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GreenTree Hospitality Group Ltd. (NYSE:GHG) Q3 2023 Earnings Call Transcript

GreenTree Hospitality Group Ltd. (NYSE:GHG) Q3 2023 Earnings Call Transcript November 22, 2023

Operator: Hello, ladies and gentlemen. Thank you for standing by for GreenTree’s Third Quarter 2023 Financial Results Release. [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, Mr. Rene Vanguestaine of Christensen, GreenTree’s Investor Relations firm. Please proceed Rene.

Rene Vanguestaine: Thank you, MJ. Hello, everyone, and thank you for joining us. GreenTree’s earnings release was distributed earlier today 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 to the same IR website. On the call from GreenTree are Mr. Alex Xu, Chairman and Chief Executive Officer; Ms. Selina Yang, Chief Financial Officer; Ms. Megan Huang, Vice President of Sales and Marketing; and Ms. [Ellen Zhao], Financial Director, stepping in for Mr. Bill Zhou, who is not available today. Mr. Xu will present the company’s performance overview for the third quarter of 2023, followed by Ms. Huang and Ms. Zhu, who will discuss business operations, and then Ms. Yang and Ms. Zhu will discuss financials and guidance.

A large hotel room with touches of luxury and hospitality in every corner.

They will be available to answer your questions during the Q&A session, which 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, expect, 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 expectation 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 currently occurrences 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.

Alex Xu: Thanks, Rene, and hello, everyone, and thank you for joining us today. We had a good third quarter with a strong recovery in our hotel business year-over-year as tourism and business travel continued to rebound. RevPAR increased 30.5% year-over-year, reaching as high as 110% of its third quarter of 2019 levels in July and August, with a surge in the number of tourists during the summer vacation. The pace of recovery of RevPAR slowed slightly in September but remained stable. We will continue to implement our long-term strategic development plan, focused on helping franchisees to maintain high-quality service and operation and expand our hotel network and the sales channel, provide stable operating profitability and maintain long-term stable growth.

Please turn to Slide 5. Compared with the third quarter of 2022, hotel RevPAR was RMB 156, up 30.5%. And the restaurant ADS, that is average daily sales per store, was RMB 6,548, up 7.4%. Total revenues were RMB 460.9 million, up 15.3%. The increase was partially due to the recovery in RevPAR. The increase in the number of hotels and the increase in the ADS offset by the closure of 85 restaurants over the past 12 months. Income from operations increased to RMB 137.8 million with a margin of 29.9%. Net income was RMB 117.4 million with a margin of 25.5%. Adjusted EBITDA, that’s non-GAAP was RMB 173.4 million, that’s up 215% with a margin of 37.6%. Core net income, that’s non-GAAP, was RMB 127.2 million with a margin of 27.6%. Cash provided by operating activities was RMB 154.8 million.

Slide 6 shows detailed numbers for hotel, total revenues, income from operations, net income and adjusted EBITDA. On Slide 7, operating performance was great. RevPAR was RMB 156. At the bottom of the slide, you can see the weekly RevPAR performance in the third quarter of 2023 compared with 2019. RevPAR gradually recovered to more than 110% of its prepandemic levels in July and August, then slow down gradually in early September. During the mid-autumn festival and the National Day, we ushered in a new round of development and growth. Slide 8 shows the operating performance of restaurants with ADS continuing an upward trend and reaching the highest level in a long time. Now starting with Slide 10. We will review our strategic execution across our businesses.

In our hotel business, we further expanded in the mid- to upscale segment and increased our penetration in Tier 3 and the lower cities in South China. As you can see on Slide 11, we continue to grow our mid-to-upscale segment with 455 hotels. That is 10.9% of our total portfolio, at the end of the quarter, up from only 50 in 2017. While the mid-scale segment remains the core of our hotel business with 70.8%, we continue our expansion into the higher-end segments. The economy segment remained stable at 18.3%. Please turn to Slide 12. Over the past 5 years, most of our new hotels have been in China’s driving Tier 3 and the lower cities. As we pursue greater penetration in Tier 3 and the lower cities, 73.7% of hotels in our current pipelines are in such cities and we will further capitalize on the substantial opportunities in such locations.

On Slide 13, we continued to focus on increasing profitability in our restaurant business. We closed unprofitable stores, increased the proportion of franchise and managed the restaurants and expanded the number of street stores. On Slide 14, during the third quarter of 2023, we closed 10 restaurants in areas of decreasing economic activities, helping improving the profitability. On Slide 15, you can see the growth in the proportion of our franchise and managed restaurants since the acquisition of Da Niang Dumplings and Bellagio during the first quarter of 2023. We opened the sixth F&M restaurants in the third quarter of 2023. Slide 16 shows the restaurant breakdown by location. Most of our restaurants are currently in shopping malls. However, we believe there is substantial potential for street stores, and we intend to grow this segment.

Now let me turn the call over to Megan and Allen Zhu. Megan?

Megan Huang: Thank you, Alex. Please turn to Slide 18 to start reviewing the operating and financial highlights. Slide 18 shows the trend in our quarterly operating performance. In the third quarter of 2023, RevPAR for our L&O hotels increased to RMB 212. RevPAR for our F&M hotels increased to RMB 155. ADR for our L&O hotels increased to RMB 268 and ADR for our F&M hotels increased to RMB 190. Occupancy at our L&O hotels increased to 79% and occupancy at our F&M hotels increased to 81.3%. Slide 19 highlights the growth in our membership programs, which accounted for most of our direct sales. Individual memberships grew to 88 million, up from 77 million a year ago. And corporate membership grew to 2.02 million, up from 1.92 million a year ago.

Now please turn to Slide 20. In the restaurant business, the number of individual members grew to 2.67 million, up 1.6% year-over-year. ADS increased 7.4% to RMB 6,548 in the third quarter of 2023 compared to 1 year before. With that, I will pass the call over to our CFO, Selina Yang.

Selina Yang: First, I will review our hotel business. Please turn to Slide 21. In the third quarter, total hotel revenues increased 40.4% year-over-year to RMB 339.1 million. The increase was primarily due to the recovery in RevPAR and the increase in the number of hotels. Total hotel revenues increased 9.2% to RMB 339.1 million compared to second quarter of 2023. Total revenues from F&M hotels were RMB 186 million, up 20.8% year-over-year, while total revenues from L&O hotels increased 83.1% to RMB 151.8 million. On Slide 22, total hotel operating costs and expenses decreased 14.7% year-over-year to RMB 212.4 million and total hotel operating costs and expenses decreased 0.5% compared to the second quarter. Total costs and expenses are composed of hotel operating costs, selling and marketing expenses, general and administrative expenses.

Operating costs were RMB 159.9 million, increased 12.1% year-over-year. The increase was mainly due to the higher personnel costs, higher consumables and higher utilities as business rebounded, as well as higher depreciation and amortization with increase in assets, partially offset by the consolidation of Argyle and Urban. Operating costs increased 6.5% to RMB 159.9 million compared to the second quarter of this year. Selling and marketing expenses were RMB 14.3 million, a year-over-year increase of 24.9%. The increase was mainly attributable to higher sales channel commissions and higher sales staff salaries. Selling and marketing expenses increased 3.7% compared to second quarter of this year. General and administrative expenses were RMB 26.7 million, down 50.9% compared with same quarter of last year.

The decrease was mainly due to lower bad debt, lower staff-related expenses and lower consulting fees. General and administrative expenses decreased 40% to -- compared to the second quarter of this year. Turning to Slide 23. Income from hotel operations increased from RMB 1.3 million to RMB 127.5 million year-over-year. Net income of hotels trend positive year-over-year at RMB 108.5 million. Adjusted EBITDA increased 221.1% to RMB 164.3 million. And core net income increased from RMB 5.4 million to RMB 118.1 million year-over-year. Next, let me turn the call over to Allen, the Financial Director.

Unidentified Company Representative: Please turn to Slide 24. In the third quarter of 2023, total restaurant revenues were RMB 121.8 million. You can also see the revenue breakdown for F&M restaurants and L&O restaurants. On Slide 25, total operating costs and expenses decreased 29.6% year-over-year to RMB 111.8 million and decreased 2.6% sequentially. You can also observe the down trend in material costs, personnel costs and the rent. Turning to Slide 26. Income from restaurant operations was RMB 10.3 million. Net income was RMB 8.8 million. Adjusted EBITDA increased 134.4% to RMB 9.1 million year-over-year. Core net income was RMB 9.1 million. Next Selina, please introduce the profitability of our group.

Selina Yang: Please turn to Slide 27. Group net income per ADS, basic and diluted, was RMB 1.15. Group core net income per ADS, basic and diluted non-GAAP, was RMB 1.25. Let’s now take a look at Slide 28. As of September 30, 2023, the company had total cash and cash equivalents, restricted cash, short-term investments, investments, equity securities and time deposits of RMB 1,331.4 million compared to RMB 1,440.1 million as of June 30, 2023. The decrease was primarily due to repayment of bank loans and investment of property, partially offset by cash from operating activities and repayment from franchisees. On Slide 29, based on our performance in the first 9 months of this year, we revised our full year 2023 guidance for the total revenues of our organic hotels upwards.

We now expect them to grow 36% to 38% year-over-year. We expect total combined revenues from our restaurant and organic hotel business for the full year of 2023 to grow 17% to 19% over the 2022 levels, reflecting the impact of the closure of restaurants. Finally, a word about our share repurchase program. In October this year, the company repurchased 554,158 of its ADS from a single investor at a price of USD 4.40 per ADS, for a total consideration of USD 2,438,295.20 in a private negotiated transaction. The repurchase was made under the auspices of the company’s share repurchase program for a total of USD 10 million authorized by its Board of Directors for 2 years on October 13, 2023. This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session.

Operator: [Operator Instructions] Today’s first question comes from Dan Xu with Morgan Stanley.

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