GreenTree Hospitality Group Ltd. (NYSE:GHG) Q4 2018 Results Conference Call March 14, 2019 8:00 AM ET

Company Participants

Rene Vanguestaine - Investor Relations
Alex Xu - Chairman and Chief Executive Officer
Selina Yang - Chief Financial Officer
Megan Wang - Director of IT Department
Nicky Zheng - IR Manager

Conference Call Participants

Justin Kwok - Goldman Sachs
Billy Ng - Bank of America Merrill Lynch
Aras Poon - Citigroup
Jisheng Liu - CLSA
Alan Lo - SWS Research

Operator

Hello, ladies and gentlemen. Thank you for standing by for GreenTree's Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. 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 Christiensen, the Company's Investor Relations Firm. Please proceed, Rene.

Rene Vanguestaine

Thank you, Keith. Hello, everyone, and thank you for joining us today. 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 today to the same IR website.

On the call today from GreenTree are Mr. Alex Xu, Chairman and Chief Executive Officer; Ms. Ms. Selina Yang, Chief Financial Officer; Ms. Megan Wang, Director of IT Department; and Mr. Nicky Zheng, IR Manager. Mr. Xu will present the Company's Q4 and Full Year 2018 performance overview, followed by Ms. Wang who will discuss business operations and company highlights, and Ms. Yang will then discuss financials and guidance. They will all 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 21-E of the Securities Exchange Act of 1934 as amended and as defined in the US Private Securities Litigation Reform Act of 1995. These forward looking statements can be identified by terminology such as may, will, expect, anticipate, 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 involved known and unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the Company's control, which may cause the Company's actual results, performance or achievements to differ materially from those in the forward-looking statements.

You should not place undue reliance on these forward looking statements. Further information regarding these and other risks, uncertainties or factors is included in the Company's filings with the U.S. Securities and Exchange Commission. All the information provided, including the forward-looking statements made in 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.

Alex Xu

Thank you Rene and thanks everyone for joining our earnings call today. I'm pleased to report our 2018 fourth quarter and the full year result that you can see on Slide 5 of the PPT we presented for you. During this quarter, we continued to expand our geographical coverage across China, covering 290 cities at the end of December 2018. We now operate 2,757 new hotels across 10 different brands from economy, mid-scale to mid-to-upscale limited services segment of the market, including our newly started apartment business. During the fourth quarter, we opened 224 new hotels and continued to grow our pipeline. As of December 31st, 2018 we had opened a total of 554 new hotels for the full year 2018. We are on track to open more new hotels in the coming years.

In the fourth quarter of 2018, our total revenue of grew 20.8% from the same quarter of 2017 to reach RMB249.9 million. Gross profit increased by 19% to RMB175.8 million. Non-GAAP adjusted EBITDA rose 35.2% to RMB160.1 million and the non-GAAP core net income rose 33.4% to RMB115.9 million. While gross margin changed slightly from 71.4% to 70.3% in the quarter, adjusted EBITDA margin improved from 57.3% to 64.1% and the core net margin improved from 42% to 46.4% compared to a year ago.

For the full year of 2018, total revenue grew 21.4% year-over-year to reach RMB945 million. Gross profit increased by 22% to RMB664.1 million. Non-GAAP adjusted EBITDA rose 30.5% year-over-year to RMB609.7 million, and the non-GAAP net income rose 31.8% year-over-year to RMB445.3 million. While gross margin improved slightly from 70% to 70.3%; adjusted EBITDA margin improved from 60% to 64.5% and the core net margin improved from 43.4% to 47.1% compared to a year ago. These results were driven by a continued growth in our hotel network under improved operating performance through IT improvement to our existing hotels. During the quarter, we opened 224 newest hotels, with around 12.5% of this in our mid-to-upscale brands, around 49.1% in the economy brand and around 38.4% in the mid-scale brand.

Our pipeline of new hotel increased from 306 at December 31st, 2017 to 430 at December 31st, 2018. More than a quarter of our pipelines is in the mid-to-upscale hotels, including Gme, Gya and VX, which we launched late last year. We are accelerating our new hotel openings under these three new brands with 14 new openings in the fourth quarter of 2018 and 21 new openings for full year 2018. To further diversify our existing products portfolio, we added one more brand called Wumian Hotels in the mid-scale segment during the third quarter. Wumian aims to provide comfortable, intimate, simple, and stylish space to business travelers for a deep sleep experience. Also, during the second half year of 2018, we started our apartment business and opened one apartment in 2018.

Across all brands, full year 2018 new openings increased by 30.4% from 425 to 554. In terms of operating performance, we saw steady progress across the board. Average daily room rate or ADR for the quarter increased by 3.8% from the same quarter of 2017 to RMB164. Occupancy had a slight decrease of 1% to 80.4%, which was related to accelerating new hotel openings and revenue per available room increased 2.3% from the fourth quarter to RMB132. For the full year, ADR increased by 4.5% year-over-year to RMB164. Occupancy had a slight decrease of 0.5% to 82.1% and the revenue per available room increased 3.8% year-over-year to RMB135. One of the biggest drivers of both our steady incremental improvement in operating performance and our high overall profitability is our loyalty program. We now have approximately 29 million individual loyal members, up by 38.1% from approximately 21 million members as of December 2017 and over 1.27 million corporate members, up by 54.9% from approximately 820,000 as of December 31st, 2017.

Out of the 29 million members, approximately 21 million of them have joined our premium paid membership program. Our brand and the direct relationship with many valued customers allowed us to sell directly. In the most recent quarter, we sold approximately 94.5 of our room nights through our direct sales channel, and for the full year 2018 approximately 95.0% of our room nights were sold through our direct sales channels.

Now, let me talk about a few important business developments in 2018 and first quarter of 2019 that you can find on Slide 6. To enhance our customer satisfaction and bring more convenience to customers we have been improving our app functionality, including the interconnections between app and PMS. As of December 31, 2018, our app was ranked second overall in terms of user activity on the Intelligent Mobile Observatory in hotel sector. M&A and strategic investments are key growth strategies for us. We have identified several appropriate targets that are complementary to our existing hotel portfolio, geographic coverage and professional talents.

First, on January 18, 2019, we invested in Gingko, a public company listed on the Hong Kong Stock Exchange. In the 2017 to 2018 school year, approximately 10,000 students are enrolled in this college. Ginko is currently ranked as China's number one hospitality university by the Gaosan Web Association, a website with introductions to and rankings of universities in China. Our two companies will work together to cultivate professional talents for ourselves and for the hospitality industry in China.

Second, on January 28, 2019, we announced a strategic investment to become a majority shareholder in Argyle. The Argyle Hotel network consists of eight mid-scale to upscale brand, with footprints mainly in Southwest China, Southeast China and some hotels in Southeast Asia. Argyle's highly distinguished brand portfolio and geographic coverage are highly complementary to GreenTree's business.

And the third, on March 11th 2019, we acquired 4.95% in New Century Hotels in their initial public offerings as the cornerstone investor. New Century is also a public company listed in Hong Kong Stock Exchange. New Century operates and manages 150 hotels ranging from mid-scale to upscale brand, with over 34,000 hotel rooms in 22 provinces in China. Our two companies will explore opportunities for future strategic operations.

Finally, on January 22, 2019, we announced the payment of cash dividends of $0.30 for ordinary shares or $0.30 per ADS. We plan to pay a cash dividend of $0.20 per share in the near future, assuming no immediate cash need for the Company's gross or M&A opportunities in order to create long-term value and benefit for our shareholders.

In conclusion, we are pleased with our team's performance in 2018. Although there is more hard work to be done in the coming years, we are confident in our business model, strategic positioning and the long-term growth strategies. We will continue to invest in our people, brand, system and technology in order to better serve our customers and franchisees and to ensure the long-term healthy development of our hotel network.

With that, I will pass the call over to Megan and Selina who will discuss our business operations, company's highlights. Megan?

Megan Wang

Thank you, Alex. If you are following along on our slides, I'll skip the overview on Slide 5 and 6, and go straight to Slide 7. Once again, the franchised-and-managed model remains our primary strategic focus. In fact, 98.9% of our hotels fall under this category. And as you can see on the chart on the right, F&M hotels have been kept steadily contribution to overall revenues. In the fourth quarter, the percentage reached around 77.3%. The percentage was 77.4% in the full year 2018.

Let's turn to Slide 8. Another critical area of our business is our loyalty programs. Our program differs considerably from most hotel businesses in the West. We have a paid program to which people sign up to enjoy a variety of premium perks and benefits. More importantly, we found that this program has allowed us to foster closer relationships with our guests.

Members came book directly with us, which has helped us and our franchisees to reduce sales and marketing fees and expenses, and our GreenTree members are very sticky customers. Although we now have about 29 million members in our loyalty program, along with 1,270,000 corporate members up from approximately 26 million and 1,20,000 as of September 30th, 2018 and approximately 21 million and 820,000 as of December 31st 2017. In the fourth quarter of 2018 around 94.5% of room nights were sold through our own direct channels, which include our individual loyal members and the corporate members.

Moving on to Slide 9, you can see our RevPAR trends here. Q4 is typically one of the low seasons during a year. In the two charts at the bottom of the page, you can see that on a year-over-year basis, RevPAR for L&O increased by 1.5% to RMB137 and the RevPAR for F&M hotels increased by 2.3% to RMB132 for the fourth quarter of 2018. Both segments showed healthy growth over the fourth quarter and the full year 2018, mainly due to higher ADR.

On Slide 10, you can see that we worked very hard this past year to further boost our pipeline of new hotels. During the fourth quarter, our pipeline is 430, while we opened 224 hotels. In particular, we're trying to boost growth and at the same time, to diversify our portfolio by adding more hotels at the higher-end and economy segments of the market.Currently, 79.2% of our hotels, really the core of our business, serve the middle end of the limited services market. In line with this strategy, during this quarter, we added 14 new GreenTree Easterns, seven GME, and seven VX hotels, which primarily serve business and the leisure travelers in the mid-to-upscale segment of the market.

So, the number of hotels in this segment increased to 3.9% of total portfolio. Meanwhile, the number of hotels in the economy segment grew to 16.9%, with the addition of 110 economy hotels across our Vatica and the Shell brand in the fourth quarter 2018. We continue to roll out our three new brands at the mid-to-upscale end of the market as a part of our strategy to strengthen our portfolio.

On Slide 11, you can see these brands, which we have named GME, GYA and the VX. We are targeting around the same price points for all three hotels. But the decor and the positioning of each will be quite different as we cater to the taste of different segments of the market. We have 29 GME, 27 GYA, and 24 VX hotels in the pipeline as of Decembers 31st, 2018.

With that, I will pass the call over to Selina Yang, who will review our financials.

Selina Yang

Thanks Megan. We delivered another solid quarter and a full year of operating and financial results. Moving on to Slide 17, we now have a total of 2,757 hotels with 221,529 rooms. On year-over-year basis, we increased our hotel network by 20.4%. We opened 224 new hotels during the quarter and 554 for the full year of 2018. By comparison, we opened 171 hotels in the fourth quarter 2017 and 425 hotels for the full year 2017. As you can see, we continue to substantially accelerate our hotel openings in the fourth quarter and the full year 2018. Of the 224 hotels opened in the fourth quarter, 28 in the middle-to-upscale segment. 86 were in the middle-scale segment, and 110 in the economy segment.

Of these, we open 20 hotels in Tier 1 cities; 49 in Tier 2 cities and the remaining 155 in smaller cities in China. During the quarter, we closed 25 hotels, so net-net, we added 199 hotels to our portfolio. We closed 10 hotels due to their non-compliance with our brand and operating standards and closed 1 hotel due to hotel upgrade. We also closed 13 hotels due to property-related issues including rezoning, returning of government-owned properties and expiry of leases etcetera. And there was one leased-and-operated hotel being converted into F&M hotel in this quarter. For the full year 2018, we've closed 86 hotels compared with the 100 hotels we closed in the year of 2017. So in net, we added 468 hotels to our portfolio during the past year.

On Slide 14, you can see some of our key operating metrics. During the quarter, we continued to see improvements in our operating performance across the board. The key numbers to look at here are the orange bars representing the performance of our F&M Hotels. These hotels make up the biggest part of our business. The performance of our Leased-and-Operated hotels skewed a bit higher since six Leased-and-Operated has been renovating since last quarter and one L&O hotel converted to F&M hotel during this quarter. In terms of our F&M hotels, our ADR improved by 3.2% to RMB163 in fourth quarter of this year. RevPAR increased by 2.3% to RMB132, while occupancy rate for our F&M hotels had a slight decrease of 0.9% to 80.7%, which was due to the acceleration of new hotel openings in the quarter.

On Slide 15 for the full year in terms of our F&M hotels, ADR increased by 4.5% year-over-year to RMB163. Occupancy rate had a slight decrease of 0.6% to 82.3%. And the revenue per available room increased 3.9% year-over-year to RMB134.

On Slide 16, you can see that total revenue grew 20.8% from the fourth quarter of 2017 to reach RMB249.9 million in the fourth quarter of 2018. The increase was primarily attributable to four factors; first, the increase of 224 F&M hotels in our network; second, the addition of a new L&O hotel and the conversion of three F&M hotels to L&O hotels since last quarter; third, improved RevPAR for both F&M and L&O hotels; and four, growth in our loyalty membership program. This was partially offset by the renovation of six L&O hotels since last quarter, and the conversion of one L&O hotel to F&M hotel during this quarter.

Total revenue from F&M hotels for the fourth quarter rose 26% to RMB193.0 million. Meanwhile revenue from Leased-and-Operated hotels rose 6.1% to RMB56.8 million. For the full year 2018, the total revenue rose 21.4% to RMB945.0 million. Total revenues for our F&M hotels for the full year 2018 was RMB731.8 million, up by 25.2% year-over-year. Total revenues from L&O hotels in the same period were RMB213.2 million, increase by 10.1% year-over-year.

Slide 17, moving over to the expense slides on the P&L. Please look at tree graphs on the right hand side of this Slide. Hotel operating costs for the fourth quarter of 2018 were RMB74.1 million. The increase of 25.5% from fourth quarter was mainly attributable to three factors. First, the increased number and the increased salary of General Managers in our hotel network; second, other costs associated with the expansion of F&M hotels; third, higher operating costs for the four newly added L&O hotels since the third quarter of 2018 was partially offset by reduced utility costs due to the renovation of six L&O hotels since the last -- the third quarter, and also offset by reduced depreciation and amortization and operating cost related to the conversion of one L&O hotel.

Selling and marketing expenses for the fourth quarter of 2018 were RMB16.2 million. The year-over-year increase of 3% in the fourth quarter of 2018 was mainly attributable to the increased personnel compensation and other costs. For example, travel expenses of business development personnel as a result of the increased opening of our hotels. General and administrative expenses for the fourth quarter of 2018 were RMB34.8 million. Excluding the one-time grant of GTI's shares to certain of our Directors in the third quarter of 2017, G&A in this quarter increased by 35.3%, compared to the same quarter of 2017. The increase was primarily attributable to the increased salary and share-based compensation. Overall, excluding the one-time grant of GTI's shares to certain of our Directors in this third quarter of 2017, the total operating cost and expenses increased by 24.7% year-over-year to RMB130.7 million. It grew 17.6% year-over-year to RMB432.6 million for the full year of 2018.

Slide 18 shows that during the fourth quarter of 2018, gross margin had a year-over-year slight decrease by 1.1% to 70.3%. While we were able to improve adjusted EBITDA margins by 6.8% to 64.1% and core net profit margin by 4.4% to 46.4%. You can also see that during the full year 2018, gross margin increased by 23% to 70.3%, while we were able to improve adjusted EBITDA margin by 4.5% to 64.5% and core net profit margin by 3.7% to 47.1%.

Overall, gross profit grew 19% year-over-year to RMB175.8 million and adjusted EBITDA increased 35.2% year-over-year to RMB160.1 million, net income increased to RMB53.8 million, and core net income increased 33.4% to RMB115.9 million. Basic diluted earnings per ADS reached RMB0.53; that's equivalent to $0.08, while basic and diluted core net income per ADS improved by 20% to RMB1.14; that's equivalent to $0.17 in the fourth quarter of 2018.

Moving on to Slide 19, our IPO has bolstered our balance sheet further, which was already strong, given our ability to consistently generate strong cash flow from operations. For the full year of 2018, operating net cash inflow was RMB554.9 million. As for December 31st 2018, cash and cash equivalents balance increased to almost RMB2.3 billion. This provides us with more resources to consider and evaluate additional capital investments and potential acquisitions. Lastly, in terms of guidance, we expect a 20% to 25% year-over-year growth in total revenues for the full year 2019.

This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session. Thank you.

Question-and-Answer Session

Operator

Yes, thank you. We will now begin the question and answer session. [Operator Instructions] And the first question comes from Justin Kwok with Goldman Sachs.

Justin Kwok

Perhaps I'll start with two questions; one on the M&A side and the other one on the growth guidance and on the demand side. The first one on the M&A side, I guess with reference to your announcement, you have made three acquisitions in the recent months, of which actually two of them are of a minority stake investment. So, I want to get your view on how you balance between getting a higher stake or high ownership versus just the minority and how that would balance your strategic cooperation in the future, whether that's actually a plus or a minus for you, because I think, I will say, you can also strike strategic partnership with certain companies without actually getting a minority stake. And with all these money being spent, can you remind us what's your available resources or cash resources -- cash or equivalent resources after all these acquisitions right now. That's the first question.

Alex Xu

First of all, in the potential acquisition and strategic investment, we want to be flexible and explore all sorts of possibilities. Sometimes acquiring a majority of the interest or acquiring an interest of your expectations may be difficult. Yet, you will find there is a potential win-win or mutually beneficial working relationships as warrant for us to invest as a significant by the minority interest. We believe that will also align, our two companies interest more closely and that is one of the rationale. But given opportunities in the future and we clear -- we clearly would like to see a higher stake in the Company for GreenTree. So, after those acquisitions, we still have approximately about liquid or cash available for acquisition close to RMB2 billion, I believe it's RMB1.8 billion or so, so I may be wrong in that, so that adjustment -- that's where we are.

Justin Kwok

Right, thanks for the color. Perhaps on the second question regarding the guidance and also the demand that, you have in release like 20% to 25% revenue growth guidance into 2019. Can I check would you be able to comment on what's the assumption on your RevPAR growth for this set of guidance? That's one; and the other thing is, can you get or share with some observations of the RevPAR trend into now, year-to-March. Thank you.

Alex Xu

Sure. Those are, again, I'm just trying to add from a strategic and operating point of view. And Selina, you can also jump in through correcting me. I'm just giving a ballpark of estimate. In terms of the gross revenue guidance, we didn't give the RevPAR guidance, we feel and considering the development personnels in our pipeline and how our market condition, taking into consideration not the new players in terms of China, we still think 20%, 25% is a healthy gross.

In fact Justin, we would like to target a slightly about 20% growth for near -- in the future. The reason is I think that, I recall that there is a 20-20 investment strategy, if the Company come on 10 or roughly close 20% growth for 20 years and you can actually increase your shareholders value by 37 times. This is both on the Warren Buffet and also some of the very stable growth companies, their strategy. So we can probably force to grow slightly bit higher, but I think that will add little bit more stress to current personnel, and so balance out their burden responsibilities and the market conditions. So I think that the revenue grows 20%, 25% should be realistically achievable. In terms of RevPAR growth, as we mentioned, we're continuing to target around a 3% to 5%, in that range in terms of like for like hotels RevPAR increase because that's in line and I think that's a healthy growth in line with the CPI, in line with the general consumer price index trend. And if you force the grow increase too high and then you may exhaust your potential to increase in the future years.

And in this quarter, we have the RevPAR increase slightly lower than the previous quarter. It's not because I think that of like for likes dropped. I think that's more resulted from the mix, the mix change of the GreenTree's portfolio of new openings for the last year, especially for the fourth quarter of 2018, we have the more economy hotels in the pipe that is opened. And when you have more openings, basically have two things that negatively impacted your overall RevPAR growths, that is a lower ADR and lower occupancy during the ramp up period and therefore reduced the result of lower RevPAR. And then when you mix them together, even though you have, you know on that economy brands, they still have a like to like increase, but because it occupies a higher percentage, so we roughly calculated that it has a roughly 1.5% of negative impact through the RevPAR and you can roughly calculate the numbers by yourself with a simple mathematics. And deleting that, I think our RevPAR growth are still in healthy range, given during the first quarter in about 3.5% to close to 4% which we believe is really healthy considering the current economic conditions. So Justin, that's my comments. Selina, any comments?

Selina Yang

Yes, please allow me to explain more. Actually in the fourth quarter, the new hotel openings increased by 24% compared with the fourth quarter of the year of 2017 because in the year, in the fourth quarter of 2018 we opened 224 hotels. I think is related to the acceleration of the new hotel openings may cause deceasing in the OTC listed. So exclude the impact of the new hotel opening, we find that there is no fluctuation in the occupancy rates for the same hotel and the RevPAR for the same hotel, the growth is higher than the 3%. Thank you, Justin.

Justin Kwok

Yes, thanks for the color, but just end of the last two months in 2019, any color? Thanks.

Alex Xu

We have -- Justin, we have because we focus on this value priced hotels, so in the last two months in total, we really have not seen any up and down, significant pattern we can observe. So we actually grow as planned.

Operator

Thank you. And the next question comes from Billy Ng with Bank of America Merrill Lynch.

Billy Ng

I just have one question. Alex, can you tell us like, I understand that you guys tried to -- some of the Asia investment and can you give us some update on where we are right now?

Alex Xu

Okay, so as we mentioned to you, Asia investment was a leftover legacy from the previous, when we became public and that in total I want to assure everyone that Asia investment we made is a great wealth equation for the company because we did an analysis even during the September 30th last year. In light of the markers, you know that stock market crashed or that reduction in China, our total returns on the Asia, just the equity appreciation net-net is about a 20% compounded average rate of return for the past 4.5 year, close to 5 years. So, if there is a little bit fluctuation, that's because we're gaining less and not we're losing actually any dollars from the Asia. But we are in the process of liquidating some of those and to move the stock, to move the dollar into the bank, so that we're ready for the acquisition in the near future. So our position currently, really hasn't reduced the sum because we have sold some of our stocks as we have mentioned to you before.

Billy Ng

And maybe just another follow up questions on what Justin asked. Regarding to the M&A strategy, I think the market condition has changed, but are there any specific target? And I also noticed that you guys make some strategic investment as well. But in terms of our focus in the next 12 months or maybe in the next 24 months, where are the opportunities. I'd like to -- do you see, still possible to buy sizable companies within China. It that still easy to spot or are the opportunities maybe is more like coming from overseas.

Alex Xu

Good question Billy. Well, no, I think there are still great companies out there, that I think are out there that are potentially our joint venture partners. The key issue is during the slowdown, the healthy, good companies expectations of their valuations is not going down. Is not getting decrease as the market has correction, so as a result, actually, there is a gap that you're in the -- see a volatile time during the market down time, it's not as easy to do good M&A during this time either. So initially I had the impression -- you know we have impression or team has the impression that maybe that with a little bit of slower down in the marketplace and people and our other players are able to reduce their expectations, but in reality that's not the case most of the time. But yet, I think there are really good companies out and we think they are still available and that makes good partner for the GreenTree, as you mentioned, based in China.

And we continue to be open minded because every company that are doing business with us, have find themselves have been helped by GreenTree and they're growing. And so we have a good reputation in the marketplace for that. And we hope this will enhance our ability to find more partners and we're in the process of doing so. However, we do not want to close the doors to the other nearby countries such as Southeast Asia. So we'll continue to explore to expand to those regions and the Argyle investment. I think that they provide us a great team and good resources in those regions, and that truly made our brand portfolio after our total merger and we basically covered the full range of the hotel products from five-star to mid-upscale limited services all the way to the economy.

So I think our true team will work really and we'll create great result. And the founder and the chairman of Argyle, Mr. Kevin Zhang is a reputable hotel expert and business entrepreneur, very successful. And so we think that the team under his leadership will accelerate his hotel portfolio gross in a much faster way than before. So we'll continue to explore that ability. So we think that the opportunities are there and with the combined organic and strategic M&A and we are able I think to achieve our planned growth.

Operator

And the next question comes from Aras Poon with Citigroup.

Aras Poon

This is Aras. Thanks for taking my question. I just have one question related to some of your new brands that you are launching this year. Because you just mentioned that you're going to accelerate the expansion of these new brands, can we just get more a sense of your marketing strategies of launching these new brands to the franchisee and also to customers? And also, can you tell us, should we expect any increase in marketing and promotional expense, especially given the market is so competitive that you need to spend more to promote these new brands?

Alex Xu

Aras, we don't expect any significant market than promotion expenses, but we did contracted a young star to represent our new brand, which cost a little more money in that end. But because we are going to rely on almost the 3000 successful franchisee partners, so the other one that have been successful by, you know, doing GreenTree's, hotels. So a lot of the three new brands are the upgrade and that the new hotel opening by the existing or their referral family members. So we believe that's healthy. We want to find partners, franchisees who has some experience on exposures in the hotel segment. It's easier to advocate and to help them and to work together to produce the best return hotels. And I think I mentioned to everyone, I think in comparison, our hotel franchisees enjoyed a really healthy returns in the industry and we've been known for that. So that -- so no significantly increase, there might be some increase, but I do not think they will impact our margin much at all.

Operator

Thank you. And the next question comes from Jisheng Liu with CLSA.

Jisheng Liu

Hey, thank you management, for taking my question. I have actually three questions and I'm going one by one. The number one is just update on hotel openings guidance because we've seen that in -- so '18 full year, we have actually opened more than 550 hotels and we have promised a target of three year 1800, which was 500, 600 and 700 year-by-year. So I was interested in, if we have opened more hotels than expected in 4Q '18 and would that be changing our hotel openings planned for 2019? That's my first question. Thank you.

Alex Xu

We at this moment are still planning for the three years of 1800 group hotels. So this year, if we are able to beat because we have also want to take some margin of safety and so we still roughly plan for about 600 and expected the opening of the hotels, so in together about 1800 for the three years, as we discussed about a year ago.

Jisheng Liu

Number two is on the initial franchise fee being 4Q '18. So, as we can see, the initial franchise fee per hotel has been actually going down. So I understand that we'll have still a temporary waiver for the Shell Hotel and new openings and we have opened more economy hotels during 4Q '18, which could be a factor as well. Apart from these two factors, do we have any other elements which are impacting the initial franchisee for hotel?

Alex Xu

These are the only factor but with the increased competition in the market place, we have also because, for instance the O&L now entered China, that we have a different business model. They actual impacted our franchisees or the market, the hotel owners' expectation and so there is a competition for that end and so we have to consider the market overall competition forces and flexible in terms of initial franchise fee. But going forward, GreenTree will always be the one that takes initiatives to be the value provider and need to ensure our franchisee gets the best value. So our financial program is already taking into consideration of those kinds of changes. So that's what we are continuing to monitor and continue to be flexible. I think the market, adding new hotel is more important than in terms of us trying to achieve, for instance, higher price or higher initial application fees.

Jisheng Liu

And the number three question is on the capital management. I want to get more sense on what the company is actually planning to do, because when we did our IPO, we said we're going to use more than half of the proceeds of the M&A transactions and now we are starting to pay dividends starting from 4Q '18 and now we're continuing to pay that going forward. So we actually have internally a target for shareholder returns to shareholder equity. And I want to get some color on why the dividend going forward is RMB0.20 per year. And in which kind of circumstances we cannot pay that dividend or in any other circumstances can we pay more than that? Thank you.

Alex Xu

Good question. We have half of our investor -- we [Indiscernible] investors. We have half of the investors said, just keep on growing, no dividends. We have half the investors said; you know that we are a stable cash flow company; we should consider giving some dividend. And so it's kind of difficult to meet everybody's expectation, but the Company listens to our shareholders request. And that the -- we feel like a dividend, if it's a company doesn't have the immediate cash need then we should pay a certain percentage -- throw a certain percentage of dividend to our shareholder. And that will continue unless there is a major M&A and if we have to exhaust all the cash in the plans and we have to take in some debt then that years dividend maybe and maybe stopped and then any acquisitions we plan to have are going to be eventually cash flow and the net earnings accretive, we're going to resume that and with higher than -- in terms of per shares -- per share dividend. But in terms of percentage wise, we have not set a target, but we just calculate that even with all the ongoing pipelines, we believe we still can have a steady stream of dividend to our shareholders without affecting the Company's growth. So, Jisheng, that's the Company's rationale for announcing that.

Operator

Thank you. And the next question comes from Alan Lo with SWS Research.

Alan Lo

I have two questions and the first one is, as we see like Fuzhou and Zhangzhou, the recent data and -- that we see more declines in occupancy rate and I think the focus more -- may focus more on Tier 1, Tier 2 cities but like us, we focus on other cities. Do you think that in the other cities better than the Tier 1 or Tier 2 cities for the last year or at present? I mean the situation for macro, is my first question.

Alex Xu

Great, Alan and that's a good question. I think, Selina, has done some research for you. For the question, we the last -- year before last year and the previous couple of years, the Tier 1 city enjoyed the much higher RevPAR increase driven by the need because the rental cost, property cost skyrocketed, so clearly indeed the RevPAR growth for first tier city. And then the last, I think one to two, the second tier city also enjoyed some good increase and now I believe the trend, third tier, first tier cities. And they are just starting to get catch up a little bit with real estate, property costs increase. So I'm looking to [indiscernible] Selina?

Selina Yang

Yes, thanks. On the RevPAR front, that the RevPAR growth in the fourth quarter of last year in different cities -- actually in lower cities, the RevPAR growth it very healthy and that's even better than Tier 2 cities and we were happy to find these.

Alex Xu

So the third tier, first tier city and the RevPAR growth Alan is higher than the Tier 2, but lower than Tier 1.

Selina Yang

Yes, lower than Tier 1. Tier 1 and II and that is the best.

Alan Lo

Sure. Thank you. And my second question involves the VAT. So we see that there will be a relief on the value added tax but I don't think that's a benefit for the service industry. So do you think they would be any different to last year for a VAT going down from 15% to 13%?

Alex Xu

For our business, and I think it will not have a lot of impact because we are providing a brand and management. And I think if you have a large sum of fixed rental expenses with equipment and then that we may get benefited by the lower VAT tax.

And our portfolio, and you can see that our gross margin remains about the same gross profit margin did not increase much. However, our adjusted EBITDA gross increased because you know our percentage of F&M hotels increased by 0.3%. So that 0.3% increase actually lowered the fixed expenses on the properties rental related expenses therefore actually the increase of the EBITDA much faster than gross profit increase.

Operator

Thank you. And this concludes the question and answer session. I would like to turn the floor back to Selina Yang for any closing comments.

Selina Yang

Thanks, operator. In closing, on behalf of the entire GreenTree management team, we'd like to thank you for your interest and participation in today's call. If you require any further information or have any interest in reaching us in China, please don't hesitate to contact us. This concludes the call. Thank you.

Alex Xu

Thank you.

Megan Wang

Thank you.

Operator

Thank you. Thank you for attending today's presentation. You may now disconnect your lines.