Ladies and gentlemen, thank you for standing by, and welcome to the Huazhu Group Limited Q3 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today’s conference call is being recorded. I would now like to hand the conference over to your first speaker today, Ms. Ida Yu. Thank you. Please go ahead.

Thank you, operator. Good morning, good afternoon, or good evening, depending on where you are in the world and thanks to all of you for dialing in today. Welcome to Huazhu third quarter 2019 earnings conference call. Joining us today is Mr. Ji Qi, our Founder, Executive Chairman; and CEO, Ms. Jenny Zhang, our Executive Vice Chairlady; and Mr. Teo Nee Chuan, our CFO. They will review our strategy and the Q3 results. Following their prepared remarks, management will be available to answer your questions. Before we continue, please note that the discussion today will include forward-looking statements made under the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. Huazhu Group does not undertake any obligation to update any forward-looking statements, except as required under applicable law. On the call today, we will also mention adjusted financial measures during the discussion of our performance. Reconciliation of those measures to comparable GAAP information can be found in our earnings release that was distributed earlier today. As a reminder, this conference call is being recorded. The webcast of this conference call as well as supplementary slide presentation is available in the Investor Relations section of Huazhu Group website at ir.huazhu.com. Now I will turn the call over to Mr. Ji. Ji Qi please?

Hello, everyone. Today I’ll share of Huazhu's long-term growth path with you from my perspective as a company Founder. Building a world-class hotel company has always been in my mind. I will also be thinking of what steps are required to get there. I think that our current plan typically follow a curved line progress in growing a publishment to growth to maturity and often to decline. How do we avoid this or to common decline? My view is that when the curve begins pointing downwards you have to find a new function, a new power and new direction till the curve takes off again. For the curve would continue it's up and sustainable, the company must process robust innovative capability and resilience. Our company, Huazhu Group, will be world-class global company only after it has reached sufficient scale and strength in geographic areas also outside China. On slide two similar to the wave principle, as I've just mentioned, I separated Huazhu's historical hotel group result part into four big waves. The first wave started back in 2005 is our HanTing brand. Now a leading economical brand serving vast majority of the Chinese population. With the increase in core capital portfolio income, we are well prepared for the next wave with our midscale hotels. Back in 2010, we started to develop the JI brand as the pioneer for the midscale hotel segment. It took a number of years for us to establish JI brand awareness. But by 2015 we had a profitable JI brand business and also reasonable scale. I still remember there were a lot of concerns from our private investor section, questioning our brand to develop this midscale hotel brand. They will worry about uncertainty for this new midscale segment, because of their negative impact on our company'…

Thank you, Qi Ji, and hello to everyone. Please now turn to slide 8 and let's review Huazhu's three areas of strategic focus this year. First of all, we are continuing the rapid expansion of our hotel network. Secondly, we are focusing on innovative technology applications to improve the guest experience and our operational efficiencies. Third, the strategic deployment in our Upscale hotel segments. As we turn to slide 9, note the lighter blue bars on the left, shows strong acceleration of our hotel openings during Q3. With more device hotels opened every day triple that of Q3 2018. Among the net increase of 486 hotels in Q3, 46% was contributed by our soft brands. We are delighted to see our reacceleration of soft brand start to bear fruit. In the first nine months of 2019, the darker blue bars on the right showed that we added 921 net hotels about 200% year-over-year growth. As we expect future hotel expansion to accelerate, given our strong growing pipeline as shown on page 10. We have a pipeline of 1,736 in hotels, equivalent to 34% of our hotels in operation. This ratio has improved from 23% at Q3 last year. The strong growth is mainly attributed to franchise and manachised business, which was 97% of our total unopened pipeline. Technology is essential for Huazhu's sustained growth. Today, I would like to share some remarkable achievements with Huazhu. First of all, on Page 12, on Page 11 our loyalty program continued to increase and reached 139 million members by the end of Q3 2019. It represents a 46% CAGR from year 2011. Secondly on Slide 12. The advanced booking through our online travel reservations contributed about 40% of our total room bookings. More than 45 million people downloaded our Huazhu's smartphone app, 45…

Thank you, Jenny, and hello, everyone. We are very excited to report our third quarter results, with double-digit growth in our number of rooms, net revenues and EBITDA. As shown on slide 27, at the end of Q3 this year, we had a total number of 504,000 rooms, an increase of 23% from the end of Q3 2018. Total turnover at hotel level, reached RMB 9.9 billion, an increase of 19% from a year ago. Our net revenues increased by 10% from RMB 2.8 billion to RMB 3.1 billion in Q3, 2019. Our adjusted EBITDA stood at RMB 0.9 billion for Q3, 2019 as compared to CNY 1 billion in the third quarter last year. However, the pro forma adjusted EBITDA would have been RMB 1.1 billion or 36.3% of net revenue in Q2 2019, if excluding the impact of our significant investment in development teams, upscale brand hotels, IT capabilities and foreign exchange loss related to our investment in Accor shares. Our investment in development teams have started to be reflected in our increasing pipeline hotels was our investment in IT has begun to reward us by the increasing share of online central reservations and online payments, which will help to drive our sustained future growth. Please now turn to slide 28. In Q3, our blended RevPAR dropped by 0.8%. The ADR grew by 2.6% contributed by an increasing mix of mid and upscale and upgraded hotels with higher ADR. However, the higher ADR was offset by a 3 percentage point decrease in occupancy. Lower occupancy was largely attributable to the softer macroeconomic environment. Turn to slide 29. Our same-hotel RevPAR declined by 3.8% in Q3. Our ADR dropped by 1.1% and our occupancy decreased by 2.5 percentage point’s year-over-year, mainly attributable to softness in macroeconomic conditions. RevPAR growth…

Ladies and gentlemen, we will now begin the question-and-answer session [Operator Instructions] Your first question today comes from the line of Tian Hou from TH Capital. Please go ahead.

Good morning, management. I have a few questions. One is in China this year one of the main theses is to go lower [indiscernible]. So I'm wondering if this thesis is applicable to Huazhu or not? That's number one. Number two, for the hotels we're planning to open next year, how many do you expect are going to be the least self-lease and operated? So that is one question. And also related to this new hotel opens. We already have more than 5,000 hotels. And as related to Hi Inn [ph], so what are the challenges for the management you guys envision you're going to face? That's my question. Thank you.

Hi. I think I will answer the second question and how many leased and operated hotels to be opened next year. And then I'll leave the other two questions to our Chairman, Qi Ji. Next year-over-year, we plan to open approximately 1,700 hotels, of which 25 of which is leased and operated and the rest is a manachised hotels.

[Foreign Language]

Hi, I will translate the answers of Mr. Ji, to your first question, in order to reach 10,000 hotels in the next three to five years, going down to the lower-tier city is inevitable, and it's -- we must go down first. The top management team and also the key members of development team has down three times grassroots survey in the three cities -- in the three trips in the Northwestern part, Central part and East part of China, and the feedback is very positive. We are confident that our flagship brands like HanTing and JI Hotel and also some soft brand hotels who have very positive return -- of all of the soft brand hotels, we have a very positive return in these low-tier cities because, first of all, lack of the good quality products in those cities. So, the second is that the rental cost is very low in these cities. So, we could provide really good product with more spacious area in the cities. And we believe the upper Midscale and Upscale brands like Crystal Orange, like Joya and others will follow the later steps of the JI Hotel and HanTing after these two brands fully established in those areas.

[Foreign Language]

Okay. So there are two folds of our answer to your questions. First of all, hotel is actually a very labor-intensive work. And as we develop larger and larger, there's a -- we're going to manage like more than 10 -- sorry, 100,000, even 200,000 people. So, therefore, we're going to improve our technology and reduce the reliance of the people by providing more cloud-based, for example, PMS, AI technology and other et cetera. It is not only just a reduced reliance people. It is also important to improve the efficiency of their work, help them to make a better and savvy position based on the daily work. That's one fold. The other fold is that is actually hotel is a human business, talking about the client service. And it's very important that we give enough caring and respect to our associates and creates a very good working place for our employees. So therefore, we're going to strengthen our development in coaching and career development and also all the -- sorry, the -- all the other kind of facilities to provide a better workplace, for example, the dormitory and also the uniform and all kinds of related to this to our people.

Thank you. Thank you for the answers.

Your next question comes from the line of Ken Chong from Jefferies. Please go ahead.

Hi, management. Congratulations on the strong results. I've had a few questions. First is on the hotel operating guidance next year, I just want to get a sense on also the net hotel cluster next year. And also, will we still emphasize on soft brands next year? And how many of them carry as are going be from soft brands and if there are any margin different from our hotel portfolio? The second question is regarding the acquisition of Polish Hospitality. I understand most of the hotels are in the lease and operate model. And they have a meaningfully lower EBITDA margin than our group. I'm just wondering how would this impact our margin next year when we consolidate? And also, when they have 36 hotels under the pipeline, how would that impact our opening? Thank you very much.

Hi Ken.

Hi.

To answer your first question is on the guidance on the closure, we expect that the closure will be approximately the same amount of the number of hotels in this year. I think you'd be in the range of approximately like 300 is number one. Number two is that, of the 1,700 hotels that we're opening approximately like 500, which will be in the soft brands. The take rate is actually lower because this -- we are in the face of developing and building a scale to study kind of soft brand hotels. So we do not expect that the net profit contribution from this hotel will be significant in the coming year. And only until that we view a certain skill, I would say that in the next few years that we start to see a more meaningful profit contribution from the soft brand hotels. Regarding -- your second question is for Deutsche Hospitality. Approximately, right now, there are more than -- 62% of which are actually leased hotels. So I would say that going forward is currently our new opening guidance of 1,700 hotels does not include the pipeline of Deutsche Hospitality yet. So we would need to actually -- after the closure, then we will actually see the -- how come we will incorporate the numbers in the next year's guidance. And the second question is about the Deutsche Hospitality margin is that, yes, the Deutsche Hospitality have actually a lower EBITDA margin compared to Huazhu. But having said that, what we have been -- is that we update in corporate numbers is that our EBITDA margin will very reduced, but having said that, it is -- we are talking about an increasing EBITDA that we are talking. And I would say that, if you look at it from a separate perspective, because we think that there is a significant potential and synergy, as mentioned by Jenny earlier, we will bring in the brand into China for fast expansion in China, and also that we would actually export some of our technical capabilities and loyalty programs to help them to improve their operating efficiencies in their home base.

Okay. Thank you very much.

Your next question comes from the line of Justin Kwok from Goldman Sachs. Please go ahead.

Hi. Good morning. Thanks for taking my questions. Perhaps, I got two questions for Mr. Qi. The first one is about -- well, very exciting to see you spend more time in the front line on the company. What would be a strategic focus for you in the coming one to two years? What exactly do you want to achieve as you take on more management duties on a day-to-day basis? And the second thing, it's also very interesting to see you getting more brands on the upscale side with DH acquisition. From the overall brand portfolio point of view, are you now quite happy with what you're having, which is already over 20 brands? Or do you think that in the next one to two years, you are still on the acquisition for more brands, as a focus? Or are you actually more looking at the M& A angle for you to expand into overseas? And just two questions. And then another question, probably more near term, as you give out a bit more guidance in 2020 on your opening, what would be the sense on the RevPAR side on the same-hotel basis. [Foreign Language]

[Foreign Language] Let me now answer the question on our outlook on RevPAR. I will say that, at the current stage is that we -- I would say into Q4 is that -- and we see that, the trend is actually quite similar when compared to Q3, where we would see that there was still some softness in occupancy, due to the slow in business, and we haven't seen a recovery yet. And I will say that there was a lot of talk about government who's things as well as the tolling of the China-U.S., kind of, trade war. But having said that, as I mentioned in the earlier conference call, there is always a flip flop between the response from the U.S., where recently, the Trump administration has also heightened up some of the conflicts again. So this may have a negative impact on the Chinese economy. But having said that, you expect that the RevPAR trend going forward to be approximately maybe flat, I would say, either flat or maybe may move down, slightly down to the slightly negative territory in the coming 12 months.

[Foreign Language]

Okay. So as we all know, there are a lot of certainty rising in the past one year, no matter the U.S.-China relationship also a lot of change in domestic U.S. and also what's happening in Hong Kong recently. That's one shot at the international geopolitics environment. And then the second is in the business segment of travel industry, BAT is very active as well as OTA and also there's an emergent entrants called OU. So there's a lot of things happening. And so that's created uncertainty of our business environment. Facing this situation, while I didn't spend enough time previously in the past years at the front line, but we realize, considering all the external factors it is important for me to take the CEO role and enhance our management capacity at the top level together with Jenny. And meantime, we will also bring more young and broad of Huazhu to create the environment and the opportunity for them to contribute to the next development of our company as well. And coming back to your question. First of all, the focus of the next two years, we think right now, it's a kind of downturn, overall macro-wise, it is a challenging external environment. But usually, winter is the good time for the strong players. We think our capabilities in loyalty program management capability as well as the IT system will help us to enable more and more individual hotels help us to connect and build a more chain effect in this industry. So we think we could help the entire industry to go through this cycle better and create a more resilient industry. And also, we have a lot of employees, like 200,000, 300,000 employees who are -- lead a very average life and who didn't have the chance…

Your final today comes from the line of Lina Yan from HSBC. Please go ahead.

Hi thank you. Thank you management for taking my question. Like, I very much agree with the Chairman's comments that you have to continuously involve in the new business drivers for the business. So, I still have a question regarding the DH acquisitions. Huazhu's share has enjoyed a premium valuation versus your peer hotel operators in China because investors like your asset-light model and also, you have been focused on the limited service formats. When -- after you like acquired DH, how can you make sure like the DH asset is not a drag on your total return on invested capital? Specifically, when you talk about the plan to bring their upscale brands into China, I'm wondering what kind of positioning you are thinking about? Are they going to be like the full-service hotels normally for luxury brands or it's kind of like -- it will be a similar type like Joya, like a limited service version in China? Thank you very much.

[Foreign Language]

This question is about the brand of the DH. So, first of all, there are two major brands under this DH platform, one is the Steigenberger. It's a legendary story brands in Germany from the 4-star, 5 Star in the luxury segment. For example, there's the World Economic Forum, there's a leading comfort value is in the Steigenberger hotel in Davos. There's another brand called Intercity. It's a 4-Star hotel as well. It has a relationship with the Deutsch Railway. And our positioning for these two brands is the following: The Steigenberger will be a standard 5-Star hotels, tailored for management contract, and it will be a full service hotel rather than limited service. And typical clients will be government and real estate – sorry, real asset developer. And Intercity is more like a 4-star hotel and for business occasions, it can be full-service and sometimes limited service. This brand will probably will develop faster than the foodservice Steigenberger. And in general, we think the China's development of these 2 brands will be fairly quick. And we anticipate the growth will -- sorry, the site will exceed Germany in the midterm probably. Okay, operator.

Thank you, ladies and gentlemen. That is all the time we have for questions today. Today's conference call has now concluded. Thank you for participating. You may now disconnect.