GreenTree Hospitality Group Ltd. Q2 FY2024 earnings call

Management Statement and Operational Highlights

• Challenges: China's economic recovery led to cautious discretionary spending, negatively impacting overall performance. Hotel RevPAR decreased, and Restaurant business underwent repositioning.
• Hotel Expansion: Further expanded in mid-to-upscale segment and Tier 3 and lower cities in South China. Mid-to-upscale segment had 505 hotels (11.8% of total portfolio), mid-scale remains core at 69%, economy segment at 19.2%. 72.3% of hotels in current pipelines are in Tier 3 and lower cities.
• Membership Growth: Individual memberships grew to 96 million, corporate memberships to 2.1 million, accounting for most direct sales.
• Restaurant Strategy: Shifted to franchised street stores to return to profitability, closing underperforming restaurants.

Segment Performance

• Hotel Business: Second quarter Hotel revenue decreased 14.8% year-over-year to RMB264.6 million. RevPAR was RMB125, down 10.8%. LO hotels RevPAR decreased 7.3% to RMB177, FM hotels RevPAR decreased 10.9% to RMB124. ADR for LO hotels decreased 2.1% to RMB250, for FM hotels decreased 4.4% to RMB171. Occupancy at LO hotels was 70.7% (down 3.9%), at FM hotels was 72.6% (down 5.3%). Membership programs: individual memberships grew to 96 million (up from 84 million a year ago), corporate memberships grew to 2.1 million (up from 1.96 million a year ago).
• Restaurant Business: Revenue decreased to RMB65.3 million. Net income turned positive this quarter after breaking even last quarter. Average daily sales per store (ADS) was RMB4,737, down 22.1% year-over-year but up sequentially. The business shifted to franchised street stores, moving away from leased and operated restaurants in supermarkets and regional shopping centers.

Guidance

• Hotel revenue in 2024 is anticipated to remain flat compared to the previous year.
• Board of Directors approved cash dividends of US$0.10 per ordinary share or ADS, payable to holders on record at closing of trading on September 30, 2024.

Risks

• Economic recovery in China may continue to impact discretionary spending, affecting performance.
• Intense competition in the hotel and restaurant industries could pose challenges.
• Regulatory issues related to obtaining licenses for hotel openings may slow expansion.
• Challenges in fully repositioning the Restaurant business to achieve sustained profitability.

Question and Answer

Q: Regarding the Hotel business, please introduce RevPAR trend in July and August year-over-year and RevPAR outlook for the second half; also, about the shareholder return plan.

A: RevPAR for July and August had a steeper drop in early July compared to last year, but August first half RevPAR recovered to less than 10% drop. Anticipate third quarter RevPAR reduction similar to second quarter, and total Hotel revenue in 2024 to be flat. Dividend declared is part of continued dividend policy, with plan to deliver sustainable returns to shareholders.

Q: About demand difference between business and leisure and performance in first/second tier vs low-tier cities.

A: Observed more leisure travels than business travels, with higher demand in Tier 3 cities with scenery/resort areas. First-tier cities had RevPAR drop of 12.5%, second tier 11.7%, third tier 9% reduction in RevPAR.

Q: About industry trend, hotel openings, M&A.

A: GreenTree is a better-performing group among peers in terms of price, occupancy, etc. Planned 480 new hotel openings, focusing on franchisee profitability. No aggressive M&A currently due to past less successful attempts, focusing on franchisee profitability and brand complementarity.

Q: About Restaurant business plan, difficulties, and liquidity.

A: Restaurant business repositioning focused on consumer demand and product mix. Plan to be conservative with new store openings. Regarding liquidity, in process of reverse merger and planning stage-by-stage offerings to increase liquidity, with restructuring hoped to be completed soon in the next quarter or so