Q3 2019 Earnings Call

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Hello, and welcome to Green Tree Hospitality group Limited's third quarter 2019 financial results released call.

Participants will be in listen only mode should you need assistance. Please signally conference specialist by pressing the star keep followed by zero.

After today's presentation, there will be an opportunity to ask questions.

Please note this event is being recorded.

I would now like to turn the conference over to running Vincristine. Please go ahead.

Thank you Andrew.

Hello, everyone and thank you for joining us today.

During todays earnings release, its bidding process and we see a video on our website that I have got 90 dot com. So.

Here's why there's beyond newswire services.

We have posted a powerpoint presentation on the cig website that accompanies our comments today and that you can use to funnel decor.

Oh, the cold today from Green tree on Mr. Onyx true Chairman and Chief Executive Officer.

Next may go <unk> director of ice easy.

And Mr. you keep driving.

Andrew.

Please note that mission in a young Chief Financial Officer, It's currently I'm not sure let me leave.

Mr. She would krish I think the company's third quarter 2019 deferments overview.

Isn't that should be ratios and company highlights.

And Miniswine on behalf of mid C. I wouldn't then discuss financials and guidance.

They wouldn't be a video Joe I'm sure you questions during the two NHS Shang just for that.

Before we begin I'd like to remind you that discomfort in school contains forward looking statements within the meaning of section 21, each of the Securities Exchange Act of 1924.

The amended and ask the fine into U.S. Private Securities Litigation Reform Act up 1995.

These forward looking statements can be identified by terminology, such as maybe where you expect anticipate.

James Shuja intends plans believes estimates don't can you sound I guess.

He is likely to go inside what confidant outlook and see Ministry.

Any statements I know historically.

Including state funded by the company and its industry our forward looking statements.

Such statements are based upon my national instruments expectations any current markets in upgrading conditions.

And relate to events that involve known and unknown risks.

Jon Peace and northern factor.

All of which are difficult to predict and many of which are beyond the company's control.

Did you make goes the companys actual results performance or achievements to differ materially from goes into forward looking statements.

You should not place undue reliance on these forward looking statements.

Further information regarding these and other risks uncertainties effect do you.

He was included in the company's Friday, we do you watch Securities and Exchange Commission.

All information provided including to forward looking statements made during this crisis from school our 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.

It is now my pleasure to introduce our chairman and Chief Executive Officer, Mr. Onyx. She used to shoot. Please go ahead, thanks, everyone and thanks, everyone for joining our earning calls today.

As already mentioned MISA Celina Young Chief Financial Officer is currently on Mark on that healing.

So you can see Oh glide sleazy, we now have a new members in our management family.

The named Iris.

Well, yeah, Hello, everyone and apologize for causing some delay for you the hi.

No.

Please turn to slide.

Page number six.

I'm quite easily for our 2019 third quarter results.

Our seven consecutive quarters of solid all three team in the financial performance.

We grew our geographic coverage to 309 cities across China by the end of September .

From 278 cities by the end of September of 2018 I.

You, 11.2% year over year growth.

We now have 3100 than pool hotels in operation, a 21.3% year over year increase.

Well, it's the banning the economy mid skill mix upscale and luxury brands.

Total revenue grow couldn't get 0.1% year over year.

292.1 million on me.

Gross profit increased 21.4% to 204.9 milling aren't they.

non-GAAP adjusted EBITDA rose, 11.6% to 177.1 million R&D.

The core net income per eight yes, that's the basic and diluted non-GAAP improves the by 16.5% to 1.3.

All right and B.

She is equivalent to 218 cents U.S.C.

Oh, peaking performance also remains solid.

Definitely compared to the overall performance of the tiny hospitality sector.

According to STR report.

Our blended average daily run rate increase the by 4.2% year over year to 174 R&D.

Occupancy way had the like 1.3 Kristen.

He price to 85.9%.

Hi, Merlin you to 250 existing hotels in renovation.

<unk> accelerate at a new hotel openings in the quarter.

Well as a lower occupancy rate in our Lucky segment.

However revenue per available or Rami increased 2.7% year over year to 149 RMB.

Moving to slide number seven.

At the end of the quarter, we upgraded US 3100, then to fulfill.

The 1.3% higher has done a year ago.

Okay, Oh, this hotels, where at least an upgraded or l. and off of health.

And the 3072 franchise and the mountain or Ethernet Amphenol tell us.

Well the Midscale segment to remain the core of our business because more than 73.8.

Second of all hotel.

Well, it's not worth a fine all portfolio by I think will tell him both the higher end on the economy segment of the market.

The number hotel in the Lucky segment I missed your effect when they increased the too.

6.2%.

The total portfolio on the called me second the role to 20%.

Turning to slide number.

We opened 181 hotel.

That's 146.

And third quarter 2018.

That's a 24% increase.

Three of those new openings why didn't the luxury segment.

When he was in the mid upscale segment.

92, well you Midscale segment on the 66, whether you or in the comedy segment.

Fixing up a newly opened the whole tell us what are you sure one city.

32 in tier two cities and the remaining 127 <unk> flat Q3 cities on the other cities in China.

Meanwhile, we closed a 34 hotels.

18, you took brand upward.

And the 13 due to non compliance with all companies brand to an all in standards.

The remaining six due to property related issues.

So net net we added 147 hotels to our portfolio.

We are proud that we actually only closed.

19 hotels in this quarter, because almost all franchisees.

And then when you faded from operation support.

Turning to slide number nine.

Our pipeline of new hotels also increase.

From 596 on June 32, 652 on September Thirtyth.

Around that 26.8% of this hotels are you in the mid upscale and luxury segment.

So as an iPhone six our unique skills and around the 33.6% economy sector.

Slide number fan summarizes some of the key operating metrics.

We continued to see improved operating performance across the board.

The key numbers to look at here are the purple bar.

Presenting the performance of <unk> astronomical itself.

Our Nm hotel Hbr improved to 4.2% to 173 R&D.

So far increase the 2.6% the true 129 on B.

Well the occupancy weighted decreased from 87.5% to 86.1%.

The performance of our own the old with health also with HCR up 6.8% to 224 RMB.

That's a thin cell an old house come back online after the completion of the renovations.

Slide 11 shows our ballpark friends.

We delivered a 7.5% year over year, increasing rental car for our Oh, No hotel to 164 on B.

While revpar for or helping them hotels increased by 2.6% to 149 on B.

Let's turn to slide well.

Another critical area, it's all our business is our loyalty program.

Our sympathy programs heap leach members enjoy a variety of premium products and benefits.

Especially after the company integrated the membership programs, we just several partners, including finance dumplings.

For made no house, you bought for caliber and still.

This enables the numbers who used to membership points on the benefits interchangeably.

Our loyalty program Healthfirst to foster closer relationships with our guess who can book with us directly.

Therefore, reducing sales and marketing fees and expenses.

Overall, we now have about 39 million individual members and 1.45 corporate the numbers.

Up from approximately 36 million on the 1.8.

As of June 30 years.

And our members are very loyal customers.

During the quarter around 93.1% of all room nights were sold to directly.

Meredith.

To our individual and incorporate the members.

Now, let me talk about a few recent development.

And I'll fly the number 13.

We added a 23 men to upscale and electric hotels, including all Kyle.

Between Eastern MPM, Jia VX and also tell hotel.

At the end of this quarter, we had 21 agarwal from the through him 18, Jia and the nice thing, Yes, we'll tell you the pipeline.

As we continue our accelerating expansion into the mid to upper skills and that left luxury segment.

In conclusion, we are very proud of our company strong performance in particular, the meaningfully increase in sales and a strong gas the preference they love the by all the diversify the brand portfolio.

Definitely the life of the shifting Chinese economy.

We remain confident in our business model.

He took a position on the long term growth strategies.

We will continue feedback you know our people brand system technology yada to better serve our guest and franchisees and making sure that healthy development of our company for the long line.

With that I will talk to call or whatever our director of IR team, making blown who will summarize our financial performance for the quarter three.

Thank you Alex let me refer you to slide 15, where you can see back Oh combined total revenues grew 20.1% year over year to 292.1 million RMB, primarily due to a three factors the opening up 180 <unk>.

And then hotels in a one.

I'll tell improved Rep hot both in Afghanistan, and al and all hotels and the growth in our loyalty membership program growth was partially offset by that renovation 60, l. and Oh hotels during the quarter.

Total revenue from <unk>, and then hooks House rose, 19.2% to 219.6 million R&D why our total revenue from L. and all hotels rose, 22.9% to 72.6 million R&D.

On the same slide during the first line lung. So 2019, so no revenues rose by 20.6% to 800, and a 2.4 million R&D.

Revenues from and then hotels was 600, and a 17.5 million R&D up by 21.2% here over here and the total revenues from L. and no tower floor at 184.9 million R&D up by 18.5%.

Year over year.

Moving to slide.

16.

The cost and expense side of the P. and now hotel operating costs were 87.3 million R&D.

17.1% year over year, which is mainly attributable to costs associated with the expansion of our S. And then hotel, including stuff Cod calcium about.

Higher depreciation and a more to sanction.

Hi, or one time ran a renovation costs related to the renovation of six how and all hotels under 200 and the since he asked and then hotels as well as the operation costs.

These were partly offset by the closure of one al and I'll tell for first line lung so fifth year hotel operating costs or 200 end up 46.2 million R&D up 21.6%.

Selling and marketing expenses were 20.8 million RMB, 71.3% year over year, mainly attributable to the incentive owners to hotel stops and operation team the operational the newly added hotel brands such as increase.

Advertising and promotion expenses to improve our brand recognition and increased personnel compensation and other costs.

Selling and marketing expenses for the first nine months of 2019 or 61.8 million R&D.

884.4% year over year.

General and administrative expenses for 39.9 million RMB.

64.6% year over year, mainly because of increased I T research and development costs.

Hi quarter stop caught early go DD, M&A and they're kinda sauteing team.

Increased all share based payment as well as the GE and they offense.

General and administrative expenses for the first nine months for 100, and the 5.4 million R&D.

51.

First 10 year over year.

Oh, they're all combined to total operating costs and expenses grew 33.4% year over year to 100, and the 48 million RMB.

On slide.

17, you can see that gross profit grew 21%, 21.4% year over year to 200, and the 4.9 million R&D gross margin increased to 70.1% adjusted EBITDA increased 11.

<unk>, 0.6% year over year to 100, and that 77.1 million R&D and adjusted EBITA margin decreased by 4.6.

Then choose 60.6%.

Moving onto slide 18 ended quarter net income decreased 28.4% to 103, and 2.2 million R&D and the net margin word.

35% decrease was primarily due to market fluctuation in our last month portfolio and the increase in total operating costs and expenses.

Core net income increased.

16.5% too.

134.8 million R&D and the core net margin increased by 1.4% to.

46.2%.

Let's look at slide 19, net income per ATM basic and diluted decreased by 28.4% to 1.01, RMB equal to 14 cents U.S. dollar.

Why a core net income per ATM basic and diluted non-GAAP improved by 15.9% to 1.32 R&D, it's called to six 818 cents U.S. dollar in a first nine months up this year net income per 80 as basic empty.

You said improved by 9.9% to 3.6 RMB equal to 50 cents U.S. dollar wire core net income per ATM basic and diluted non-GAAP interest by 12.7% to 3.46 RMB eight.

So to 48 cents U.S. dollar.

Moving onto slide 20.

During the first nine months of 2019, our operating that cash inflow worth 395.5 million RMB I saw September 30, we had cash cash equivalent so almost 2.1 billion R&D.

This provides us with ample resources. After we continue to evaluate additional potential investments and acquisitions and we do not anticipate the need to raise additional capital at this stage.

Lastly in terms of off guidance, we expect total revenue for the full year 2019 to grow 20% to 25% from 2018, but change what due to delight consolidation of urban and the feed off of our renovation program.

This concludes our prepared remarks, operator, we're now ready to begin the Q and a question. Thanks.

We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

If you are using a speakerphone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then too.

At this time, we will pause momentarily to assemble our roster.

Okay.

<unk>.

The first question comes from Ken Chong of Jefferies. Please go ahead.

[noise].

Hi, all my friend for taking my question on congratulation on bar results and long I, just wonder about Iran. Qualcomm to us okay quota.

Good to see Didnt. So when I was still on deliver positive blended revpar growth well I'm just wondering for the fourth quarter now we already in mandates on November to really be collars on on the right about trends honestly like Obama we have a breakdown by roomlia occupancy and its second question is more from here from a in the industry appears like Oreo.

Won best friends. So many economy hotels on both national friends on the right sees a neat you open more in Alsace MAU to choose us thing on market share all thank you very much.

Thanks, Ken great questions on the theme.

Let's talk about the first cool, but the fourth quarter for us.

At this moment.

<unk> costs.

We discussed the before and we have a value price the business model and the we try to work really hard to folks on the direct sales would have loved loyal customer base as a result.

And we see our raw.

We'll be continually could be stable or will be improved slightly for the for.

The fourth quarter this year.

And that however, we will speed up the renovations because I'll through innovation, we clearly see you see a.

Major improvement after the Oh, you know the.

Packs enough that the slight upgrade these sorts and hotels so doing the renovation puria that we may see some not maxcv impact tourist occupancy I may be on and so excluding the impact of that we should be able to see some gradual on.

Small slight increase of the performance over the same quarter last year. So so far.

We have not been.

Nexidia, you're not giving the impact of the BYOD you know the.

The concern from our you know customers Andover and.

The second question regarding the softer brand that the entry to that.

We did see so there's a lot of change in that area.

However.

Our belief is still a brand that should have a silicon valley.

That is.

Standardized or quality services, who you are.

Those two I guess I'm sure franchisees.

So that both of them happen do you have to be very happy.

So we will not having a higher I didn't know that high quality in that and so are you ought to.

Make sure we have a sustainable growth.

On the we certainly do not want optum down for future growth. So we help we had been really careful in terms of modeling monitoring that progress.

And the market is right.

The maxing out of China. The hospitality is a huge so I think decide that there is ample opportunities on the whoever can do a job consistently and iPhone in the same high quality I think even today will succeed so event. So that's why can't we.

We have continued to maintain our standard in our development, we have not add that a lot, but not on you know soft brand the problem.

As I said that the war monitoring that was evaluated evaluating sat on the will also add to the south.

Development the personnel as was the operation personnel training them to see whether we need to add the more I'd just in case of the need to add more softer brand. This as a means the farmer existing franchisees wasn't next year.

Okay.

Sure. Thank you very much.

Again, if you would like to ask a question. Please press Star then one on a touchtone phone.

Again that is star then one to ask a question.

Next question comes from Nate junk of China Renaissance. Please go ahead.

Hi management. Thank you for taking my question congratulations to the Great result that congratulations to us may not have been iris.

I have three questions. If I may the first thought about the operation. They say hey, you, maybe give give us a little bit clear on the same hotel revpar growth.

In this quarter during this quarter and one is what is like biopsy material.

Yeah, maybe the first one oh of course.

Well if they stayed hotel.

[noise] then you take a look at the numbers because.

[noise] [noise].

[noise] [noise], so the thing hotels.

We usually have.

They are.

Rob.

The mid scale, it's up 2.3% you call me up to 3.6%.

And the C.

MIEFE upscale collectively was down 3.7%.

So thats a basically the Rob Carl.

Last July .

Gross and that's our organic but our consolidated that.

Is.

Breaking down by the fall in the luxury well say flat myth Upskill field, 0.2% decrease.

I mean skills is 2.3% included on the call me, there's a three plus 6% increase that's some girl.

Okay.

Thank you. Thank you and Democrats hinted about Oh operating expense.

Hi, because they are we actually have seen a.

A significant increase in the X 10. It caused so maybe can you give us a bit more color on the brick thrown off.

I kind of caught I thought the cell phone calls and marketing wouldn't your brand how much is there going forward.

Sure. So it is what is the kind of a normalized EBITDA margin shall we expect.

Okay. So thanks, Nick for those two questions. So that's the only on the marketing expenses. So we have a basically three components there and Oh, Yeah me one component is.

The alcohol consolidation.

That has contributed to about.

21%.

Oh the increase.

We think that's effect for would be gone by the next year.

And then the falling 30%.

Roughly about.

We had that one time selling expenses because we have this is a 15 year 15 years anniversary, we have down some promotions and if that's or roughly.

Has the one five point close the six millions.

That expenses and then I think that's up from 47%.

[laughter] holding that those two major items and then there are miscellaneous activities, our core sales and marketing a regular suezmax expenses only increased to 2.9%.

Under so.

Regarding to the T.N. day.

Again.

Sorry.

About three areas one is all about how consolidation, which contribute to about 7.1% increase.

Out of that the total number.

Then the on a you know the RMB this quarter, we spend the 5.7 mailing and so we amortize that but even in ways that we have a unique face off before mailings.

That all in India. So that's like a 16 point.

7% about 17%.

So either the all of that.

I think the then we also because as I mentioned for you.

The.

Cost of adding that development on the operation in preparation for the next year.

On the higher speed up gross.

We did not we think that's a regular and expenses that.

Gross at the speed of increase will be slowdown so.

Greetings, though.

He is going to be I'm.

Less than 47% then we also have you know the a continuous evaluation like a consulting fees di di and that that the various Oh, you know various advisory costs.

Little bit higher because when evaluating systematically some opportunity.

And that that is a 10% the increase and so the leading all of that so then that core DNA.

Is about 30% increase okay.

Hello, Nick and that's our breakdown.

Oh.

Okay. Thank you. Thank you Manny part a.

Detailed explanation and congrats to resolve thank you.

The next question comes from call letting go of Goldman Sachs. Please go ahead.

Thanks, My name from for taking my questions, So and congratulations on that as far south.

Hi, I see two questions first of all be regarding on the same hotel revpar.

So so comparatively speaking seems green tree.

It has been developed during very easy then performance in terms of same hotel Revpar I'd like to know comparing to appears how why green tree.

Over.

Overperform comparatively speaking and I also my second question will be on a further expansion.

Midscale and upscale segment.

Thank you our cities they own ample cash resources would you.

Be considering opening up more Lisa on hotels or seeing some mid to high end hotel you investment opportunities both domestically and globally.

Yeah. So here on my two questions.

Okay.

So the first question regarding our performance can sometimes not purists, we really have not compatible appearance that closely because we think of that we use.

This is model that value pricing lightings, Archie and the pay attention to the you need to alpha loyalty members, our corporate memberships what their needs. So we do not fully houston's addressed all price constantly.

And though we have basically a value pricing model.

The because to be common.

The shifting the a change.

[noise] such as because it's a change of the shifting of the economy I think that bodes well for the commerce as well as seem to be travelers.

Our sat in Congress, Linda Hobbled budget.

So we have always belief in the end value priced products and services will be in a great demand.

And secondly that we have ads or we have said to you before and the we evolve.

Strengthens our membership doubling the programs we screened no marketing programs, we've talked the dollar a you know that.

Membership.

Sales and marketing we also have a one of a kind to because our parent company has a a restaurant.

And we should we have on more than close to 100 million on the hundred mailing visitors per year, where are we can use the point of contact for market.

Our brand.

So as a combined a combination of all of that.

An amazing see sales and marketing programs.

More effective I think that also stabilize and getting the of moral volatile market, our our AG, our occupancy and therefore, the Ron Paul.

So I think those are the key she factors.

And with regards to the second question we are evaluating.

Opportunities and to try to deploy our cash responsibly in to further grow our China market.

We are monitoring that and we seem to fail or be a great opportunity set a hat and the so that it.

We have.

No. It's good to see strategically located properties and also well price the we will who collectively our own one that the smell credit hotel on hotel.

So thats the globally, we believe our strength Madison spends on the core competencies are based in China.

So unless those opportunities are coming towards the from our franchisees far from our customers.

Not a diverse you know divert our focus true elsewhere.

I think the opportunities here in China and also the sphere of influence such a thing about China. So our.

Our folks the growth for the next few years I continue to be focusing domestically.

The market has been a will be really really good and they'll be ample opportunities.

Okay. Thank you very much and congratulations down that starts off.

Thanks.

The next question comes from teaching new of CLS say please go ahead.

Hey, Thank you operator, thank you, Alex Mega and Nicky taking the questions. While I have a couple of questions. Maybe two quick ones first first one was on a guy that's what's on 19 I noticed that you have.

Put a new revenue guidance of 20 to 25 cents a yahya gross thing so 19 versus 18.

I was just wondering if this is only organic basis.

Oh, primarily and for the Oh, that's that's including that's include US a number of minuses off the call solid base involved Kyle.

But it seems that we.

You bet I want to delay the urban and a consolidation, but probably less than one loss or less so primarily you can see primarily from organic growth.

Ah, yes, but if something at end of second quarter than until we actually sat on the revenue of 2019 is it was expected to grow about 20, 320%. So 18 so.

By the time actually urban was already I'm, sorry, I'll go with or the consolidated.

So I was just wondering is so if that got us was actually so 20% to 25% of revenue growth for this quarter, which was announced for two or 19 target.

So that would be rather considered as a telephone gross a guy tolling business. So if that were to amass that our fourth quarter implied revenue growth will be much slower so why was that actually.

Oh.

You can easily we anticipate that adds that we will have a consolidation now for urban frozen title fourth quarter, but that will be delayed for two months also so which will have a mcafee impacts on the revenue growth for the M&A under secondly.

But we as I mentioned to you that then we ended up we feel that during the transition period that they speed up the existing hotel renovation is very important. So we have a renovation program aggressive program is being implemented and so we'll have a higher.

We will have an higher number of hotels being renovated.

So we do not.

That is already Waffle force the.

The closure of Ralph will tell us and we want to gave incentivize our franchisees who are being made during this period decline. So you want to those two factors.

Under the reduction of the growth the revenue from a consolidation from beat M&A and also the a speed up they serve innovation and the where we'll see you said that guidance or drop a 3%.

Got it that's very clear things.

Second one was because you just mentioned you have been adding development person house.

So my I know, how many personnel in development or did you actually have by the end of let's say Joan until 19, and how many do we have like just now and how many we plants at any future actually.

And they kind of would helpful.

Oh, sorry, if that.

Based on my all my memory that then I think they do this quarter. We here in the fourth quarter. We added about we because we screening, though as we common and our development personnel will come in for three months for six months out that sure. There was a fall here yet because not.

Everybody can be made the 12 full time.

After the trainings can be a a on a full time not easy person. So I think the last quarter. We have already we have a higher close to 45 personnel.

And at the end of the third quarter. We also have squeezed out quite a bit so at the end of the third quarter I think we have about 200.

Plus or minus is put be no BD personnel.

It is the timing and also that then it is the screening process that caused a great deal.

And that the so that's the number on the world This quarter we plan.

Another 40, so by the yearend, we think we should have a 242 250.

That's all that's how our claims.

Great. Thanks, and assert question Oh actually noticed some of your spreads actually too.

They have been going through a rebranding exercise so pago actually.

In the Princess over last quarter as nameless Pago only at this quarter. It has become our goal Grand Hotel and four G.M.B. Hotel last quarter was GMI hotel just quota it will remain renamed to G. M Hotel.

So if my understanding was right you are actually doing some rebranding exercise all there so.

But we got a bit says, what's the rationale behind that because if dashed no real economic impact I think franchisees make at pretty confused because previously they have one brand and now the bread has actually changed a little bit. So how was the rational behind it or if any current shareholders. Thanks.

That's great question no it does no actually.

Right no change up the brand the yen and of those the logo is Chinese I think that the agi almost half the agarwal and the than they have a brand. They have a lot of other things of that then depending on the property types. So does that I can we just use the representatives at one of the reference most the representatives of the.

Yeah, well help brand that there in terms of our indeed, a you know Golden age again that is that correct me if I recall, that's always felt <unk> and we said the G E and E. I send people are you with what do you have either come up on the nucleoside G. M E G.

And I think I'll guess lack of GE, yeah, a gem that.

South correctly are you going to share that are usually so you know that the customers in the u. Messrs. So that's the a and say a younger and younger side that we just a flat slightly modified those all brand the but.

Oh, no brand changes to our major twog customers in China.

So I apologize for the confusion.

[laughter].

Alright, Thanks, maybe just a little or the last little elements to check with you a actually last a year during the fourth quarter you actually pay the dividend. So shall we expect a dividend during the next caller and if there is.

What amount should we expect for next quarter. Thanks.

We have announced a plan for a dividend policy, where would I think it for that.

For the time being my last announced otherwise.

Okay. Thank you very much artists all my questions I my thanks.

Once again, if you have a question. Please press Star then one on a touchtone phone.

Again, if you have a question. Please press Star then one on a touchtone phone.

I see we have a follow up from they don't have trying to Renaissance. Please go ahead.

Okay.

Thanks, Alex maybe one follow up question about our strategy because previously us on some of asking about their oil and something that impact and we're also seeing you know major try knows how corp., saying, they're going to penetrate into lower tier cities. So my question is how are we are projecting this increasing.

Competition in the lower tier city, which is our target markets and shall we.

Expecting some kind of bad.

Increased competition, then maybe lower that maybe price work something that's something like that to happen and shall we expect the caught the about that at the cost of developing new hotels to increase the theater and how are we going to corporate cope with it. Thank you.

Thanks Nicholas.

Great question.

Oh, we we clearly see.

There was there are more opportunities and third the sheer on the fourth tier cities.

In China and the.

The first here in the second tier.

The brand.

Annotation that it's a much higher so we go into the third fourth fifth tier and the demand the for the management. The resource is much higher I think that there is a price war right now in terms of on the initial brand applications. These initial fees a lot of people give you a lots of D.

Come on.

And so as a competition Dan.

We are clearly also seem that impact and so we have adjusted the hour fees do you want to position ourselves compete effectively but so far.

So far I seem to that because I'll pass the performance and because.

Franchisee hotel and I can see our sustained.

Profitability and performance. So we have he vitamin a 50% as we said more than 50% is driven by our existing franchisees.

You open even send to referrals. So we're pretty confident that number will continue on the will tend to sort of nextera holiday increase.

And we Oh, we have a trend in the past consistently our operating managers to be able to a to be sent through the fluid for secure cities. We have the largest I think number of.

Managers in the company and the so we are.

We think we are uniquely position to do about the job in the third force and fixture city because as you said he see a revenue the HDR and that there I'd say a seeming Tibetan I'm. So the operating performance operating efficiency and the systems.

But the support the logistics are crucial.

I will make the hotel.

Accretion profitable and sustainable so embed in them, we believe well uniquely position on the qualified so we're not really concerned a lot more competition in the past 10 years. We did we do see plus 50 years and some brand come and go on the it is the.

So all of the obsolete.

We will continue to deliver.

The performance the franchisee will be the Wednesday.

Okay. Thank you Alex or explanation. Thank you.

Again, if you have a question. Please press Star then one the next question comes from Billy on of Bank of America. Please go ahead.

Hi, Onyx Justice has a follow on back questions. If I go would you mind to tell us what do you think about the time of buying them like the do mention the competition or become a little bit more than 10 spell of course, I I, but we do believe green tea is very well puts us.

And on that but.

Hum so like a corporate ability of the franchisees.

Oh, how do you see your own franchisees profitability compared to a year ago and also maybe in terms of overhaul industries, how profitable or not comfortable at this stage and I said themselves in 2020.

Whether you think there will be bigger opportunities for you guys to get onto how those profitable.

Oh operators out there to join the franchise or Oh, a general it will be very top and bottom as well as the one selective.

The incentive to open new hotels are a low and how what stage a weekend at this point.

Okay. So a very thank you so much for for the questions that.

Oh for our franchisees our profitability has been very stable.

Because the other drop we did not a profitable toss it to go through a a lot of preparation some design and construction cost pre opening costs. The operating cost of sales marketing costs and also you on you know that ability to having direct sales forces.

In addition to work with you know so so many online players there. So it is a.

Comprehensive sales and marketing a management skills sad the team has the house to deliver.

Hey, a return.

Through our franchisees so for our existing on existing hotels, you know a you know with no need for renovations are the our profitability stays the same and our.

Original plans that the investment.

We turned period for me for three years and I think what you all you're not getting that ran for many hotels.

We have hotel older.

Oh, the hotel a need to be reasonably to them.

That they will be more impacted by a newly opened the hotel from nearby so that they have a did you know reduced performance. So that is why and there would be trend.

Another what their profitability gotten rid use but most of them that already the capital paid back.

And the years ago. So they are in the best position to read reinvest some of that the orders to renovate and things stay there are profitable look you always real youre come back.

Because.

What we designed in terms of the hotel product some pricing I really need to the poor demand for the every day leisure and business travelers. So that it's about the 200 108, according to try and this hotel statistics.

The average.

Hotel space is about $177.

So what do you want to target the Midmarket and did that said the great demand. So we all the majority of our offer our franchisees profitability remained the same and Oh Thats why I think they are you suitable for the upcoming opportunities setting and that they are developing.

Ross hotels I Miss So we anticipate a next year.

We should have a and the same or higher speed of growth and we have gone through that in 2009, 2010, and I think our gross we may have not been impacted.

That much.

In terms of the Uh huh.

Going into future about the economy conditions, we think that.

Because.

You must be a or as a pressure on terms of what that.

In terms of that that services for many small and medium sized corporation under humans for some we've seen some the household debt level, you increase that need pullets stamping terms and household expenditures not or small business travel budget, but I believe from the core demand out there so as long as though we don't.

Yet you know overspend in transceiver design on the construction and the price of hotel above four or five stars route Paul I think where the sector will be very healthy and at least at the fee sector. We stay.

And the comparing you know, we compared with a lot of different sacrosanct White believes the hot hospitals hospitality sectors are really a sound riots industry and well really last a 2 billion that play.

Okay. Thank you.

Once again, if you have a question. Please press Star then one on a touchtone phone.

A reminder to press Star then one on your Touchtone phone if you have a question.

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

Thank you operator in closing.

The hop off the entire grain trade management team. We thank you for your interest and participation in today's call. If you require any further information or have an interesting minutes and I think China. Please do not hesitate to contact that does conclude the call.

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