Hello, ladies and gentlemen. Thank you for standing by for GreenTree's Third Quarter 2018 Earnings Conference Call. [Operator Instructions] 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 Christensen, the company's investor relations firm. Please proceed, Rene.

Thank you, Anita. 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. Selina Yang, VP of Operations; Ms. Jasmine Geffner, Chief Financial Officer; and Mr. Nicky Zheng, IR manager. Mr. Xu will present the company's Q3 2018 performance overview, followed by Ms. Yang, who will discuss business operations and company highlights, and Ms. Geffner will then discuss financials and guidance. They will be available to answer your questions during the Q&A session that will follow. 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 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 information provided, including the forward-looking statements made in these conference calls 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.

Thank you, Rene, and thanks, everyone, for joining our earnings call today. I'm pleased to report our 2018 third quarter result. During this quarter, we remain committed to a steady and stable growth strategy as we explore the growing consumption trend in the second- and the third-tier cities and expand our geographical coverage across China. Now we're covering 278 cities at the end of September 2018. We now operate 2,558 hotels across 9 different brands from economy, mid-scale to mid-to-upscale limited services segment of the markets. During the third quarter, we opened 146 new hotels and continued to grow our pipeline. We are on track to open more new hotels in the remaining part of the year. We also started to explore ways to grow our service apartment business recently. Finally, we continue to explore appropriate value-enhancing acquisition opportunities to help strengthen our hotel platform and increase long-term shareholder value. In the third quarter of 2018, our total revenue grow 21.6% year-over-year to reach RMB 256.8 million. Gross profit increased 19.5% to RMB 180.7 million. Non-GAAP adjusted EBITDA rose 24.2% to RMB 156.5 million. Net income increased 36.3% to RMB 152.4 million, and the non-GAAP core net income rose 30.3% year-over-year to RMB 125.3 million, while gross margin trimmed slightly from 71.7% to 70.4%. Adjusted EBITDA margin improved from 59.6% to 60.9%. Net margin improved from 52.9% to 53.3%, and the core net margin improved from 45.5% to 48.8% compared to a year ago. These results were driven by continued growth in our hotel network and improved operating performance at our existing hotels. In the quarter, we opened 146 new hotels with half of these new open hotels in our mid-scale brand, around 35.6% in economy brands and around 14.4% in the mid-to-upscale brand. Our pipeline of new hotels increased…

Thank you, Alex. If you are following along our slides, I will skip the overview on Slide 5 and go straight to Slide 6. Once again, the franchised-and-managed model remains our primary strategic focus. In fact, 98.8% of our hotels fall under this category. And as you can see on the chart on the right, F&M Hotels have been steadily increasing their contribution to our overall revenues. In the third quarter, the percentage reached almost 70%. Let's turn to Slide 7. Another critical area of our business is our loyalty program. 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 can book directly with us, which has helped us and our franchisees to reduce sales and the marketing fees and expenses, and our GreenTree members are very sticky customers. Overall, we now have about 26 million members in our loyalty program along with 1,020,000 corporate members, up from approximately 24 million and 930,000 as of June 30, 2018, and approximately 21,820,000 as of December 31, 2017. Around 94.9% of room nights were sold through our own direct channels, which includes our individual loyal members and corporate members. Moving on to Slide 8. You can see our RevPAR chart here. The third quarter is generally one of the high seasons during the year. In the 2 charts at the bottom of the page, you can see that, on a year-over-year basis, RevPAR for L&O increased by 4.8% to RMB 152, and RevPAR for F&M hotels increased by 4.3% to RMB 145 for the third quarter of 2018. Both segments showed healthy growth…

Thank you, Selina. We delivered another solid quarter of operating and financial results. Moving on to Slide 13. We now have a total of 2,558 hotels with 209,463 rooms. On a year-over-year basis, we increased our hotel numbers by 20.7%. During the quarter, we opened 146 new hotels. By comparison, we opened 109 hotels in Q3 2017 and 425 for the full year 2017. So as you can see, we substantially accelerated our hotel openings in Q3 2018 in the first 9 months of 2018. Of the 146 hotels opened in Q3, 73 were in the mid-scale segment, 21 in the business to mid-to-upscale segment and 52 in the economy segment. Of this, we opened 10 hotels in Tier 1 cities, 28 in Tier 2 cities and the remaining 108 in smaller cities in China. During the quarter, we only closed 22 hotels. So net-net, we added 124 hotels to our portfolio. We closed 5 hotels due to their noncompliance with our brand and operating standards and closed 2 hotels due to hotel upgrade. We also closed 15 hotels due to property-related issues, including rezoning, returning of government-owned properties, and expiry of leases and so on. 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 L&O hotels skewed a bit higher because we added 4 L&O hotels, renovated 6 L&O hotels this quarter and converted 1 L&O to F&M hotel after the second quarter of 2017. In terms of our F&M Hotels, our ADR improved by 4.4% to RMB 166…

[Operator Instructions] The first question today comes from Justin Kwok with Goldman Sachs.

Perhaps, I have 2 questions, one on the franchisee support program and the other one on the service apartment, more on the strategic side. Now the first one, I hear Alex mentioning that they've initiated the franchisee support program in the quarter, which will lower the membership transfer fee or the booking fee for the franchisees. I just want to get a sense on the backdrop on those. Is it more related to competition? Or is it more related to some of the franchisees expressing their concerns on the operating environment? What other measures are there in the support program? And would you be able to give some color or quantify a bit on the impact to your revenue or to your profit on that side? That's the first question. The second question would be on the service apartment. I read in your press release that you're also exploring the service apartment segment. Can I check what exactly is this? What are your plans and whether you can give some color on the progress on that?

Okay, Justin, this is Alex. And thank you so much for the 2 important questions. With regard to the franchisee support program, we -- the company always initiates those program proactively. We rarely wait for the franchisee to ask for help because, by then, we think it's too late. We think that we have heard some concerns over the uncertainty of the economy for the fourth quarter and for next year due to this bit of slowdown -- a little bit of slowdown in China economy and also the trade conflict. So we just sensed some franchisee may be worried about their continued profitability. We want to make sure even with the current environment, our franchisee can continue to generate the same amount or even higher profitability for the individual hotels. So as a result, we developed this incentive program. We think that we -- this incentive program coupled with the increase in membership drive will improve and at least help our franchisees during the fourth quarter, next quarter and the next year as well. We have not, in our network, experienced any major or noticeable slowdowns in the consumer demand. However, by reading industry report, we noticed there as you saw some long-distance traveler, such as leisure and business travelers may -- there may be a reduction of that, and there may be a reduction of the higher-end travels. But our strategy has always been focusing on there in providing, delivering the core -- hardcore demand for our everyday business and travelers and that the value priced hotel chain is especially important for them during any kind of economic change time for the small- to medium-sized business travelers. So that's our -- the reason for GreenTree to initiate the support programs. We actually, during the last downturn -- or…

Yes.

The next question comes from Billy Ng with Bank of America Merrill Lynch.

I also have 2 questions. And one is to follow up on Justin questions regarding the franchisee support program. I think, since Alex, you mentioned that we have done that before in the last few cycles, so like -- can you describe, like, how easy to roll back, right, when things are improving again? Whether some of those measures can be rolled back and especially the case how easy was that? And also, I know you mentioned a little bit of like it's not going to impact the profitability or the financial that much from our perspective. So roughly speaking, less the -- if -- without those programs for those target franchisees, let's say, if we are getting 4%, 5% of the top line, and with those program, how much can that be -- can we still get the similar kind of the revenue or it will be slightly lower? And that's question number one. And then question number two is, in terms of, I know this is still a bit early, but in terms of next years, the number of target opening, roughly speaking, because we saw your competitors, some of them have increased their pipeline and most likely will have more openings than this year's, but some competitors probably are already seeing peak of the openings in this year's and will have smaller number of opening next years. What do you think in our case and GreenTree's, do you feel that we can open more hotels than this year's or more likely will become a little bit more conservative given the macro uncertainty?

Thanks, Billy. Again, because this is related to our strategy and operation, I'll pick up the first questions even though I think Selina and Jasmine are well aware of what we are doing. The first regarding the incentive program whether once we implemented and whether it's difficult to roll back or not. I'd say, we have experience for that -- when the market improves, we can easily roll it back because, according to the contract, we have a specific term governing those kind of policies in terms of reservation program and reservation fees. And so by the contract, by the spirit of cooperation, we never really experienced any challenge of rolling those programs back. And we -- our franchisee are very thankful and appreciative to have a partner like GreenTree in the past. And our heart and our support always goes with them. And so, however, GreenTree is also the first mover -- I believe we are the first to reduce a lot of reservation fees from CNY 20 to CNY 10 preliminary already, primarily because 10 years ago, our support franchisees of those reservations are coming from telephone -- live telephone operators. With the newer technology, we also are improved the system support, automation and some simple AI and our reservation in terms of central support, the cost have gradually decreased. So with our reduction of the fees to franchisee saves our cost. So initially, we always designed that that's not a additional income because we generate the income from 4.5% to 6% royalty fees. We think we should -- the other support really should be a cost at most pass-through. So the reservation fee is really additional fees from the franchisee, and we incur additional cost. So we have to continue to innovate to deploy the AI to…

The next question comes from Praveen Choudhary with Morgan Stanley.

I have 2 questions. The first question is related to your cash flow statement. I see you have given loan to franchisees in this quarter, around $35 million. But then you have given loan to third parties. Would you explain what that is, that $156 million? And including that loan to franchisees around $200 million, is that also to support your franchisee at this time when they're struggling? The related question is, this time around, your growth rate as well as your peer's growth rate is 20% to 30%, and yet, it seems like you're worried about down cycle and you're helping your franchisees. What other indications are you seeing based on your conversations with the franchisee that is making you either nervous or you're taking a proactive measure?

Okay. Thanks, Praveen. And I appreciate for your continued support as always. Regarding detailed breakdown, I'll have Jasmine or Selina to answer there. But I'll give you overall picture of that. The support to our franchisees are coming from those franchisees. Typically in the past, they may have a easier time, let's say, to borrow in the marketplace from the various financing programs, including from the banks. In the last year, I think, that the PIP, so-called finance market and also the bank financing are tighter than before to some of our franchisees, so the result that we see some quite good opportunities, we do not want to discourage our franchisees not to do it. So we roll out those franchisees that we're providing the loans to them to help them to speed up. But those loans are typically provided for those outstanding franchisees. They already have successful hotels in operation. They have proven they have the experience, ability to run a big hotel. So we provide those kind of loans to them. So the second, with rolling out those -- the supporting program is, the market that sometimes is not the -- the actual numbers matter, it's the rumors and they sometimes hit the news that make people -- some have concerns and cautious. And so that -- we want -- during this time, we want to encourage our franchisees to do more in marketing and sales, and so -- and as a result, we also want to show our company will also participate in that to help them to work together. And so we -- now where we even during 2009/2010, we really did not experience a slowdown in terms of correction for use in RevPAR in our hotel network, if I recall. So -- and that's the [ spirit ] we are working under, okay. And that -- we are -- I think, our franchisee are in the best position because the products and the price of our hotel products are really meeting the demand for the small- to medium-sized business travelers, okay. So for detailed number breakdown, I'll leave that to Jasmine.

Praveen, this is Jasmine. Now regarding the loan to third parties, they're mostly to third parties that are related to our hotel business. For example, we make short-term loans to a company that's an operator of 168.com, which is our online e-commerce platform serving our members and hotel guests. Basically, our members can -- and hotel guests can use the points they accrue by staying at hotels to exchange for products on this online platform, so we give them short-term loans to support their working capital needs. We do charge market interest rate of 4% to 6% on an arm's length basis.

Are they are expected to pay back?

They're expected to pay back before year-end.

The next question comes from Ingrid Zhang, UBS.

My question would be, could you please provide a bit color on the 2019 outlook, especially on the RevPAR trend because there are rising market concerns about economy uncertainty, and some investors we talk to are really expecting RevPAR growth to decelerate to below 1%. Would you give us a bit more color on this? How do you expect the hotel industry RevPAR trend to be in next year and maybe owned [ GHT ] specific as well?

Okay. Even though my CFO told me we don't gave out the RevPAR guidance in the past, but I still think that this is a valid question, and we really appreciate you asking. We -- our hotel was priced at a -- always reasonably. So we don't accelerate the pricing -- increase the price very rapidly, sharply during good time. We don't decrease those during bad time very much either. So I think -- we think in the long run, by same segment, the hotel pricing should more be in line with the CPI, and by the way, if we improved the product's quality, it may increase a little bit higher, so like 3% to 5%. So we don't expect that there'll be -- at least at this moment, we don't expect really a decline or sharp deviance from that number. So if the market really changes, maybe we should see a slight reduction, but we do not feel that we will be that much negatively impacted. So I wish I would also have a fully proven vision to tell for next year, but that's what we are budgeting or planning along with the CPI.

Next question comes from Juan Lin with 86Research.

So I have 2 questions. My first question is on business expansion. You have been accelerating new hotel openings, especially in the mid-upscale hotel category. Oh, you also provided the pipeline for the upscale hotels. I wonder if you could break down your economy and the mid-scale hotel? And then also, in terms of Tier 1, Tier 2 cities versus Tier 3 cities, what is your future hotel opening plan in terms of geographic distributions of what the different tiers of cities? Also, you mentioned that you are actually looking for M&A target. I wonder if the M&A target is mainly to facilitate upward expansion or geographic expansion? Second question is on operating efficiency. If I exclude the revenue mix factor, I still see a pretty good improvement in operating efficiency. I wonder in addition to RevPAR improvement, what are the approaches or factors that have been driving the operating efficiency improvement?

Okay. All right. In terms of breakdown of the numbers, I'll leave that for Selina or Jasmine in terms of the economy hotel's pipeline. I think there's numbers over there. First-tier, second-tier, third-tier cities, I think our focus is going to be on the organic growth. So wherever there are good opportunities, we will go there. But in the last quarter, I believe, the second-, third-tier cities were more. But detailed numbers, I will leave that to Selina. But in terms of the margin, in the past, we have always tried to adopt the technology in helping our people to do a better job. So last time, I think, we discussed there are still a slight -- there will still be a slight improvement with the margin in our business. We think we have not reached to the optimum yet. The company has been also working really hard on the technology platform. I think that's the driver for our continued productivity increase. And the second is our effective joint marketing program and also our membership -- loyal membership program that's really standing out. Our membership program, I think, differs from a lot of others, and you don't see our -- it's going to take a large amount of members, but our members, I believe, really quality paid memberships, they help a great deal. And so those factors are contributing to the improved profit margin. In terms of the M&A, we are looking for both, and both brand -- complementary brand operator and also geographic area complementary operator. And so we think, with the current market condition, there will be even, I think -- valuation opportunities in that area will be more than in the hot market. So we're working really hard, and we think that -- but we -- even though we have urgency, we know that to grow, but we also want to be disciplined. We're making sure we find the right match with the right team, right philosophy and reasonable price with the right growth plan. So we are applying very disciplined criteria for selecting our partner, the future acquisition partners. And so the numbers, I'm leaving to Jasmine and Selina.

Okay. Of our pipeline of new hotels, we see that about 1/4 of our pipeline -- pipeline of our hotels is in the business to mid-to-upscale hotels, and about 23% are our economy hotels, including our Vatica and the Shell, these 2 brands.

So the balance, I think the business to [indiscernible], so 23%, right, is in the budget category Vatica and Shell.

Yes, exactly.

The next question comes from Jisheng Liu with CLSA.

If I may, I have 3 questions. So number one on the F&M hotel openings. So I see in the press release that you have put a temporary waiver on the Shell hotel during the third quarter of '18. So I'm just wondering what's the reason behind that because, as Alex mentioned, you've put some support to your hotel franchisees, but I will pretty much understand temporary waiver for the initial franchise fee of Shell hotel has pushed towards more accelerating hotel openings. So I'm just wondering if you have continues plan in the future to put that kind of waiver, or if you would even more expand to other hotels, such as Vatica? So that's my first question. The second one is on the L&O hotels. So during third quarter, I've seen that you have got 1 opening of L&O and 3 conversions from F&M. So just wondering what's the rationale behind that, and what's your plan going into 2019? Number three is on, I guess, you guys have also heard about a scandal last week across all hotel industry in China where the cleaning staff are not doing their job very properly. So just wondering if you guys foresee any regulatory issues going into the industry, and if you are going to input even more internal control procedures?

Okay. Thank you for the 3 great questions. First of all, in terms of the Shell hotels, we did have a waiver or delayed payment of the initial application fees. I think those are conditional, and we have rolled out a program because the market there, there are new players -- a lot of new players coming to, they said, different area off a different program, and we want to give our franchisees a sense of comfort and confidence that, in the future, once the performance above the market and above and beyond what they have been operating, then those fees will be paid to us. And because our people really worked very hard to help our franchisees in beginning for the selection during business -- doing the business analysis and the various other design and improvement of -- so we incur work like -- were really different than most other probably LatAm if they stick with budget or budget segment. We do want to provide a comprehensive 360-degree support to our franchisees. So our cost structure is there. So we will collect, I think -- we're confident we'll collect them. And so in the future, depending on the market, we'll want to continue to give our franchisees confidence that we can deliver a better performance. I think that the program will show that. So we enjoy also very, very big support from them. I have personally talked to a few of our franchisees in that categories, and I'm more than pleased with the performance. Secondly, with the 3 L&O hotel conversions, those conversions, we have a few criteria. First of all, the hotel will be located -- is located in a strategic location and, for instance, that the hotels are converted and located in 2 of the Fortune 500…

[Operator Instructions] The next question...

By the way, I'm not reading those from prepared scripts. Anticipate this is conversation. So my English still needs to be improved, so if you see a bad programmer, don't transcribe the way it is and correct it for me.

The next question comes from [ Bruce Mei ] with UBS.

Actually, Selina has already answered one of my questions. And could you please provide any guidance on your closures in 2019? And I want to also doublecheck that, Alex, before you mentioned that, in 2019, you will open around 600 hotels, right. That's right?

That's right. Yes. Next 3 years, we're opening 1,800 for 3 years. So you do the math, but we do a 3-year plan, and so we think that averaging 600 per year.

Okay. And could you, please...

That's opening. On the closure, we have estimated 4% in the past, right around 4%. And we think that next year will not be sharply deviated from that. We still intend the lowest closure rate in the industry due to the profitability of our individual hotel owners. But sometimes, they can drag in further new problem -- creating new problem because when our franchisees are profitable, and they -- sometimes some of them are having less incentive to upgrade. And so we have to work really hard. So this year, we'll roll out the incentive program for those upgrades. But the closure right around 4% plus or minus [indiscernible].

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

Thank you, Anita. 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 visiting us in China, please don't hesitate to contact us. This concludes the call. Thank you all.

Thank you.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.