GreenTree Hospitality Group Ltd. (NYSE:GHG) Q3 2024 Results Conference Call November 21, 2024 8:00 AM ET

Company Participants

Rene Vanguestaine - IR
Alex Xu - Chairman and CEO
Selina Yang - Chief Financial Officer

Conference Call Participants

Betty Du - UBS
Lewen Liu - China Securities

Operator

Good day and welcome to the GreenTree Hospitality Group Third Quarter 2024 Financial Results Conference Call. [Operator Instructions]

Please note today's event is being recorded. I would now like to turn the conference over to Rene Vanguestaine. Please go ahead.

Rene Vanguestaine

Thank you, Rocco. 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 a 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; and Ms. Selina Yang, Chief Financial Officer. Mr. Xu will present the company's performance overview for the third quarter of 2024, and Ms. Yang will then discuss financials and guidance. 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, 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 as well as unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements.

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

All information provided, including the forward-looking statements made during this conference call, are current as of today's date. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under applicable law.

It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Alex Xu. Mr. Xu, please go ahead.

Alex Xu

Thanks, Rene. Hello, everyone, and thank you for joining us today. I'm pleased to report that our hotel business improved in the third quarter over the first two quarters of this year as the economy continued to recover. Travel patterns have normalized following last year's surge, which has influenced year-over-year comparisons. We're back to a more positive environment, focusing on growing our pipeline and upgrading numerous hotels across our portfolio. We are confident that we are on the right track and will benefit from the ongoing stimulus measures implemented by the government.

Our restaurant business' net income remained positive for a second consecutive quarter as we continued to grow the number of franchise of 3 stores and stores with stable consumer traffic. Such stores now accounted for 55.5% of our store count compared to 44.6% a year ago, following the closing of unprofitable stores over the past year. The number of restaurants in operation had stabilized at 182 at the end of the quarter. We are now focusing on growing that number.

Please turn to Slide 5. Compared with the third quarter of 2023, hotel RevPAR was RMB 135, a decrease of 13.6%, and the restaurant ADS was RMB 4,891, a decrease of 25.6%. Total revenues were RMB 357 million, a decrease of 22.5%. Hotel revenues were RMB 286.9 million, a decrease of 15.4%, mainly due to a 13.6% year-over-year decrease in RevPAR and the closure of L&O hotels, partially offset by new openings. Income from operations decreased to RMB 106.4 million with a margin of 29.8%. Net income was RMB 65.2 million, a decrease of 44.4% with a margin of 18.3%. Adjusted EBITDA non-GAAP was RMB 122.5 million, a decrease of 32.1% with a margin of 34.3%.

Slide 6 shows detailed numbers for total revenues, income from operations, net income and adjusted EBITDA. Slide 7 shows the trend in our quarterly operating performance in the third quarter compared to a year ago. RevPAR for our L&O hotels decreased by 7.5% to RMB 196. RevPAR for F&M hotels increased by 13.8% to RMB 133. ADR for our L&O hotels decreased by 3.6% to RMB 258 and ADR for our F&M hotels decreased by 6.1% to RMB 179. Occupancy at our L&O hotels decreased to 75.9% from 79%, and occupancy at our F&M hotels decreased to 74.6% from 81.3%.

Slide 8 highlights the growth in our membership programs, which accounted for most of our direct sales. Individual memberships grew to 100 million, up from 88 million a year ago, and the corporate membership grew to 2.1 million, up from 2 million a year ago.

Slide 9 shows the operating performance of restaurant with ADS decreased year-over-year to RMB 4,891 but increased sequentially from quarter 2.

Starting with Slide 11 to Slide 13. I will review our strategic execution across our businesses. In our hotel business, we further expanded in the mid- to upscale segment and in Tier 3 and the lower cities, especially in South China. We also added more hotels in the Tier 2 cities.

As you can see on Slide 12, we continued to grow our mid- to upscale segment with 527 hotels, that's 12.1% of our total portfolio at the end of the quarter. While the mid-scale segment remains the core of our hotel business at 68.4%, we continue our expansion into the higher end segments. We also continued to grow our economy segment, ending the quarter at 19.5%.

Please turn to Slide 13. Both of our current pipeline and the hotels in operations are growing in the Tier 2 cities.

On Slide 14, we continue to turn around our restaurant business to ensure that it is sustainably profitable going forward by focusing on areas with greater foot traffic. We have closed L&O stores and opened F&M stores, completing the strategic transformation to our new business model. As a result, F&M restaurants accounted for 87.9% at the end of the quarter compared to 74.8% a year ago, and street stores accounted for 48.9% compared to 38.6% a year ago.

Next, Selina will review operating and the financial highlights.

Selina Yang

Thank you, Alex. I will first review our hotel business. Please turn to Slide 16. In the third quarter, total hotel revenues decreased 15.4% to RMB 286.9 million compared to the third quarter of 2023. Total revenues from L&O hotels were RMB 118.2 million, a decrease of 22.2% year-over-year. The decrease was primarily attributable to a 7.5% year-over-year decrease in RevPAR of L&O hotels, the closing of 6 hotels and the reduction in sublease revenues, mainly due to the disposal of property in the second quarter.

Total revenues from F&M hotels decreased 9.7% to RMB 167.9 million. primarily due to a 13.8% decrease in RevPAR, partially offset by new openings.

On Slide 17, total hotel operating costs and expenses decreased 4.9% year-over-year to RMB 201.9 million. Operating costs decreased 4.8% to RMB 152.3 million year-over-year. Costs decreased less than revenues because of the costs associated with the closing of L&O hotels.

Selling and marketing expenses were RMB 12.9 million, a year-over-year decrease of RMB 1.4 million. The decrease was mainly due to lower advertising expenses. General and administrative expenses were RMB 35.3 million, up 32.5% compared with same quarter of last year. The increase was mainly due to an increase of RMB 11 million in bad debt provisions for long aged accounts receivables.

Turning to Slide 18. The decline in revenue resulted in a decrease in profitability for our hotel business despite lower operating costs and expenses. Income from hotel operations decreased from RMB 127.5 million to RMB 99.5 million year-over-year. Net income was RMB 58.6 million compared to RMB 108.5 million in the third quarter of 2023. Adjusted EBITDA decreased 32.8% to RMB 110.5 million and core net income decreased 21.4% to RMB 86.9 million year-over-year.

Next, let me review our restaurant business. Please turn to Slide 19. In the third quarter, as Alex mentioned, we substantially completed the strategic transformation of our business model. Total revenues were RMB 70.6 million, a decrease of 42% year-over-year, mainly due to lower ABS and the closure of L&O stores. Total cost expenses decreased 42.8% year-over-year to RMB 63.9 million due to better cost management of personnel expenses and sales channel commissions.

And on Slide 20, income from operations for restaurant business were RMB 6.9 million, adjusted EBITDA was RMB 9.4 million.

Next, I will review the profitability of our group. Please turn to Slide 21. Group net income at RMB 65.2 million compared to RMB 117.4 million a year ago. That was negatively impacted by a foreign exchange loss of approximately RMB 33 million. Group net income per ADS that's basic and diluted decreased by 44% to RMB 0.65, and core net income ADS basic and diluted non-GAAP decreased by 26.1% to RMB 0.92.

Let's now take a look at Slide 22. As of September 30, 2024, the company had total cash and cash equivalents, restricted cash, short-term investments, investments in equity securities and time deposits of RMB 1,883.9 million compared to RMB 1,737.2 million as of June 30, 2024. The increase was mainly attributable to continued operating cash inflow and repayments of loans from franchisees.

On Slide 23, we now anticipate revenue for our hotel business for the full year 2024 to decrease 8% approximately compared to the year of 2023. This is based on our operating performance so far this year and particular lower-than-expected travel in the third quarter and a strategic review of our L&O hotels that led to the net closure of 9 hotels at the end of third quarter and contributed nearly half of the decline.

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

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today comes from [Kevin Wong] with [indiscernible] Capital.

Unidentified Analyst

I would like to have two, if I may. The first one is, can you talk about the trend of the industry? How does the company's performance in the third quarter compare to your other peers? And my second question is about the restaurant business. It seems that the business turned profitable in Q2 and turning even better in Q3. So what do you expect for Q4?

Alex Xu

Okay. Kevin, this is Alex. Thanks for those two questions. In terms of the trend in the hospitality industry for the year, we have compared like-to-like, I think our portfolio has a higher percentage of aged hotels, legacy hotels. So as a result that our RevPAR impact during the downward trend is more severe compared with the newly opened hotels portfolio. We noticed our newly opened hotels has a much better performance than the aged hotels. And we have a track record of 20 years, so we have accumulated more legacy hotels in that end.

So the downward pressure is more noticeable after the mid-August, like August 15, and we see a more downward trend in the travel industry. But in October, we have also happily observed an improvement in the occupancy trend. So we expect that the fourth quarter will be performing better than the third quarter. And with more and more newer hotels adding to our portfolio, we think our trend will be reversed and will be outperforming the average of the industry in the 1 year or 2 with our substantial new products coming online. So that’s on the hospitality side.

On the restaurant, we have worked really, really hard and we’re trying to reposition our business model. The past, our stores are located in, for instance, in supermarket and in the shopping malls with severe drop of the foot traffic, and the substantial number of those are closed, repositioned into 3 stores. And secondly, we also made improvement in the supply chain side because in the restaurant, the business model heavily relied on the foot traffic, the supply chain, the management system and also the team. So as a result, I think we have performed better than the industry average in the restaurant chain side. We’re happy to see a continued profitability, and we will continue to select new locations to add the new stores at our own pace, so to make sure that as I point out to you, the profitability can be sustained. So we have all business segments contributing to the bottom line.

So Kevin, that is this trend in the restaurant, and we are still optimistically cautious about the restaurant business because we will see how the consumer trend will change, will shift and how we can deliver more value at a more affordable price. And that’s, I think, what the majority of the consumer is looking for. So we’re continuing to improve our restaurant operating model. Thank you so much for these two questions.

Operator

[Operator Instructions] Today's next question comes from Betty Du with UBS.

Betty Du

I also have two questions. And first is, could you give us some more color on your expectations for the sector supply and demand landscape going forward? Would the current fast supply expansion continue in 2025? And my second question would be, what measures are the company planning to take in the next 1 to 2 years to further improve your RevPAR amid current macro conditions?

Alex Xu

Thanks, Betty. The industry’s competition intensified a great deal, but we are getting into a more normalized period. Last year, and there was a big surge after the pandemic finished. So this year, I think we see a normalized competing environment. However, there are lot more new hotels, new brands and on the supply side and the demand side, I think, has not caught up. As a result of that, we’ll see the downward industry-wide RevPAR decrease. And you can see from our L&O hotels segment, the downward pressure was not as much as the – our franchise hotels because our franchise hotels has a lot more older models there.

So we are pretty confident our new products in the new locations are going to be a lot more competitive. So we expect a better performance in the 2025 for the year, both on the RevPAR as well as our hotel openings because we see we’ll have many, many new hotels in the pipeline. And not only in the third tier city, we also had a substantially more new hotels in the pipeline in the second tier city. The second tier city consists of primarily the regional economic centers and the provincial capital cities. I think that those locations that once we have newer hotels will better showcase our hotels’ presence in those regions will further help to improve our Tier 3 cities hotels performance. So overall, we are very optimistic about our own 2025 outlook and performance.

In terms of RevPAR, as I said to Kevin earlier, we see an improvement in the Q4 of this year already. However, it is really, I think, difficult to project the travel pattern next year because in light of the write down of the economic environment. But GreenTree’s business model has been more resilient. For instance, as you can see from our mix of portfolio, we may be hurt a little bit by the – in the company side because when you have more hotels in the second and third-tier cities, our RevPAR is not high in the first tier city. So as a result, our fee income, other related incomes are not as high as comparing with some of our peers, which has a large hotel portfolio in the first tier city.

However, the second- and third-tier cities has a higher profit margin than the first-tier cities. The first-tier cities basically have higher rent, higher personnel cost and, as a result, the profit margin is much smaller than the second, third tier city. So our franchisee has a lot more room to grow, and we expect our profitability and the RevPAR for the second and third tier cities will be stable to say the least and/or at least will withhold the pressure – withstand the pressure from the market fluctuations. So hopefully, Betty, I answered your questions regarding 2025.

Operator

[Operator Instructions] Our next question today comes from Lewen Liu with China Securities.

Lewen Liu

Okay. And I have two questions. The first is about -- as we see like the third quarter financial portfolio OTAs like [indiscernible]. We still see they can achieve double-digit growth in the hotel industry despite of the situation. So what do you think about your bargaining power as the hotel side, like for the following -- for next year. This is my first question.

And the second question is about, I see that we have like an investment or a new project like in Guizhou probably in [indiscernible]. So I think quarter 3 slowed there. Can you share some color on this project?

Alex Xu

Thanks, Lewen. With regard to the OTAs and online travel agencies taking more market share, I think that’s really understandable because we are moving into the digital period. And that – I think that double-digit growth is taking the share from the offline and not necessarily in terms of the overall industry, hotel hospitality demand increased double-digit. And we are working closely with all of the reputable online travel agencies. I think as long as mutually profitable, we can bring in the business with affordable commission costs. I think that will become the new ecosystem and the new win-win situation.

And that we are – we think that that trend, the average consumer become younger and younger, and they will use the digital tools to make the reservations. And so we are basically taking notice of that trend and working closely with them.

With regard to the Guizhou project, and we are working with – we have strategic partners in the 4 or 5 star hotels, which we potentially will bring into the group in the future. There is a noticeable well-known projects over there that’s ideal for a showcase, 4-star, 5-star hotels there. And the local government has sought our cooperation, help to reposition that asset and to make it that they are workable, reopen that, reposition, reopen that in the near future. So we’re really happy to have the opportunity to work with the local government and to make the nonperforming asset work.

Operator

[Operator Instructions] Today's next question comes from Victor Lee with [indiscernible].

Unidentified Analyst

I have two questions. The first one is about the dividend. The dividend was announced in the second quarter. And now we see the performance in the third quarter is lower than expected. So do you have any plan to continue to paying the dividends in the future? And my second question is about the liquidity. Can you tell us how you plan to improve the liquidity in the capital market since the company has previously mentioned that the company is considering several passes to boost the liquidity. So is there any progress on timetable now?

Alex Xu

Thanks, Victor. I will answer the question. And Selina, you can always jump in. With regard to the dividend, Victor, that will – even though we see the third quarter net income dropped and it looks like a large number of drops, like 44%. However, we are pretty confident because some of the cause of the drop, as Selina mentioned to you in the report, RMB 33 million of that drop is really a paper loss of the foreign currency exchange because we have – a portion of the deposit is U.S. dollars as in the third quarter, at the beginning of the end, the conversion basically, there is a RMB 33 million paper loss there.

Then I think there is a RMB 11 million, a bad debt provision for the long aged accounts receivable. We’re pretty also confident that a lot of them eventually will be worked out, we have given the opportunity for the franchisee to work out their hotel performance, improve the hotel performance a little bit better and slowly. And so some of those will be paid back.

So in addition, we have legacy hotels being improved. And that’s a result because we have a large percentage in the legacy hotels, so a result of the RevPAR decrease and more than the industry. We also see that a large number of newly opened hotels had a better performance. So on the going-forward basis, we think our operating income and EBITDA will also improve significantly. As a result, our dividend policy will continue. And like we stated in the past, we’ll not deviate from the past plan and the strategy we have announced.

Regarding to the liquidity, we have, I think, also shared with our analysts and the investors that we are – our company is going through a reorganization. And as a result, the parent company will merge with our GHG as a result of that and some of the shareholders in the parent company will become direct shareholders of the GHG and therefore, will increase the liquidity. And hopefully, that will help and boost our liquidity in the long run. I think that’s our analysis, that’s our current. We are still on schedule and – but because there are a number of approving – approval process, so hopefully, that will be completed soon.

Operator

[Operator Instructions] This concludes our question-and-answer session. I'd like to turn the conference back over to Selina Yang for closing remarks.

Selina Yang

Thank you, operator. In closing, on behalf of the entire GreenTree management team, we thank you for your interest in GreenTree and your participation in today's call. If you require any further information or have plans to reach us, please feel free to contact us. Thank you all.

Alex Xu

Thank you.

Operator

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day or evening. Thank you.