Huazhu Group Limited (NASDAQ:HTHT) Q4 2021 Earnings Conference Call March 23, 2022 9:00 PM ET

Corporate Participants

Jason Chen - Investor Relations Director
Ji Qi - Founder and Chairman
Jin Hui - Chief Executive Officer
Ye Fei - Deputy Chief Financial Officer

Conference Call Participants

Billy Ng - Bank of America
Sijie Lin - CICC
Lina Yan - HSBC
Bruce Lee - UBS

Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Huazhu Group 2021 Q4 and Full Year Earnings Conference Call. Please be advised that today's conference is being recorded. At this time all participants are in a listen-only mode.

It is now my pleasure to introduce IR director, Jason Chen.

Jason Chen

Thank you, Andrew. Good morning and good evening everyone. Thanks for joining us today. Welcome to Huazhu Group's 2021 fourth quarter and full year earnings conference call.

Joining us today is our Founder and Chairman, Mr. Ji Qi; our CEO, Mr. Jin Hui; our President, Ms. Liu Xinxin; our CFO, Ms. Chen Hui; our Deputy CFO, Ms. Ye Fei; and our CEO of international business Ms. He Jihong. Following their prepared remarks, management will be available to answer your questions.

Before we continue, please note that the discussion today will include forward-looking statements made under the Safe Harbor provision of the United States Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. Huazhu Group does not undertake any obligations to update any forward-looking statements, except as required by applicable laws.

On the call today we will also mention adjusted financial measures during the discussion of our performance. Reconciliation of those measures to comparable GAAP information can be found in our earnings release that was distributed yesterday.

As a reminder, this conference call is being recorded. The webcast of this conference call, as well as supplementary slide presentation is available on Huazhu Group's website at ir.huazhu.com.

With that, now I will turn the call over to Mr. Qi Ji. Mr. Ji, please.

Ji Qi

Good morning and good evening everyone.

2021 was another challenging year, cost and the variation and resurgence of COVID-19 and of course, many uncertainties to the lodging industry. At the same time, global macro conditions are also becoming increasingly complex. Since China's economic development strategy is changing from high-speed growth to high-quality development. We also adjusted our strategy from previous upscale growth for sustainable quality goals, focusing on high-quality hotel development.

With the new strategy, we should be able to achieve a sustainable and the quality growth created greater value to our customers, employees and franchisees and make the industry [equal] [ph] by leveraging on our unique three-in-one unique model, which include brand, traffic and the technology. Under the sustainable quality growth strategy, the growth is still the main thing. However, the growth relies on two critical conditions. One, it is called precision or accuracy, by leveraging on Huazhu Hotel technology and innovative capability as well as a people-oriented organization from [indiscernible]. We can see more precise and accurate operations to achieve high efficiency and quality.

Moreover, the precision also requires us to benchmark world-class companies on talent cultivation, reservation, in order to maximize the staff efficiency in the company. In addition, both products and service should also be changed not good enough and more for previously, for simplicity, concentration, perfection focused on core strategy. Success or failure is often determined by tiny details in hotel business. Hence precision becomes more and more important.

Another condition is called value or benefit. It means value creation, long-term focus and social benefit. Also, we're continuously focused on creating greater values to our stakeholders along the value chain of lodging. Also, we would insist on doing difficult other things and the long-term focus.

Last but not least, we will also focus on ESG development, environmental protection, carbon emission reduction, social welfare and corporate social responsibility to bring long-term benefits to our customers, employees, franchisees, owners, shareholders, communities and countries. With that I will turn the call to Jin Hui to discuss our development and focus.

Jin Hui

[Foreign Language]

Thank you, Ji Qi. As mentioned by Ji Qi earlier, 2021 was again a challenging year. However, we continuously insist on implementing our strategies and achieve to several great achievements for the year. Please turn to Slide Four.

On the Quality Hotel expansion front, we defined again our standard of Comfort 360 program and Quality Hotel. We achieved 7830 hotels in operation by the end of this year, with net openings of 1041 hotels. We further penetrated into lower tier cities, with roughly 200 new cities of coverage added during the year.

Also, we successfully introduced the Intercity and Maxx brand into China market. Moreover, through the joint venture with Sunac, we had opened 14 Steigenberger brand hotels in China in 2021. Lastly, Blossom House to further tap into the booming domestic like leisure traveling market.

In regards to our multi-dimensional direct sales we had achieved another year of solid member growth of 14% to 193 million members by the end of 2021. We also officially launched our H-world app 3.0 version to integrate customer services from online to offline. Also, our room nights contributed from corporate customers further improved to 11% in the fourth quarter 2021 and CRS contribution further improved to 63% in the same quarter.

Lastly, in terms of our global technology platform, we had started gradually roll out of our One Global Digital Platform for DH hotels.

[Foreign Language]

Of course, lately, the resurgence of COVID consistently affected our RevPAR recovery. Please turn to Slide Five.

Since China remains implementing zero COVID policy, every researchers of COVID in relative large scale would result in stricter traveling restriction, and hence significantly affected our RevPAR recovery. In February, post the Chinese New Year, we saw our RevPAR recovered steadily on a week-over-week basis. However, since March, the highly infectious Omicron virus has been spreading rapidly in China, which interrupted our RevPAR recovery trend. As of March 22, our month-to-date RevPAR recovered to only 64% of the same period of 2019.

[Foreign Language]

Please turn to Slide Six. Although we are facing many difficulties and challenges, we will unswervingly implement our sustainable quality growth strategy. We have formulated fourth strategic forecast for 2022 which include growth strategy, brand strategy, membership strategy and digitalization strategy. I will discuss details on each of these strategy in the following slides.

[Foreign Language]

Please turn to Slide Seven. Growth strategy mainly includes three areas; firstly, the China forecast to penetrate into lower tier cities; secondly, break through into Huazhu’s less-penetrated market; thirdly, further developing in upper-mid and upscale hotel segment.

[Foreign Language]

Firstly, we will continuously penetrate into the lower tier cities. Please turn to Slide Eight.

As of 2021, there are 40% and 57% hotels contributed from lower tier cities for hotel in operations and pipeline respectively. We totally signed up 2849 new hotels during 2021 with 55% of them came from lower tier cities. At the end of 2021, we have covered 1062 cities in total. Our future target is to cover 2200 cities, which means we still have around over 1000 empty markets to be penetrated.

[Foreign Language]

Please turn to Slide Nine. Our next key regions, key focused regions to penetrate are Southern and Western parts of China. The China's national strategy includes four economic development zones, as shown on the slide. We have good penetrations in Jing-Jin Ji agglomeration and ChangJiang Delta area. However, Chengdu-Chongquing economic circle and Guangdong Hong Kong-Macao Greater Bay Area still very much less penetrated for us.

Last year, we had established our regional headquarters in Shenzhen and Chengdu to develop these two areas. Attract local franchisees and penetrate the local market. By doing so, we can achieve a more balanced to development across all regions in China.

[Foreign Language]

Lastly, I would like to discuss our upper-mid and upscale hotel segment. Please turn to Slide 10. In the upper-mid segment, we insist on using multi-brand strategy to develop the market. Our brands include Crystal Orange, Intercity, Madison, Man Xin, Mercure and Novotel. As of 2021, we have 454 upper middle hotels in operation and a 264 in pipeline. We are targeting to achieve over 1000 hotels in operations and pipelines by the end of 2023.

[Foreign Language]

Our upscale hotel segment is also progressing steadily. Please turn to Slide 11.

We divided our upscale hotels into three parts. Firstly, we are expanding the number of upscale hotels through the joint venture with Sunac. As of 2021, we achieved our first milestone of total 100 apps good hotels in operations and pipeline. Secondly, we use our Blossom House brands to further tap into the booming domestic leisure traveling market. During 2021, we signed up total 35 hotels of Blossom House brand. Lastly, we are using Maxx brands to seek for the conversion opportunities in China focusing on China's existing market of independent upscale hotels. The best example is we had cooperated with Shanghai Les Suites Orient Hotels by using Maxx brands to enter the CBD area at Bund in Shanghai.

[Foreign Language]

In terms of our brand strategy, we also divided into three parts. Please turn to Slide 12.

First one is the product by Upgrade, we constantly upgrade our products for different brands to enhance the brand recognition and the product quality. For example, our flagship economic brand hunting, we continuously upgrade the product and introduce new versions to the market. Second one is on the flagship hotels. We selectively invest and open our flagship hotels in the core cities at core locations to improve our brand awareness. For example, we opened our new version of Crystal Orange 2.0 flagship hotels in Shanghai last year.

Lastly, we sharpened our brand positioning, each Huazhu brands should have its unique positioning to provide differentiated products and services to its own talking to customers in order to gradually transit from products and function leading in the past to rather leading in the future.

For example, Huazhu is targeting the mass market and the customers who are seeking for the highest value for money. Orange brand represents healthy, energetic and sunny. We help brands to become China new youngsters preferred choice while they choose the hotel.

[Foreign Language]

Now let's move to the membership strategy. Please turn to Slide 13. We will now be focusing on with direct sales channels, which mainly through our in-house sales, corporate customers and across the industry allies to attract new customers and expand our membership basis. Our H-world is the critical core platform conducting a deep customer's operations.

[Foreign Language]

Please turn to Page 14. Over the last few years, our membership continuously grows steadily. We had achieved a CAGR of 26% growth from the year of 2015 to year of 2021.

[Foreign Language]

Our CRS contribution also continuously improved. Please turn to Slide 15. For the full year of 2021, the CRS contribution improved by three percentage points year-over-year to 58%. More importantly, our CRS contributions in lower tier cities are only slightly lower than the tier one or tier two cities.

[Foreign Language]

Please turn to Slide 16. Contributions from the corporate customers also further improved. For the full year of 2021 room nights computed from the corporate customers accounted for roughly 11.9%, 2.5 percentage points improved from 2020. Specifically, the corporate customers contribution also gradually improved in the upper mid and upscale segment.

[Foreign Language]

Let's now move to the digitalization strategy. Please turn to Slide 17. Over the past several years of development, the [indiscernible] had already achieved several digitalization processes for its limited service hotels at the hotel level. Transferring many offline functions to online created the time management model. Today, where we deeply reviewed our previously development process, we find out that there are still many constants of the functions that hotel level it can be further operated and managed to digitally. Therefore, the first part of our digitalization strategy is to achieve the comprehensive digitalization of our limited service hotels at the offline hotel level.

[Foreign Language]

Please turn to Slide 18. In the future we think the comprehensive digitalization can include the digital sales, online guest experiences, quality management, GOP management, lifetime franchisees services and extra, more digitalization can further improve the management efficiency and the capabilities.

[Foreign Language]

Please turn to Slide 19. In terms of the full service hotel, this business model is different to limited service hotels. And there's also a very new area for Huazhu to experiment. Therefore, the second part of our digitalization strategy is to transform the full service hotel from single hotel management to cloud-based the digital chain hotel management model. We are experimenting to build up a digital shared platform to move offline functions at hotel level, such as human resources, accounting and finance and supply chain management to online in order to achieve an online shared service platform among many food service upscale hotels.

[Foreign Language]

Before I finish my prepared remarks, I would like to emphasize again on the importance of ESG for Huazhu. Please turn to Slide 20. Under the background of China's carbon utilization target, as well as increasing concern on sustainable growth globally Huazhu has already incorporated ESG into our long-term strategic planning.

Last year, we released our first ever ESG report since listing and the release will continue in the future. At the same time, Huazhu has also started a very comprehensive internal assessment among each business divisions to seek the potential of improvement in any ESG related matters.

[Foreign Language]

With that, I will turn the call to Ye Fei to discuss our fourth quarter and full year of 2021 operational and the financial performance. Ms. Fei, please.

Ye Fei

Thank you. I jumped the guard a little bit. Good morning and good evening to everyone.

Let's move on to our operational and financial review for the fourth quarter and full year of 2021. As shown on Slide 22, our combined hotel networks expanded by 15% in 2021 to 753k rooms of 7830 hotels, compared with 652k rooms of 6789 hotels in 2020. Excluding DH Legacy Huazhu Hotel network expanded by 16% year-over-year to roughly 728k rooms of 7706 six hotels in 2021.

For our hotel turnover in 2021, our total hotel turnover grew at 36% year-over-year to RMB 45 billion in 2021. This was mainly due to our continuous network expansion in China and the low base of 2020. Excluding the DH, Legacy Huazhu hotel turnover grew 38% year-over-year to RMB 42.7 billion in 2021.

Turn to Page 23. Legacy Huazhu blended RevPAR for Q4 '21 was RMB 163, 14% lower than 2019 level. The ADR in Q4 was up by 3% compared to 2019 level at RMB 239, while the occupancy in Q4 is 14 percentage points lower compared to 2019. This was mainly due to COVID-19 resurgence in November.

For the full year 2021, Legacy Huazhu blended RevPAR was RMB 172 a decline by 13% from 2019. But an increase of 16% from 2021. The ADR was RMB 239 up by 2% compared to 2019. Well occupancy is 12 percentage points lower compared to 2019. It was mainly due to the several outbreaks of COVID through the years of 2021, especially in the later half.

Turn to Page 24. Despite the recovery in the fourth quarter was interrupted by Omicron variant since November, our Legacy DH business saw strong recovery in Q4 2021 on a yearly basis. DH is blended RevPAR for Q4 21 rebounded by 153% to 43 Euro compared with Q4 2020. The occupancy improved by 24 percentage points compared with Q4 2020. And the ADR improved by 24% to 94 Euro only 3% lower than 2019 level.

Fr the full year DH blended RevPAR slightly increased by 4% to 32 Euro compared to 2020, mainly driven by 3% increase in ADR occupancy rate was roughly flattish at 35% between 2020 and 2021 as the first quarter of 2020 was pre-COVID in Europe.

Please see our financial results on Slide 25. Total net revenue grew by 9% year-over-year to RMB 3.4 billion in the fourth quarter '21 mainly driven by 130% increase of DHs revenue in Q4 '21. However, Legacy Huazhu recorded 2% year-over-year revenue decline to RMB 2.8 billion in line with our previous guidance.

Due to COVID-19. resurgence in over 20 provinces since November, China's leased and owned hotels saw a 13% year-over-year decline in revenue offset partially by an 8% year-over-year growth of manachised and the franchised revenue.

For the full year of 2021, total net revenue grew by 25 year-over-year to RMB 12.8 billion excluding DH Legacy Huazhu recorded a 30% of year-over-year revenue growth to RMB 11.2 billion in line with our previous guidance. Breaking down the full year revenue; revenue from leased and own hotels increased by 17% year-over-year to RMB 8.1 billion and revenue from manachised and franchised hotel grew by 40% to RMB 4.4 billion. The SLIs manachised and franchised business contributed 34% of total revenue in 2021 compared to 31% in 2020 at group level. For the moment, this is mainly driven by the Legacy Huazhu’s manachised and franchised business whose portion also increased from 36% to 39% in 2021.

Now, let's move to the cost and profitability session on Slide 26. In Q4 '21, the reported operating income was RMB 39 million, compared to a loss of RMB 134 million last year, and positive 72 million a quarter before. The year-over-year improvement was mainly driven by the DH business recovery and the 60 million euro government subsidy received in Q4 but offset by the weaker China Business Performance. Excluding the DH, Legacy Huazhu’s operating income in Q4 was RMB 60 million, compared to RMB [301.5 million] [ph] last year and RMB 239 million a quarter ago.

On a full year basis, the reported operating income turned positive to RMB 164 million from a loss of RMB 1.7 billion last year, despite several resurgences of COVID during 2021 Legacy Huazhu recorded an operating income of RMB 891 million, compared to a loss of RMB 100 million last year. Legacy DH narrowed its loss significantly from RMB 1.6 billion in 2020 to RMB 727 million in 2021. Thanks to the government subsidy, totally European dollar 101 million received in the second and fourth quarter.

The total hotel operating cost for fourth quarter 2021 was RMB 3.2 billion increased by 16% year-over-year. The cost increase included a non-cash impairment loss of RMB 257 million, which was mainly related to DH. For Legacy Huazhu it's recorded RMB 2.3 billion hotel operating costs, indicating a 13% in year-over-year growth. The increase was mainly attributable to higher rental cost of a new upscale and upper-mid hotels, higher personal costs as we're expanding our hotel network rapidly and higher D&A costs which were related to the upscale and upper-mid hotels opening and also upgrading of existing hotels as well as the consolidation impact of a recent physical acquisition.

So Legacy DH, it recorded RMB 866 million hotel operating cost indicating a 28% of year-over-year growth. The increase was mainly due to variable costs increased along with business recovery, as well as non-cash impairment loss of RMB 257 million mentioned above. On a full year basis, total hotel operating costs grew 16% year-over-year to RMB 11.3 billion mainly driven by 20% year-over-year growth of Legacy Huazhu with similar reasons mentioned above.

As we mentioned in previous quarters, our future expansion of upscale hotel will mainly use SLIs model. Therefore, pre-opening costs declined by 19% year-over-year to only RMB 30 million in Q4. The pre-opening costs significantly declined by 72% year-over-year to only RMB 81 million for the full year of 2021.

Our SG&A in Q4 increased by 21% year-over-year to RMB 624 million driven by the increase in both Legacy Huazhu and the Legacy DH. Excluding DH, SG&A for Legacy Huazhu increased by 8% year-over-year to RMB 437 million. The increase was mainly attributable to the increase of headcount for sales teams, IT team, BD team and last but not least, the upscale business unit, which are the areas we strategically invest in.

As you can see from the chart, the increase of SG&A is mainly driven by Legacy Huazhu, while DH side recorded 2% savings from 2020, which also as part of the reclassification impact from the DH side.

Turning to Page 27, our adjusted EBITDA income was RMB 278 million in Q4, compared to RMB 375 million a year ago. If we exclude the non-cash impact loss of 257 million, which was mainly related to DH, the adjusted EBITDA would have been RMB 535 million, representing a 43% year-over-year growth. DH EBITDA turn positive in Q4 ‘21 to RMB 69 million compared to a loss of RMB 389 million last year, thanks to the business recovery and government subsidy, but offset by the non-cash impairment loss. Excluding DH Legacy Huazhu recorded an adjusted EBITDA income of RMB 209 million declined by 73% in Q4 2020 due to the impact of COVID-19 resurgence in the fourth quarter.

Full year adjusted EBITDA turned positive of RMB 1.6 billion from a loss of RMB 244 million in 2020. This was mainly driven by the 81% of growth of Legacy Huazhu’s adjusted EBITDA of 2 billion, as well as a narrowed adjusted EBITDA loss of DH of RMB 461 million. In Q4 2021, we recorded an adjusted net loss of RMB 227 million in large from a loss of RMB 8 million in Q4 2020. Excluding DH, Legacy Huazhu recorded an adjusted loss of RMB 187 million, compared to a net income of RMB 300 million in Q4 2020.

Adjusted net loss for the full year narrowed from RMB 1.8 billion in 2020 to RMB 260 million in 2021. Legacy Huazhu turned positive profit of RMB 358 million, compared to a loss of RMB 459 million a year ago.

Coming to the cash position. Our net debt remains healthy at RMB 4.7 billion by the end of Q4, and there's no risk of breaching the financial covenants of the remaining amount of European dollar 338 million syndication [loan] [ph]. Our cash balance was RMB 5.1 billion, and the unutilized bank facilities were RMB 3.3 billion. Given the COVID impact remains uncertain in the foreseeable future, we'll keep cautious on capital spending and discretional spending to preserve cash.

A few more words on DH, since November last year, DH's recovery trend was again interrupted by Omicron variant. Its occupancy rate dropped by three percentage point to 46% compared to a quarter ago. However, as German government unfolded the initial opening plans in mid-Feb and later applied to March 4, it should help to reaccelerate our RevPAR recovery in the future. However, we will remain cautious and as to implement the mitigation measures, a further emphasis on efficiency improvements, negotiation of lease waiver, personnel cost optimization, deferral of major CapEx, additionally, the short-time worker compensation would continue to be valid until June 30, 2022.

Turning to Page 31 on guidance. As you may know, since March 2022, the highly infectious Omicron variant has been spreading rapidly in China, which seriously affected our business performance, and China's zero-COVID policy also adds great uncertainty to the business recovery. Moreover, the war between Ukraine and Russia may negatively impact our European business. Therefore, the guidance can be of short-term view and only reflect our current understanding of the situation. In terms of our hotel opening plan in 2022, after reviewing our existing pipeline and hotels under construction, we now expect to open around 1,500 hotels and close around 500 to 550 hotels for the year. This is built on the presumption that COVID spread will be contained in a reasonable timeframe in China.

In terms of revenue guidance for the first quarter of 2022, we expect revenue growth to be in the range of 11% to 15% compared to the first quarter of 2021 or to the range of 1% to 5% if excluding DH. For the full-year of 2022, we expect the revenue growth to range from 15% to 20% compared to the full-year of 2021 or to the range from 4% to 9% if excluding DH. Again, the above guidance only reflect our current views, which are subject to change. Last, but not least, considering current condition, we may from time to time make repurchase of our securities, including American depository shares and convertible notes in the open market transactions, privately negotiated transactions or otherwise subject to market conditions and other factors.

With that, let's open for the Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Billy Ng with Bank of America.

Billy Ng

[Foreign Language]

I just wonder like in terms of the product upgrade, I think in the PPT, you guys mentioned that as one of the growth driver. So I -- we understand that in the past, like product upgrade actually can significantly enhance [indiscernible]. But is that still the case going forward and if that's the case? And also in terms of the plan for doing product upgrade, are we helping the existing franchisees to do a large scale upgrade?

Unidentified Speaker

[Foreign Language]

So the product upgrading is our key strategy to cater into the consumption upgrade trend in China. It's happening not only to HanTing, JI Hotel, but also like Orange and Hi Inn. I think the RevPAR improvement of HanTing existing hotels upgrade has been bring -- has brought very good return to the franchisees at least comparable level as the new hotels to the franchisees.

[Foreign Language]

Arguably, Huazhu is the only one pushing the economy product upgrade in China, which is also well received by the customers of us.

[Foreign Language]

Billy Ng

[Foreign Language]

So like I think my second question is like, basically we noticed right now Omicron outbreak was -- is pretty severe in China. So I just wonder whether this outbreak has impact the incentive of the franchisees and whether they decide to open for this year has changed?

Unidentified Speaker

[Foreign Language]

Okay. Certainly, you're right. The current COVID situation and also the China's zero-COVID policy has the negative impact of our performance and also the franchisees, the interest especially reflected in the March number, but having said that, I would also mention two factors as a mitigation. First of all, China is very big and large market. Actually our hotels in the lower tier city has been running good, and this further stimulating the signing of the new hotels in those markets. That's number one.

Two is the further requisition of the -- of our hotels by the current government bureau. Currently, more than 1,850 hotels are under requisition, it's roughly 12% of our hotel portfolio. This is very important to help our franchisees to go through current tough time, especially for the franchisees in the Tier 1 or Tier 2 cities.

Billy Ng

[Foreign Language]

Operator

Thank you. And our next question comes from the line of Sijie Lin with CICC.

Sijie Lin

[Foreign Language]

So my first question is that for the full-year revenue guidance, what's the implying RevPAR recovery rates? And my second question is that we know that ADR recover faster than what we see in 2021, what's the trend of ADR in the future when we recover from COVID-19? Because some people say ADR may continue to increase because people pursue for better quality and strong brands, but some may not think so considering the soft consumption environment? So that's my two questions. Thank you.

Unidentified Speaker

[Foreign Language]

Okay. So to answer your question in terms of revenue guidance we -- for the Legacy China side budget -- we budgeted 81% to 84% of RevPAR recovery compared to 2019 level, it is based on our internal assessment and also the evaluation of the impact of COVID. And regarding to your second question of consumer markets and also the corporate markets reaction, yes, we admit there is a challenge of further sensitivity of the customers' price sensitivity, especially regarding the corporate customers.

From our latest number, especially in January and February Chinese festival, actually the recovery is pretty decent both for the leisure travel and also business travel. I would say from Huazhu Group, we have full spectrum of a product, actually, this creates a very good opportunity for us to capture all kinds of customers, especially those who become more price sensitive, because we are -- we have our own competitive edge in terms, a high-efficient and low cost business model creating both value for our franchisees and also our customers. Let's wait for the next question.

Operator

Thank you. And our next question comes from the line of [Indiscernible] with Goldman Sachs.

Unidentified Analyst

[Foreign Language]

So the question was related to your cost and also the margin price because we saw a bit of margin dilutions last year for the China operations, wondering whether you would have any guidance on the cost as well as the margins? And secondly, in relation to your 7,000 hotel in 1,000 cities and expanding into another 1,000 cities, geographically, we know that you have a huge exposure in Northern and Eastern part of China, wondering whether you have any concentrations, guidance or expectation in the first tier, second or even third tier cities? Thank you.

Unidentified Speaker

[Foreign Language]

Okay. Let me translate the second question first. So, first of all, certainly the lower tier cities is much less penetrated compared to the up-tier cities. The 1,000 incremental cities were mainly coming from third tier city, fourth and fifth even like county. And secondly, we are -- relatively, we have lower market share in the Southern China and Western China. So there is a lot of further growth area for Huazhu as well. So to summary, in our further -- in our portfolio, it will be 55% coming from lower tier city and below and 45% were coming from Tier 1, Tier 2 cities. And our strategy is full penetration through all tier of cities in China through all -- full spectrum of brands. For example, we're going to enhance our penetration in Tier 1 and Tier 2 by more upscale and mid upscale products like Steigenberger, Blossom House and et cetera.

And same time, we will increase our market share by economy and mid-scale brands in lower tier city, and for example, HanTing and JI Hotel. Yeah, that's the question -- answer to the second question. For the first question, certainly, we admit there is mounting pressure in terms of EBITDA because the revenue is under pressure due -- for this sudden change of COVID situation. That's number one. Two, also we -- internally, we have analyzed there is a further improvement areas of course to management even along our key strategy, further penetration, upscale and upper midscale and also digitalization. Under the sustainable and quality growth overarching strategy, we'll focus on the key areas and further improve the cost efficiency. We're going to develop more detailed measures in the next period of time.

Unidentified Analyst

[Foreign Language]

Unidentified Speaker

Thank you, Simon.

Operator

Thank you. And our next question comes from the line of Lina Yan with HSBC.

Lina Yan

Hello?

Unidentified Speaker

[Foreign Language]

Lina Yan

Okay, okay. I just have one question. Do you have an estimate for the breakeven revenue, like the level of breakeven revenue for Huazhu Legacy and DH? And also do you have like a breakeven RevPAR level for that?

Unidentified Speaker

Sorry. You're asking a breakeven RevPAR for Huazhu and DH separately?

Lina Yan

Yes, yes. Yes, yes.

Unidentified Speaker

Historically, we have a ballpark estimate for China that is around RMB130 and for the DH side is roughly around like EUR60 and -- to EUR65.

Lina Yan

Okay, okay. And do you have a breakeven like revenue for this thing?

Unidentified Speaker

The number I'm talking about is relatively is about the EBITDA breakeven level as we gave to the market before, and certainly it will be subject to the COVID recovery, it's going to be moving very quickly, I think.

Lina Yan

Okay, okay. Thank you very much.

Unidentified Speaker

Maybe --

Operator

Thank you. And our next question comes from the line of Bruce Lee with UBS.

Bruce Lee

[Foreign Language]

Hi, management. My first -- I have two questions. And the first question is on the revenue performance for the first two months in Q1 this year, despite the COVID resurgence disruption in March, we saw that the RevPAR recovery in the January and February is relatively better. So may I ask about the revenue performance in January and February this year?

Unidentified Speaker

[Foreign Language]

Bruce Lee

[Foreign Language]

Unidentified Speaker

[Foreign Language]

Bruce Lee

[Foreign Language]

My second question is on the cost front. So I saw that the gross margin in Q4 declined compared with the previous quarters. So I'm -- and I saw that the main reason is the due to the increase in rental, personnel and other cost. So may I double check that, is the increase in rental and personnel cost is mainly due to the increase in number of leased and owned hotels? And also the main contributor in the other cost and how much is the impact on cost increase from the acquisition of CitiGO? Thank you.

Unidentified Speaker

Actually, you're right. The impact of the cost increase mainly come from the upscale and upper mid hotel -- hotels in the leased hotels. And certainly, as we mentioned later, the continued growth model will be asset light, so we're going to control the further investment in this area. CitiGO has a very relatively -- the acquisition size is small. So the contribution to the cost side is relatively limited. It's just more than like RMB10 million level. It's a limited contribution.

Unidentified Speaker

[Foreign Language]

Bruce Lee

[Foreign Language]

Operator

Thank you. I'll now turn the call back over to IR Director, Jason Chen for any closing remarks.

Jason Chen

Thank you, everyone, for taking your time with us today. And we look forward to contact with you again in the upcoming quarter. Thank you again. Bye-bye.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. And you may now disconnect.