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Edited Transcript of GHG.N earnings conference call or presentation 24-May-19 12:00pm GMT

Q1 2019 GreenTree Hospitality Group Ltd Earnings Call

Jul 2, 2019 (Thomson StreetEvents) -- Edited Transcript of GreenTree Hospitality Group Ltd earnings conference call or presentation Friday, May 24, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alex S. Xu

GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO

* Qing Huang

* Yiping Yang

GreenTree Hospitality Group Ltd. - CFO & Director

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Conference Call Participants

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* Aras Poon

Citigroup Inc, Research Division - Associate

* Colin Yao

Goldman Sachs Group Inc., Research Division - Research Analyst

* David Li

* Jisheng Liu

CLSA Limited, Research Division - Research Analyst

* Ronald Leung

BofA Merrill Lynch, Research Division - Junior Analyst

* Xin Chen

UBS Investment Bank, Research Division - Director and Research Analyst

* Rene Vanguestaine

Christensen & Associates - Chairman & CEO

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Presentation

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Operator [1]

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Hello, ladies and gentlemen. Thank you for standing by for GreenTree's First Quarter 2019 Financial Results Release Earnings Conference Call and Webcast. (Operator Instructions) As a reminder, today's conference call is being recorded.

I would like to now turn the meeting over to your host for today's call to Mr. Rene Vanguestaine of Christensen, the company's Investor Relations firm. Please proceed, Rene.

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Rene Vanguestaine, Christensen & Associates - Chairman & CEO [2]

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Thank you, Elisa. Hello, everyone, and thank you for joining us today.

GreenTree's earnings release was distributed earlier and is available on our IR website at ir. 998.com as well as on PR Newswire services. As a reminder, we also posted a PowerPoint presentation that accompanies our comments today to the same IR website.

On the call today from GreenTree are Mr. Alex Xu, Chairman and Chief Executive Officer; Ms. Selina Yang, Chief Financial Officer; Ms. Megan Huang, Director of IT Department; and Mr. Nicky Zheng, IR Manager. Mr. Xu will present the company's first quarter 2019 performance overview, followed by Ms. Huang, who will discuss business operations, and Ms. Yang will then discuss financials and guidance. They will be available to answer your questions during the Q&A session that follows.

Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology, such as may, will, expects, anticipates, aims, future, intends, plans, believes, estimates, continue, target, is or likely -- are likely to, going forward, confident, outlook and similar statements. Any statements that are not historical facts, including statements about the company and its industry, are forward-looking statements.

Such statements are based upon management's current expectations and current market and operating conditions, and relate to events that involve known and unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. You should not place undue reliance on these forward-looking statements.

Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the U.S. Securities and Exchange Commission. All information provided, including the forward-looking statements made during this conference call, are current as of today's date. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.

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 is 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 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-up-scale 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-up-scale, 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 per 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 system 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. This 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, [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 turn 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 foster closer relationships 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 quarters 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 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 serve business and leisure travelers in the business to mid-to-up-scale 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 noncompliance 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 continued 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 1.1% to 78.4%, which was due to the acceleration of new hotel openings in this quarter. The performance of our L&O hotels also remained steady except for slight fluctuation in occupancy rates due to the renovation of 7 L&O hotels.

On Slide 15, you can see that total revenues grew 20.1% year-over-year to reach RMB 235.3 million. The year-over-year increase was primarily attributed to our 4 factors: first, the opening of 101 F&M hotels; second, the addition of 1 new L&O hotel and the conversion of 3 F&M to L&O hotels since the third quarter of last year, namely the GreenTree Inn Xuzhou High Speed Railway Zhanqian Square Hotel, the GreenTree Eastern Yancheng Administration Center Hotel and GreenTree Eastern FoShan ShunDe District Huicong Electronics Store Hotel due to their strategic location and franchisees wanted to free capital to develop more hotels; third, improved RevPAR for both F&M and L&O hotels; and fourth, growth in our loyalty and membership program. Growth was partially offset by the renovation of 7 L&O hotels during the quarter and conversion of 1 hotel from L&O to F&M in the fourth quarter of last year. Total revenue for our F&M hotel rose 22% to RMB 183.5 million, while total revenue for our L&O hotels rose 13.6% to RMB 51.8 million.

Moving over to the expense slide of the P&L, please look at the 3 graphs on the right-hand side of Slide 15 (sic) [Slide 16]. Hotel operating costs were RMB 80 million, a year-over-year increase of 25.5%, which was mainly attributable to increased employee salaries, year-end bonus and other expenses, costs associated with the expansion of our F&M hotels, onetime accretion cost related to the renovation of 7 L&O hotels, higher rental costs, consumer growth, depreciation and amortization associated with our 4 new L&O hotels added to our portfolio since the third quarter of 2018 and 1 new L&O hotel opened this quarter.

Selling and marketing expenses were RMB 24.7 million. The year-over-year increase of 135.7% was mainly attributable to the one-time expenses of the annual conference celebrating the first anniversary of listing and other minor expenses, such as increased advertising and promotion expenses, including the cost of our brand spokesman, increased personnel compensation and other costs, for example, travel expenses of business development personnel as a result of accelerated hotel openings.

Excluding the onetime expenses of the annual conference celebrating the first anniversary of listing and appreciation for new franchisees, selling and marketing expenses increased by 35% over the first quarter of 2018.

General and administrative expenses were RMB 25.7 million. The year-over-year increase of 26.1% was primarily attributed to -- attributable to increased share-based compensation and increased research and development cost.

Overall, total operating costs and expenses rose 37.7% year-over-year to RMB 130.5 million. Excluding the effect of onetime expenses of annual conference, we find the total operating costs and expenses grew only 26.5% year-over-year.

Turn to Slide 17. Gross profit grew 17.5% year-over-year to RMB 155.3 million and gross margin decreased by 1.5% to 66%. The decrease was primarily due to increased operating costs mainly caused by rising staff numbers and bonus expenses and onetime cost related to the renovation of 7 Listed and Operated hotels.

Adjusted EBITDA increased 20% year-over-year to RMB 133.9 million, and adjusted EBITDA margin decreased by 0.1% to 56.9%. Adding back the onetime expenses for the annual meeting, the adjusted EBITDA increased by 29.4% from the first quarter of last year and adjusted EBITDA margin increased to 61.4% compared to 1 year ago.

Net income increased 58.8% to RMB 134 million, and net margin improved by 13.9% to 56.9%. Core net income increased 18% to RMB 92.3 million and core net margin decreased by 0.7% to 39.2%. If we add back the onetime expenses, the core net income increased by 31.5% and margin increased to 43.7% from the 39.9% 1 year ago.

Basic and diluted earnings per ADS improved by 44.6% to RMB 1.33 equal to USD 0.20, while basic and diluted core net income per ADS improved by 7.1% to RMB 0.91 equal to USD 0.14 in the first quarter of 2019.

Moving on to Slide 18. Operating net cash inflow was RMB 122.2 million. As of March 31, our cash and cash equivalent balance was almost RMB 2.2 million -- RMB 2.2 billion. This provides us with ample resources as we 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 2019.

This concludes our prepared remarks. Operator, we are now ready to begin the question-and-answer. Thanks.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Xin Chen with UBS.

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Xin Chen, UBS Investment Bank, Research Division - Director and Research Analyst [2]

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This is Xin Chen from UBS. I have a question about RevPAR. May we know the new hotel RevPAR growth and RevPAR breakdown by cities, such as Tier 1, Tier 2 and lower tier cities? And the second question is that could you give us some color on the RevPAR trend going forward this year? And just 2 questions.

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [3]

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All right. So the question is the RevPAR growth for Tier 1, Tier 2, Tier 3 cities of the breakdown, am I correct, Mr. Chen? And also, going forward RevPAR -- the RevPAR growth rate? Okay. So I think that my understanding is that our like-to-like RevPAR increased about 3.5%, roughly -- 2.5% -- 3.5% [industry], right? And then because of our portfolio mix, we have yield a little bit downward to more economy hotels, so the blended total RevPAR growth of 2.5% in the first quarter is really in line with our large -- overall existing hotels like-to-like 3% to 5% RevPAR growth. So that's the first quarter breakdown. And so we didn't experience any like-to-like RevPAR decrease in our categories.

The ongoing -- on the second quarter, we believe the RevPAR growth situation will improve somewhat over the first quarter as we see the trend. I think we also -- it's the reasons we are benefited from the presence in the second, third and smaller tier cities. In some of the tier cities, the economy has been driven by domestic consumptions. They're really less impacted by the current economic changes. So we observed that it's more stable in those cities.

So I will pass back to Selina to see you want to add anymore?

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Yiping Yang, GreenTree Hospitality Group Ltd. - CFO & Director [4]

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Thank you, Alex. And thank you, Xin Chen, for your question. Actually, for the first quarter of 2019, we observed that the Tier 1 cities still performed the best in terms of RevPAR. And we continue to observe that the RevPAR for Tier 3 and the lower cities, the performance is better than that of the Tier 2 cities, and the RevPAR growth is more than 3%, okay? And we want to emphasize that you may find our occupancy rate had a slight decrease of 1.1% this quarter, and this is primarily due to the acceleration of our new hotel openings. If we exclude the fact of new hotel openings, we find our occupancy rate for the same hotel is nearly stable, just a decrease by 0.3%. And so if we exclude this factor, our RevPAR for the same hotel increased by 3.5% year-over-year. And the other factor is that we had more Shell hotels to open this quarter. So if we exclude the high percentage of Shell hotels, our RevPAR growth will be near to 4%. Thank you.

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Xin Chen, UBS Investment Bank, Research Division - Director and Research Analyst [5]

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I have one more question, it's about revenue growth. Q1 revenue growth was 20%, and the company's full year guidance remains at 20% to 25%. Does it mean we can see revenue acceleration in the rest of the year?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [6]

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Sorry, can you repeat the question?

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Xin Chen, UBS Investment Bank, Research Division - Director and Research Analyst [7]

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Sure. Q1 revenue growth was 20%. The company's full year guidance remains at 20% to 25%. Does it mean we can see revenue acceleration in the rest of this year?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [8]

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Yes. That's what we expected a higher growth in the second, third, fourth quarter on the pipelines for mid-to-upscale limited services and also mid-scale service hotels that have more openings. Even though we have hotel opening about 28%, but the hotel room count, I think, increased less than that. So if you add the room count increase plus the RevPAR, you get back to the total revenue growth rate. So we do -- in the first quarter, we met only -- we only opened 102 hotels. And the following quarters, we planned and budgeted to open more hotels to have a higher accelerated growth. And that has not -- the 20% to 25% increase, I think, we have not counted for the potential addition for the consolidation from those hotels we acquired. So that could in addition another booster to the performance by the end of the year.

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Operator [9]

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Our next question today comes from Colin Yao with Goldman Sachs.

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Colin Yao, Goldman Sachs Group Inc., Research Division - Research Analyst [10]

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I would like to first of all get some color of the current RevPAR run rate of the second quarter. So are we seeing like similar growth trends for the RevPAR into April and May?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [11]

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That is correct. So I think we do see -- we have not noticed a major -- I think we didn't see any major upward increases, but we do see a stable, I think, slight improvement for the past 1.5 months for the second half.

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Colin Yao, Goldman Sachs Group Inc., Research Division - Research Analyst [12]

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1.5 months compared to the first quarter, but are we seeing like significantly better RevPAR in May comparing to April probably?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [13]

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No. We basically compare with our second quarter last year, I apologize. Because compared with the first quarter, we -- of course, we have a improvement. We are talking about the quarter -- year-over-year increase, we still observed a slight improvement.

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Colin Yao, Goldman Sachs Group Inc., Research Division - Research Analyst [14]

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And previous -- because I think we have guided for like 3% to 5% same hotel RevPAR for the full year. So has that guidance remained the same right now?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [15]

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Yes. That is correct.

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Colin Yao, Goldman Sachs Group Inc., Research Division - Research Analyst [16]

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For the full year. Okay. All right. Got it. And also got the other question. So as we can see right now, the company has slight -- almost RMB 2.2 billion, but I would like to know like approximately how much are available for like immediate deployment out of the RMB 2.2 billion?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [17]

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Most of it are ready for immediate deployment of the cash. As you can see from our report, we generate -- we -- our company has always focused on the cash from operations because cash -- free cash flow is a extremely important measure of our company's performance. And so we generate cash from the operation. We also invest in certain of those investments we announced, and we also paid partial payment to some of those acquisitions. So even after that, we still have about CNY 2.2 billion cash. A lot of them are in -- denominated in RMB and they are ready for immediate investment. And if we are -- while we are working and exploring those opportunities, we also are trying to invest those responsibly in the certificate of deposits in certain -- with highly liquid forms. So question -- the answer is, ready at any moment.

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Colin Yao, Goldman Sachs Group Inc., Research Division - Research Analyst [18]

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Okay. And my last question will be regarding on the investment. So well, you guys are maybe investing some of your lease-out hotel to have some -- there are 2 parts. The first, how do you consider investing those lease-out high-end hotel to be the more flagship hotels? And the second part of this question is that as we have seen some of your competitors having some like nonstandardized kind of hotels like some are in the form similar to an OTA running -- in the form similar like OTA like some star Internet company such as like OYO or one of your major competitors who are doing similar thing, would you also consider doing similar kind of hotel operation?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [19]

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Great question. And the first is, if we do have the appropriate location, strategic location also that we can assist the brand marketing, then we will invest in those flagship by ourselves. However, in certain cases, if our franchisee invested -- build hotels, they want to free up the capital to do new one. We may -- just like the last quarter and the previous quarter, we may assist them by acquiring the majority of the interest in the hotels.

The second question -- please let me know whether I answered your question correctly. The second question regarding the nonstandard offering of our products. We are very careful in terms of offering that because we have tried. We have observed that many players in the industry, including OTAs in the past, have experimented that concept. And so far, we have not really seen industry widespread successful business model on the hotel brand group. So GreenTree Alliance is the only experiment we have done. And we have to spend a lot more time and management powers to make sure those hotel are performing because the GreenTree's driver for the sustainable growth is to make sure every franchisee, no matter what brand they join, they will have a healthy and higher profit level than the industry average.

So being nonbranded, we really have to figure out the value-enhancing activities we can bring to those franchisees. Otherwise, we will cause -- I think the -- it will cause more harm than benefit to the hotel group. And then that -- just like the OTA have tried to do the soft brand in the past and have not proven that concept correctly is -- can be sustained growth. And likewise, I think the same way. So we are very, very -- we have experimented that. We are very cautious. We are making sure out of all the brand we are doing and there is a real value -- distinguish the value-added activities who can bring to the franchisees.

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Operator [20]

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Our next question today comes from Jisheng Liu with CLSA.

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Jisheng Liu, CLSA Limited, Research Division - Research Analyst [21]

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Jisheng calling from CLSA. I want to clarify one thing on revenue front. So the guidance of 20% to 25% revenue growth, what is the baseline for that? Is it -- as we updated the restatement in 1Q '19, so the revenue has been changed actually. So I was just curious what was the baseline for the 20%, 25% top line growth 2019. Is it based on the already reported FY '18 revenue? Or that should be restated FY '18 revenue?

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Yiping Yang, GreenTree Hospitality Group Ltd. - CFO & Director [22]

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Jisheng, thank you for your question. Yes, that's the main reason because our company adopted accounting standards update for the first quarter of this year. So the revenues from contract with our company on a retrospective basis is the consolidated financial statements. So -- and the most meaningful impact of the adoption of the standard, so we have reviewed in -- reported in our press release.

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Jisheng Liu, CLSA Limited, Research Division - Research Analyst [23]

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Yes. So just to clarify because I know that we have revised initial franchise fees accounting standard measures as we have been accelerating our hotel openings momentum since 3 years ago. That means if we change the accounting standard, then the initial franchise fee allocated for the year so '18 maybe lower than previously reported. So that means '18 revenue base may be lower than previously reported. So my question was, which base will the 20% to 25% revenue growth guidance be based on this year?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [24]

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I didn't -- I apologize, I didn't get into that question. So I would, at this moment, assume we are under the same base, under the same kind of rule. So we adjusted so that the 20%, 25% would be better matched in that comp -- in that -- by that criteria. So that's my understanding, typically, the principle when we -- internal -- when we do the -- with the auditors when we make those kind of comparison.

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Jisheng Liu, CLSA Limited, Research Division - Research Analyst [25]

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Okay. So the next question is on deferred RevPAR growth performances between different brands. So I was, in particular, interested in how does GreenTree Eastern's RevPAR growth compared to the low end products such as Shell and Vatica in 1Q '19? Is there any difference in RevPAR growth there?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [26]

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So we do have GreenTree Eastern, the RevPAR growth is 7.7%, right? So the -- am I correct, the RevPAR?

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Yiping Yang, GreenTree Hospitality Group Ltd. - CFO & Director [27]

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Yes.

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [28]

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Okay. So 7.7% growth. So a little higher than the other segment.

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Jisheng Liu, CLSA Limited, Research Division - Research Analyst [29]

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Okay. So then I'm just curious, so what was the hotel brand which is underperforming the average? So if we say the average for same hotel is 3.5%, GreenTree Eastern is actually higher than that. So what was underperforming the average? Is it GreenTree Inn, the main brand?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [30]

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I think that is our Vatica. So I'm sorry about that. Our -- let's see, our GreenTree Inn's growth 2.6%. And the Shell -- our Shell growth is a bit lower. Our Shell at this moment stays roughly flat.

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Yiping Yang, GreenTree Hospitality Group Ltd. - CFO & Director [31]

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Yes. And that's because for this quarter, we opened about 38% of the Shell hotels.

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [32]

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So our -- among all of them, it is our Shell that right now has the lowest RevPAR growth.

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Jisheng Liu, CLSA Limited, Research Division - Research Analyst [33]

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Okay. So if we talk about on same hotel basis just for Shell, the existing hotels, let's say, 18 months ago, how was their performance then, if we don't take the newly opened Shell hotels last year?

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Yiping Yang, GreenTree Hospitality Group Ltd. - CFO & Director [34]

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Yes. Thank you, Jisheng. Yes, for the same hotel, the RevPAR growth for the Shell is nearly...

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [35]

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3 point...

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Yiping Yang, GreenTree Hospitality Group Ltd. - CFO & Director [36]

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3.5%.

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Jisheng Liu, CLSA Limited, Research Division - Research Analyst [37]

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Okay. And my last question is on your M&A transactions. So we're happy to see that you have acquired 60% and 70%, respectively, of the 2 targets that we have previously disclosed. May I know if these transactions will be completed purely in cash? Or there will be some equity level swap or other related transactions like that?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [38]

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Great. Good question. And typically we prefer to use cash in all of our transactions, but also because we're trying to negotiate a competitive price. We are trying to invest in all companies with not only earning, but also EPS accretive. As a result that our targeted companies founder principle, we also -- we are also very, very confident in the -- have a bigger expectation -- higher expectation with a combined company. So they, typically, would at that time request about half in ballpark numbers to see whether we can use converted into GreenTree's shares ownership. So -- and we typically will honor that request, become a win-win situation. So they will become the shareholder of the GreenTree. So that's the typical structure we'll finally end up compromising with, so we think that's a win-win, so they can capture upside, and so we don't have to have a zero-sum negotiation during the transaction. So I hope that what I described to you make enough sense to you as well.

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Jisheng Liu, CLSA Limited, Research Division - Research Analyst [39]

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Okay. So just on that front, if we are doing the equity swap so that other companies can get our shares, I have actually two-sided questions. So number one, is, if they do get our shares, will they have any lockup period on that, so that they cannot sell, say, for the coming 2 years or 3? Number two is, that the share swap, if it's true, is it including our previously announced share -- potential share placement and shareholder selling of shares? Or are they totally independent?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [40]

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No. They're totally, first of all, independent. And typically, they have lockup period. And that -- secondly, that -- but may not been that long. And secondly, we also have a mutually agreed performance guarantee, the performance conditions, and we're trying to make a win-win transaction structure.

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Operator [41]

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Our next question comes from Ronald Leung with Bank of America Merrill Lynch.

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Ronald Leung, BofA Merrill Lynch, Research Division - Junior Analyst [42]

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I just have a question on the Urban Hotel Group acquisition. Could you provide a little bit more color about the acquisition, like acceleration and how much earnings contribution and the RevPAR of the company, et cetera?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [43]

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Okay. So I want to get -- can you repeat the questions again? Leung, can you repeat the questions? The -- what the -- I couldn't hear clearly.

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Ronald Leung, BofA Merrill Lynch, Research Division - Junior Analyst [44]

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Okay. So I want to ask about Urban Hotel Group acquisition. So could you provide more details like the acceleration, how much consideration, the earnings contribution of the acquisition?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [45]

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Okay. I apologize that we had a confidentiality agreement in place, but the concept I already described to you. When we acquired the company, we typically acquire at both RMB, EPS side accretive to the company. And so we are not having a breakdown because that we are still in the process of completing the closing conditions. So we are compiling all of them together. It's a dynamic moving process.

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Ronald Leung, BofA Merrill Lynch, Research Division - Junior Analyst [46]

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All right. So -- and does the company still expect to complete a few more M&As before the end of this year? Or do you think the company may slow down a little bit on the M&A front?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [47]

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We will continue to look for suitable complementary brand and resources to the company. We do believe at this moment that our membership network, our system are very beneficial to enable some of those partners to do a better business and the synergies there. So the GreenTree's culture has always been working well when we do investment, so we'll continue to look for and partner with those companies. And we will have more -- I think we are planning to make the investment with the principle and also earning always with earning accretive, PE and EPS accretive in mind so to generate the benefit to our existing shareholders. Meanwhile, trying to create more value for the acquirees or investees in that process. So we will continue, maintain at a steady speed for M&A. We hope by the year-end, we'll have more to come every quarter, and we hope that will generate some new activities, and I think it is exciting for both our companies and our partners.

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Operator [48]

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Our next question comes from David Li with Lizard Investors.

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David Li, [49]

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I have several questions. Alex, can you talk a little bit -- just about macro sort of demand environment for your -- for all of your brands for your demand? And how you guys -- and also across different tiers of cities, how you guys are being impacted? And why aren't you guys seeing the same impact that some of your competitors are seeing?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [50]

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That's a good question, David, that we see some macroeconomic conditions. I think somewhat it's overblown a little bit. In China, we have always designed our strategy to be the most resilient to any kind of economic cycle. I've been doing business in U.S. for close to 32 years, I've been through 3 cycles. The hotel -- hospitality hotels is labeled as consumer cyclical, and I'm the type who is always kind of afraid or concerned about risk. So our business model is designed to counter those cycles. We observe in every cycle, the value priced product and services are always in greater demand during that period of time. And in addition and to have a sticky just like repeat customer base in your loyal membership base is also a key to maintain your business.

And so that's why we have designed our products and also placed our location size where we believe it is value-driven for our day-to-day business travelers and even during some kind of economic correction time. So we have observed that in our -- in China and the businesses for the -- targeted for domestic consumptions, such as education sectors, such as Medicare, such as -- they've done -- a lot of small to medium business that is providing services to the locals. Second thing, just in Henan province and there is a very -- I think there isn't a lot of impact from the current macroeconomics to -- macro economy to their local business travelers. So we didn't observe the kind of negative impact. I believe that the leisure travelers from higher priced those sectors will move down potentially because companies can -- will reduce the travel budget. We have more, I think, corporate travelers inside our network than before. So all indicating that, that our business model, our innovative strategy and being a little bit more conservative, being a little bit more disciplined, will pay off during this time.

If you looked at our free cash flow from operation and we really have not been impacted that at all. So the -- we are not talking about the business -- the investment income, just talking about the cash from operation. You observed that numbers. We have not been impacted at all.

So as Selina pointed out, the first tier city, we have a good growth of the RevPAR. I think that's due to the demand side is constrained, also there is a higher threshold to open more hotels. Not necessarily the supplies -- I'm sorry, the supply side is limited and because higher threshold for the safety, for the [phone-ins] and so not necessarily from the really -- very accelerated growth of the demand. But in the third, fourth tier city and -- our demand and supplies are really balanced from our point of view. So as a result, we enjoy the same rate of growth similar to last year.

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David Li, [51]

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Okay. And also on the acquisitions side, you guys made 4 acquisitions in the last few months, right? New Century, Argyle, Gingko and Urban. Understand some of these things you probably can't talk a little bit about because Urban is still ongoing. Can you just talk about like all -- the timing of these acquisitions, it seems like they all happened like very quickly. We understand some of the strategies about Gingko's education. Maybe just talk about -- a little bit about overall the timing of these acquisitions now like why all of a sudden?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [52]

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Okay. So some of that acquisition and investment took a long time to understand each other's strengths and weaknesses, and it takes months for both party to understand each other's philosophy, culture, to understand the team. GreenTree has never been really that hasty in making those kind of investment. So for instance, Argyle and -- we -- for the founder and I have been friend and I know that -- we are all industry players that we know each other. And then we saw that they're negotiating -- discussing this joint venture for almost 9 months. And similarly that it takes also months for us to understand Gingko and their university's strength, what we can do for them, what they can do for us.

So I mean that's how -- but they all matured similarly in the first quarter of 2019 by coincidence. The only -- I think that the New Century is a shorter, it's about 3 months and that is introduced by our bank from Morgan Stanley. And we discussed about the synergies there, and we think there are potential synergies for the -- because they are the -- they are one of the top 5 star hotel chains, very rare, largest Chinese brand in China. We think there are potentially many synergies, and the 2 teams are collaborating right now in terms of the loyalty program, membership program systems.

So -- and -- so hopefully, David, I answered your question. And some investment like that our investor asked, why do you want to invest in the university like Gingko? You can just go there to recruit, but right now there's a talent war. And not necessarily that we can go there, recruit the people come, I think it takes also relationship to understand their faculties, their program, education program to see what we can do on the GreenTree side so we can get student involved when they are in the first grade, freshman and all the way. So we already have done several programs and one we've already that is in place and well received by the graduates. They have 2,000 enrollment currently just in campus and that all studying for 4-year accredited bachelor degrees for hospitality management. They're ranked #1. So we have this kind of joint venture. We also have enjoyed their appreciations, stock is profitable. And we think they have a lot more potential and so we get talent. We also get investment returns for our shareholders. And so we think those are win-win situations hard to find and that we hoped our investor will understand as well.

So -- and within -- with Urban, we've been in discussion also for many months, almost close to a year because it takes a while to understand the 2 teams' chemistry kind of work together because every business we acquire, we want to become mutually successful, okay? So David, hopefully, I answered the question for you.

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David Li, [53]

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No, that's great. I've a couple more. I know we're running a little short on time. But just on the EBITDA margin front, for the next quarter for this year, given we have slight decline in EBITDA margins, going forward, is there still room -- opportunity for you to continue to increase EBITDA margin year-on-year? And what's going to drive, obviously, the renovation, the onetime expense? Can you just talk a little bit about for the next few quarters if the opportunities still remain to include EBITDA margin year-on-year?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [54]

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David, that's a great question. I'm leaving that to -- I'm going to give one comment and then leaving that to Selina. We believe that first quarter is very special because we had a ambassador program, we had onetime, also the franchisee appreciation celebration, that annual celebration. And so it cost -- incurred a lot of onetime cost, but on a going-forward basis, our EBITDA margins should be maintained the same or higher. So I am going to pass that to Selina.

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Yiping Yang, GreenTree Hospitality Group Ltd. - CFO & Director [55]

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Yes. I agree with Alex. David, yes, we think there is still headroom to increase our EBITDA margin. As you see, if we exclude the onetime fees on the annual conference, our EBITDA margin is still more than 60%, and as our IT systems efficiency increases with free cash, our EBITDA margin will keep to -- continue to increase.

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [56]

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That's a good point, Selina. And David, that our IT system, we think that's one of the core competitiveness of the company because most of the system we use that's servicing not only our customers, but mainly enable our employees to have -- to do a better job to reduce their workload, increase the efficiencies. And so that -- those comprehensive technology tools will make our -- we think that will increase our productivity further, with certain robotics, also AI, to be further deployed in our network.

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David Li, [57]

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Okay. And one more. The Shell filing recently, just last one, the 11.7 million shares, can you just talk a little bit about that? Obviously, within the Shell filing, the insiders are allowed to sell 3 million shares and you guys allowed to do 8 million new shares primary. Can you just talk a little bit about that given the fact that the stock price is pretty undervalued when we see things like this? As investors, we're not sure what to think of it. Can you just comment a little bit about what the rationale and your thoughts behind the Shell filing?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [58]

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David, that's a great question. We've been observing that because 90% of the shares are originally in the IPO plan, we want to have 20% of primary share issued. And at the week of the IPO, the market was volatile, so we actually issued 10%. Due to that, our liquidity is really low. And so our group companies hold 90% that we do not want to sell, and so that created even further constraint. And so the one actually possibility to increase liquidity is to having our group floating to sell 10% to the other investors, but our group feel that the stock price have not realized the maximum -- has not realized the potential, so we didn't -- our group investors did not want to sell.

And so we want -- we filed this because this -- the Shell filing, which will be valid for 3 years, and so in the next -- when the market condition's right, we want to actually float a little more, so to increase our liquidity. Many institutional buyers are not able to buy due to the liquidity, not able to invest in the company. And I think that's one of the reasons I think we saw one of the report ranked as PE ratio -- we are ranked one of the top, I think, in the stock market.

So that's basically -- and by issue also that the primary shares we hope that will give the company some additional liquidity resource just in case because we are systematically screening the M&A candidates in this marketplace, so we think that will solve the problem. But the company will make the decision responsibly. We want every investor, every shareholder in our company will be profitable, we are making profit. So we will be sensitive to how and when and so that -- to benefit all shareholders. And eventually, I think this exercise will lead to higher liquidity and then, hopefully, that higher -- that more institutional, more investors into our company.

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Operator [59]

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Our next question comes from Aras Poon with Citigroup.

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Aras Poon, Citigroup Inc, Research Division - Associate [60]

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This is Aras from Citi. So I just have 1 question. I understand that you guys have been launching this GreenTree apartment models and there is a target of 30 apartments for the rest of the year. So I just want to get an understanding. Maybe can you give us some more colors on how the business model for this apartments is going to be so -- in terms of how the economics works with the franchisees? Or how long the contract is generally signed with the customer? Because I'm worried that in the presentation that the price is charged on a monthly basis. So I assume that the economics is kind of different from the hotel that you're operating. Maybe can you just help us understand how this will impact your financials moving forward?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [61]

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That's a great question. Because -- in the marketplace, a lot of the -- I was told a lot of apartment operators are not running a profitable business. So we observed that. So our apartment -- GreenTree apartment business model is very different. First of all, at least, we opened one has become profitable. We just want to use the testing models. But apartment, the business model will be working on either the total asset heavy or the total asset light. And the business model (inaudible) for instance, you lease and then act as a second landlord and then lease to the customers. Those models are having high risk and are working really well. So our business model is going to be 2 tiers, one, primarily to use our technology to help the landlords manage their apartment well, so we earn -- we don't take the property risk, we just provide the technical system, reservation management services and that's the out of the [9] under contract, most of them are in that category. So I think the typical contract is about 10 years.

And then second, if we do -- if we have an opportunity to be able to secure some of the properties at a much lower, for instance, cost base, which can generate 7% to 8% returns on the investment, then we will work to see whether we can secure with a directed cautious invest in those properties, provided they are in strategic locations, they have a higher appreciation, they can generate IRR in higher -- in mid-10s. So those are the second, but I think we'll be rare to find properties in major cities which fall into that category. So our business model for the GreenTree apartment are primarily long-term extended stay management for third parties for primarily property owners, real estate developers and that's our business model. So it's going to be a earning accretive to GreenTree group.

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Aras Poon, Citigroup Inc, Research Division - Associate [62]

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So you mentioned most of these apartments will be run under a more asset light where you will be helping the landlord. Can you share with us how, say, the management fee will be calculated? Is it based on top line? Or is it more like a base fee?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [63]

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Typically, we -- I'd say top line. We always do a top line. And then in certain cases, if the landlord wants to have a fixed fee, we will consider those as well.

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Operator [64]

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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. - CFO & Director [65]

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Thank you, operator. In closing, on behalf of the entire GreenTree management team, we 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 today's call. Thank you all.

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [66]

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Thank you.

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Operator [67]

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The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.