GreenTree Hospitality Group Ltd. (GHG) Q1 2020 Earnings Report, Transcript and Summary

Good day and welcome to the GreenTree Hospitality Group Ltd.’s First Quarter 2020 Financial Results Release Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Rene Vanguestaine of Christensen GreenTree Investor Relations firm. Please go ahead, sir.

Thank you, Chuck. Hello, everyone and thank you for joining us. GreenTree's earnings release was distributed earlier today and is available on our IR website at ir.998.com, as well as on PR Newswire services. As a reminder, we also posted a PowerPoint presentation that accompanies our comments today to the same IR website. On the call today from GreenTree are Mr. Alex Xu, Chairman and Chief Executive Officer; Ms. Selina Yang, Chief Financial Officer, Ms. Megan Huang, Director of IT Department; and Mr. Nicky Zheng, IR Manager. Mr. Xu will present the company's first quarter 2020 performance overview; followed by Ms. Huang, who will discuss business operations; and Ms. Yang will then discuss financials and guidance. They will be available to answer your questions during the Q&A session which follows. 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. Future 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.

Thank you, Renee, and thanks everyone for joining our first quarter earnings call today. Let's start with slide five. In the first quarter, our operating performance was severely impacted by COVID-19. Our blended ADR decreased 7.8% year-over-year to RMB 150. Our occupancy rate dropped to 47.3%, and RevPAR decreased 44.1% to RMB 71. Nonetheless, we continued to expand our market presence across China. During the first quarter, we opened 62 hotels, mainly in the first part of January 2020, and we ended the quarter with 1,025 hotels in our pipeline, and that’s up 113.1% year-over-year. By the end of the quarter, we had to grown our geographic coverage to 342 cities across China with 3,998 hotels in operation, up 41.3% over the prior year. Total revenues were RMB 157.4 million, a 33.1% decrease compared to the first quarter of 2019. Gross Profit decreased 56.4% to RMB 67.6 million. Non-GAAP adjusted EBITDA decreased 64.5% to RMB 47.6 million, and the core net income per ADS, that’s basic and diluted non-GAAP decreased 70.3% to RMB 0.27. Let's now turn to slide seven for an update on the impact of COVID-19. Thanks to the government's efforts. The outbreak has largely come under control in China. Inevitably, our operating performance declined due to the lockdown of a number of cities, business closures, and travel restrictions imposed by governments around China. However, GreenTree's overall performance was better than the average performance across the hospitality industry in China, due to the strong dedication and hard work of our staff, franchisees, and partners in the food and beverages business as well as our strong positioning in Tier 3 and the smaller cities. Now, please turn to slide eight. The COVID-19 outbreak created new needs, which together with our franchisees GreenTree answered immediately. We responded promptly to the government's call and provided the rooms to house medical staff, volunteers, and the travelers that needed to be quarantined and stayed. Anticipating the resumption of the business, we worked with our corporate clients to provide quarantine rooms for the workers who were returning to work. We provided fee waivers and other meaningful financial support to our franchisees, and we implemented new precautionary measures to reinforce our already stringent health, safety, and hygiene standards and protocols. With this assistance from GreenTree, our franchisees have gradually managed to resume business operations, and as a result, our occupancy rate has rebounded and exceeded 65% on average in the second half of May. That's from a low of 21.5% at the end of the January, and since March 9, our individual or corporate numbers -- members have accounted for more than 80% of all of our guests. Despite these encouraging trends, we expect revenues for our second quarter to be down, 18% to 23% year-over-year. I cannot thank enough, all our employees, franchisees, and guests, as well as the medical professionals, police, firefighters, and community leaders for their support and dedication in helping us resume our business rapidly. Despite these extremely challenging times, we are well-positioned to deliver our multiple missions, that is to serve our guests, to support our franchisees and employees, and to create long-term and sustainable growth for our shareholders. I will now pass the call over to Megan Huang, who is also in-charge of our sales and marketing. Megan, please go ahead.

Thank you, Alex. Moving to slide 10, at the end of this third quarter, we had 3,998 hotels in operation, 41.3% higher than a year ago. 35 of these hotels were leased and operated or L&O hotels and 3,963 were Franchise and Managed or F&M hotels, while the mid-scale segment remains the core of our business with almost 64.6% of all our hotels. Last year, we expanded more into both the higher end and economy segment of the market. As a result, by the end of this quarter, the number of hotels in the mid-to-upscale and luxury segments increased to 7.3% of the total portfolio and the economy segment grew to 28.1%. Our entry into these segments will enhance our ability to cross market our different brands. We have also increased our dominant position in Tier 3 and smaller cities. As a result, 66.8% of our hotels were located in these cities at the end of this first quarter. Industry data, such as STR indicates that hotels in these cities are recovering faster and they're performing better than hotels in Tier 1 and Tier 2 cities. On slide 11, you can see that we open the 62 hotels compared to 102 in first quarter 2019, a 39.2% drop; 7 of these were in the mid-to-upscale segment; 37 in the mid scale segment, and 18 in the economy segment; 3 were in Tier 1 cities; 13 in Tier 2 cities, and the remaining 46 were in Tier 3 and smaller cities in China. Meanwhile, we closed 21 hotels; 5 due to brand upgrade; 8 due to non-compliance with our brand and operating standards; and 8 due to property related issues. So net-net, we added 41 hotels to our portfolio in the first quarter. Slide 12, shows the growth in our pipeline of new hotels. Our pipeline increased from 949 on December 31, 2019 to 1,025 on March 31, 2020. Around 39% of these hotels are in the mid-scale segment, about 36% in the economy sector and around 25% in the mid-to -- segment. Slide 14, summarizes the impact of COVID-19 on our first quarter operating performance. Our F&M Hotels ADR decreased 7.6% to RMB149. Occupancy rate dipped from 78.4% to 47.7%, and the RevPAR decreased 43.8% to RMB71. While our L&O Hotels ADR decreased 15.4% to 169, occupancy rate dipped from 59.6% to 32.7% and the RevPAR decreased 53.6% to RMB55. Slide 15 shows the quarterly RevPAR change. As you can see, RevPAR for our L&O Hotels decreased 53.6% year-over-year to RMB55 and the RevPAR for our F&M hotels decreased 43.8% to RMB71. With that, I will pass the call over to our CFO, Selina Yang.

Thank you, Megan. Please turn to slide 17. Total revenues decreased 33.1% year-over-year to RMB157.4 million. Total revenue from F&M Hotels decreased to 32.6% to RMB123.6 million, while total revenue from L&O Hotels decreased 34.8% to RMB33.8 million. The decrease was almost entirely due to the impact of COVID-19, which resulted in declined RevPAR, cancel our reclosures in compliance with local government requirements, delay in new hotel openings as well as partial reduction and extension of net income. What's more in support of our franchisees from February 1st to March 31st, we reduced both franchisee management fees and central reservation fees and usage fees by 50%. Slide 18, shows that hotel operating costs were RMB89.8 million, up 12.2% year-over-year. This increased cost were mainly attributable to higher depreciation and amortization and the consolidation of Argyle and Urban. Excluding Argyle and Urban, hotel operating costs decreased 3.9%, which was primarily due to the decrease in salaries of regional general managers and decrease in utilities consumables, food and beverage, which resulted from the declined occupancy rate. Selling and marketing expenses were RMB17.8 million, a decrease of 27.7% year-over-year. The decrease was mainly attributable to decreases in advertising, travelling and meals, because of the measures taken to control the spread of COVID-19, including the lock-down of certain cities, business closures and the restrictions on travel. General and administrative expenses were RMB 28.7 million, up 11.7% year-over-year. The increase was primarily attributable to increased legal and accounting consulting fees, and the consolidation of expenses from Argyle and Urban. Excluding Argyle and Urban, G&A expenses decreased by 15.5%, mainly due to a decrease in staff-related costs and compensation expenses. Overall, total operating costs and expenses grew 5.4% year-over-year to RMB 107.5 million. Excluding Argyle and Urban, total operating costs and expenses decreased 11.0% compared with one year ago. On Slide 19, you’ll see that gross profit decreased by 56.4% year-over-year to RMB 67.6 million. Gross margin decreased from 66% to 43%. Net income decreased from 110.6% to net is RMB 14.1 million. And net margin decreased from 56.9% to negative 9%. This year-over year decreases was primarily due to the impact of COVID-19. On Slide 20, you can see that adjusted EBITDA decreased the 64.5% year-over-year to RMB 47.6 million. Adjusted EBITDA margin decreased to 30.2%. Core net income decreased 69.9% to RMB 27.7 million and core net margin was 17.6%. Please turn to Slide 21, net income per ADS, basic and diluted, increased the 108.7% to negative RMB 0.11, that's equal to negative US$0.02. Why core net income per ADS, basic and diluted non-GAAP decreased to 70.3% to RMB 1.27 equal to $0.04. Let’s now look at slide 22. Our operating net cash outflow was RMB 48.4 million as a result of an operation net income loss because of COVID-19. As of March 31, 2020, we have cash and cash equivalents of RMB 1.6 billion as compared to RMB 1.8 billion as of December 31, 2019, primarily due to loans to franchisees, loan losses from the investment in equity securities and investment to upgrade hotels decoration. The cash and cash equivalents provide us with ample resources. As we continue to evaluate potential investment and to support our franchisees, our long-term top region with several banks in China, and our strong financial provision operational performance have allowed us to obtain unutilized bank facilities of RMB330 million. On slide 23, as Alex mentioned, COVID-19 has significant impact on our business results. As a result, we expect decline into the revenues of 10% to 15% for the full year 2020 as compared to 2019. This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session. Thank you.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Justin Kwok with Goldman Sachs. Please go ahead.

Hi, morning, Alex and team. Thanks for taking my question. Perhaps, I'll start with two questions, more broadly. One is on the M&A side, I think, as you've just mentioned, immediately you got RMB1.6 billion worth of cash and cash equivalent now. What are you seeing in the market post-COVID-19? Are you actually seeing more opportunities coming out or not, because I think when I talked to a lot of the industry participants, it seems that this time around the disruption was pretty short and then there was still quite ample liquidity, so they are not seeing a lot of deals happening? So, that's the first one. And the second one regarding your revenue growth guidance for the second quarter, can I get a sense on what broadly you are assuming, say in terms of your occupancy level, in terms of your room rate level, and also are you assuming any further discount or help to the franchisees through the franchise fees cuts or rebate as well? Thank you.

Thanks, Justin. Selina, I'll take the two questions and you can add on top of that. So, Justin, those are great questions. Regarding the M&A landscape, since the beginning of COVID-19, I think there's a number of measures taken by the government, also taken by the companies, and also taken by the participation through the employees and hotel owners. I think most of the hotel companies at this moment are still are able to absorb the shock. So, we have -- we know and the overall financial performance of the hotel industry has been impacted severely. And the -- but it takes time for the companies to realize that the strategic partnership with the GreenTree would be the best interest to their hotel owners to all the parties. So, we have received information regarding certain small, medium, and some regional, some of the certain segments that the inquiries about the certain -- of potential strategic investment. But we do expect that I think in the third quarter and the fourth quarter, there should be more opportunities because the recovery is rapid, but we'll see really how rapid the recovery speed is. At this moment, I think the recovery -- the speed, just like what we said that in the second quarter, from May -- the second half of the May, we only recovered 65% of the occupancy. Originally that -- and I think this is a little bit lower than the industry's, than our expectation. And so, overall, the industry recovers, I think, we looked at the numbers, a little bit slower than GreenTree. So, we would expect the M&A opportunities will be more -- they'll be definitely more towards the second half of the year, so we'll prepare to evaluate. GreenTree has always been very reasonable trying to create a win-win situation for all parties. So, we hope that we will take advantage of the situation and to seize the moment and to create a win-win for everybody. So that's on the M&A landscape, and that's the reason why we have untapped these credit lines. We plan to obtain more from our lender, and if we need. Regarding the second -- your second question, the revenue coverage on the second quarter. As we have indicated to you, in the second quarter, our revenue consists of several components, one is the amortized income from the hotel opening and the system fees and also the franchise fees, and those are the three primary fees we have. So, we have -- in combined that we have 18% to 23%, depending on the second -- the June's recovery speed. I know -- I think, I know that government is really speeding up helping the business to recover. So, really it depends on the recovery speed of June. So we have -- first of all, we have a range of what there are [ph] -- 5% plus or minuses. And so we think that the RevPAR compared with the last Q2 in 2019 in the probably 20% to 30%, or 25% plus or minus in that end. So, Selina can correct me if I'm wrong. And so, we expect in the third quarter, the recovery will be even -- will be better than the second quarter. And so, we do not, at this moment, the health -- the financial health of our franchisees, Justin, are the most critical elements that GreenTree pays attention, that's the most important area we're focused on. We want to make sure GreenTree's franchisee has the best financial health in the industry. So, we'll do whatever we need, including, you can see it, our cash flow for the first quarter, we have provided close to -- more than RMB80 million to support our franchisees. And that we also waived 50% of all the fees. We also returned, the reason why we have a RMB48 million roughly million cash from operation loss, the negative instead of -- we have 20 -- core earnings of RMB27 million or so, we're supposed to have similar cash flows. But because we refunded the prepaid deposit with the cancellation with also prepaid deposit and prepaid -- also paid the revenue -- revenue to our central reservations, we actually refound that we actually dispersed those quickly. So created a negative -- almost RMB80 million of cash outflows. And so, our balance sheet you'll see that number drop. If we believe that, the impact of that, we still have a positive cash flow from the operation to the company. So we plan to use them all to support our franchisees if necessary. At this moment what we observe is that our overall financial conditions of the franchisee are very healthy. So, we have not planned to cut any franchise or system fees or regulation fees. And that however if -- depends on recovery speed if there is really another dip and another somehow another impact then we're prepared to do everything possible to help our franchisees. But at this moment we don't see -- we have not -- we don't -- we have not seen the great need other than, we may continue to provide some financial support to our franchisees who wants to open more hotels during this time period because the capital to them in the market is not as readily like available like before. So because this is not real estate hard asset, it is more on the supply chain side construction improvement and renovation. So that's the -- my questions -- my answers to your question Justin. So Selina do you have anything else to add?

I think yes. As of Justin's question, I want to comment that we observed our operation performance has resumed since the middle of May. I mean they resumed more quickly than ever before. So as we have introduced our RevPAR decrease in the first quarter was 44%. And now we observed our decrease in RevPAR was about 30% to 35%. So -- and if everything is going smooth then we're likely to see the decrease in the RevPAR will narrow in the coming second quarter. Thank you.

Thanks both. May I just have one more question, it's that, obviously the current discussion on ADR relisting or delisting to Hong Kong market is something very hot in the market in a way. How would management see these in terms of the opportunities or in terms of the considerations that you're looking at? If you can just hopefully provide some overall feedback?

Okay Justin. Selina, I'm also going to take this question okay? So Justin, we take every risk factors very seriously because our mission is really to protect -- very clearly to protect the financial health of the franchisees and keeping a stable platform for our employees as well as providing long-term stable returns to our shareholders. So the recent HFCAA initiative by the Senate alarmed us greatly. So we do not know, how this will be impacted us and how quickly that will be implemented or will it be implemented ever. However, what we have checked, I have already commissioned our adviser to do analysis under 19C to see whether we can be prepared in advance to secure an alternative -- just to have a backup to better plan to mitigate the risk for this potential legislation. So again we take everything -- we take every risk very seriously in order to protect our shareholders' long-term interest. So Justin we can -- we'll continue to report to our investors about progress we're making. But we are -- we have taken the initiatives.

Thank you.

And our next question will come from Praveen Choudhary with Morgan Stanley. Please go ahead.

Thank you very much for taking my question. This is Praveen. Two questions for me, Alex and Selina. The first one is, I'm trying to understand the demand side of the equation. There are two parts to that question. One is in the new normal considering the social distancing, what part of the business is not yet coming back? For example, leisure probably is coming back slower. I'm just trying to understand whether it will come back at all or it will not come out at least in Q3, Q4 this year? And what percentage of your business comes from that segment? The second related question is, what you mentioned I think that 80% of your customers were members. I wanted to understand what percentage of that was corporate versus individual? And then I have a third question, which is not related to demand, which is about equity portfolio, which has seen some losses in Q1, which is understandable. But I just wanted to know whether you have either bought new shares or sold any of those existing shares? Thank you.

Praveen, thank you so much for those two wonderful questions. I will take the first part. And Selina and Megan you guys can complete the supplement. Regarding the demand side, we'll just talk about the general trend. And we are particularly concerned about the long-term impact of this COVID-19 number one to leisure and number two to group meetings to the conventions, because the conventions and holidays and leisure’s provide strong support during certain months for the entire hospitality industry. And whether the -- for the time being, I believe the company are very concerned about the risk to the employees and so are we. So in terms of conventions large group gathering and also the large amount of fee long distance domestic travelers Praveen, that we – we think that will slowly to come – that will not be quickly coming back. Depends -- also depending on our government – our China government’s initiatives because the society is a little bit different, I think, our business community and citizen can be easily mobilized to do certain things. And – but worldwide, we'll see that we are not – we are coming back slowly. I think we’ll not be a sharp lead types rebound, you know, that's just the number of months takes to drop, the number of months take to coming back. So under that luckily, I think that the sector that impact the most for that are not of the main focus of our business. Our business has been always flat and limited services to the essential business travelers. So they are just as we describe to you the traveling medical professionals, the key logistic suppliers, engineers, and the key supporting peoples are under here. So, those are the types of also the – like selective surgeries, people going to the hospitals, going to schools, going to the resort. We – the going to a key location. So those are the types of client we see right now, Praveen that we are catering to them. And that we will all be very careful in terms of monitoring our high-end hotels, and how do we actually solve the problem for the group – lack of group reservations. Because I think as a social distancing until unless we have either, you know, effective vaccine or some kind of therapeutic remedy, I think than there will be a so much pent-up demand from my point of view. I don’t think there will be a problem, but until then I think we see the business and even ourselves are taking lot more precautions to protect our people. And I think the other businesses are doing the same. And in addition, the families, you don’t recommend your family members to travel long distance. So that these recoveries I think will be subdued. And coupled with lack of international traveling the tourist demand – so the leisure travel will be – I think will be coming back slower than the price point where we are providing. So the 80%, you said that the members of individual and are corporate. At this moment, we see the like more than 50%, 60% are from local corporate and then 30% to 40% are individual members. But they are also traveling for business. So – and more and more towards the later part of May, I think, we see half and a half. And so it's a healthy balance, and that we also see a great, you know, higher – quicker recovery in the third and fourth tier cities. We had a strong, you know strategy in the past – the initiative going down to providing the – to providing our brand and system support to those cities, hotel operators, I think yield a good result. And so that's the demand side. So we are – we're pretty lucky that in the past we have that strategy to provide us most affordable, that value-driven hotel products and services to our business and also individual travelers. I think that is being paid off. I think another reason the fee being paid off is because a lot of small to medium-sized businesses. We provide 70% of the employment, but we are also very constrained with a budget that lack of revenues in the COVID-19. And so the naturally they will also cut back their travel budget and that then, we are here for them. And regarding the -- your second question, the equity portfolio. Basically we only invest in the past that we report to our shareholders. And the key strategic I think in our portfolio, we still have some left in the SBC than then from past. Then the other three stocks we have are our -- we are the second largest shareholder for the [Indiscernible] hotel chain. That's the -- I think number one domestic 5-star brand in China. So, we have not changed the position. We -- in the last quarter, we neither buy and sold any positions. We didn't change. So we -- I think likely in the -- we'll see the second quarter will be a rebound. The second is we are a strategic cornerstone at the time of investor for New Century. That's a second -- that's also one of the best higher end luxury hotel and also for the 5-star hotel chain New Century. And the third is we have a strategic investment in the university in the Kimco University that's the best largest hospitality four-year, perhaps the great [ph] University in China and that they are the best. So, that's the three major holdings we have. And the hospitality industry has impacted the most so as the stocks and that's why we have a reduction in the equity value in those. And we do expect that that will also be fully coming back in the near future. So, Praveen that's my quick answer. Selina and Megan?

Thank you, Alex. And we're also observing that our contribution from property members and individual members are keep increasing in the second quarter. If we compare their contribution of the first quarter and May and April, we can see that the percentage of our individual members increased by 5% and the percentage of corporate members increased by 2%, meanwhile as percentage of OTA decreased by, nearly 2%. Thank you.

And our next question will come from Jisheng Liu with CLSA. Please go ahead.

Hey, hi. Good morning and good evening, Alex, Selina and Megan and Nicky for taking my question. It's Jisheng, here. I have maybe two to three questions. I will go maybe one by one. Number one is a hotel closure actually. So, actually in first quarter 2020, we recorded even fewer hotel closure than first quarter 2019 or any quarters previously. So, I was trying to understand if we anticipate more hotel closures in the quarters to come, given the COVID situation? And maybe there are more to come that will also impact our revenue going forward? I’d like some colors to be shared on this. Many thanks.

Okay. So, Selina, I remember that we have the closure, I think, about one-third of them is due to the upgrade of hotels that are upgraded, that's why we have the closure reopening. And then, I think, that due to the non-compliance and also due to the profit-related issue that is, now we will have hotels that are underlying property leases, for instance, they are already expiring. So their lease come to a termination. And so, we -- because, Jisheng that we have a responsible approaches to help our franchisees, and so our RGMs and our hotel GMs. So, overall, our franchisees have not -- we have not seen a major trend, a lot of closures in the horizon. I think if there’s -- if there are any major closures, it’s going to be the second quarter, but we have not seen a large blocks of closure in the pipeline. And our closure mainly are due to the hotel lease, real estate lease is already expiring and some are not able to keep up with the maintenance of the hotels, because franchisee have some other cash needs for other operations. They may not be able to put all the profit back to --some of the profit back to fix the hotel staff. So they are not in compliance. And some will be just internal, because we have other brand, and then we are able to upgrade for the renovation. So, that's my reading from our pipeline of the request. So, Selina, do you have anything to add?

No. You have explained very clearly. Thank you.

So we don't expect, as you said, large numbers to closure. And we have always been, as I mentioned here, that's a demonstration that we have been able to maintain a pretty good support to our franchisees. We try our best and during the COVID that every employees, every staff in the corporate office worked to support their frontline operation.

I got that. Thanks, Alex and Selina. My second question is on the general ADR trend. So we have seen some data saying in Tier 1 cities, for example, in China, that the general on average ADR decline year-over-year has been even larger than in March. So, I was wondering if in Tier 3 to 4 cities, we have seen the similar trend, or we see, well, a similar ADR decline year-on-year versus March? Because we have also on the presentation that we have recorded already much less than industry ADR decline in first quarter. So I was wondering, if we are not affected that much by ADR in the quarters to come as well. Thank you.

Okay. Selina, would you like to answer this question?

Sure, sure. Thank you, Jisheng for the question. And just like you said, you observed the year-over-year decrease of ADR in the Tier 1 cities and it was not good. Actually we observed the same trend. In the Tier 3, the year-over-year decrease of ADR was better than that of the Tier 1. Actually, if we compare the performance in Tier 1, Tier 2 and Tier 3 cities, the ADR decrease in Tier 3 cities was less than that of Tier 2 and then -- and which was less than that of Tier 3.

Now, so let me also add a little bit more to that. The – Jisheng, one of the reason we believe, okay, we believe is the Tier 3 city has a lot of local travelers that are more like in the smaller groups and the smaller team as individuals. And in Tier 1, Tier 2 cities, especially Tier 1 cities that they are in the past some of the key drivers right now that are missing. So it's very natural. And this will continue as long as those key growth drivers not coming back. For instance, for international tourism and international travelers and also the group travelers, conventions, meetings. And so the entire – those sectors are right now are not very active. So the result of that I think Tier 1 city are really having a sharper drop in the ADR and occupancy. So but the – we hope – we are very hopeful that those will come back in the near future.

Thanks.

Yes, you're right Alex. And I'd like to add some comments because Tier 1 cities include Beijing, Shanghai, Guangdong, Shenzhen. And during COVID-19 there are more restrictions on traveling all the other cities for these big four cities. And since late April, we find that there's more traveling between these big four cities and so that we are hoping like that and more occupancy will be increased in these four cities. Thank you.

Yes. The drop Jisheng is about 10%. I think the 10% difference between the Tier 1 and Tier 3 cities. So for instance, just Tier 1 city, it is – if the Tier 1 city is 50% Tier 3 city would be 40%. So it could be 10% difference. So the Tier 3 city performs much better in that sense than the Tier 1 city at this moment.

Okay. Thank you. So my last question is on government subsidies. So I've seen that in first quarter you have already recorded some government subsidies adjusted EBITDA level. I was wondering if these were related to the requisition hotels during the COVID peak outbreak or it is not? So maybe a follow-up on this is that, our requisition hotels in first quarter, how many are they? And how many government subsidy do we estimate to be in coming from second quarter and third quarter onwards? Are they similar levels as what we have seen in first quarter, or would this be more actually? Thank you.

Selina?

Hello. Yeah, hey, Jisheng, thank you for question. The subsidiaries was mainly attributable to the tax subsidiaries coming from the government, it's much for the requisition. And the second quarter, our number of hotels by the government was less than 3%, and now nearly almost -- nearly all the hotels that are opened due to be used by the government. Thank you.

Jisheng, I think that one of the -- those are pretty much a payroll related tax some of the rebate, in other words the refund. So it's part of the subsidiary then. So I think primarily just as Selina said, it's a part of a reduction of the tax in essence.

Thank you. So maybe just a quick follow-up on this. If the government's subsidy in first quarter was not at all related to requisition hotels, so when these government subsidies related to requisition hotels come in the future, accounting-wise would you record that in RevPAR or would you record that just below the line?

We do not -- how many hotels Selina -- we basically will -- if we have give income, we'll record to the add revenue. And we would -- we do not record the subsidies from the government. So Jisheng, that hopefully answer your question.

Yeah, yeah. That's very clear. Thank you for answering my questions.

Great. Thank you.

And our next question will come from Bruce Mai [ph] with UBS. Please go ahead.

Good morning. Thanks, Alex, Selina and Megan for taking my questions. I just have one small question. So could you please share with us about your hotel decline for this year and next year? And also could you give us a rough breakdown in -- by the city tiers and hotel segments? Thanks.

Okay. So Bruce, I'd say we have a stronger pipeline historically right now, a record pipeline more than 1,025. So we -- even the first quarter -- in the first quarter in light of the COVID, we still develop more than 100 hotels. We opened 62, I think that we continue to add to the pipeline. So this year we plan really to open initially 700 because that's five, six, seven. And so we're trying to push to see whether we can achieve that number. However, we also understand that we are sensitive to the concern of the franchisees because a lower occupancy and lower demand in the second quarter. So we do not really want to commence or encourage our franchisee to open the hotels at this moment. But if they're ready -- everything is ready then we will definitely will help them, because we have a longer ramp-up period. So we will counting -- we are very optimistic in third quarter, fourth quarter. I think we're opening -- our opening will catch up. But our plan originally is about 700. I think the first – the first quarter and second quarter we may short of a 100. If we can't catch up, then we'll probably about 600 plus minus, and that really depends on the how quickly the economy rebound in the third and fourth quarter. And then we'll probably achieving our goal, because our company always has been very disciplined in achieving our plan, and achieving our budget. And in terms of the mix, we continue to see, it’s like a pyramid, 10%, we hope, 5% to 10% in the first year, and then 20% to 30% in the second year, and then 50% to 60% third year. And that in terms of the brand that then we have upper to mid-to upper, and to luxury. And we'll plan really 5% to 10% to that end, then mid – mid-scale high and to about 15% to – 15%, and then mid-scale is about 50%, 40% to 50% then the balance of 25% to 30% economy. So that's our – just the ballpark, a strategic focus. And again, development is we're trying to have an organic development that is possible, so also depend on the team. The development team where the opportunity emerge, so we're focusing a little bit more. So that's how our ongoing future plan. Next year, and we really want to speed up to open the other hotels in the pipeline. And so, we will, because now we have two more fully operating divisions that's Argyle and Urban, and I think our two teams are really have done – tried very hard, and both Argyle and Urban and the CEO, Kevin Zhang, and also, Ms. Chen, and they are all, you know, day and night trying to speed up their development, and their openings. So next year, and we should be able to see a much higher. I think that the growth rate than this year.

And our next question will come from Lydia Ling with Citibank. Please go ahead.

Hi, management. Thanks for taking my questions. And my first question, I want to follow-up on the store opening. And can we have some idea on the store opening pace so far for the second quarter to date? And we also want to get more idea how about the sentiment of our venture – our franchise so far as we recover versus the first quarter? And also, what kind of the support we may get – further get support to the – our franchisees? And my second question goes to actually, I think in general we were expected a more consolidation to happen in second quarter. So I think large platforms in the hotel segment will actually want to explore this industry consolidation opportunity. So any plans from our company's side to provide more attractive terms to those independent players to join our terms? Because, I would assess that at [Indiscernible] would actually target to see the independent franchise -- independent players. So, thank you.

Selina, I'll pick up the questions and then you supplement. Okay. Lydia, thank you so much for those three questions. The opening of the -- second quarter our openings also we have a number of planned in June. And then summer, I will give you a little bit larger range because we -- as we said -- as I said to you that we want to respect to our -- to make sure that our franchisees and the hotel owner feel as comfortable as possible when they open. We also want to design so that we have a quicker ramp-up period. So, I would say 100 to 150 numbers in that range the openings in the second quarter. And then the second question you have talked about the sentiment of the franchisees, definitely as not as bullish as the previous year. And however, as I said GreenTree's franchisees are in a much better financial conditions and so in the last two years last -- we have asked our franchisees to be more disciplined because the market is very hot. Everybody is trying to get the properties, very high lease rate -- property lease rate and spend tons of money borrowing with a lot of loaded with them with the debt or the private borrowing to open the hotels and even to higher-end and that there is a lot more supplies in those areas. So, we have educated -- we forcefully educated and trained our franchisees that in any -- very good time, you have to anticipate that there is a correction. We never expected that the correction will come in in this COVID-19 form, but nonetheless it came, I mean in such an unexpected way. But our end result is our franchisees are much more prepared. So, we have a much better sentiment. That is one of the reason a lot of our franchisees are still exploring trying to open the hotel -- clients signing up the leases or purchase properties, signing up with GreenTree various brand. So I think the sentiment is not as good as the overall industry. But our GreenTree Group that still is performing really well, the sentiment among our franchisees. So the -- that's also because we have -- we provide this financial support. You can see the first quarter we already opened our connections with our lenders and also with our own cash and we continue to have these capabilities. With the second quarter, we have -- we don't have the refund issues that the prepaid central reservations and also all of that in place. I think that, we even have more cash from the operations from the lenders to support our franchisees. As I said what they most needed is they know if they have a great deal and we have ample financial support for them. We and -- and that is the advantage of working with GreenTree because we're always prepared to support our franchisees. And the third -- your third issue is more consolidation. Definitely, we see a smaller to medium and expect that there are so many smaller regional hotel brand. The most important issue is that consolidation has been responsible ones. Because a lot of the smaller hotel chains, Lydia, from our point of view, they have a several issues that the products may not be consistent and that the management may not be consistent. Secondly, that -- thirdly and the number of years they left on their original lease-term varies. So how do we're making sure that when we consolidate, it's not purely number game, but also increase overall, our quality for -- the quality of the products and the quality of our service. So that's one major concern. Secondly, whether the management team we see, they have the same philosophy, have the same culture because not every management team have the same goal. And that's the most important criteria and more important than anything else. So in the past, what we have talked for a long time with Kevin of Argyle and Ms. Chan in the Urban, I think, we share the same philosophy. They are hard-working and trying to make the brand a valuable resource for the hotel owners. And that if we think the third quarter, fourth quarter, there will be more. And we are open -- our arms are fully opened. Also, if you have any certain opportunity, please recommend to us. We think in this particular environment and our strategic partnership with them, will definitely strengthen both parts. So unless we create win-win, we don't do the deal. So that's our criteria, Lydia. So that's my quick answers to your three questions.

Thanks a lot.

Selina?

No comments. Thank you, Alex.

Okay.

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

Thank you, operator. In closing, on behalf of the entire GreenTree management team, we thank you for your interest and participation in today's call. If you require any further information or have any interest in visiting us in China, please don't hesitate to contact us. Thank you all.

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

Thank you, operator. Thank you, Chuck.