Ladies and gentlemen, thank you for standing by, and welcome to the China Lodging Group 2014 Q2 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, 12th of August, 2014. I would like to hand the conference over to your first speaker for today, Ms. Ida Yu. Thank you. Please go ahead.

Thank you, Benham. Good morning, everyone. Thanks to all of you for dialing in, and welcome to our second quarter 2014 earnings conference call. Joining us today is Mr. Ji Qi, our Founder, Executive Chairman and CEO; Ms. Chen Hui, our CFO; and Ms. Jennu Zhang, our CFO and CSO. Following their prepared remarks, management will be available to answer your questions. Before we continue, please note that the discussion today will include forward-looking statements made under the Safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. China Lodging Group does not undertake any obligation to update any forward-looking statement, except as required under applicable law. On the call today, we will also mention adjusted financial measures during the discussion of our performance. Reconciliations of those measures to comparable GAAP information can be found in the 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 on the Investor Relations section of China Lodging Group's website at ir.huazhu.com. Now I would like to turn the call over to Mr. Ji. Qi Ji, please.

Good morning, everyone. Thank you for joining us today. On the annual second quarter 2014, we had more than 179,000 rooms in operation, with [indiscernible] potential for future growth in the economic hotels in China. Only 20% of total economic hotels are branded are shown on Page 3. We remain our leading position and continued [indiscernible] in this segment. The development of HanTing Hotel and the Hi Inn are both well on track, as shown on Page 4 and 5. We expected to have about 1,530 HanTing hotels and about 115 Hi Inn operations by the end of this year. This, however, translates into 5 years hard work of 40% and 80% for HanTing and Hi Inn, respectively . We are confident that our [indiscernible] will continue to set us apart from other competitors. To better consolidate the market, we have presented -- launched the Elan Hotel, a new brand as shown on Page 6. This brand is a nonstandardized economic hotels brand to enable existing economic hotels to join Hua Zhu's premier platform at a lower conversion cost. We will start facing the market with a preliminary manachised model. In addition to our leading position in economic hotel segments, I'm also glad to report that we have achieved the role and succeed -- we succeed the mid-scale hotel segment especially in Hua Zhu market. Q4 is a very well received for the upgrade consumption chain. And 2 examples of JI Hotel in Shanghai are as shown on Page 7. Both hotels have over 200 rooms each, which [indiscernible] over 90% within 6 months. The same procedural path of JI Hotel recorded a double-digit growth year-over-year. The stellar performance of the hotels that drive us to the top of the lot of a middle-scale hotels, including JI Hotel and Starway Hotel, as shown on Page 8. At the end of the second quarter, we had 137 middle-scale in operation and 83 in pipeline. One thing to note is that our management have shown that particular [indiscernible]. Above 80% of our middle-scale pipeline are contributing to manachised hotels. With that, I will turn the call to Chen Hui, who will walk you through our future operational results. Jin [ph], please?

[Chinese]

Thank you, Chen. Now let me walk you through our operational highlights for Q2 2014. In Q2, as shown on Page 10, we opened 15 new leased hotels and 125 net new manachised hotels. At the end of Q2, we have 1,659 hotels in operation, among which 35% were leased hotels, 54% were manachised hotels and the remaining 10% were franchised Starway hotels. Then to the top right of our graph, we continue to see a certain [ph] number in pipeline with a record high of 505 hotels at the end of Q2.

[Chinese]

As shown on Page 11, in Q2, our group's blended occupancy was 91%, the same as a year ago. The blended ADR was RMB 180, a decrease of 1% year-over-year as a result of more hotels in lower-tier cities where ADR tends to be lower. In summary, in Q2, the blended RevPAR was RMB 164, a decrease of 1% year-over-year.

[Chinese]

Page 12 provides a detailed view of the growth trends of our same-hotel RevPAR for hotels in operation for at least 18 months. In Q2, the same-hotel RevPAR remains the same with both flattish ADR and occupancy due to the soft macro economy. We can see a relatively supportive piping strategy. And consequently, our same-hotel occupancy stabilized at 96%. With that, I will turn the call over to Jenny, our CFO and CSO, who will walk you through our Q2 financial results. Jenny, please?

Thanks, and hello, everyone. In Q2 2014, as shown on Page 14, our net revenue increased 20.5% year-over-year. Leased hotels revenue grew to 18.9% and the manachised and franchised hotels revenue grew 32.6% year-over-year. Our manachised and franchised hotels revenue reached 13.4% of our total revenue in [indiscernible]. On Page 15, the adjusted quarterly operating margin came in at 13.2%, the same as that of Q2 last year. The hotel operating cost and percentage of net revenue decreased by 2.4% year-over-year, mainly attributable to the soft RevPAR and the increased number of leased new hotels in the rest upstate [ph]. We added 23 new leased JI Hotels in the past 4 quarters. Truthfully, a new JI Hotel incurred the significant amount of rental and [indiscernible] cost before its revenue ramped up to a stable level. Our preopening expenses as a percentage of net revenues saw a 1.4% decrease due to our enlarged revenue base relative [ph] from economies of scale and cost saving efforts, adjusted SG&A expenses and other operating income as percentage of net revenue increased by 1%. Last, but not the least, move on to the cash position as shown on Page 16. Our cash balance closed at RMB 683 million at the end of Q2. We had a total credit facility of RMB 898 million from ICBC in China Merchant Bank. For second quarter of 2014, our operating cash flow totaled RMB 427 million or 41% increase from a year ago. Our investing cash flow totaled RMB 220 million, a 25% increase from a year ago. In June 2014, we completed the investments in China [ph] Quanjude for a total amount of RMB 100 million. As of June 30, 2014, the company recognized RMB 137 million gain [indiscernible] income on the equity in the balance sheet as a result of share price depreciation opportunities from our purchase price. Such gain will not be reflected in our income statements until the investment is reclassified as a trading asset or being sold. This means that our cash balance, our operating cash flow and our available credit facility will be sufficient to fund our rapid expansion plan in the near future. Finally, as shown on Page 17, we expect to achieve net revenue for Q3, will increase 20% to 22% year-over-year. With that, let's open the floor for questions.

[Operator Instructions] And the first question comes from the line of Justin Kwok of Goldman Sachs.

I'll have just 2 questions. The first one, maybe I'll post it to, Mr. Ji. It's about the brand portfolio building of the company. So you have added another new brand called Elan into your portfolio. I just want to get a sense on the management thinking on how you're going to treat the whole brands strategy. What would be the customer segmentation? What will be the focus? And also, it was now for 7 brands. Is that enough or you're still looking for building more -- adding more brand into the portfolio? And instead of building your own brand, are you also open to buying more like [indiscernible]? This is my first question.

[Chinese]

[Indiscernible] established itself as a premium brand, economic hotel brand. We have maintained a very consistent brand policy and we are -- as product standards has been strictly followed through our all the HanTing [ph] hotels. We noticed that in the market, there are also group of economy hotels which are of decent quality. However, they do not fit into the HanTing standard. Just for example, a franchised -- a potential franchisee has a hotel it seems like a third or fourth-tiered city in China and there are people [indiscernible] bars in the lobby and with HanTing, we are not going to accept that, because it's not in line with our brand standard. However, if you would have it from the customers' perspective, we know [indiscernible] to see the market in a hotel in [indiscernible] market there are players who are more open to [indiscernible], to certain standard also reached certain size, although we are not as successful as [indiscernible] but we do see [ph] every month for a more acceptable product in the market. That's the backdrop we roll out in the Elan brand. And we would like to use it as standard in our brand, but still reasonable [indiscernible] standards. But in terms of [indiscernible] flexibility as compared with our HanTing brand. So this is our current results [ph].

Okay. Maybe just a quick follow-up. Is it fair to say that you do keep the manachised way of doing the business? I mean, i.e., that you still retain the management of the hotel instead of just purely franchising out the system or your membership network to the incremental franchisee?

At this stage, the brand is still in the [indiscernible] phase. We are still [indiscernible] the manachised model. And -- but we do not exclude the possibility that once the operating platform is well established and the brand standard is [indiscernible] is well established, we may consider using the franchise model in the future. But in the near term, I will strictly adhere to the manachised model.

Okay. Maybe my second question just quickly is on -- in the presentation, you also mentioned that your pricing strategy has been a little bit conservative in the previous quarter. So what are you seeing in the third quarter? Have you been turning a bit more -- a bit in terms of pricing as we are now in the middle of the peak season?

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Okay.

[Chinese]

Let me translate. We have been clearly able to increase these -- or high season for us throughout the year. So we definitely see a price uptick from the second quarter. But our seasonal pricing practice has been in place for many years. So the base for last Q3 is also very high. So in general, we have seen a reasonably nice momentum, and we have pushed forward our new management process in the tourism business where we can raise our price. So in the [ph] tourism focus [indiscernible] we have seen a 53% uptick in the Suzhou [ph] hotel, our price. But for [indiscernible], for the whole country, the price uptick is not meaningful.

And the next question comes from the line of Jamie Zhou of Macquarie Bank.

I got a couple of questions. First one is on a follow-up to the Elan brand reintroduction. Want to clarify with you on what the nonstandardized model for the Elan, what the -- or what is the price positioning for this brand? And how are the economics compared to our existing manachised hotels in the economy hotel segment? That's my first question.

[Chinese]

Jamie, let me take your question. Currently, we are positioned [indiscernible] pricing in the both part [ph] of HanTing. We may have a little wider variation in terms of the pricing practice. And since the brand is just rollout, we cannot very actively predict this outcome [ph] yet. We have to wait [ph] probably 6 to 12 months to see how well the brand is accepted by the consumers. And so the general position in terms of economy segment, we will be positioned in part with HanTing, but with a little bit wide range of variation. And you need to definitely be above our HanTing standard. That's where we stand.

Then in terms of our economics, are we getting the same 6% of the room night revenue from the franchisees?

We're applying the internal pricing in [indiscernible] as compared with the pricing [ph] and we may offer a little bit more discount in the onetime in the joining fee as this is a new brand.

Okay. And also, my follow-up. A read on Chinese local media that quoted "China Lodging trying to expand its brand potentially in 5 years to more than 1,400 hotels." Can you confirm that?

This is our internal goal we have given to our newly set up in brand [indiscernible]. Nevertheless, we do not want to put this in our goal as the [indiscernible] for our investors.

Okay. I see. And this would be in addition to what we previously had seen in your pie chart planning for the next 5 years to reach 4,000 to 5,000 hotels. Is that correct?

Yes. We believe we will maintain the percentage fees of HanTing, as we have seen internally between 300 to 400 hotels a year. And we will also continue the evaluation of our Hi Inn brand, which we had in December [ph] of last year and also this year. So those trends will not be impacted by the introduction of the new brands.

Okay. My second question is on the full year margin outlook. Noted that in the second quarter, you guys have done an excellent job in pushing through some economies of scale. What can we expect from our current standing in the third quarter as to second half margins off the EBITDA line? Can we see any EBITDA margin expansion compared to same period last year?

As we mentioned about half a year ago, our objective is try to maintain the overall EBITDA margin this year. We've already seen some achievements in the second quarter. But the overall picture, I think, still have some challenges attached. So currently, we will [ph] be too optimistic to start [ph] a margin [ph] expansion for the moment. But we are quite confident that our fast growth will continue into the second half of the year and also the years ahead.

I see. And lastly, very quickly, are you maintaining your full year revenue growth target of 20% to 23% on last year?

Yes.

And the next question comes from the line of Lin He of Morgan Stanley.

First question is for [indiscernible]. [indiscernible], can you please talk about the competition landscape -- competition environment you're seeing for the mid-scale settlement? This year, I think we have seen some international players putting a little bit more focus on the segments. We have seen Hyatt open the Hyatt Place in Shanghai, and we have seen the Hilton open the Garden Inn product in China. So can you talk about the competition environment? And secondly is that -- my second question is about the pipeline. This quarter, we have seen a very strong pipeline momentum for the company. Can you talk about which segment, which brand we are seeing particularly strong growth to drive this pipeline increase in segment?

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So a couple of years ago, [indiscernible] hotel growth. And in the past 2 years, clearly, this becomes a comment, too, in the industry. So a lot of players joining the platform, not only that Hi Inn, I [indiscernible] continue growing of their existing mid-tier [ph] brand, but I also see a lot of local players [indiscernible] all have their brands getting into the [indiscernible]. Currently, we haven't seen any brand become dominant in this segment yet. But that means [ph], clearly, have a few -- our own advantage in this segment, our 2 brands, [indiscernible] and [indiscernible] Starway [indiscernible] are in terms of sale, are definitely in the business [ph] -- in this competition. And also, you have seen in terms of our performance, JI Hotel is a big success, attracting both consumers and franchisees. Specifically, about your question on the 5 [ph] players. Honestly speaking, Hyatt Place, I think it more a [indiscernible] of a mid-tier market similar [indiscernible] so based on experiments in the economy hotels, we think we are going to face challenges in terms of house [ph] management and how to attract sufficient amount of consumers into the hotels. So we feel hotels are full is mainly driven by the consumers' demand for consumption upgrades. And for economy hotel players like us, we have the advantage of owning a large pool [ph] of the existing consumers who like to choose the better hotels. However, finance system and IT, they do not have [indiscernible] customer base [ph]. They built -- they have stronger place in the upscale and the luxury segments. So I think they're going to have challenges when they try to fill up their customer base. And then your second question about the pipeline growth drivers. We have seen a very strong pipeline for HanTing and the JI Hotel. We also see a very solid pipeline for Hi Inn. So those are the main drivers for our pipeline growth.

And the next question comes from the line of Billy Ng from Bank of America Merrill Lynch.

I just have one question. I just want to get a sense, what do you guys think? At the macro level, we see some recovery. PMI is improving, things like that, and seems like the overall market, although [ph] share some optimism here. But have you seen business travel pick up in your hotel? And also, I know like your full year guidance hasn't changed. But as I compared to a quarter ago, have you changed more optimistic or it still remains the same?

So far the trend seems fairly stable. So we maintained our view a quarter ago.

And the next question comes from the line of Yaoxin Huang of CICC.

I have a question, goes to Mr. Ji. [Chinese]

[Chinese]

Let me translate the question and the answer. The question is about Hi Inn. [indiscernible] has been [indiscernible] currently -- has expanded to more than 100 hotels and the [indiscernible] and probably distinguished itself of HanTing and other competitors like [indiscernible]. Mr. Ji's answer is Hi Inn is positioned as a budget hotel. Its price is generally [indiscernible] 5% lower than HanTing in the same location. We have seen in the past few years, the competitors in the [indiscernible], in the budget hotel segment actually has been decreasing because many of them have seen challenges in cost control and [indiscernible] generally reasonable profit in such a low price. And we are very glad and proud to see that our Hi Inn has figured out the right messages [ph], and we have won in the past couple of years the recognition of our franchisees, since they're generating very decent profits. We've seen many of [indiscernible] of franchisees [ph]. They would like to invest in the second and the first of Hi Inn hotel after they achieve success in the first one. In terms of properties, Hi Inn is a [indiscernible]. So it fits in a different segment as [indiscernible]. We see large amounts of those new hotels we do see in China, this become a [indiscernible] with the expansion of Hi Inn in the future.

And the next question comes from the line of Tian Hou from T.H. Capital.

[Chinese] I will do the translation. So I'm asking Qi Ji a question regarding the relationship between a standardized budget hotel chain and a nonstandard acquisition -- nonstandard hotel acquisition. And the initial growth for standard budget hotel chain is to take advantage of scale to earn some returns or profit, but now we're acquired nonstandard. So how do we generate economy of scale? [Chinese]

[Chinese]

Okay. Understood. So the second question is for Min Zhang. So related to your hotel expansion -- the hotel expansion recently, you opened a lot of hotels in the tourism attraction places. So I wonder, was -- is there a difference in terms of RevPAR seasonality? [Chinese]

[Chinese] Let me translate for Qi Ji's answer to the earlier question about what's the advantage of having [indiscernible] hotel which [indiscernible]. We have realized that in the market, our [indiscernible] franchisee and some potential franchisees have raised the question to us that it's easier for them to achieve consistent [indiscernible] standards, but if we have to push them to change the whole decoration, it will cost us a reasonable amount of CapEx. And that can we have a new brand that has a wider [indiscernible] in terms of the peer? And so we have seen -- we have heard a lot of voice from our franchisees and that is not [ph]. And also, we have seen our -- some of our competitors actually loosen their whole brand standards to tolerate all kinds of different looks and feel. We look at the situation and we feel that instead of extending the HanTing brand to embrace those hotels have a different look and feel, we would rather keep HanTing a very consistent brand with integrity, and then we will have another brand to meet the need of a more diversified decoration side [ph]. In our brand portfolio, we have a very clear position what we offer. We have HanTing positioned at the upper part of the company hotels and Hi Inn positioned at the lower part. Clear distinguishers in terms of [indiscernible] standard is pricing point. And then Elan will be positioned at the similar kind of pricing level, so we feel this is much more diversified in style. However, in terms of the core quality sector and the operational procedures, that will be largely the same as such. For example, they will use the same kind of PMS [ph], same kind of membership program, same kind of quality sectors for the [indiscernible] facility, same kind of management [indiscernible] level required, and also same kind of [indiscernible] services will be expected. So the difference in the look and feel that [indiscernible] that we have [indiscernible] in the basic quality standard, we want to make that [indiscernible]. We have seen in the more established markets some of the brands have widened it still to accommodate different styles. For example, our core has consolidated Four Seasons and [indiscernible] into a top brand of Ibis and mainly, it's Ibis Style and Ibis [indiscernible] separately. And they [indiscernible] if you travel from the East to the West of United States, you'll see [indiscernible] also have a decent look and feel across the continent. So we think that in the more established markets, the consumer has had reasonable tolerance for some of those definitions. We will watch how consumers react to the rollout of Elan. And currently, we still prefer to see HanTing as a consistent brand and Elan is a consistent [indiscernible] but more diversified appearance.

[Chinese]

Sure. Let me translate for Mr. [indiscernible]. Clearly, the tourism is not -- has been booming as of the [indiscernible] business travel continues. To address this booming demand, we have increased our presence in the tourism destinations. For example, in Elan, we have expanded into much larger scale in the past couple of years. Clearly, the tourism destination has a very clear seasonality. The low season and the high season [indiscernible] the very significant division in terms of RevPAR. However, if you blend those hotels into our overall portfolio, I think it's actually a very [indiscernible] to our existing portfolio. In terms of seasonality of the tourism hotels and the business hotels are almost exactly opposite each other since our fluctuation. And to support our expansion into tourist markets, we have also adjusted our maintenance [indiscernible] to attracting new members. We have rolled out [ph] various programs to enlist more members who have their travel and [indiscernible]. So our customer base are also involving to support our network section into the tourism destination.

And the next question comes from the line of Hsung Khoo from One North Capital.

I have some questions answered. I have 2 broad questions. One relates to the new brand, Elan brand. I mean, I just want to get better understanding of the target customer segment for this brand and what is your promise to the customer, given that the look and feel will be pretty different because of different hotels. And related to that from a different perspective, from the perspective of, let's say, a prospective current hotel owner who's deciding between the different brands that you offer, whether he would go for Elan or HanTing. What is -- what would drive his decision, given that -- since Elan propositioned and said, hey, you can join the China Lodging family, without including the CapEx necessary to transform your hotel. So that's the first part of my question. I've got a second broad question to follow.

Let me address your question. The Elan customers are the general customer pool for economy hotels who are looking for a reasonably priced, but economy hotels, [indiscernible] for quality, that still -- the same customers you are seeing who are attracted to their economy hotel. And in terms of the perspective of hotel owner, clearly, we have the same kind of the pricing scheme to our franchise fee. So pricing is not the main distinguishing point. I think they are -- the owner is a franchisee who are holding either probably -- we'll need to [indiscernible] between invest more to convert it into a standard HanTing Hotel, which is the reliable established brand. [indiscernible] more kind of the expected high RevPAR can be achieved. The [indiscernible] higher investment from a CapEx because they have a very standardized [indiscernible]. And then the second choice would be to [indiscernible] existing hotels, then we can invest really on the [indiscernible] and keep some of the appearance and they're not necessarily have to convert everything into the HanTing center. [indiscernible] clearly is not as established as HanTing despite of the [indiscernible] the same kind of the membership program and they're [indiscernible] so there will need to be some [indiscernible] there. So for our franchisees [indiscernible] are currently having the hotels have a good quality, maybe a better [indiscernible] if you choose Elan, but if the [indiscernible] currently not will offer decent housing standard is probably we will better off to invest or convert it into a HanTing.

Right. Okay. Now I just want to understand a little bit more about your process about EBITDA margin going into 2015 or even going forward. I mean, given your understanding of where you are in terms of the development of your hotel pipeline and how the new hotels have been opened over the past 12, 18 months, and the operating trends at these hotels, can you help me just understand what would it take for EBITDA margin to expand in 2015?

There are actually very -- quite strong factors to have an impact on the EBITDA margin. Let me just quote a few more important ones. I think number one would be the [indiscernible] RevPAR appreciation fees versus inflation. In general, the economy [indiscernible] in the past few quarters. However, we see some positive [indiscernible] that are going to happen in the next couple of years may have a positive trend. For example, the [indiscernible] factors to get into operation [indiscernible] and we still have more than of our 10% hotels in the Shanghai area. And if you cost [ph] the 2 neighboring provinces [indiscernible] East China represent a significant portion of the portfolio. So we expect benefits from the opening of business. So the real process is definitely our key driving factors. And secondly, I think our revenue mix between the leased hotels and franchised and manachised [indiscernible] is another driving factor. We have been accelerating their expansion through more leased -- more manachised and franchised hotels. As that trend -- as it continues, it will also positively impact the overall margin. However, we also need to keep in mind [indiscernible] expansion state [ph]. We're investing into our platform systems. We are investing [indiscernible]. So we expect to know in the next couple of years, we will still incur price on your platform expenses to support our very ambitious [indiscernible] in the next 5 years. So those 2 factors that I think -- we need to think about [indiscernible] definitely where the margin will be in the next couple of years.

Sure. Sure. That's very helpful. I could just wrap up just one quick question. How much of your new hotels in 2014 is -- involves conversion of an existing hotel, not a new build hotel?

Currently, we have seen about 40% to 50% of our new hotels are actually conversion from existing market facility. With that, we would need to close our call today. Once again, thanks, everyone, for making time from your busy schedule to join our call today. We look forward to talking to you in the next quarter earnings call. Goodbye, everyone.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may all now disconnect.