Edited Transcript of GHG.N earnings conference call or presentation 5-Jun-20 1:00am GMT

Jun 24, 2020 (Thomson StreetEvents) — Edited Transcript of GreenTree Hospitality Group Ltd earnings conference call or presentation Friday, June 5, 2020 at 1:00:00am GMT

* Alex S. Xu

GreenTree Hospitality Group Ltd. – Founder, Chairman & CEO

GreenTree Hospitality Group Ltd. – Director of IT Department

GreenTree Hospitality Group Ltd. – CFO & Director

Good day, and welcome to the GreenTree Hospitality Group Ltd.’s First Quarter 2020 Financial Results Release Conference Call. (Operator Instructions) Please note that this event is being recorded.

I would now like to turn the conference over to Rene Vanguestaine of Christensen, GreenTree’s Investor Relations firm. Please go ahead, sir.

Thank you, Chuck. Hello, everyone, and thank you for joining us. GreenTree’s earnings release was distributed earlier today and is available on our IR website at ir.998.com as well as on PR Newswire services. As a reminder, we also posted a PowerPoint presentation that accompanies our comments to the same IR website.

On the call from GreenTree are Mr. Alex Xu, Chairman and Chief Executive Officer; Ms. Selina Yang, Chief Financial Officer; Ms. Megan Huang, Director of IT Department; and Mr. Nicky Zheng, our IR Manager. Mr. Xu will present the company’s first quarter 2020 performance overview; followed by Ms. Huang, who will discuss business operations; 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 terminologies 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 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. Future 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 statements 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.

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Alex S. Xu, GreenTree Hospitality Group Ltd. – Founder, Chairman & CEO [3]

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Thank you, Rene, and thanks, everyone, for joining our first quarter earnings call today.

Let’s start with Slide 5. In the first quarter, our operating performance was severely impacted by COVID-19. Our blended ADR decreased 7.8% year-over-year to RMB 150, our occupancy rate dropped to 47.3%, and RevPAR decreased 44.1% to RMB 71. Nonetheless, we continued to expand our market presence across China. During the first quarter, we opened 62 hotels mainly in the first part of January 2020, and we ended the quarter with 1,025 hotels in our pipeline. That’s up 113.1% year-over-year. By the end of the quarter, we had grown our geographic coverage to 342 cities across China with 3,998 hotels in operation, up 41.3% over the prior year. Total revenues were RMB 157.4 million, a 33.1% decrease compared to the first quarter of 2019. Gross profit decreased 56.4% to RMB 67.6 million. Non-GAAP adjusted EBITDA decreased 64.5% to RMB 47.6 million. And the core net income per ADS, that’s basic and diluted non-GAAP, decreased 70.3% to RMB 0.27.

Let’s now turn to Slide 7 for an update on the impact of COVID-19. Thanks to the government’s efforts, the outbreak has largely come under control in China. Inevitably, our operating performance declined due to the lockdown of a number of cities, business closures and travel restrictions imposed by governments around China. However, GreenTree’s overall performance was better than the average performance across the hospitality industry in China due to the strong dedication and hard work of our staff, franchisees and partners in the food and beverages business as well as our strong positioning in Tier 3 and smaller cities.

Now please turn to Slide 8. The COVID-19 outbreak created new needs, which, together with our franchisees, GreenTree answered immediately. We responded promptly to the government’s call and provided the rooms to house medical staff, volunteers and travelers that needed to be quarantined [and/or stayed]. Anticipating the resumption of the business, we worked with our corporate clients to provide quarantine rooms for their workers who are returning to work. We provided a fee reverse and other meaningful financial support to our franchisees, and we implemented new precautionary measures to reinforce our already stringent health, safety and hygiene standards and protocols. With this assistance from GreenTree, our franchisees have gradually managed to resume business operations. And as a result, our occupancy rate has rebounded and exceeded 65% on average in the second half of May. That’s from a low of 21.5% at the end of January. And since March 9, our individual or corporate members have accounted for more than 80% of all of our guests. Despite these encouraging trends, we expect revenues for our second quarter to be down 18% to 23% year-over-year.

I cannot thank enough all of our employees, franchisees and guests as well as the medical professionals, police, firefighters and community leaders for their support and dedication in helping us resume our business rapidly. Despite these extremely challenging times, we are well positioned to deliver our multiple missions that is to serve our guests to support our franchisees and employees and to create long-term and sustainable growth for our shareholders.

I will now pass the call over to Megan Huang, who is also in charge of our sales and marketing. Megan, please go ahead.

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Qing Huang, GreenTree Hospitality Group Ltd. – Director of IT Department [4]

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Thank you, Alex. Moving to Slide 10. At the end of this first quarter, we had 3,998 hotels in operation, 41.3% higher than a year ago. 35 of these hotels were leased-and-operated, or L&O, hotels, and 3,963 were franchised-and-managed, or F&M, hotels. While the mid-scale segment remains the core of our business with almost 64.6% of all our hotels, last year, we expanded more into both the higher end and economy segment of the market. As a result, by the end of this quarter, the number of hotels in the mid-to-upscale and luxury segments increased to 7.3% of the total portfolio, and the economy segment grew to 28.1%. Our entry into these segments will enhance our ability to cross-market our different brands. We have also increased our dominant position in Tier 3 and smaller cities. As a result, 66.8% of our hotels were located in these cities at the end of this first quarter. Industry data such as STR indicates that hotels in these cities are recovering faster and performing better than hotels in Tier 1 and Tier 2 cities.

On Slide 11, you can see that we opened 62 hotels compared to 102 in first quarter 2019, a 39.2% drop. 7 of these were in the mid-to-upscale segment, 37 in the mid-scale segment, and 18 in the economy segment. 3 were in Tier 1 cities, 13 in Tier 2 cities, and the remaining 46 were in Tier 3 and smaller cities in China. Meanwhile, we closed 21 hotels, 5 due to brand upgrade, 8 due to noncompliance with our brand and operating standards, and 8 due to property-related issues. So net-net, we added 41 hotels to our portfolio in the first quarter.

Slide 12 shows the growth in our pipeline of new hotels. Our pipeline increased from 949 on December 31, 2019, to 1,025 on March 31, 2020. Around 39% of these hotels are in the mid-scale segment, about 36% in the economy sector and around 25% in the mid-to-upscale segment.

Slide 14 summarizes the impact of COVID-19 on our first quarter operating performance. Our F&M hotels ADR decreased 7.6% to RMB 149, occupancy rate dipped from 78.4% to 47.7%, and RevPAR decreased 43.8% to RMB 71. While our L&O hotels ADR decreased 15.4% to CNY 169, occupancy rate dipped from 59.6% to 32.7%, and RevPAR decreased 53.6% to RMB 55.

Slide 15 shows the quarterly RevPAR change. As you can see, RevPAR for our L&O hotels decreased 53.6% year-over-year to RMB 55, and RevPAR for our F&M hotels decreased 43.8% to RMB 71.

With that, I will pass the call over to our CFO, Selina Yang.

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Yiping Yang, GreenTree Hospitality Group Ltd. – CFO & Director [5]

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Thank you, Megan. Please turn to Slide 17. Total revenues decreased 33.1% year-over-year to RMB 157.4 million. Total revenue from F&M hotels decreased 32.6% to RMB 123.6 million, while total revenue from L&O hotels decreased 34.8% to RMB 33.8 million. The decrease was almost entirely due to the impact of COVID-19, which resulted in declined RevPAR, temporary closures in compliance with local government requirements, delays in new hotel openings, as well as partial reduction and extension of sublease income. Once more, in support of our franchisees, from February 1 to March 31, we reduced both franchisee management fees and central reservation system usage fees by 50%.

Slide 18 shows that hotel operating costs were RMB 89.8 million, up 12.2% year-over-year. These increased costs were mainly attributable to higher depreciation and amortization and the consolidation of Argyle and Urban. Excluding Argyle and Urban, hotel operating costs decreased 3.9%, which was primarily due to the decrease in salaries of regional general managers and decrease in utilities, consumables, food and beverage, which resulted from the declined occupancy rate. Selling and marketing expenses were RMB 17.8 million, a decrease of 27.7% year-over-year. The decrease was mainly attributable to decreases in advertising, traveling and meals because of the measures taken to control the spread of COVID-19, including the lockdown of certain cities, business closures and restrictions on travel. General and administrative expenses were RMB 28.7 million, up 11.7% year-over-year. The increase was primarily attributable to increased legal and accounting consulting fees and consolidation of expenses from Argyle and Urban. Excluding Argyle and Urban, G&A expenses decreased by 15.5%, mainly due to a decrease in staff-related costs and compensation expenses. Overall, total operating costs and expenses grew 5.4% year-over-year to RMB 137.5 million. Excluding Argyle and Urban, total operating costs and expenses decreased 11.0% compared with 1 year ago.

On Slide 19, you see that gross profit decreased 56.4% year-over-year to RMB 67.6 million. Gross margin decreased from 66% to 43%. Net income decreased 110.6% to negative RMB 14.1 million. And net margin decreased from 56.9% to negative 9%. These year-over-year decreases were primarily due to the impact of COVID-19.

On Slide 20, you can see that adjusted EBITDA decreased 64.5% year-over-year to RMB 47.6 million. Adjusted EBITDA margin decreased to 30.2%. Core net income decreased 69.9% to RMB 27.7 million, and core net margin was 17.6%.

Please turn to Slide 21. Net income per ADS, basic and diluted, decreased 108.7% to negative RMB 0.11 that’s equal to negative USD 0.02; while core net income per ADS, basic and diluted, non-GAAP, decreased 70.3% to RMB 0.27, equal to USD 0.04.

Let’s now look at Slide 22. Our operating net cash outflow was RMB 48.4 million as a result of an operational net income loss because of COVID-19. As of March 31, 2020, we had cash and cash equivalents of RMB 1.6 billion as compared to RMB 1.8 billion as of December 31, 2019, primarily due to loans to franchisees, loan — losses from investment in equity securities, and investment to upgrade hotels’ decoration. The cash and cash equivalents provide us with ample resources as we continue to evaluate potential investments. And to support our franchisees, our long-term cooperation with several banks in China and our strong financial position, operational performance have allowed us to obtain unutilized bank facilities of RMB 330 million.

On Slide 23. As Alex mentioned, COVID-19 have significant impact on our business. As a result, we expect a decline in total revenues of 10% to 15% for the full year 2020 as compared to 2019.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question will come from Justin Kwok with Goldman Sachs.

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Justin Kwok, Goldman Sachs Group Inc., Research Division – Executive Director [2]

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Perhaps I’ll start with 2 questions more broadly. One, it’s on the M&A side. I think that’s — you’ve just mentioned in — immediately, you got CNY 1.6 billion worth of cash and cash equivalent now. What are you seeing in the market post COVID-19? Are you actually seeing more opportunities coming out or not? Because I think — when I talk to a lot of the industry participants, it seems that this time around, the disruption was pretty short and then there was still quite ample liquidity. So they are not seeing a lot of deals happening. So that’s the first one.

And the second one. Regarding your revenue growth guidance for the second quarter, can I get a sense on what broadly you are assuming, say, in terms of your occupancy level, in terms of your room rate level? And also, are you assuming any further discount or help to the franchisees through the franchise fees’ cuts or rebate as well?

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Alex S. Xu, GreenTree Hospitality Group Ltd. – Founder, Chairman & CEO [3]

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Thanks, Justin. Selina, I’ll take the 2 questions and you can add on top of that. So Justin, those are great questions. The — regarding the M&A landscape, since the beginning of COVID-19, I think there’s a number of measures taken by the government, also taken by the companies and also taken by the participation through the employees and the hotel owners. I think most of the hotel companies at this moment are still able to absorb the shock. So we have — we know the overall financial performance of the hotel industry has been impacted severely and the — but it takes time for the companies to realize that a strategic partnership with GreenTree would be the best interest to their hotel owners, to all the parties. So we have received information regarding certain small to medium and some regional — some of the certain segment that — the inquiries about certain of — potential strategic investment. But we do expect that, I think in the third quarter and the fourth quarter, there should be more opportunities because fee recovery is rapid, but we will see really how rapid the recovery speed is. At this moment, I think the recovery speed, just like what we said in the second quarter, from May — the second half of May, we only recovered 65% of the occupancy. Originally, that — I think it’s a little bit lower than the industry’s — than our expectation.

And so overall, the industry recovers. I think we looked at numbers a little bit slower than GreenTree. So we would expect the M&A opportunities will be more — there will be definitely more towards the second half of the year. So we’re prepared to evaluate. GreenTree has always been very reasonable trying to create a win-win situation for all parties. So we hope that we will take advantage of the situation and seize the moment and to create a create a win-win for everybody. So that’s on the M&A landscape, and that’s the reason why we have untapped these credit lines. Now we plan to obtain more from our lender and if we need.

Regarding the second — your second question, the revenue colors on the second quarter. As we have indicated to you, the second quarter — our revenue consists of several components. One is the amortized — or the amortized income from the hotel opening and the system fees and also the franchise fees, and those are the 3 primary fees we have. And so we have in — combined, we have 18% to 23%. Depending on the second — the June recovery speed, I know I think — I know that government is really speeding up, helping the business to recover. So really it depends on the recovery speed of June. So we have — that’s why we have a range of whether 5% plus or minuses. And so we think that the RevPAR, still comparing with the last Q2 in 2019, in — probably 20% to 30% or 25% plus or minus in that end. So Selina can correct me if I’m wrong. And so we expect the third quarter, the recovery will be even — will be better than the second quarter.

And so we do not — at this moment, the health — the financial health of our franchisees, Justin, are the most critical elements that GreenTree pays attention. That’s the most important area we focus on. We want to make sure GreenTree’s franchisee has the best financial health in the industry. So we will do whatever we need, including — you can see our cash flow, the first quarter, we have provided more than — close to — more than CNY 80 million to support our franchisees and that we also waived 50% of all fees. We also returned — that’s the reason why we have a CNY 48 roughly million cash from operation loss, the negative, instead of — we have 20 — core earnings of CNY 27 million or so. We’re supposed to have similar cash flows. But because we refunded the prepaid deposit with the cancellation with also prepaid deposit and prepaid — also paid the revenue — room revenue through our central reservations, we actually refunded that. We actually dispersed those quickly, so created that negative — almost $80 million of cash outflows. And so our balance sheet, you’ll see that number drop. If we believe that, the impact of that, we still have a positive cash flow from operation to the company. So we plan to use them all to support our franchisees if necessary.

At this moment, what we observe is our overall financial conditions of the franchisee are very healthy. So we have not planned to cut any franchise or system fees or regulation fees and — however, if — depends on recovery speed, if there is really another dip and another — somehow another impact, then we’re prepared to do everything possible to help our franchisees. But at this moment, we don’t see — we have not — we don’t — we have not seen the great need other than we may continue to provide some financial support to our franchisees who wants to open more hotels during this time period because the capital to them in the market is not as readily, like, available like before. So — because this is not real estate hard asset. It is more on the supply chain side, construction, improvement, renovation. So that’s the — my questions — my answers to your question, Justin. So Selina, do you have anything else to add?

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Yiping Yang, GreenTree Hospitality Group Ltd. – CFO & Director [4]

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I think you asked — of Justin’s question, I want to comment that we observed our operation performance has resumed since the middle of May. I mean they resumed more quickly than ever before. So as we have introduced, our RevPAR decrease in the first quarter was 44%. And now we observe our decrease in RevPAR is — was about 30% to 35%. So — and if everything is going smooth, then we’re likely to see the decrease in the RevPAR will narrow in the coming second quarter. Thank you.

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Justin Kwok, Goldman Sachs Group Inc., Research Division – Executive Director [5]

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May I just have one more question. It’s that obviously, the current discussion on ADR relisting or delisting to Hong Kong market is something very hot in the market in a way. How would management see these in terms of the opportunities or in terms of the considerations that you’re looking at? If you can just hopefully provide some overall feedback.

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Alex S. Xu, GreenTree Hospitality Group Ltd. – Founder, Chairman & CEO [6]

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Okay, Justin. Selina, I’m also going to take this question, okay? So Justin, we take every risk factors very seriously because our mission is really to protect — very clearly to protect the financial health of the franchisees and keeping a stable platform for our employees as well as providing long-term stable returns to our shareholders. So the recent HFCAA initiative by the Senate alarmed us greatly. So we do not know how this will be — impact us and how quickly that will be implemented or will be implemented ever. However, what — we have checked, have already commissioned our adviser to do analysis so that I can see — to see whether we can be prepared in advance to secure an alternative — just to have a backup to better plan, to mitigate the risk for this potential legislation. So again, we take everything — we take every risk very seriously in order to protect our shareholders’ long-term interest. So Justin, we can — we’ll continue to report to our investors about progress we’re making, but we are — we have taken the initiatives.

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Operator [7]

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And our next question will come from Praveen Choudhary with Morgan Stanley.

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Praveen Kumar Choudhary, Morgan Stanley, Research Division – MD [8]

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This is Praveen. Two questions from me, Alex and Selina. The first one is, I’m trying to understand the demand side of the equation. There are 2 parts to that question. One is, in the new normal, considering the social distancing, what part of the business is not yet coming back? For example, leisure probably is coming back slower. I’m just trying to understand whether it will come back at all or it will not come out at least in Q3, Q4 this year. And what percentage of your business comes from that segment? The second related question is what — you mentioned, I think, that 80% of your customers were members. I wanted to understand what percentage of that was corporate versus individual.

And then I have a third question which is not related to demand, which is about equity portfolio which has seen some losses in Q1, which is understandable. But I just wanted to know whether you have either bought new shares or sold any of those existing shares.

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Alex S. Xu, GreenTree Hospitality Group Ltd. – Founder, Chairman & CEO [9]

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Praveen, thank you so much for those 2 wonderful questions. I will take the first part. Selina and Megan, you guys can complete — supplement. Regarding the demand side, we’ll just talk about the general trend. And we are particularly concerned about the long-term impact of this COVID-19, number one, to leisure and, number two, to group meetings, to conventions because the conventions and holidays and leisures provide strong support during certain months for the entire hospitality industry. And whether the — for the time being, I believe the company are very concerned about the risk to the employees and so are we. So in terms of conventions, large group gathering and also the large amount of fee — long-distance domestic travelers, Praveen, we think that will slowly come — that will not be quickly coming back, depends — also depending on our government, our China government’s initiatives because the society is a little bit different. The — I think most business community and citizens can be easily mobilized to do certain things and — but worldwide, we’ll see that we’re not — we’re coming back slowly. I think it would not be a sharp (inaudible) rebound that just the number of months it takes to drop, the number of months it takes coming back.

So under that, luckily, I think that the sector that impact the most for that are not of the main focus of our business. Our business has been always [the slack] and the limited services to the essential business travelers. So they are, just as we described to you, the traveling medical professionals, the key logistic suppliers, engineers and the key supporting people under the — so those are types of — also the — like selective surgeries, people going to the hospitals, going to schools, going to the resort, the — going to a key location. So those are types of client that we see right now, Praveen. So we’re catering to them. And we will all be very careful in terms of monitoring our high-end hotels and how do we actually solve the problem for the group — lack of group reservations because I think — because of social distancing. Until and unless we have either effective vaccine or some kind of a therapeutic remedy, I think then there will be so much pent-up demand from my point of view that I don’t think there will be a problem. But until then, I think we see the business and even ourselves are taking a lot more precautions to protect our people. And I think the other businesses are doing the same. And in addition, the families — you don’t recommend to your family members to travel long distance. So the leisure travelers, I think, will be subdued. And coupled with the lack of international traveling, the tourist demand, so the leisure travel will be — I think will be coming back slower than the price point we are providing.

So the 80%, you said, of the members of individual and — or corporate, at this moment, we see the — like more than 50%, 60% are from local corporate and then 30% to 40% from individual members. But they are also traveling for business. So — and more and more towards the later part of May, I think we see half and half. And so it’s a healthy balance. And we also see a great, higher — quicker recovery in the third and fourth tier cities. We had a strong strategy in the past, the initiative going down to providing the — to providing a brand and system support to those cities, hotel operators, I think, yielded good result. And so that’s the demand side. So we are — I think we’re pretty lucky that in the past, we have that strategy to provide the most affordable, that value-driven hotel products and services to our business and also individual travelers. I think that is being paid off. I think another reason the fee being paid off is because a lot of small to medium-sized businesses, we provide 70% of employment. But we are also very constrained with the budget, the lack of revenues in COVID-19. And so naturally, they will also cut back on their travel budget and have been — we are here for them.

And regarding the — your second question, the equity portfolio. Basically, we only invest in the past that we report to our shareholders. And the key strategic — I think, in our portfolio, we still have some left in [ICBC] that then — from the past. Then we — the other 3 stocks we have are our — we are the second largest shareholder for the [Jinling] hotel chain. That’s the, I think, #1 domestic 5-star brand in China. So we have not changed the position. We — in the last quarter, we neither buy and sold any positions. We didn’t change. So I think likely in the — we’ll see the second quarter will be a rebound. The second is we are a strategic — a cornerstone, at the time, investor for New Century. That’s the second — that’s also one of the best higher-end luxury hotel and also for the 5-star hotel chain, New Century. And the third is we have a strategic investment in university, in Gingko university. That’s the best, largest hospitality, 4-year — best 4-year bachelor degree university in China and they are the best. So that’s the 3 major holdings we have. And the hospitality industry has impacted the most, so are the stocks, and that’s why we have a reduction in the equity value in those. And we do expect that, that will also be fully coming back in the near future. So Praveen, that’s my quick answers. Selina and Megan?

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Yiping Yang, GreenTree Hospitality Group Ltd. – CFO & Director [10]

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Thank you, Alex. And we’re also observing that our contribution from corporate members and individual members are — keep increasing in the second quarter. If we compare their contribution of the first quarter and May and April, we can see that the percentage of our individual members increased by 5% and the percentage of corporate members increased by 2%, meanwhile, as percentage of OTA decreased by nearly 2%, yes. Thank you.

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Operator [11]

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And our next question will come from Jisheng Liu with CLSA.

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Jisheng Liu, CLSA Limited, Research Division – Research Analyst [12]

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Jisheng here. I have maybe 2 to 3 questions. I will go maybe one by one. Number one is hotel closure actually. So actually, in first quarter ’20, we recorded even fewer hotel closure in the first quarter ’19 or any quarters previously. So I was trying to understand if we anticipate more hotel closures in the quarters to come given the COVID situation. And maybe there are more to come that will also impact our revenue going forward. I will need — I’d like some colors to be shared on this.

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Alex S. Xu, GreenTree Hospitality Group Ltd. – Founder, Chairman & CEO [13]

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Okay. So Selina, I remember that we have the closure. I think about 1/3 of them is due to the upgrade of — hotels that upgraded. That’s why we have the closure reopening, and then I think that 8 due to the noncompliance and also 8 due to the property-related issue that is we — now we will have hotels — there are underlying property leases. For instance, they’re already expiring. So their lease have come to a termination. And so we — because, Jisheng, that we have a responsible approach to help our franchisees and so are our area GMs and our hotel GMs. So overall, we — our franchisee have not — we don’t — we have not seen a major trend, a lot of closures in the horizon. I think if there’s — if there are any major closures, it’s going to be the second quarter, but we have not seen large blocks of closure in the pipeline. I know of closure mainly due to the hotel lease — real estate lease is already expiring and that — some are not able to keep up with the maintenance of the hotels because franchisee have some other cash needs for other operations. They may not be able to put all the profit back to — some of the profit back to fix the hotels up. So they are not in compliance. And some will be just internal because we have other brands, and then we are able to upgrade for the renovation. So that’s my reading from our pipeline of the request. So Selina, do you have anything to add?

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Yiping Yang, GreenTree Hospitality Group Ltd. – CFO & Director [14]

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No. You have explained very clearly. Thank you.

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Alex S. Xu, GreenTree Hospitality Group Ltd. – Founder, Chairman & CEO [15]

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So we don’t expect, Jisheng, large numbers to closure. I know we have always been — as I mentioned here, that’s a demonstration that we have been able to maintain a pretty good support to our franchisees. We try our best. And during the COVID, every employees, every staff in the corporate office worked to support the frontline operation.

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Jisheng Liu, CLSA Limited, Research Division – Research Analyst [16]

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I got that, Alex and Selina. My second question is on the general ADR trend. So we have seen some data saying in Tier 1 cities, for example in China, that the general — on average, ADR decline year-on-year has been even larger than in March. So I was wondering if, in Tier 3 to 4 cities, we have seen the similar trend or we see, well, a similar ADR decline year-on-year versus March because we have also on the presentation that we have recorded already much less than industry ADR decline in first quarter. So I was wondering if we are not affected that much by ADR in the quarters to come as well.

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Alex S. Xu, GreenTree Hospitality Group Ltd. – Founder, Chairman & CEO [17]

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Okay. Selina, would you like to answer this question?

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Yiping Yang, GreenTree Hospitality Group Ltd. – CFO & Director [18]

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Yes. Sure, sure. Thank you, Jisheng, for the question. And just like you said, you observed the year-over-year decrease of ADR in the Tier 1 cities. It was not good. Actually, we observed the same trend. In the Tier 3, year-over-year decrease of ADR was better than that of the Tier 1. Actually, if we compare the performance in Tier 1, Tier 2 and Tier 3 cities, the ADR decrease in Tier 3 cities was less than that of Tier 2 and then — and which was less than that of Tier 3.

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Alex S. Xu, GreenTree Hospitality Group Ltd. – Founder, Chairman & CEO [19]

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Now the — so let me also add a little bit more to that. The — Jisheng, so one of the reason we believe — okay, we believe is the Tier 3 city has a lot of local travelers. They are more like in the smaller groups and the smaller team, individuals. And in Tier 1, Tier 2 cities, especially Tier 1 cities, they are, in the past — like some of the key drivers right now, they’re missing. So it’s very natural and this will continue as long as those key growth driver is not coming back, for instance, for international travelers and also the group travelers, conventions, meetings. And so the entire — those sectors are — right now, are not very active. So the result of that, I think Tier 1 city are really having a sharper drop in the ADR and occupancy. So — but the — we hope — we are very hopeful that those will come back in the near future.

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Yiping Yang, GreenTree Hospitality Group Ltd. – CFO & Director [20]

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Yes. You’re right, Alex. And I’d like to add some comments because these Tier 1 cities include Beijing, Shanghai, Guangzhou and Shenzhen. And during COVID-19, there are more restrictions on traveling all of the cities — for these big 4 cities. And since late April, we find that there’s more traveling between these big 4 cities and so that we — it’s hopefully like that and more occupancy will be increased in these 4 cities. Thank you.

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Alex S. Xu, GreenTree Hospitality Group Ltd. – Founder, Chairman & CEO [21]

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Yes. The drop, Jisheng, is about 10%, I think the 10% difference between the Tier 1 and Tier 3 cities. So for instance, just Tier 1 city, it is — if a Tier 1 city is 50%, Tier 3 city would be 40%. So it could be 10% difference. So the Tier 3 city performs much better in that sense than the Tier 1 city at this moment.

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Jisheng Liu, CLSA Limited, Research Division – Research Analyst [22]

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Okay. So my last question is on government subsidies. So I’ve seen that in first quarter, you have already recorded some government subsidies, just the EBITDA level. I was wondering if these were related to the requisition hotels during the COVID peak outbreak or it is not. So maybe a follow-up on this is that our requisition hotels in first quarter, how many are they? And how many government subsidy do we estimate to begin coming from second quarter and third quarter and onwards? Are they at similar levels as what we have seen in the first quarter? Or would this be more actually?

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Alex S. Xu, GreenTree Hospitality Group Ltd. – Founder, Chairman & CEO [23]

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Selina?

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Yiping Yang, GreenTree Hospitality Group Ltd. – CFO & Director [24]

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Yes. Jisheng, thank you for your question. The subsidies was mainly attributable to the tax subsidies coming from the government. It’s much for the requisition. And the second quarter, our number of hotels used by the government was less than 3%. And now nearly almost — nearly all the hotels that are opened are due to the use by the government. Thank you.

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Alex S. Xu, GreenTree Hospitality Group Ltd. – Founder, Chairman & CEO [25]

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Jisheng, I think that one of the — those are pretty much a payroll-related tax, some of the rebate, in other word the refund. So it’s part of the subsidies then. So I think primarily, just as Selina said, it’s a part of reduction of the tax in essence.

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Jisheng Liu, CLSA Limited, Research Division – Research Analyst [26]

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So maybe just a quick follow-up on this. If the government’s subsidy in first quarter was not at all related to requisition hotels, so when these government subsidies related to requisition hotels come in the future, accounting-wise, would you record that in RevPAR? Or would you record that just below the line?

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Alex S. Xu, GreenTree Hospitality Group Ltd. – Founder, Chairman & CEO [27]

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We do not — how many hotels are there, Selina? We basically will — if we have — it gave us income, we’ll record to the — at revenue. And we would — we do not record the subsidies from the government. So Jisheng, that’s — hopefully, I answered your question.

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Operator [28]

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And our next question will come from [Bruce Mee] with UBS.

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Unidentified Analyst, [29]

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I just have one small question. So could you please share with us about your hotel opening planned for this year and next year? And also, could you give us a rough breakdown into — by the city tiers and hotel segments?

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Alex S. Xu, GreenTree Hospitality Group Ltd. – Founder, Chairman & CEO [30]

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Okay. So Bruce, I’d say we have a stronger pipeline historically right now, a record pipeline, more than 1,025. So we — even the first quarter — in the first quarter, in light of the COVID, I still — we still developed, I think, more than 100 hotels. We opened 61 — opened 62, I think. We’ll continue to add to the pipeline. So this year, we plan really to open initially 700 because that’s 5, 6, 7. And so we’re trying to push to see whether we can achieve that number. However, we also understand that we are sensitive to the concerns of the franchisees because of lower occupancy and lower demand in the second quarter. So we do not really want to convince or encourage our franchisee to open the hotels at this moment. But if they’re ready, everything is ready, then we definitely will help them because we have a longer ramp-up period. So we will — counting — we’re very optimistic in third quarter, fourth quarter. I think we’re opening — our opening will catch up. But our plan originally is about 700. I think the first quarter and second quarter, we may — short of 100. If we can’t catch up, then we’re probably about 600 plus/minus. And it really depends on how quickly the economy rebound on the third, fourth quarter, and then we’re probably achieving our goal because our company always has been very disciplined in achieving our plan and achieving our budget.

And in terms of the mix, we continue to see — it’s like a pyramid, 10%, we hope — 5% to 10% in first city — in first tier, and then 20% to 30% in the second tier; and then 50% to 60%, third tier. And in terms of the brand, we have upper to — mid- to upper and to luxury and we’ll plan really 5% to 10%. Then mid-scale is high and to about 15% — to 15%. And then mid-scale is about 50% — 40% to 50%; then the balance of 25% to 30%, economy. So that’s our, just the ballpark, strategic focus. And again, development is — we’re trying to have an organic development as possible, so also dependent on the team — the development team where the opportunity emerge. So we’re focusing a little bit more. So that’s our ongoing and future plan. Next year, we really want to speed up to open all the hotels in the pipeline. And so we will — because now we have 2 more fully operating divisions. That’s Argyle and Urban. And I think our 2 teams really have done — tried very hard. And both Argyle and Urban and the CEO, Kevin Zhang and also Ms. Chen, they are all — they are now trying to speed up their development and their openings. So next year, we should be able to see much a higher, I think, growth rate than this year.

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Operator [31]

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And our next question will come from Lydia Ling with Citibank.

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Wei Ling, Citigroup Inc, Research Division – VP [32]

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My first question, I want to follow up on the store opening. And can we have some idea on the store opening pace for the second quarter to date? And we also want to get more idea about — how about the sentiment of their — of branches or franchise — our franchise so far if they recover versus the first quarter. And also, what kind of support we may get — further get support to their — our franchisees?

And my second question goes to — actually, we — I think in general, we will expect more consolidation to happen in second quarter. So I think large platforms in the hotel segment will actually want to explore this industry consolidation opportunity. So any plans from our company’s side to provide more attractive terms to those independent players to join our terms? Because I would assess that more platforms actually would actually target to receive the — those independent franchise — independent players.

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Alex S. Xu, GreenTree Hospitality Group Ltd. – Founder, Chairman & CEO [33]

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Selina, I’ll pick up the questions and then you supplement, okay? Lydia, thank you so much for those 3 questions. The opening of the second quarter — our openings, also, we have a number planned in June. And then summer, I will give you a little bit — a larger range because we — as we said — as I said to you that we want to respect our — to make sure that our franchisees and hotel owner feel as comfortable as possible when they open. We also want a design that — so that we have a quicker ramp-up period. So I would say 100 to 150 numbers in that range, the openings in the second quarter.

And then the second question, you have talked about the sentiment of the franchisees, definitely as not as bullish as the previous year and — however, as I said, GreenTree’s franchisees are in a much better financial condition. And so in the last 2 years, last — we have asked our franchisees to be more disciplined because the market was very hot. Everybody is trying to gather properties at very high lease rate, property lease rate and spend tons of money borrowing with a lot of — loaded with debt or the private borrowing to open hotels and even the higher end and there is a lot more supplies in those areas. So we have educated — we forcefully educated, trained our franchisees that in any — in a very good time, you have to anticipate that there is a correction. We never really expected a correction will come in, in this COVID-19 form, but nevertheless, it came and in such an unexpected way. But we — but our end result is our franchisees are much more prepared. So we have a much better sentiment. That is one of the reasons a lot of our franchisees are still exploring, trying to open the hotel — or trying to — signing up the leases or purchase properties, signing up with GreenTree various brand. So I’m — I think the sentiment is not as good as the overall industry, but our GreenTree Group that — still is performing really well, the sentiment among our franchisees.

So the — that’s also because we have — we provide this financial support. You can see the first quarter, we already opened our connections with our lenders and also with our own cash. And we continue to have these capabilities. With the second quarter, we have — we don’t have the refund issues that the prepaid central reservations and also all of that in place. I think that we even have more cash from the operations from the lenders to support our franchisees. As I said, what they most needed is — they know if they have a great deal and we have ample financial support for them. We — and that is the advantage of working with GreenTree because we always prepare ourselves to support our franchisees.

And the third — your third issue is more consolidation. Definitely, we see a smaller to medium and there — especially, there are so many smaller regional hotel brand. The most important issue is that consolidation has to be a responsible one. Because a lot of the smaller hotel chains, Lydia, from our point of view, they have several issues that the products may not be consistent and that the management may not be consistent. And secondly — thirdly, and the number of years they left on their original lease term varies. So how are we making sure that when we consolidate, it’s not purely a number game but also an increase overall, overall quality for our — the quality of the products and the quality of service. So that’s one major concern. Secondly, whether the management team — we see they have the same philosophy, have the same culture because not every management team have the same goal. And that’s the most important criteria and more important than anything else. So in the past, what we have talked for a long time with Kevin of Argyle and Ms. Chen in Urban, I think we share the same philosophy. They’re all hardworking and trying to make the brand a valuable resource for the hotel owners. And if — we think the third quarter, fourth quarter, there will be more. And we are open — our arms are fully open. If — also, if you have any certain opportunity, please recommend to us. We think in this particular environment and our strategic partnership with them will definitely strengthen both parties. So unless we’ll create a win-win, we don’t do the deal. So that’s our criteria, Lydia. So that’s my quick answers to your 3 questions. Selina?

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Yiping Yang, GreenTree Hospitality Group Ltd. – CFO & Director [34]

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No comments. Thank you, Alex.

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Alex S. Xu, GreenTree Hospitality Group Ltd. – Founder, Chairman & CEO [35]

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Okay.

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Operator [36]

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This concludes our question-and-answer session. I would like to turn the conference back over to Ms. Selina Yang for any closing remarks. Please go ahead.

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Yiping Yang, GreenTree Hospitality Group Ltd. – CFO & Director [37]

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

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Operator [38]

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The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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Alex S. Xu, GreenTree Hospitality Group Ltd. – Founder, Chairman & CEO [39]

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Thank you, operator. Thank you, Chuck.