Hello, ladies and gentlemen. Thank you for standing by for GreenTree's Fourth Quarter and Fiscal Year of 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to hand your meeting over to your host today, Rene Vanguestaine with Christensen. Please go ahead.

Thank you, Darcy. Hello, everyone, and thank you for joining us. GreenTree's earnings release will be distributed shortly and will be available on our IR website at ir.998.com as well as on PR Newswire services. We have 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, Vice President of Sales and Marketing; and Ms. [Ellen Zhao], Financial Director. Mr. Xu will present the company's performance overview of the fourth quarter of 2023, followed by Ms. Zhao, who will discuss restaurant business operations, and Ms. Yang and Ms. Zhao will then discuss financials and guidance. They will be available to answer your questions during the Q&A session, which 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 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. 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.

Thanks, Rene, and hello, everyone, and thank you for joining us today. We had a good and stable fourth quarter in our hotel business and continued to make progress in restructuring our restaurant business. Hotel RevPAR increased 23.3% year-over-year, reaching 110% of its fourth quarter of 2019 level during the October national holiday. Restaurant average daily sales were up 14% year-over-year. We continue to streamline our hotel and restaurant operations to increase efficiency and quality. We are working on optimizing our products and service standard to further improve our brand identity for each of our hotel brands. In our restaurant business, we are focusing on growing our network of franchisees as we expand the number of street stores while reducing our footprint in shopping malls and supermarkets. Now please turn to Slide 5. Compared with the fourth quarter of 2022, hotel RevPAR was RMB 128, up 23.3%, and the restaurant ADS was RMB 5,433, up 14%. Total revenues were RMB 372.2 million, up 3.2%. Hotel revenues reached RMB 289.6 million, up 21.7%. The increase in total hotel revenues was partially due to the continued improvement in RevPAR and the increase in the number of hotels. Income from operations increased to RMB 23.1 million with a margin of 6.2%. Adjusted income from operations, excluding other general expenses, which include the provisions for trademark especially due to the acquisition of the restaurant business, loan receivable related to franchisee loans and impairment of assets, increased to RMB 99.2 million with a margin of 26.7%. Net income was RMB 7.4 million with a margin of 2%. Adjusted EBITDA as non-GAAP was RMB 161.3 million. That's up 2.1% with a margin of 31.3%. Slide 6 shows detailed numbers for total revenue, income from operations, net income and adjusted EBITDA. On Slide 7, RevPAR was RMB…

Thank you, Alex. Please turn to Slide 17. In the fourth quarter, total revenues increased 3.2% year-over-year to RMB 372.2 million. The increase was primarily due to continued improvement in RevPAR and the increase in the number of hotels. Total hotel revenues increased 21.7% to RMB 289.6 million compared to the fourth quarter of 2022. Total revenues from F&M hotels were RMB 162.9 million, up 6.5% year-over-year. While total revenues from L&O hotels increased 48.9% to RMB 125.5 million. On Slide 18, total hotel operating costs and expenses increased 9% year-over-year to RMB 252.2 million. Excluding other general expenses consisting of provisions for trademarks, especially due to the acquisition of the restaurant business, loan receivables related to franchisee loans and impairment of assets, our total hotel operating costs and expenses increased 3.1% year-over-year. Among the total hotel operating costs, operating costs increased 7.6% to RMB 154.6 million compared to the fourth quarter of 2022. The increase was mainly due to higher consumables and higher cost of general managers of franchise-managed hotels due to the increase of our F&M hotels and partially offset by lower utilities. Selling and marketing expenses were RMB 8.3 million. That's a year-over-year increase of only 0.9%. G&A expenses were RMB 49.7 million, down 12.5% compared with same quarter of 2022. The decrease was mainly due to lower staff-related expenses and lower bad debt. Turning to Slide 19. Income from hotel operations increased from RMB 13.3 million to RMB 47.4 million year-over-year. And net income of hotels was RMB 21 million compared to RMB 7.5 million in the fourth quarter of 2022. Adjusted EBITDA increased 82.8% to RMB 107.7 million, and core net income increased from RMB 47.8 million to RMB 61.7 million year-over-year. Next, let me turn the call over to [Ellen], the Financial Director of our restaurant business.

Please turn to Slide 20. In the fourth quarter, total restaurant revenues were RMB 87.7 million, a 29.2% year-over-year decrease mainly due to the close of L&O stores and partially by increase in ADS. You can also see the revenue breakdown for F&M restaurants and L&O restaurants. On Slide 21, total operating costs and the expenses decreased 16.7% year-over-year to RMB 118.1 million. You can also observe the down trend in material cost, personnel costs and rents. Turning to Slide 22. Loss from restaurant operations was RMB 29 million. Net loss was RMB 18.2 million. Adjusted EBITDA increased to RMB 4 million year-over-year. Core net income was RMB 21.7 million. Next, Selina will review the profitability of our group. Please? Yiping Yang GreenTree Hospitality Group Ltd. – Chief Financial Officer Thank you. Please turn to Slide 23. Group net income per ADS that's basic and diluted was RMB 0.11. Group core net income per ADS that's basic and diluted non-GAAP was RMB 0.87. Let's now take a look at Slide 24. As of December 31, 2023, the company had total cash and cash equivalents, restricted cash, short-term investments, investments in equity securities and time deposits of RMB 1,377.1 million. That's compared to RMB 1,331.4 million as of September 30, 2023. The minor decrease was primarily due to investment in property and repurchase of ordinary shares, partially offset by primary -- partly offset by bank loans and repayment from our franchisees. On Slide 25, for the year of 2024, we expect total revenues of our organic hotels to grow 7% to 12% year-over-year, and total combined revenues from our restaurant and organic hotel business to grow 3% to 5% year-over-year. This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session. Thank you.

[Operator Instructions] Your first question comes from Dan Xu from Morgan Stanley.

Congratulations on the fourth quarter result and then also good work on narrowing the losses in the restaurant business. My question is -- I still have not gotten a good time to look at the results in details, but I'm looking at the revenue guidance that Selina just kindly mentioned. Just wanted to check with you, for the full year guidance of 2024 of 7% to 12% for hotel business, what are we factoring in, in terms of drivers from RevPAR and also drivers from hotel opening. And how is our hotel opening plan for 2024? Yes. That's my question.

Okay. Thanks, Dan. The 7% to 12% of the hotel revenue up, it consists of the following factors. We expect we'll continue the improvement of the overall RevPAR but only slightly with the 2023. So the -- that's around 2% or so, the RevPAR growth. The balance of the growth are roughly 10% of the hotel numbers growth because we planned about the detailed number of hotels opened this year, we plan to be about 500. Selina, correct me if I'm incorrect in that number. And then also, we will have a number of hotels in the transition period that, that is -- we have a relatively older portfolio compares with some of the new stores competitor group. So like the last quarter, we have taken down in the last year after the pandemic, many hotels into renovation stage, so then reduced by the renovation stage. Then combined, we have been into a 7% to 12% of total revenue. Okay? So that, Dan, consists of that number. And to further elaborate that, okay, why the -- only 2% of RevPAR over 2023, why not be a little bit more aggressive? Because last year, we've seen the RevPAR increased a lot stronger than 2022 because of the post pandemic and also many, I think, pent-up demand. The Tier 3 cities, where we have a larger percentage, over 73%, the Tier 3 cities, the RevPAR increase, I think, in the higher single digits comparing with a double-digit 15% to around 15% to 13% in third -- in the first year and second year. So we expect that the third tier RevPAR growth to be relatively flat in 2023 compared -- 2024 comparing with 2023. And with more seasonality and up and downs, for instance, we have observed during the holiday season and during the weekend, we see a sharp increase, for instance, during the Chinese Spring Festival in the RevPAR -- in the overall ADR and occupancy but then trended down and also relatively sharply just like in the fourth quarter national holiday and so in balance and they will be trending to be a little bit upward in that than 2023. And we will continue to add new products, and new products has a better identity and can offer more family and leisure-oriented elements. So we will expect a stronger RevPAR increase in the following several years after we complete this transition period. So then that's our assessment to you.

Can I just follow up with one question on the RevPAR? I saw that fourth quarter RevPAR growth versus 2019 was mainly driven by ADR, and also occupancy was still -- although recovered, but still, I think, around 10% below 2019 level, so 6 percentage points below 2019 fourth quarter level. So I'm just wondering, Alex, for your 2024 and if you look at your weekly chart, we are now maybe around 90% of 2019 as of March. Are you seeing this year, 2024, seeing occupancy increase year-on-year versus 2023 but ADR was flat to decline so resulting in this 2% increase? Or you would say is 1% plus 1% both are growing? Just my last question.

Okay. Thanks, Dan. The 2 actually are interrelated. If we lower the ADR, then the occupancy will be increased. So on balance, there is an optimal rate, but we do not know what’s the optimum – the best strategy of achieving the optimum RevPAR increase. However, we – this is our plan. We plan to have a slight increase of the ADR, but the occupancy, we expect to be relatively stable. So we would like to increase the run rates. And then so we expect that most of the growth should be the ADR. And then once the ADR reach certain levels, then we’ll try to then further increase occupancy. The occupancy -- some of the occupancy is resulted from the seasonality and also, I said, the sharp up and downs in the balance, the travel pattern for the – at end of 2023 to 2024, we find that there is a little bit higher trend in terms of holiday and leisure and family-related travels. So that’s more seasonal than the constant demand for the business travels, so which also resulted in a blended relative – a little bit lower occupancy. So our internal projections to be on the RevPAR – the increase primarily result is from ADR.

[Operator Instructions] We have a follow-up question from Dan Xu from Morgan Stanley.

I have another follow-up question on the hotel opening. Just wondering, for management, what's the plan for your leased hotel, the L&O hotels for 2024? Do we still have hotels in the pipeline? And are we still continuing to build net additions in leased and owned hotels?

Okay. Dan, as we previously stated, we will only build the L&O hotels in the key like Tier 1 and the transportation hub at the showcase hotels. Currently, I think there is – we plan 1 to 2 showcase L&O hotels for our flagship brands such as GreenTree and the GreenTree Inn. So there is a single-digit numbers there. And currently, we’re evaluating and we are still focused on continue to grow our hotel in the franchised and managed. That is our core competitiveness and strength. So let me elaborate our overall business strategy again in light of this question. 2023 is a transitional year. I think that we, in the past, we try – we have evaluated the potentials for acquisitions and growing of the business with many different approaches but that – with also many more brands. And now with the COVID and post COVID and we have transitioned into focusing more on the traditional and fundamental approach to the hotel operations, the hotel management. That is – our objective is to deliver a consistent service and products to our customers. And we need to upgrade our little bit aging portfolios. So we have taken a larger number of hotels and giving our franchisee 6 months and most of the time, to almost 1 year time to renovate to a newer standard, which we find that we can substantially then increase the ADR occupancy and therefore, RevPAR. And we’ll continue to build our team to be more proficient and more efficient in both their career growth and their productivities and delivering a consistent service quality to our customers. And then thirdly, we will try to implement and upgrade our existing technology platform to incorporate the new features, especially some of new applications in the technology industries to further…

[Operator Instructions] Your next question comes from Simon Cheung from Goldman Sachs.

I have three quick questions. Just on your Slide 8, where you laid out the leased and owned and the franchised RevPAR performance individually, I can't help to basically observe that the leased and owned restaurant performance is much stronger than the franchised. So when -- Alex, you mentioned that you're modeling or expecting a 2% RevPAR growth, just wondering that, obviously, the franchise exposure is going to keep increasing. The weaker performance of the franchised, RevPAR performance, would that be -- any way that would drag your overall RevPAR performance 2 percentage point? On an individual basis, let's say, just from your observations, are you seeing any possibility that the franchised are starting to do better? Just generally wanted to get a sense how you're thinking of the respective segments and the equity overall. That's the first question. And then the second one is in relation to the profitability of your both business. Great to see you do have some leverage in the last 1 to 2 quarters. But wanted to -- and you also mentioned some synergy benefits between the 2 business. Can you just briefly chat about how you're seeing the margins in the -- maybe in the medium term for respective business maybe in a 2-, 3-year time? And equally, just also wanted to get a sense how you're thinking about the top line growth or the -- actually, the number of hotel and restaurant because, obviously, for restaurants, for example, you already reduced your restaurant count quite significantly over the last 1 year or so. Just -- and then that hotel count 4,000s, is that some medium-term target that you have in your mind?

Okay. Great questions. The -- I will leave the third question to Selina about the restaurant business revenue change because the restaurant business, the revenue has a sharp drop because we have closed many direct owned, leased and operated restaurants due to the impact from the traffic -- lower traffic to the shopping malls and the supermarket anchored malls. So even though the number of restaurant, the segment changed, and we have a little bit increased number of franchised and managed restaurants, while the number of directly owned dropped, but the impact to the revenue was much larger. But going back to the first question, leased and operated and the franchised, the RevPAR trend, as we have said earlier, we built the leased and operated at the showcase hotels. So naturally, with the showcase hotels, they tend to perform the -- ADR-wise, which has a service element, more complementary services to the family, to the businesses. So as a result, the ADR has been improved much higher than the balance of the larger base of franchised restaurants -- franchised hotel. But we do see that trend will be probably similar because many, many franchised hotels are going through the renovations. Once -- after the renovations is done and the ADR -- we expect the ADR will grow at the same level. And we -- our focus and the strategy right now has been focusing on the ADR-driven growth strategy because you have and -- you always have an option of lower your price a little bit, increase the occupancy and thereby, taking the higher -- a little bit different market shares resulted in an increase of the same level of ADR but with -- RevPAR. But with ADR increase, I think we have more room and a better potential and…

Simon, could you please repeat the third question, which we think had to do with L&O hotels versus F&M going forward?

No, my third question is actually more related to, broadly speaking, the number of hotels now you're running at slightly over 4,000 and restaurant over 200 now. I did hear that you have a hotel target additions, 500 for this year but more like in the medium term. Do you have any target in your mind in terms of the outcome for both respective segments?

Okay. The -- Simon, that -- our ambition and plan and -- is always that let's build the fundamentals. Then, we'll build a growth plan that's compatible with our current resources with the -- so that we can continue to improve our brand standard and brand identity. And so we plan, internally, the next 3 to 5 years and continue to grow our hotels by the numbers, by 10% to 15% per year. And slowly, hopefully, after we build a stronger fundamental, build a stronger base, we can even further accelerate it to growth. But right now, because we have a number of issues experienced and lessons we have learned through the past M&A, which also resulted in some of the legacy problems that also consumes our internal resources to restructuring those kind of businesses and also to restructuring the restaurant and making sure the restaurant has a robust logistics system support to grow the franchised and managed models. And we -- the hotels landscaping is very clear, and the restaurants, we're still getting a -- trying to learn the lessons and patterns of our strengths in which area, such as community store, the street-front stores and also the high-traffic areas such as train stations, subway stations. And so once we have firmly built a profitable, robust business model, then we will grow more quickly. So that's our -- the next midterm plan.

Sorry, I haven't looked at the numbers yet, but then the restaurant, are you done with all the closure? Do you feel that your hotel -- your restaurant count is pretty much bottom and likely going to steady at least in the coming quarters?

Sorry, Simon?

Number of restaurants [indiscernible].

That is correct. The -- right now, with a substantial completion, I think the restaurant reorganization is substantially completed. And so now, we can focus on instead of closing or transitioning working -- restructuring of the unprofitable stores, that now we can focus on growing the franchised, the more profitable stores. The legacy issues of the restaurant side, Simon, has primarily resulted in, I think, some of the locations are -- had a higher rent and continue reducing the traffic, reduce the traffic. And so it's more challenging and -- to stay profitable even after our staff put in more efforts. And so those restaurants, we have already closed, substantially closed. So we do -- we will expect the -- a number of restaurants and we're also growing but albeit initially, I think, slowly because, as we stated, the pattern and the system are still emerging. And the restaurants -- the competition in the restaurant is stronger than we originally estimated and expected. And so we do not know the trend will continue, but we still think that the restaurant business, I think, will be more -- has more characteristics and challenging than the hotel business.

If I may just get a very final follow-up question, just you mentioned number of hotels that you're planning for some upgrades. So out of your 4,000 aged hotels, how many of them are going to offer upgrade? And your receptive -- receptions of -- by the franchisee, how are they willing to take -- indeed do the upgrades when you compare to your assessment of the entire portfolio?

Right now, about half. I think that my last numbers came in about half of them are in the renovations. And I think another half, we expect them to be completed in the next 2 years, next two to three years.

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

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

Thank you.

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