Ladies and gentlemen, thank you for standing by, and welcome to Huazhu Group Limited First Quarter 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. And I would now like to hand the conference over to Huazhu Group. Please go ahead.

Thank you. Good morning, and good afternoon or good evening depending on where you are in the world, and thanks to all of you for dialing in. Welcome to Huazhu First Quarter 2020 Earnings Conference Call. Joining us today is Mr. Ji Qi, Founder and Executive Chairman of Huazhu Group; Mr. Jin Hui, Huazhu China CEO; Ms. Liu Xinxin, Chief Digital Officer; Yunhang Xie, Chief Strategy Officer; Mr. Teo Nee Chuan, CFO; and Ms. Ye Fei, VP of Strategic Investment. 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 provision of the United States Private Security 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 laws. 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's website at ir.huazhu.com. Now I will turn the call over to Mr. Qi. Mr. Qi, please.

Good morning, everyone. I would like to start by sharing my thoughts on the industry recovery. Instead of a V shape, the recovery is more like a tick shape due to the wide spread of the COVID-19 and resurgence in some place like Beijing. In China, our recovery is in place with the lifting of traveling rejections and other preventive measures. Although the second wave in Beijing is set recently, the possibility of a massive spread is low. We see continued improvement of hotel occupancy under RevPAR. In Europe, Germany is relatively ahead of recovery. Recently, Germany and some European countries started to stop the land border checks and have removed travel restrictions, which will further boost the recurring of lodging industry there. About 80% of DH hotels housing reopened. Local markets have a faster recovery, as we can see on Page 3, based on Huazhu's number in 2020. Room nights sold to local market as a percentage of room nights available has reached the same level as last year and even exceeded slightly. While the room nights sold to nonlocal market as a percentage of room nights available is still catching up. This is also thanks to our strong local sales team. Everyone in this industry is affected. Companies of new business models are under more pressure due to the nonstandard products. International hotels in China are affected more because of the international travel restrictions. This COVID-19 pandemic is a greatest challenge and also a test to the lodging industry. We are restructuring our organization, mainly in the following 4 areas on Page 5. First, streamline our head office by combining departments and reducing headcounts. Head office becomes a platform, which provides services to different business units and regions. Second, decentralize the organization. A dedicate respond probability to regional office and people at the front line; third, build a formal talent program to change and retain young people and give them more opportunity to grow. Fourth, set up Huazhu China for China business and the Huazhu Group for International. China is our home market and the most important market. We will use Singapore as a place for international expansion. Now I will turn the call to Hui. Hui, please.

[Foreign Language]

[Interpreted] Hello, everyone. I'm Jin Hui, the CEO of Huazhu China. Before we start to share about our thoughts about the strategy in 2020, I would like to review our hotel recovery in China.

[Foreign Language]

[Interpreted] So after the worst first half of February, since the second half of February, we already started revamp -- reboot our team very quickly. In order to make sure the safety of our staff members and also the guest, we try to keep the hotels as -- open as soon as possible.

[Foreign Language]

[Interpreted] By second quarter, 97% of our hotels has resumed operations. Due to the preventive measures and the border control by the government and also the second wave of the COVID-19 in Beijing, by June 29, we still have 157 hotels under government requisition.

[Foreign Language]

Meantime, our occupancy rate is also on the trajectory of recovery. Please refer to Page 8.

[Foreign Language]

[Interpreted] During the week of June 14 to 20, the average occupancy of our operating hotel has been back to 74%. Meantime, this number reviewed by STR China is 47 of the industry comps. So [Audio Gap]

[Foreign Language]

[Interpreted] The resurgence of COVID-19 in Beijing since June 11 did have a negative impact on our operations. However, we also see the Chinese government took very thoughtful, quick reaction to this situation. Therefore, we keep very cautiously optimistic.

[Foreign Language]

[Interpreted] On Page 9, it shows the recovery curve of our RevPAR. It is -- it actually means the same-hotel RevPAR in 2020 as the percentage of 2019. It reflects the comment Chairman Qi just mentioned, the tick-shaped recovery. By the 28th of June, our RevPAR of the same-store has been back to the 65% of last year.

[Foreign Language]

[Interpreted] Next, I'm going to shed the light on the strategic directions of 2020. There are major 3 areas.

[Foreign Language]

[Interpreted] So the first one is the accelerated quality hotel expansion. Second is build the multidimensional direct sales capability. And third, is build the global technology-based shared service platform. The President of Huazhu China, Ms. Liu Xinxin, is going to join me to share the 3 major strategic points with us in the next few slides.

[Foreign Language]

[Interpreted] Talking about the growth strategy of our stores. Looking at the chart of the hotel pipeline, we can see, even with the COVID-19, the pipeline by the first quarter still keep the same level as last year, slightly over last year's number. And also in the pipeline structure, there is a clear trend of the further penetration into the lower-tier cities. In terms of segment hotels, majority of our hotels are still in the economy and mid-scale segment, which is more resilient and profitable. But in the upscale and mid-upscale sectors, we-- our pipeline remain strong as well.

[Foreign Language]

[Interpreted] On Page 12, we compare the new signing of hotels from January to May of 2020 versus 2019. You can see the number is almost the same level as last year. Therefore, it shows the strong confidence from our franchisees in us.

[Foreign Language]

[Interpreted] So why do franchisees chose us? There are major 4 reasons. First of all, the consolidation and the further penetration of chain hotel is inevitable. Joining the chain can help our franchisees to further smooth the market risk. Second, Huazhu is quite famous for the high operating efficiency and low-cost structure, therefore, translating to higher profitability. This is even more evident in the COVID-19 and downward macro economy. The franchisees have cared more about the cost and efficiency. Third, Huazhu has very strong membership system with in-house volume. Therefore, it's going to bring very strong and stable customer flow to the franchisees. And lastly, and most importantly, I would like to say Huazhu's organization is very nimble and has very strong agility, responded to the COVID-19 very quickly and adaptable. Therefore, our franchisees' reliance is further strengthened through this COVID-19.

[Foreign Language]

[Interpreted] Besides the pipeline situation, I would also like to share with you our development in the upscale sector.

[Foreign Language]

[Interpreted] Our in-house brand, Joya and the Blossom House, have enjoyed very good recovery, above industry average. Compare the occupancy number versus the upscale sector of STR's comp, the occupancy of Joya and Blossom Hill is ahead by 20 percentage points. This is also -- for example, take Blossom House as example, because the travel restriction for international markets, resurgence of the local market travel really drives the performance of Blossom Hill.

[Foreign Language]

[Interpreted] Except for our Chinese type of upscale brand like Joya and Blossom House, we're going to also bring the upscale brand of DH into China. In the very soon future, we will see the 3 brands hotels launched in China, including Steigenberger, IntercityHotel and MAXX.

[Foreign Language]

[Interpreted] Now I'm going to turn the microphone to Liu Xinxin and she's going to share the strategy in marketing and sales. Thank you.

Thank you, Jin Hui. Good morning, everyone. I would like to share with you about our strategy focused on multi-dimensional direct sales. Let's turn to Page 14. Huazhu has demonstrated strong online direct sales capabilities, particularly during the COVID-19 outbreak. Due to the pandemic and travel restrictions, online customer bookings declined significantly. Contributions from online travel agencies of our total bookings also decreased. As of May 2020, customers booked through online travel agencies was still 4 percentage points lower compared to last year. On the other hand, customers that book through Huazhu on Central Reservation recorded a sharper rebound, much stronger than the OTAs. As of May 2020, contributions from Huazhu's own Central Reservation exceeded the 2019 level. We also take this opportunity to further strengthen our offline direct sales capabilities. Please turn to Page 15. Our efforts for offline direct sales were channeled through our local on-site sales as well as through our corporate sales initiatives. As Ji Qi mentioned earlier, local travel market recorded a faster recovery during this pandemic. For local sales effort, we work to establish relationships with the local community, local government, local enterprise located within certain geographic radius around our hotels. On the other hand, corporate sales initiatives focused on establishing the relationship with our corporate customers, we customized our sale products to meet the needs of customers with different lodging needs. We also created direct booking and settlement IT solutions that can be connected to our B2B corporate customers, all these automation systems are up. These solutions enable our corporate customers to book easily based on their staff, different travel budget level and also the ease of monthly settlement directly with the company, combining hundreds of hotel bills into 1 single payment per month. The number of our B2B corporate customers grew to…

Thank you, Xinxin, and good morning, everyone. As shown on Slide 20, at the end of Q1, we had a total number of 5,953 hotels with 575,488 of rooms in operations, an increase of 31% from the end of 2019. Excluding the 115 DH hotels at the end of Q1, legacy Huazhu recorded a room inventory growth of 26%, with 552,352 rooms at the end of Q1. As mentioned by Jin Hui earlier, the COVID-19 pandemic has a significant impact on our China business since January '20, and started to impact our DH business in Europe from early March onwards. In order to contain the spread of the pandemic, government in both China and Europe imposed strict social distancing measures and travel restriction, et cetera, that caused a decline in our hotel occupancy. Our system-wide hotel turnover recorded a 32% decline from CNY 7.2 billion in Q1 last year to CNY 4.9 billion this year. Excluding DH, Legacy Huazhu hotels turnover would have declined by 49% in to CNY 3.7 billion. We will have a separate discussion on our blended RevPAR for Legacy Huazhu and DH because the pandemic impacted these 2 regions at a different timing. Turn to Page 21. Our blended RevPAR for Legacy Huazhu, excluding hotels under requisitions, declined by 58% to RMB 75 in Q1. The ADR decreased by 15% to RMB 189, and our occupancy decreased to 40% from 81% in Q1 last year. As mentioned by Jin Hui earlier, our weekly average occupancy has increased to 74% during mid-June before dropping to 34%, following the resurgence of the COVID-19 cases in Beijing. With the recovery of RevPAR in China, we are glad to report that we have recorded a positive EBITDA in May. Turn to Page 22. DH recorded a small growth in blended…

[Operator Instructions] The first question we have is from the line of Justin Kwok from Goldman Sachs.

Perhaps I'll start with 2 questions. The first one is about the recovery path of your operations in both China and also in Europe. I guess we already just finished the calendar of Q2, and then we're now just stepping to the Q3. So can I get a sense on what are you looking at in terms of the target for both the occupancy and also the room rates into the end of Q2 or into Q3, what are you looking at? That's the first question. The other question is about Mr. Qi's earlier comments at the beginning of the call that you look at the industry, you have noticed a very fast recovery of the local market demand when compared to that of the same city market demand, and also the challenge that you have already seen for the new business model and international operators in the market. So with that in mind, how would you look at -- how would you derive your upcoming new product openings or your product setting in view of these 2 market phenomenon?

[Foreign Language]

[Foreign Language]

[Interpreted] Okay. Hi, everyone. Jin Hui. I would like to comment on the recovery in China first. In our slide, you can see that actually the recovery trajectory is healthy. In Q2, the RevPAR of 2020 has already reached 65 percentage of last year. So it's a push curve of the recovery.

[Foreign Language]

[Interpreted] We have to say that the resurgence of the COVID-19 in Beijing does have a negative impact on our operation.

[Foreign Language]

[Interpreted] We keep cautiously optimistic about the future operation because the uncertainty of the COVID-19. It depends on -- it highly depends on the government's counter measures.

[Foreign Language]

[Interpreted] Our government took very thoughtful measures to counter the Beijing resurgence of COVID-19. Therefore, we're generally positive about the outlook of our RevPAR recovery. Our estimation is that by Q4, our RevPAR will reach around 85 percentage of the last year's operation.

[Foreign Language]

[Interpreted] And our government is also -- took a different preparation in order to contain this COVID-19. We are very confident about our government's reaction.

[Foreign Language]

[Interpreted] Having said that, there is also a chance of resurgence of COVID-19 in some areas of China. However, we are prepared for that kind of situation.

[Foreign Language]

[Interpreted] Okay. I would like to comment on second question by Justin and then Qi may talk about the DH later. So you may find this through our previous reporting, we invested in companies something like OYO and Ni Hao, which is like the aggregator of nonstandard small hotel. This type of business model is under extreme test of COVID-19. It is much harder for the nonstandard product to take off in China. Therefore, first of all, we stick to our hard brand standard. Second, even when we launch our soft brands, we have very specific product standards and which might involve certain level of renovation of the hotels. It's not a pure aggregator of the hotel. Although the COVID-19 has a very negative impact of -- but we still keep a very strong devotion and investment into the product development.

Justin, to answer your questions on Deutsche Hospitality, let me just recap that. In Europe and in Germany, the COVID-19 started to impact on the -- in that continent as well as our business in Europe, starting from early March. And in March -- at the end of March and in the beginning of April, the cities was too badly hurt. The fact is that we have closed down approximately -- our hospitality -- more than like 90% of hotels during that period. But since then in Germany -- but the government in Germany has taken a very swift and very decisive control on -- to contain the pandemic. And I will say that by the end of June, we have seen that we have reopened approximately like 91 of our hotels or 79% of our portfolios. And our occupancy has like rose from the lowest point of like 13% to 23% at the end of June as well. And the RevPAR also rose to like EUR 23 as well. And while we will -- we have been cautious about the growth -- the recovery going forward, as we experienced in China is that the pandemic may reemerge in some of the areas that is least expected. But the Germany government has been taking very strict actions in restarting the economy as well while also taking into account of the protection measurements to prevent the second reemergence. Having said that, is that -- I would say that in Q2, is that the impact on our Europe business is it will be a low point. And based on the experience in China, we expect that the recovery in occupancy in Europe will start to recover in Q3, particularly in -- during the summer and going to the autumn. With that, is that -- the Europe reopening is still at the very beginning stage is yet to be seen -- and to see how the different countries in Europe are working together to contain the virus together. Because in Europe, all the countries, there are many countries that are connected to each other.

The next question we have is from the line of Billy Ng from Bank of America.

I also have 2 questions. And the first question is more like the follow-up questions of Justin's regarding to the recent trend and we noticed that the RevPAR after the Beijing's small outbreak, decline again -- or decelerate a little bit again. But it has been about 3 weeks now. Have we seen that trend stabilize and we see a recovery of that trend and reacceleration of that trend? Or is it still kind of decelerating as of right now? And also, how does that compare the situation outside of Beijing? Have you seen traffic pattern change a bit after that outbreak outside of Beijing as well? And then my second question is about -- on the cost side. I noticed that like the -- in Q1, the overall EBITDA decline is higher than the revenue decline, thus, suggest that cost is increasing. And I understand you explain a little bit of -- there are some one-off items. And -- but can you tell us a little bit more how much of the one-off items impacted 1Q? And what should we expect in terms of second quarter when we forecast the cost? Is it still kind of increasing? Will some of the accrual happen in 1Q actually will be -- will not be better in the second quarter? Yes, those are my 2 questions.

[Foreign Language]

[Foreign Language]

[Interpreted] Beijing is probably the most important business and tourism center city of China. Therefore, it has the impact of the outflow of the travelers from Beijing. The occupancy in Beijing remains at a low level, therefore, because the government has imposed very strong preventive measures to contain the pandemic. Therefore, it drags down the occupancy of Huazhu network by 10%, reset the occupancy back to the later half of May. We do see a slowly and gradual recovery of occupancy in Beijing. And right now, we enter into the second 14 days. So therefore, we think after the 2 14 days, the situation will be better.

Let me address your question on the cost side. As I mentioned in my presentation, there are a number of items which actually impact -- our EBITDA in Q1. Number one is that we provided a one-off management fee waiver for our franchisees in Q1, while we say that until April is that the -- because for those hotels that had been like located in Hubei and Wuhan area. And number two is that for the hotels that has been keep on reopened during the lockdown, during that period, the impact of that is approximately like CNY 74 million, CNY 74 million. And going forward, because this is a one-off fee management waiver, so going forward, that we will collect that in the subsequent quarters, is number one. Number two is that we also -- I also mentioned that the -- a number of our costs for the streamlining of our headcount and head office, as you can see that I presented approximately the saving in this year will be approximately like CNY 400 million. None of that has been reflected in Q1. The main reason is because the cost saving has been more than offset by the severance costs that we paid to these employees. So the impact is not yet reflected. And number three is that we are still undergoing renegotiation with our rental -- with our landlord. And none of the rental reduction has been reflected in Q1 as well. So -- and in addition to that is that the CNY 1 billion loss we are talking about also include DH. In DH, the business actually started to decline in March. And the compensation that they are going to receive on the furloughed employees as well as the business interruptions, they are going to receive in the…

The next question we have is from the line of Lina Yan from HSBC.

Okay. So my first question is regarding to the numbers. So you mentioned in May your EBITDA has been positive. So can you reiterate what will be your breakeven RevPAR for hotels in China, and therefore, DH? Maybe in China, what would that be for like Huazhu hotel and for the upper scale hotel, respectively? So that will be my next -- first question. And after the answer, I'm going to ask the next question.

Okay. The breakeven level of our China business, we are talking about is like including tax, it will be approximately RMB 131, RMB 131 on an overall basis, it's number one. Number two is that on the DH is that I would say that the number is a little bit of fluctuating. The main reason behind that is because the subsidies that we received from the government relating to the furloughed employees, it is not certain depending on which hotels we are talking about. The approximate 40% of the staff costs are being subsidized. So that one is a bit uncertain. But having said that, is that we see the impact of the -- our DH operations in our overall profitability is not that significant because the -- for example, in Q1, the impact of the loss from DH is approximately like RMB 100 million, something like that.

Okay. Got it. But in China, like do they have -- do you have the breakeven RevPAR for upper scale hotels like Joya, like this?

So we look into the breakeven. Because Huazhu has significant share operations with centralized operating platform, so the things that we are looking into the group's -- the China operation's breakeven EBITDA, we are looking at the blended REVPAR.

Okay. Do you have that for self-operated and franchised and managed structure?

It's Blended. It's blended.

Blended.

We need to pay for direct cost for all these operated hotels. But on the other hand is that the franchise business has a significantly higher contribution margins that would also help to reduce the level of the breakeven RevPAR.

Okay. And my second question, I wanted to ask about the sales and marketing. So you mentioned in the presentation on your local like staff sales force and the corporate sales. So could you briefly compare that with the OTA? How is it different from the OTAs like the sales strategies? And what is the cost of acquisition, like by having your own like a local sales force like -- and comparing with acquiring traffic from OTA?

[Foreign Language]

[Foreign Language]

[Interpreted] Huazhu has been emphasizing the importance of direct sales and the high loyalty of the members. Actually, the B2B sales is also part of the direct sales.

[Foreign Language]

[Interpreted] So we keep recruiting the new members at the lowest cost, as low as possible. And also we encourage the repurchasement from our members.

[Foreign Language]

[Interpreted] B2B sales is also a very strong supplement to our current local sales.

[Foreign Language]

[Interpreted] So the daily contribution from the B2B customers has already exceeded the level of last year, and we continue to take different measures to strengthen the stickiness with our business clients, B2B customers.

[Foreign Language]

[Interpreted] All the B2B sales leads are from the sales leads of the front line and they collaborate on our local sales together.

[Foreign Language]

[Interpreted] The cost of acquisition is pretty low, and we are going to continue to push this effort.

Ladies and gentlemen, this does conclude our conference for today. Thank you all for participating. You may now disconnect.

Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]