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Edited Transcript of GHG.N earnings conference call or presentation 16-Aug-19 12:00pm GMT

Q2 2019 GreenTree Hospitality Group Ltd Earnings Call

Aug 23, 2019 (Thomson StreetEvents) -- Edited Transcript of GreenTree Hospitality Group Ltd earnings conference call or presentation Friday, August 16, 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

* Yiping Yang

GreenTree Hospitality Group Ltd. - CFO & Director

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Conference Call Participants

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* Ingrid Zhang

UBS Investment Bank, Research Division - Associate Director & Research Associate

* Jisheng Liu

CLSA Limited, Research Division - Research Analyst

* Justin Kwok

Goldman Sachs Group Inc., Research Division - Executive Director

* Nate Deng

China Renaissance Securities (US) Inc., Research Division - 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 Second Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to 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 will be released in a few minutes and posted on our IR website at ir. 998.com as well as on PR Newswire services. As a reminder, we have also posted a PowerPoint presentation on our website that accompanies our comments today and that will help you follow our remarks.

On the call today from GreenTree are Mr. Alex Xu, Chairman and Chief Executive Officer; Ms. Selina Yang, Chief Financial Officer; and Mr. Nicky Zheng, IR Manager. Mr. Xu will present the company's second quarter 2019 performance overview, business operations and company highlights 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 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 filing 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. Please turn to Slide 5, if you have able to download the PPT. I'm pleased to report our 2019 Q2 results, marking our sixth consecutive quarter of solid operating and financial performance. We grew our geographic coverage to 300 cities across China by the end of June, up from 267 cities in the Q2 of 2018, a 12.4% year-over-year growth. We now operate 2,965 hotels, a 21.4% year-over-year increase across 12 brands from the economy, mid-scale, mid-to-upscale limited services and luxury segments.

Total revenue grew 21.6% year-over-year to RMB 274.9 million. Gross profit increased 21.1% to RMB 196 million. Non-GAAP adjusted EBITDA rose 19.1% to RMB 173.1 million. Net income increased 35.2% to RMB 127.1 million. And net income per ADS, that's basic and diluted, improved by 35.5% to RMB 1.26, which is equivalent to USD 0.18.

Operating performance also improved across-the-board. Blended average daily room rate increased by 4.8% year-over-year to RMB 172. Occupancy rate had a small decrease of 1.5% to 81.1%, primarily due to our accelerated new hotel openings in the quarter and our lower occupancy rate in our luxury segment, but revenue per available room increased 2.9% year-over-year to RMB 139.

Moving to Slide 6. We now have 30 leased and operated or L&O hotels and the 2,925 franchised and managed or F&M hotels in operation, a year-over-year increase of 21.4%. Among them, 30 L&O hotels and 2,897 F&M hotels are operated under the GreenTree brand.

The mid-scale segment remains the core of our business with more than 75.5% of our hotels. At the same time, we are diversifying our portfolio by adding hotels in both the higher end and the economy segment of the market. We added 19 hotels, representing 0.6% of the total portfolio in the luxury segment. And the number of hotels in the mid-to-upscale segment increased to 5.1% of the total portfolio. Meanwhile, the number of hotels in the economy segment grew to 18.8%.

Turning to Slide 7. During this quarter, we opened 134 hotels compared to 104 hotels in the second quarter of 2018, a 28.8% increase. One of those openings -- one of the new openings was in the luxury segment, 21 were in the mid-to-upscale segment, 60 were in the mid-scale segment and 52 were in the economy segment.

Seven of the newly opened hotels were in the Tier 1 city. 32 -- I'm sorry, 34 were in the Tier 2 city and the remaining 93 were in select Tier 3 and other cities in China. Meanwhile, we closed 35 hotels, 26 due to their noncompliance with our brand and operating standards and 8 due to property-related issues. The remaining one was due to upgrade. So net-net, we added 99 hotels to our portfolio.

Turning to Slide #8. Our pipeline of new hotels also increased from 481 at March 31 to 596 at the end of this quarter. Around 28% of the hotels in our pipeline were luxury and mid-to-upscale hotels. 40% of our pipeline focused on the mid-scale hotel business and around 32% of our pipeline was in the economy hotel sector.

Slide 9 summarize some of the 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 purple bars, representing the performance of our F&M hotels. Our F&M hotels' ADR improved by 4.8% to RMB 171. RevPAR increased by 2.8% to RMB 139, while the occupancy rate slightly decreased from 82.6% to 81.1%, mainly due to the acceleration of new hotel openings in the quarter and a lower occupancy rate as we consolidated Argyle brand into our results for the first time. The performance of our L&O hotels also remained steady except for a slight fluctuation in occupancy rate due to the renovation of 9 L&O hotels.

Slide #10 shows our RevPAR trend. The Q2 witnessed a 6.7% year-over-year increase in RevPAR for our L&O hotels to RMB 152, while RevPAR for F&M hotels increased by 2.8% to RMB 139.

Let's turn to Slide #11. 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. Through this program, we can foster closer relationships with our guests. Members can book directly with us, which help reduce sales and marketing fees and expenses. Overall, we now have about 36 million individual members and 1.38 million corporate members. That's up from approximately 33 million and 1.32 million as of March 31. GreenTree members are very loyal customers. In the Q2, around 97.8% of all room nights were sold directly, primarily due to our individual and corporate members.

Now let me talk about a few recent developments that you can find on Slide 12. First, during this quarter, we added 7 GreenTree Eastern, 4 GMe, 5 GYa and 4 VX hotels, which serve business and leisure travelers in the mid-to-upscale segment of the market.

Meanwhile, the consolidation of Argyle brand had an immediate impact on increasing our luxury and mid-scale -- mid-to-upscale hotels by 19 and 9 respectively. Consequently, the number of hotels in these 2 segments increased to 0.6% and 5.1% of the total portfolio.

On the same slide, you can see we had 66 Argyles; 1 Wumian, that's Deep Sleep Hotels; and 22 GMe; 22 GYa; and 13 VX hotels in the pipeline, which will accelerate our expansion in luxury and mid-to-upscale segment.

Second, we are integrating memberships with our partners such as Da Niang Dumplings and Yibon Hotel Group. By doing so, we are able to allow their aggregate members to use the membership points and benefit interchangeably. Third, we are continuously developing and improving our systems to better serve our clients and our franchisees through the cross-marketing and restaurant operations.

In conclusion, we are delighted with our team's hard work and dedication in Q2 of 2019. We are confident in our business model, strategic positioning and long-term growth strategies. We will continue to invest in our people, brands, system and technology in order to better serve our guests and franchisees and to ensure the healthy development of our companies for the long term.

With that, I'll pass the call over to our CFO, Selina Yang, who will summarize our financial performance for the quarter for you. Selina?

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

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Thank you, Alex. Let me refer you to Slide 14. On this page, you can see that our combined total revenues grew 21.6% year-over-year to RMB 274.9 million, primarily due to 4 factors: The opening of 134 F&M hotels, improved RevPAR, growth in our loyalty and membership program and the consolidation of Argyle's results of operation into our financial segments. Growth was partially offset by the renovation of 9 L&O hotels during this quarter.

Total revenue for F&M hotels rose 22.7% to RMB 214.4 million, while our total revenue from L&O hotels rose 17.9% to RMB 60.5 million.

On the same slide, during the first half year of 2019, our total revenues rose by 20.9% to RMB 510.2 million. Total revenues from F&M hotels were RMB 397.9 million, up by 22.4% year-over-year. And total revenues from L&O hotels were RMB 112.3 million, increased by 15.9% year-over-year.

Moving to Slide 15. The cost and expense line of the P&L. Hotel operating costs were RMB 78.9 million, a year-over-year increase of 22.9%, which is mainly attributable to costs associated with the expansion of our F&M hotels, including staff costs, higher rent, consumables, depreciation and amortization associated with the 4 new L&O hotels added to our portfolio in the third quarter of last year, 1 new L&O hotel opened in the first quarter of this year as well as operation costs of Argyle.

For the first half year, our hotel operating costs were RMB 158.9 million, representing a 24.2% increase.

Selling and marketing expenses were RMB 16.4 million, a 49.8% year-over-year increase, mainly attributable to the operations of the newly added hotel brand, including increased advertising and promotion expenses to improve our brand recognition and increase the personnel, compensation and other costs. Selling and marketing expenses for the first half year were RMB 41.0 million, representing 91.8% increase.

General and administrative expenses were RMB 39.8 million, a 58.1% year-over-year increase, which was primarily attributable to increased share-based compensation expenses, consulting fees and traveling expenses. General and administrative expenses for the first half year were RMB 65.5 million, representing of 43.8% increase.

Overall, in this quarter, combined total operating costs and expenses grew 34.7% year-over-year to RMB 135.1 million.

On Slide 16, you can see that in the quarter 2, gross profit grew 21.1% year-over-year to RMB 196 million, while gross margin decreased by 0.3% to 71.3%. The decrease was primarily due to increased operating costs, mainly caused by rising staff members and onetime costs related to the renovation of 9 L&O hotels. Adjusted EBITDA increased 19.1% year-over-year to RMB 173.1 million, while adjusted EBITDA margin decreased by 1.3% to 63%.

Moving on to Slide 17. In this quarter, our net income increased 35.2% to RMB 127.1 million and net margin improved by 4.6% to 46.2%. Core net income increased 16.9% to RMB 125.8 million and core net margin decreased by 1.9% to 45.7%.

Now let's look at Slide 18. The second quarter net income per ADS, that is basic and diluted, improved by 35.5% to RMB 1.26, which is equal to USD 0.18. And core net income per ADS, that is basic and diluted, non-GAAP, improved by 16% to RMB 1.23, which is equal to USD 0.18 (sic) [USD 0.17].

In the first half year, net income per ADS, that is basic and diluted, improved by 40.8% (sic) [40.6%] to RMB 2.59, which equals to USD 0.38 (sic) [USD 0.37]. And core net income per ADS, that is basic and diluted, Non-GAAP, improved by 11.5% to RMB 2.14, which equals to USD 0.31 (sic) [USD 0.30].

Move on to Slide 19. During the first half year, our operating net cash inflow was RMB 207.2 million and cash and cash equivalent balance was almost RMB 2.1 billion. This provides us with ample resources and we consider and evaluate additional capital investments and potential acquisitions.

Lastly, in terms of guidance, we expect total revenue for the full year 2019 to grow 23% to 28% from the last year. This concludes our prepared remarks.

Operator, we are now ready to begin the Q&A session. Thanks.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today come from Justin Kwok with Goldman Sachs.

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Justin Kwok, Goldman Sachs Group Inc., Research Division - Executive Director [2]

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Perhaps, I'll start with 2 questions, one more on the numbers, one on the operational side. The first one on the numbers is your revenue growth was pretty strong. I just want to get a sense that for the 22% revenue growth in the second quarter, can you break it up for the organic part, which is excluding the addition from the M&A side? And on the full year guidance of 23% to 28%, if I recall correctly, I think the ongoing guidance is somewhere like 20%, 25%. So it seems like it's actually moved up from the central case. Is it more because of the RevPAR run rate or is it more because of revenue from the M&A side, maybe that's a bit on and we get some follow on that.

Maybe I'll also ask around the operational question as well. Your RevPAR has surprisingly seen growth in the second quarter. And can you perhaps help us to understand or attribute as to what are you saying that's coming in from your product side, from your geography or the location side or is it from the fact that you guys have been opening (inaudible) and the others in the last 2 years. Any color will be very helpful.

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

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The second question, I didn't hear that clearly. Let me answer the first question then. Thank you so much for asking those questions. The second question I didn't hear -- we didn't -- I didn't hear clearly. So I will ask you later to repeat. But the first question, in terms of moving up the guidance for the entire year, I think that in the second half of the year 2019, our organic -- original GreenTree's group will grow a little bit up -- at a higher velocity. And in addition, our Argyle, the M&A Argyle will come in for the full second half of the year.

And the third, we may have a couple of months of integration of this -- of our urban group. So a combination of those factors we think that we're comfortable moving the -- this guidance up and -- because we are moving the full year guidance. So the second year's growth will be higher and that will be weighted towards the full year. You are correct and -- you are correct to assuming part of that is coming from the consolidation. But our core at GreenTree group's growth is also very stable and healthy and we may experience a little higher increased velocity in the second quarter. So hopefully, I addressed your question, but the second -- what's the second question exactly?

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Justin Kwok, Goldman Sachs Group Inc., Research Division - Executive Director [4]

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I think the first -- the second question was actually -- perhaps if we can get a sense on how you view your RevPAR growth when compared to, say, your competitors, given a few of them reported slight negative growth in the second quarter, where you're actually upholding mid-single digit or low single-digit growth in the RevPAR. What do you think has contributed to your relatively strong RevPAR growth in this quarter?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [5]

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Great. Listen, if you look at our Slide #10, the Slide #10 shows our quarterly RevPAR growth trend. We try to manage our quality and also price, so that we align with the market anticipated. We -- last time, we indicated to you the CPI because we also have blended very healthy. We're not skewed towards mid-to-upscale limited services. So our portfolio has a blend of the economy and mid-scale and mid-to-upscale limited services. So we think that we are targeting this core demand of business travelers and we provide value-priced products to our loyal customers. So we're less sensitive to the price adjustment and -- because that's what we've always been doing. And we always in the past indicated that we are concerned. The companies and also individual travelers' travel budget may be constrained by the economy or the change of the economy and -- so we designed our products and pricing always keeping that in mind. So I think and the result is we are less sensitive. We have robust demand to our core products. So we have not really -- we have observed across the entire geographical regions healthy growth. And in the area where we have more leisure-related travelers, I think we see a little bit more slowdown or a drop in occupancy. But otherwise, across-the-board, majority of the hotels are doing very well.

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Yiping Yang, GreenTree Hospitality Group Ltd. - CFO & Director [6]

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Justin, I want to add some comments in terms of our RevPAR growth by segment -- I mean, by product line. We can see our RevPAR for this quarter is -- year-over-year growth of 2.9%, which is mainly attributable to our middle scale hotels because hotels in this segment contribute to 3% year-over-year growth in terms of our RevPAR.

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [7]

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And because we have a little bit higher percentage of economy segment, so it dragged down the RevPAR growth to 2.9% -- I think 2.8%. But we also have a small bump from the Argyle because we have 0.6%, the RevPAR -- 0.6% on the luxury segment 4, 5-star segment.

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Operator [8]

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(Operator Instructions) Our next question comes from Jisheng Liu with CLSA.

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Jisheng Liu, CLSA Limited, Research Division - Research Analyst [9]

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I have maybe just one question. I haven't gone through the financial statement completely, but just maybe on the hotel openings. I think in the first half, we opened some 30-something hotels. I'd like to understand how many of that is organic part? And how many of that is Argyle, if Argyle his opened any hotels in the first half? And then also if the soft guidance previously of 600 hotel openings this year and the 700 hotel openings for next year are subject to change, given that we have integrated Argyle already and maybe in the second half we are going to include urban as well? So that's the number one question.

And then for number two, I'm trying to understand -- I'm not sure if that's possible to be answered for now. What will be the financial impact from urban in terms of hotel openings, in terms of RevPAR, in terms of other cash flow? Just 2 questions for now.

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [10]

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I think that new openings primarily are organic growth, right?

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Yiping Yang, GreenTree Hospitality Group Ltd. - CFO & Director [11]

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Yes. Exactly. Jisheng, this is Selina speaking. Yes. Amount of new hotel openings this quarter mostly from our organic growth. Actually, the exact number is 132.

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [12]

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Thanks. So 132 or 134 are organic growth. So we expect that this year, the original GreenTree group will grow 600 and that we are right on target. And then with the Argyle and urban, I think we'll have additional openings, but we also experienced slowdown in the openings of Argyles because Argyle has more than 68 hotels in the pipeline. And due to the -- I think due to the policy, due to the economy and -- I think the opening of those hotels has been pushed back. And that we have -- Argyle has increased our development team as well and further trying to catch up, further speed up the market share and by doing more development. And so we'll see that -- we'll probably bring the result to next year or the year after. So urban will have a couple of months' consolidation than most for this year. And we have -- the year-over-year performance is right -- is excellent for urban in the first 6 months and we should experience that 20% year-over-year increase over last year and that -- I think that we should be able to -- we budgeted the urban side to be anywhere between 150 around plus or minuses of new -- to 190 new openings next year.

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Jisheng Liu, CLSA Limited, Research Division - Research Analyst [13]

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Okay. May I just have a follow-up. I think for especially the second quarter, our RevPAR performance -- I'm just talking about GreenTree, the 2.2% growth in the quarter is maybe better than -- maybe all -- well, they've not reported yet, but maybe better than all of them -- all the hotel peers listed group. Did you see actually any more franchise interest especially in the economy or lower and mid-scale segments wanting to having their property going to our group. And if that's possibly a transitional impact on urban and Argyle saying that maybe these hotels, these brands can also help perform other peers within the same price range in the future. Any color will be helpful.

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [14]

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Great question. In all segments of the hotel industry and the competition become fierce and fierce. And there are so many new operators -- so many new well-reputable operators coming in from all over the world. So there are also new supplies. But I think GreenTree's competitive advantage right now, I think we have differentiated ourselves with several things. So first of all, we are trying to still utilize the system technology to provide the brand and the system support to the franchisee at the lowest cost at the hotels in terms of revenue percentage. So the franchisee will have less financial burden by joining our brand.

And secondly, I think the sales and marketing -- in other words, the cost of catching the customers and acquiring customers become more and more expensive. But at GreenTree, we also have our restaurants, F&B operations and -- which -- standing out, we have a cross-marketing program. We bring the hotel marketing to the tens of millions of customers going through the restaurant business.

And thirdly, we also -- right now, we are writing a pilot -- finished our pilot program. It will be very successful in bringing restaurants, typically the cost center into a profitable restaurant -- profit center by operating the restaurant with our standardized branded operation.

So with all of those strengths, our hotel franchisee revenue performance is strong. And that we are even increasing our efforts in sales, marketing and support to the franchisees. So we don't -- we think with our demonstrated solid and profitable growth, we should be able to attract more and more franchisees to over system. But nowadays, the market competition, there are so many newcomers, they have different package. We still are trying to analyze the long-term sustainability of each program or each brand and we're trying to grow and GreenTree is trying to grow our business always with a profitable, solid and win-win for everybody. So in the long run, we are confident we can withstand any kind of competition and growing our brand and franchise.

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Operator [15]

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Next question today comes from [Tony Dan] with (inaudible) Capital.

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Unidentified Analyst, [16]

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Congratulation on excellent results. I have 2 questions. So as you just discussed on competition, I would like to know a little bit more on the competition effect on the franchisee pricing of the whole sector? Does it -- does the OYO and [Gingko] had impact on the franchisee fees side of it?

And second question is related to the different costs, like the marketing cost and other SG&A cost, which we have seen increased faster than the revenue as a whole? Are we going to see this trend to continue for -- into the near future? And on top of that, how much of the revenue growth for this year is going to be organic versus acquisition?

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

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Tony, I will answer the question. And Selena, you will supplement. Tony, a good question, but -- we -- if you look -- we looked at all the financial reports from various companies and gross profit margin and net profit margin for operating a sustainable hotel brand. I think that we have -- we can drop our price to compete and then getting our size up and getting our fee reduced to compete directly. And we have also a lot of financial resources and after our 2 investments -- several investments, we still have ample cash in hand to do further -- either sales and marketing or offering the lower fees overall to gain the market share. We believe (inaudible) gross margin and net profit margin, some of the fees we offer have to be sustainable for ourselves in the long run. And -- so we think they eventually would have to adjust their fee levels and certain operators in order to make this sustainable or we will compete -- that we will drop our fees to compete because we are the most efficient -- we think that we are very efficient in that end, so -- but we wouldn't want to have a price war from our point of view. At least, we have not seen the need to do that yet. And we have -- we are carefully analyzing the different business model. We respect what they do and we hope that we'll also continue to enhance our technology and enhance our system and to -- in the future to see whether we can even lower our fees to benefit and compete to have a higher rate of growth.

So the second question in terms of marketing and G&A fee increase, I think that increase primarily resulted from the consolidation and also our significant amount of the expenditures on the due diligence, DDCs such as lawyer fees and auditing fees for evaluating many projects. And excluding that, I think that our increase overall is about 20%, 25%, which is in line with our revenue growth. And then third is that our original group's -- our organic -- another word, original GreenTree group's and revenue growth is still in the 20%, 25%. I think that's going to be a little bit higher for the second half of the year because we also have some small branded hotels, where we're piloting programs, which will benefit our sales. So -- and that's my -- that our response to you. So Selena, do you have anything to add.

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Yiping Yang, GreenTree Hospitality Group Ltd. - CFO & Director [18]

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Yes. Alex, you are correct. If we included other expenses in the cost by organic growth, our total operating costs when expanded for the second quarter was RMB 128 million. That was about 22% year-over-year increase, yes. And specifically, for selling and marketing expenses, by organic growth, the year-over-year increase was about 13%. And G&A for this quarter was about 50%. And for the G&A expense that was mainly attributable to our onetime consulting fees for M&A and also share-based compensation. If we exclude the onetime expenses for consulting fees, actually our G&A expenses represent 25% year-over-year.

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

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So Tony, those are the numbers that Selena just quoted to you. I don't recall those numbers. I know they're in the ballpark, okay?

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Jisheng Liu, CLSA Limited, Research Division - Research Analyst [20]

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So basically, is it safe for me to assume the market will keep at the current level and basically other costs will be -- grow in line with the organic revenue growth?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [21]

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You said that all the expenses will be in line with -- like the rate of organic growth rate? And if that's the case, yes.

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Operator [22]

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(Operator Instructions) The next question today comes from (inaudible).

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Unidentified Analyst, [23]

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I have only one question. Why does the company have a lot of nonrecurring profit and loss in the second quarter? Is it because of the stock income?

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

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What was...

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Yiping Yang, GreenTree Hospitality Group Ltd. - CFO & Director [25]

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Sorry, can you repeat your question?

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Unidentified Analyst, [26]

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Why does the company have a lot of nonrecurring profit and loss in the second quarter? Is it because of the stock income?

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

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Nonrecurring loss...

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

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We -- other than -- for this quarter, the only -- the nonrecurring that we think that the items significant, it is -- as Selena said, we have evaluated systematically many, many companies, so we have many -- we have a lot of DD costs, legal and auditing and accounting. And then, we also have the consolidation costs that bring the costs from the Argyle consolidation. And that we don't think we have a lot of other non -- onetime and nonrecurring costs. Do we?

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Yiping Yang, GreenTree Hospitality Group Ltd. - CFO & Director [29]

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No.

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

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Also I want to go back to your question. I recall you said that we may have one of the highest RevPAR growth for the quarter. I think that we have not aggressively grow the ADR and also our composition wasn't -- competition with the hotel segment was not really moving really at very, very high end. So we have -- because of that, I think we have also rooms to improve. So we respect a lot of the changes -- the performance done by other hotel groups in the past. Especially, they have higher RevPAR growth, but we believe that we are trying to design our program always been sustainability, continued growth. In light of the economic conditions, I think that's our principal guidance for our company's operation, Tony. So just wanted to add one more comment to your question.

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Operator [31]

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The next question today comes from Ingrid Zhang with UBS.

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Ingrid Zhang, UBS Investment Bank, Research Division - Associate Director & Research Associate [32]

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I have 2 questions. First, would you mind sharing RevPAR growth trend in Q2 by city tiers? And my second question is regarding (inaudible). I noticed that while our economy segment has been seeing very strong growth in terms of hotels under development, our mid-to-upscale brands are pretty stable. Would you -- pretty steady around 117. Would you mind sharing some color on this as well?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [33]

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Yes. The RevPAR by city. Do you have the number?

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

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Yes, the RevPAR by city -- Ingrid, thank you for your question. Actually, our RevPAR growth in Tier 1 city was the highest at nearly 9%. And RevPAR growth in Tier 2 year-over-year growth is about 5% and remaining contribute to our RevPAR growth around Tier 3 and other cities, that is about 2.5%.

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

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And the pipeline, the...

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

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For second question, yes -- for the pipeline, if we analyze our pipeline number by segment, (inaudible) Which meet our growth in our economy segment, that is -- if we look at our slide.

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [37]

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The -- so let me try to answer Ingrid's question, I think, for the (inaudible) for the projection. So Ingrid, we have observed that there's more activities in the economy segment in the past 1 year, especially. So we have added our people to that -- we have -- I think that -- added people and also a lot of the existing developers' attention, also focus -- I think shifted and expanded to an economy segment as well. But this year -- and we will also plan to add staff levels at our development team to increase our pipeline building for the mid-scale or mid-to-upscale. And so we want to see across-the-board eventually move to [20 60] and further increase the economy and furthermore. So we're trying to maintain that kind of composition and we think that we can achieve that -- we can achieve a little bit higher growth rate in the mid-scale for the balance of the year and next year.

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Ingrid Zhang, UBS Investment Bank, Research Division - Associate Director & Research Associate [38]

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May I have a follow-up question on this? Are we observing franchisees have maybe lower interest in mid-to-upscale segment due to the economy challenges?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [39]

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Ingrid, one more time.

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Ingrid Zhang, UBS Investment Bank, Research Division - Associate Director & Research Associate [40]

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Sure. My question is for the -- still for the mid-to-upscale pipeline growth. Are we observing maybe lower interest from franchisees in -- to invest in this segment due to softer economy?

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Alex S. Xu, GreenTree Hospitality Group Ltd. - Founder, Chairman & CEO [41]

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I see. Okay. Great question, Ingrid. I think there are -- we have observed a trend in the marketplace. People made bigger investment with higher rent and we observed other -- a lot of other franchisees. Their mid-scale performance is not increasing, but dropping. So as a result, we are -- I think we see more and more franchisee are concerned and making bigger investment around the mid-scales and paying higher rent. And the -- so your observation is right. But we still see many, many investors and entrepreneur trying to invest in hotel sector because it is really one of the brightest sector in our experience-based new economy. And that -- so the interest are still there. And I think that the financial -- they are more disciplined financially and they are more -- I think they are more analytical and they are more prepared than before. So we are working with many, many franchisees and trying to find responsible investment opportunities with them.

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Operator [42]

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The next question today comes from Nate Deng with China Renaissance.

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Nate Deng, China Renaissance Securities (US) Inc., Research Division - Research Analyst [43]

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Congrats on the great results. I have 2 questions, if I may. The first one is regarding the same-hotel RevPAR. Can you break it down by segments, say, economy segment, mid-scale segment, which one is faster and which one is slower?

And the second one is regarding the 9 L&O hotels -- renovated L&O hotels you mentioned before. When are you expecting them to reopen and contribute to revenue growth? And how -- to what extent can we expect them to drive revenue growth?

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Yiping Yang, GreenTree Hospitality Group Ltd. - CFO & Director [44]

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Thank you for your question. For the first question, you want to know the same-hotel RevPAR. And I'd like to assure you that this number exaggerates with our organic growth. For the same hotel, our RevPAR growth is above 3% for the same hotel and for our own organic growth.

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

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The breakdown by the brand -- the mix...

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Yiping Yang, GreenTree Hospitality Group Ltd. - CFO & Director [46]

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By segment breakdown, these many attributable to our mid-to-upscale and our economy segment. For mid-to-upscale, same-hotel RevPAR growth is above 4%. And for economy segment is about 3%. And for middle scale, that is about 1%. I'm sorry, I found out I made a mistake. For mid-to-upscale, our RevPAR growth is above 1.5%. And for middle scale, our RevPAR growth is about 3.5%. And for our economy segment, it's about 3%.

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

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And for the balance of the 9 hotels, we are not taking them completely down, so we are renovating while we are in operation. So they will have an overall negative impact not [seeing] and RevPAR during that time. But before the year-end, all 9 should be open -- should be fully renovated.

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Operator [48]

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This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Selina Yang for any closing remarks.

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Yiping Yang, GreenTree Hospitality Group Ltd. - CFO & Director [49]

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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 [50]

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Thank you.

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Operator [51]

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