyst [35]
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Yes. May I know the trend in the second half of this year?
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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [36]
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Trending forward. We have -- we believe, the trend will continue to be consistent with what we have reported and planned earlier. So in the past that I believe we said full year, we will anticipate our RevPAR growth is between 4% to 6%. And so we continue to see the trend in that regard in light of even -- in light of some of the investors concerned of the current economy.
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Yiping Yang, GreenTree Hospitality Group Ltd. - VP of Operations & Director [37]
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And as you can see, we're also seeing Chinese government is trying to (inaudible) in order to revitalize smaller cities. So we believe, eventually leisure travel growth -- we see a lot of opportunities to grow RevPAR since our (inaudible) can with brand positioning.
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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [38]
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Good comment, Selina. The first -- I think the last couple of years you can see some RevPAR increase in the first-tier cities and then spread in second-tier cities. I think that the next catch-up, I think, should be in more third or fourth tier cities, because once we have a dramatic growth then the growth rate tends to slow down. And then, it is like a wave spreading into the other cities eventually evenly. So the -- it's like that our current [CPI]. So that -- we believe our current mix and the -- current mix of the portfolio will ensure that we'll have a very healthy growth in the RevPAR.
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Operator [39]
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This concludes our question-and-answer session. I would like to turn the conference back over to Selina Yang for any closing remarks.
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Yiping Yang, GreenTree Hospitality Group Ltd. - VP of Operations & Director [40]
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Thank you, operator. In closing, on behalf of the entire GreenTree management team, we'd like to thank you for your interest and participation in today's call. If you require any further information or have any interest in visiting us in China, please don't hesitate to contact us. This concludes the call. Thank you all.
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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [41]
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Thank you.
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Operator [42]
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This conference has now concluded. Thank you for attending today's presentation, you may now disconnect.