H World Group Limited (HTHT) Q4 2017 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the China Lodging Group Fourth Quarter 2017 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, 14th of March, 2018. I would now like to hand the conference over to your speaker today, Ms. Ida Yu. Thank you. Please go ahead.

Thank you, Rachel. Good morning, everyone. Thanks to all of you for dialing in, and welcome to our Fourth Quarter and Full Year 2017 Earnings Conference Call. Joining us today is Mr. Ji Qi, our Founder and Executive Chairman; Ms. Jenny Zhang, our CEO; and Mr. Teo Nee Chuan, our CFO. Jenny and Teo will present the strategy review and the Q4 and full year results. Following their prepared remarks, management will be available to answer your questions. Before we continue, please note that the discussion today will include forward-looking statements made under the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. China Lodging Group does not undertake any obligation to update any forward-looking statements, except as required under applicable law. On the call today, we will also mention adjusted financial measures during the discussion of our performance. 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 the supplementary slide presentation is available on the IR section of China Lodging Group's website at ir.huazhu.com. Now, I would like to turn the call over to Jenny. Jenny, please.

Good morning, everyone. I'm pleased to report our solid results achieved in 2017, both from operational and financial perspective. As shown on Page 2, in the backdrop of consumption upgrades, we achieved 15% RevPAR growth in 2017 Q4, a very strong growth in the relatively low season. In the full year of 2017, our blended RevPAR grew by 14.4%, not only driven by the increase in ADR and occupancy, but also by more revenue contribution from mid- and upscale hotels. Such strong performance led to accelerated growth in revenues and expanded profit margin. On Page 3. In 2017, our net revenues grew by 25%, accelerated from 13% in 2016. We achieved operating margin of 17.6%, EBITDA margin of 28.9% and net margin of 15.1%, all hitting the historical highs. Those set of statistics exceeded the legendary year of Shanghai Expo in 2010. Teo will provide you more financial details later. On Page 4, by leveraging our powerful brand and member program, we consistently expanded our network under the asset-light model, which provides us good margin and a reliable cash flow. At the end of 2017, our manachised and franchised hotel rooms accounted for 78% in total rooms in operation, up by 2 percentage points from the previous year. Page 5 shows that our hotel pipeline remains robust, standing at 696 at the end of 2017, a 57% year-on-year increase from the end of 2016. Approximately 70% of the rooms in the pipeline are under mid and upscale brands. We are very positive on our 2018 opening plan. Let's turn to the next page, Page 6. We are also very excited about the fast growth of our membership program, which reached the milestone of 100 million members in Q4 2017. The members contributed 76% of our total room nights billed in 2017. And our direct channels accounted for 87% of our total bookings in 2017. Our expanded network, diverse brand portfolio and the commitment on quality continue to attract new members and increase the stickiness of our existing members. The pictures on Page 7 refer to our recent event of Hua Zhu World Conference held in Shanghai last December. This is our annual corporate day for partners and employees, which attracted more than 2,000 participants, including 900 franchisees; 550 business partners; more than 40 media journalists; and 30 investors. We showcased our 18 brands and industry-leading digital solutions to improve hotel operation efficiency. For example, our Hua Zhu E-purchase platform, our online supply chain platform, attracted a lot of franchisees to purchase high-quality hotel supplies at low cost. H-World, a technology company incubated by Huazhu, provides IT solutions for automatic check in, check out, mobile housekeeping and easy invoicing. Those solutions are very welcomed by upscale and the luxury hotels in China and overseas. We will continue to invest in our brands and technology to further benefit our franchisees and customers. Before we move into the details of operations and financials, I'd like to take a few minutes to summarize how we have fulfilled our strategic focuses. Page 8 illustrated our achievements in all the strategic priorities. The first focus is to upgrade our economy hotels. Our flagship, HanTing, has 38% upgraded rooms and saw a 7.6% same-hotel RevPAR growth in 2017. Secondly, the focus is on fast expansion of midscale hotels. As you already know, we have a number of midscale brands at different development stage. JI Hotel grew to 390 hotels at the end of 2017. It has become a truly leading midscale brand with scale and the reputation. We also acquired a design hotel chain, Crystal Orange, to enrich our brand portfolio in Q2 2017. Aside from those, thirdly, we continue to improve the same-hotel RevPAR for the full year of 2017. Our same-hotel RevPAR grew by 7.7%, including 7.4% for economy hotels and 8.2% for mid and upscale hotels. I will elaborate those points in a little bit more detail in the following pages. As shown on Page 9, the Q4 of 2017 was the fifth consecutive quarter of HanTing's positive RevPAR growth. It reached 6.8% in this quarter. The growth rate in October was a little bit soft due to high comparison base in Hangzhou in 2016. And we also had a big event in Beijing this year in October, which was the 19th National Congress of CPC. Those events have slowed down the growth of our RevPAR. However, November and December saw a still very strong same-hotel RevPAR growth, above 8%. For the full-year of 2017, HanTing same-hotel RevPAR grew by 7.6%, after annual decreases since 2014. We continue to see HanTing to grow their same-hotel RevPAR going forward. Page 10 shows the picture of our latest design of our economy hotel brand. HanTing, Elan and Hi Inn all rolled out new designs in 2017. Some of you may have already stayed at one of them. The few of the upgrades has a very strong feedback. The customers talk about them on WeChat and Weibo. The upgrade is not limited to hardware. We also have more efficient process and a higher standard for cleanliness. The refreshed models are catering for upgrading needs from the mass market. With the efforts of quality improvement, Elan and Hi Inn also achieved same-hotel RevPAR growth, up over 5% in 2017. Let's move on to midscale brands. Page 11 demonstrated the successful integration of Crystal Orange. Post-acquisition, the same-hotel RevPAR growth has been consistently above 10%, significantly higher than the 6.8% same-hotel RevPAR growth achieved in 2016. We see that mainly coming from the synergy through our membership program. The new openings are budgeted to be 80 hotels in 2018, accelerating from 27 in 2017. The growth rate is 52% in terms of room count as compared to 21% a year ago. Crystal Orange talent pool was further enriched by adding Ms. Cao to the role of CEO at the beginning of 2018, while Mr. Wu Hai remains as Executive Chairman of Crystal Orange and EVP of our High-End Product Innovation. In 2018, we also initiated effort to further improve direct sales and hotel operation efficiency after completion of back office integration. We rolled out three new midscale brands in 2017. As you may recall, the launch of CitiGo, urban Manxin and HanTing Premium was in the first half of 2017. I'm excited to see the rapid growth in those new brands. At the end of 2017, CitiGo has six hotels in operation and 11 in pipeline. Manxin has 11 hotels in operation and 16 in pipeline. HanTing Premium, the very new extension of our prime HanTing brand, has five hotels in operation and 39 in pipeline. This is the result of our solid execution in brand development. With the above concrete progress in midscale segments, our mid- and upscale hotels are increasing their contribution to our revenues. In 2017, the revenue from mid and upscale hotels increased by 68% to RMB 3 billion, accounting for 38% of our total net revenue, up from 29% in 2016. Further, on same-hotel RevPAR on Page 14. In Q4, our same-hotel RevPAR increased by 6.5%, with a 4.9% increase in same-hotel ADR and a 1.3 percentage point increase in occupancy. It's worth mentioning that the growth in same-hotel ADR has been accelerating from 4.5% in Q3 to 4.9% in Q4. For the full-year of 2017, our same-hotel RevPAR grew by 7.7%, with a 3.7% increase in ADR and 3.3 percentage points in occupancy. Heading into 2018, we will focus on three add backs, as shown on Page 15. First, we'll continue the fast expansion of midscale hotels. Secondly, we'll focus on the continuous growth in same-hotel RevPAR through quality improvements. Thirdly, the innovation in upscale hotel segment. We expect to bring you more exciting news in the next earnings call. With that, I'll hand over the call to Teo, who will provide you a more detailed analysis of quarterly and the full-year results. Teo, please.

Thank you, Jenny. Good morning, everyone. Please turn to Page 17. At the end of Q4 2017, we have a total number of hotels in operation of 3,746. In Q4, we opened 137 hotels and closed down 47 hotels, giving a net opening of 90 hotels during the last quarter of 2017. Including the hotels that came with the acquisition of Crystal Orange, we have a total gross hotel openings of 665, or net of 477 in 2017. Turning to Page 18. Our blended RevPAR grew by 15% to CNY 180 in Q4. This was mainly due to increasing mix of midscale hotels, as well as strong demands for our upgraded economy hotels. For the full-year of 2017, our blended RevPAR increased by 14.4%, with 3.5 percentage point increase in occupancy and 10% increase in ADR. Moving on to the financial results on Page 19. Our net revenue grew by 32.6% year-over-year in Q4 and 25% for the full year in 2017, at the high end of our previous guidance. Breaking down the revenue growth in 2017, the net revenue from our leased and operated hotels improved by 22% year-over-year, and net revenue from our manachised and franchised hotels was up 27% year-over-year. Due to our asset-light growth strategy, we expect revenue contribution from our manachised hotels will continue to grow going forward. As mentioned on Page 20, our full-year operating margin expanded by 4.3 points year-over-year to 17.6%. The hotel operating costs and other operating costs as percentage of net revenue improved by 6 percentage points year-over-year. This is mainly due to our improved blended RevPAR and better operating efficiencies from scale. However, we booked an impairment loss on our leased hotel assets, totaling 92 million in Q4 2017 or 169 million for the full-year in 2017. This impairment loss was related to loss-making hotels and early termination of hotel leases on military properties, as well as rezoning purposes. Since the mid of 2016, we have seen continuous improvement in the RevPAR in our hotel network around China. Therefore, we decided to take a conservative approach to write down the unprofitable hotel assets, particularly those located in the lower tier cities in Q4. In 2017, we also see a number of early termination of leases related to military properties across China under the directive of the authorities, which is to be completed by the end of 2017. Therefore, we also make a provision to write down these assets. With the continuing improvement in the RevPAR trends for our hotels, and also the completion of the early termination of leases exercised by the military, we do not expect any significant provision for impairment in 2018. The pre-operating expenses as percentage of net revenues increased by 1.4 percentage points due to more leased and midscale hotels under construction compared to 2016. The SG&A expenses and other operating income as a percentage of net revenue increased by 0.2 percentage points year-over-year. This is mainly due to: number one, the inclusion of Crystal Orange expenses in our books, which carry a high percentage of expenses as a percentage of net revenue; number two, one-off transaction costs related to the acquisition of Crystal Orange totaling RMB45 million; number three, certain spending to redesign a selection of our brands; number four, marketing expenses to promote our brands, such as our event for the Hua Zhu World Conference and the advertisements placed on the high-speed train between Beijing and Shanghai; and last but not least, the accruals for a long-term performance-based bonus tied to our operating earnings to our employees. Turning to Page 21, our strong RevPAR growth and better operating efficiencies drive our profitability. In 2017, our EBITDA increased by 36% year-over-year to approximately 2.4 billion. Our EBITDA margin expanded by 2.4 percentage points from 26.5% to 28.9%. Net income increased by 54% year-over-year to 1.23 billion, while our net income margin expanded by 2.8 percentage points from 12.3% to 15.1%. We expect our profit margin will continue to expand in 2018, driven by a further increase in scale, increasing contribution from midscale hotels and better RevPAR. Moving on to the cash flow status on Page 22. In 2017, our net cash from operations reached 2.45 billion. Our CapEx for maintenance and new development totaled 820 million. As a result, our free cash flow in 2017 was 1.6 billion. In 2017, we secured debt funding totaling 4.3 billion, mainly from a syndicated loan in May and subsequently a convertible bond in October. We used the funding secured from debt financing and some of our own cash flow to pay for: the acquisition of Crystal Orange; investment in hotel stocks with an intention of further strategic cooperation; strategic investment in apartment services; office-sharing services; bike-sharing company, Mobike; and an Indian hotel chain, OYO. We also paid a cash dividend of 306 million to shareholders in December. At the end of 2017, we had a cash and cash equivalent of 3.5 billion. Turning to Page 23. I would like to highlight to you that there are new accounting rules in the U.S. GAAP on revenue recognition that'll be effective from January 1, 2018. Firstly, on initial franchise fee. In 2017 and in the prior years, we recognized all the initial franchise fee as revenue upon hotel opening because we had fully provided the services related to the initial franchisees. However, under the new rule, the initial franchise fee has to be amortized over the franchise agreement terms in the range of 8 to 10 years. The impact of such changes has no impact on cash flow. However, it will reduce the initial fee recorded as revenue in the first year of the franchised hotel opening, which is to be offset by the revenue from the previous year initial fee deferred to this year. Taking 2017 as an example, such rule will reduce the 2017 net revenue by approximately 10 million. At the end of 2017, the balance of deferred revenue to be amortized over the next 8 to 10 years was approximately 280 million. Secondly, there is also a change in accounting treatment on loyalty membership points. In 2017 and in the prior years, upon issuance of loyalty points to members for their stay in our hotels, we immediately accrued for the estimated cost of such points as hotel operating cost and selling expenses. For membership points that had expired, the cost will be reversed from the hotel operating cost and selling expenses. However, under the new rules, we are required to defer a portion of revenue related to the point issuance and record it as revenue when the points are being redeemed. Similarly, for membership points that have expired, this will be reflected as an increase in revenue. Such changes have no significant impact on net earnings, but it will increase both the net revenue and cost. Taking 2017 as an example, such rule will increase the net revenue by 73 million and also an increase in the cost and selling expenses by CNY 63 million. Finally, our guidance on Page 24. In 2018, we plan to accelerate our gross opening to 650 to 700 hotels, and 60% to 65% of which are midscale and upscale hotels. As for the revenue guidance, we expect to achieve a net revenue growth rate of 27% to 29% year-over-year in Q1 2018. For the full-year in 2018, we expect our net revenue to grow in the range of 16% to 19%. With that, let's open the floor for questions.

Thank you. [Operator Instructions] Your first question comes from the line of Justin Kwok from Goldman Sachs. Please ask your question.

Hi, good morning. Thanks for taking my question. Perhaps I'll have two questions. The first one is, when you released the full-year 2018 revenue growth target of 16% to 19%, can I get more color on how did you come up with this? What kind of same-hotel RevPAR that you have baked into the assumption or occupancy gain, room rate growth, et cetera to help us to get more understanding on how you plan for this? The second question is when I look at your strategic focus for 2018, the third point is the innovation in the upscale segment. Can I get more understanding on what do you mean by that? Are you going to roll out a lot more brands or what kind of innovation or size of the impact to your portfolio that you are talking about? Thank you.

Hi, Justin. Let me address the first question. As for the revenue growth of 16% to 19% taking into account on a couple of factors. Number one is that there will be an annualized impact of the Crystal Orange acquisition. Because in 2017, the Crystal Orange was acquired in the late May of 2017, so it would have annualized impact on Crystal Orange is number one. And number two is that we also include the growth – or the hotel openings spread over the years – spread over the – throughout the year. And we expect that the – as in the previous years, is that the hotel opening is like – is usually is more concentrated in the second half of the year rather than first half of the year. And the third part is that you also can see that some of hotels which will undergo some upgrades or renovations – so we will have a pick-up in revenue from those hotels. And number three – number four is that the occupancy of – we actually – the occupancy is actually ranging from – varies depends on the locations. So is that in 2017, is that our occupancy has reached approximately 88%. So, we would actually depend on the different locations in the different area. So, it will be also in the range of approximately 85% to around 88% up to 90%. So, it differs from places to places. And as far the RevPAR growth, we estimated that the same-hotel RevPAR growth will be in the range of 3% to 5%. So, this is based on our outlook for 2018 at this juncture.

And in terms your second question about the upscale innovation, we have already started some experiments and they are along a few different lines. One line is to introduce innovative products into the upscale segment. For example, Joya, we just had a new flagship hotel in Shanghai, soft opened just a week ago. We formed alliance with Shang Xia, which is a subsidiary of Hermès. We introduced art and more elegance into the hotel design. We believe this model will fit the consumption trend better than a lot of the existing product in the market. And the second line is introducing more efficient operating model into the 4-star and the 5-star hotels. We have already successfully done that with Mercure in a few hotels. And we decided to accelerate the expansion of Mercure to copy this model to many more cities. We also are exploring the opportunities to leverage Novotel and the Grand Mercure to also transform the business model of a lot of existing 5-star hotels by utilizing their space more profitably. We are running experiments in Shanghai Pudong with the Grand Mercure. So, I'll report to you more details next quarter when we see the results of some of our experiments.

Alright. Thank you.

The next question comes from the line of Billy Ng from Bank of America Merrill Lynch. Please ask your question.

Hi, good morning. I also have two questions. The first question is, we saw there's a big jump in the costs in fourth quarter. I think Teo mentioned about a one-off item because of the write-off or the impairment costs, about 91 million or 92 million. Can you clarify, are there any other cost increase, they are one-off in nature as well?

Right. In Q4, the impairment loss is one of the major expenses that we accrued. Number two is that we also accrued for a long-term staff bonus, which is performance related. So basically, is that we put in place a plan to incentivize our employees, our people, to boost the earning – the net profit of the company. So – and then we actually put – we give them – we actually put a bonus for that, and that this bonus is going to materialize, say, in 2019, 2010 – sorry 2019, 2020. But we have to start making accruals now because it's a long-term bonus plan. And number three is that we also incur some of the marketing expenses, I would say that the rebranding fees for select of our brands, because we are putting in some new design which may call it as a one-off, but on the other hand, is that we also continues to refresh our brands once in a while so I won't – and I'll call it entirely one-off but these are the couple of expenses.

I see. And the bonus you mentioned, how much are we talking about, roughly speaking?

We are talking approximately 36 million.

36 million. Thanks. And my second question is related to – can you share if there are any color or anything you have seen so far for the 1Q RevPAR trend? And we see from the FCR [ph] data, it seems like January has been pretty strong but understanding that February, there's Chinese New Year's, and also for March, if the National Congress will have – what type of impact it will have on the overall Beijing ADR or RevPAR?

Okay. As for the - I mean I won't give you a comment on the March one, because we have not closed the month yet, but for the January and February, our same-hotel RevPAR trend is approximately mid-single digits.

Okay. Thanks.

The next question comes from the line of Tallan Zhou of Deutsche Bank. Please ask your question.

Hi management. Thanks for taking my question. My first question is about margins. It seems like EBITDA – non-GAAP EBITDA, of course, is lower than net revenue. So, is this because of the combination of Crystal Orange? So, if you can give us the color on the margin difference Crystal Orange and the original China Lodging part?

To break it out for the entire year, I would say that the EBITDA margin for China Lodging is actually higher is because that – because we have a bigger scale. If you look into the Crystal Orange itself, is that it's like 2 to 3 percentage points lower compared to the China Lodging stand alone. So, I would say that the – but having said that, is that we are – we have been putting in place on a number of things to improve the operating margin of Crystal Orange, so that they become in line with the China Lodging's cost structures. But that is still in progress. We have completed a number of integrations, particularly from a back-office perspective, particularly from a system perspective last year in Q4 2017 and we expect that we will continue to drive more efficiency on the in-store performance in 2018 and going forward.

Okay. And my second question to – so if the trend is like what you said, so we are likely to see the margin to trend up because Crystal Orange will open more franchised hotel starting from Q1 all the way to Q4 this year, am I right?

Yes. Actually, in my presentation, I mentioned that we expect that our – we expand our profit margin further in 2018 due to our scale and efficiencies.

Okay. Thank you.

The next question comes from the line of Huang Yaoxin. Please ask your question, your line is open.

Hi. I have two questions. First question is to Teo. Could you further say what's the EBITDA and profit for Crystal Orange only in 4Q 2017? The second question is, you mentioned that the January and February same-hotel RevPAR is mid-single digit. So, what is the breakdown between high-end and the low-end? Thank you.

Okay. In Q4, it's that the adjusted EBITDA margin of Crystal Orange is approximately – coming to approximately 22%. Okay?

Sorry, 22%?

2-2. 22%. Okay. As for your next question, the blended – so the same-hotel margin is approximately 4-point – sorry, is in the mid-single digits. The midscale is slightly higher while the economy is slightly lower. I won't put it out for now because in Q3 – Q1 has not been completed yet. The Q1 hasn't – yes.

The next question comes from the line of Leon Chik of JP Morgan. Please ask you question.

Yes, hi, good morning. Just a couple of questions, hopefully you haven't answered that already. The first one on the 92 million provision, can you just confirm that's all in G&A cost? The second one is of the 36 million or so bonus, can you confirm is that all in G&A costs, or spread out in say, marketing and other areas? And then the third one is just your wages expense as a percentage of sales is quite high, fourth quarter only. So, kind of 18.6 versus 16 previous quarter, just wondering why. Thanks.

Okay. The first question is on the impairment cost. The impairment cost is actually in hotel operating cost others. Okay. The second question is that the CNY 6 million is in G&A expenses. Okay. Sorry, your third question is...

I think the – of the salaries expense and hotel operating cost as a percentage of revenue is much higher than previous quarters, just wondering why.

Okay. Now because it is that – you see what happened is that the hotel operating cost – the people costs are relatively fixed, right? So, when the revenues – because we have a revenue seasonality, so Q4 is the – I would say that the third best – the third season – I would say that the best season in the entire year is Q3. The second highest revenue will be recorded in Q2 and the third one will be in Q4, and the worst – the lowest revenue will be recorded in Q1. So, is that when the revenues come down, the payroll does not drop as much.

And compared to fourth quarter last year, that's just Crystal Orange and other acquisitions or it's also higher, the fourth quarter last year.

Right. In addition to that is that in the fourth quarter, we also recorded some of the bonuses related to even, including Crystal Orange in Q4.

Is that on top of the 36 million? Is it included in the 36 million? Or extra on top of the 36 million?

It's included in the 36 million. It is - we have other accruals in the – for the staff cost as well – for the hotel operating staff as well. So, the 36 million is a long term…

Okay. So, this hotel – this bonus for operating hotel staff, that's mostly in the fourth quarter, and it's ongoing every year. Or it's just like a special one this fourth quarter and not recurring in the future?

I think it will recur in the future if the performance of the hotels is doing well.

And is this always in the fourth quarter? Or is it spread out over the year? Is it always in the fourth quarter before they find out if the performance is doing well?

Usually, we will accrue it during the year – usually, we will accrue the bonus expenses during the fourth quarter. But having said that, in Q4, we will have a final assessment and then is that we will see that how they have achieved, overachieved their results. If they have performed much better, then we will give them a better bonus.

Okay, that’s perfectly understandable. Thank you.

The next question comes from the line of Chun Choi of 86Research. Please ask your question.

Hi. Thank you management for taking my questions. I have one. Actually, I want to understand more about our company's views on the lease and owned hotel strategy. So, I know most of the hotel will be under manachised mode going forward. But I just want to know a little bit more if leased and owned will also be a focus as well in light of your recent partnership with TPG on two hotel acquisitions, Teo. So, could you maybe share with us, out of the 650 to 700 hotels in pipeline, how many of those will be under leased and owned? Thank you.

Actually, we see leased hotels still as an essential part of our overall strategy. They play a few roles. One, by occupying the very good location, that these hotels continue to generate very good profit. Number two, when we innovate on our different brands, the leased hotels is a good way to serve as the flagship for the franchisees to follow. So overall speaking, we continue to invest in leased hotels. And we are very cautious in the site selection. Our new leased hotels are almost all in Tier 1 and the Tier 2 cities. You can see that we continue to use this model to move upwards into the upscale segment. As we just mentioned, the new Joya, the new Mercure, new Grand Mercure hotels are all under the leased model.

The next question comes from the line of Dan Chen of Franklin Templeton. Please ask your question.

Thank you. I want to ask a question, is that for our Q4 2017, the revenue is starting to increase year-on-year. And then for your guidance for Q1 2018, the increase is 27% to 29% and your guidance for the whole year is 15% [ph] to 19%. So, is that mean the revenue increase, we are slowed down quarter-by-quarter in the future?

Let me explain, is that because the revenue for Q4 in 2017, because in 2016, the comparison number is 2016 does not have Crystal Orange, okay. So, we record a pretty high – and in Q1 – because Crystal Orange was acquired in 2017, May 26, which you can assume that starting from the 7 months from June of 2017 up to December. So, comparatively, in Q1, we will have the impact of the inclusion of Crystal Orange in Q1. I would say that for the 2 months in Q2, we have the same thing. But going forward is that we would – because since Crystal Orange has been incorporated in our results since June 2017, so the growth rate going forward from June of 2018, it will be comparatively lower because of the higher base in 2017.

For the consolidated report for Orange Crystal [ph], is in June 2017, so in the first half of 2018, I think the growth will be around the 30 – for the Orange Crystal if not consolidated in the first half in 2017. So, maybe the second half year of 2018 for the growth will – very [ph] down I think, is that?

Possibly is that the higher growth rate in the first half of the year is mainly due to the annualization of the Crystal Orange, as well as we expect that we will also see some better – the RevPAR improvement in 2018, compared to 2017 and also that the impact of our hotel openings, which is coming to the stream in Q1 and Q2 of 2018 compared to 2017. So, it is a blended impact. But on the other hand is that we also will place some of the hotels under renovation. So that will actually take some revenue out. So that will be the net impact. Yes.

Okay. Thank you.

The next question comes from the line of Michael Wu of CITIC Securities. Please ask your question.

Hi, management. So, you mentioned that your assumption for 2018 same-hotel RevPAR growth is 3% to 5% year-on-year. I was wondering can you elaborate the breakdown of economy and midscale hotels. And I was also wondering, does this assumption take into account product upgrade, especially in economy segment.

Okay. The range of approximately – the RevPAR, same-hotel RevPAR approximately 3% to 5%, we can say that the lower end, we expect to come from the economy hotel and the midscale to be at the higher end of the 5%. Yes. And sorry, your next question?

Yes. I was wondering the same-hotel RevPAR growth, does that take into account the product upgrade like the HanTing 2.1 upgrade? Does that come as same hotel or as a new hotel?

We have – look, when we guesstimate, when we estimate that the RevPAR growth, we will not be able to consider the impact of the upgrades that will be done in 201 [ph], so particularly on a newer product because this is not yet known. And number two is that the magnitude, the quantity of the upgraded hotel will be small at the beginning of the product development. So, no, I will say that we have not considered such product into [indiscernible].

Okay. So, for the 3% to 5% RevPAR growth, do you think that's a base case scenario? Or it's more kind of conservative?

Because this is the beginning of the year, we only see the results for January, February. So, I suppose that we would – we'll relook at our assumption in Q1 and Q2.

Okay. Thank you. Thank you very much.

The next question comes from the line of Jerry Tang of Natixis. Please ask your question.

Hi, management. Thank you for taking my questions. I just got three questions from my side, firstly on your revenue guidance. If you were to incorporate the accounting treatment, the changes in accounting treatment made on your franchise fees and your different loyalty programs, the year-on-year or the – for your year-on-year growth and the quarter-on-quarter growth be significantly different? And my second question will be like what would be your target net openings for the next 3 years?

First question is on the – as you may see that the revenue reduction from the initial franchise fee will be approximately 10 million. On the other hand, it is that the – I mean, in for – that was for 2017, okay, and as for the loyalty program, is that the increase in revenue will be approximately like 73 million. But on the other hand, they come with an increase in the cost and selling expenses of around 63 million. So, net-net impact is that the revenue – the net – the impact on net revenue will be not significant. You will be either on the higher side or the lower side, it all depends on the deferred revenue related to initial fees and the loyalty program. But I don't expect that amount – the total amount to be significant.

And on your target net openings for the next 3 years?

Okay. We expect to open – we plan to open approximately 650 to 700 this year. And then is that we may close approximately 200 hotels this year as well. So that will give approximately 450; 450 to 500 hotels in this year. So, for next 2 years, we said we expect that the hotel openings may accelerate a little bit, but we have yet to have a fixed number, to have more certain numbers at this juncture.

Okay. I'm sorry, we've got to have a last question. What will be your – what do you expect your CapEx to be for the next 3 years, just in terms of your hotel refurbishments? How much of it will be hotel refurbishments? How much of it will be opening of the new hotels?

Okay. Our – you see, because in last year, our hotel openings is approximately 850 million. This year is that we expect our capital expenditure for both maintenance and upgrade will be approximately in the range of 850 million to 900 million as well. So as for the upgrade, then that we said will be in the range of 600 million of hotel openings and maybe we said 200 million to 300 million of maintenance and upgrades.

Okay. Thank you. Appreciate it.

The next question comes from the line of Tian Hou of T.H. Capital. Please ask your question.

Yes, good morning management. So, the question is related to your pipeline. So, would you please give some color or profile of those 600 to 700 hotel openings in the pipeline in terms of what percentage that are going to be mid to upscale? What percent of that is going to be economy? And what percent of that is going to be Tier 1 cities, Tier 2 cities? And what percent of that are going to from lower tier cities? That's number one question. And also, number two question is related to the selling and the marketing expense. So, you mentioned about you use that to promote your brands and loyalty program. And so, I wonder what's the percentage of trend is going to be in the – going forward as a percent of revenue, what's that going to be going forward in 2018? That's my two questions. Thank you.

As for the pipeline hotels, is that we have approximately I would say that – okay. We plan to – for our pipeline of approximately 690, over 96 hotels. In Tier 1 and Tier 2, it's approximately 60 – around 64%. I will say that mainly two-thirds of the hotels are related to Tier 1 and Tier 2 cities and the remaining will be in the Tier 3 cities.

What about the middle or upscale and economy?

As for the – okay, approximately 70% of our group numbers are related to the midscale and upscale hotels, and the remaining will be in the economy segment hotel.

Okay. That's helpful. What about the marketing trends as a percent of revenue?

No, we've said – we expect that, in 2017, we spent some money to promote our loyalty programs, as well as our brand upgrade. But having said that these expenses we expect that we will continue such spending. But in terms of percentage of revenue, we expect that will be either maintained or slightly reduced due to our increasing scale. But we expect that to maintain such spend going forward to enhance our corporate branding.

Thank you. Very helpful.

At this time, I would now like to hand the conference back to Ida Yu. Please continue.

Thank you, everyone, for dialing and spending time with us. And we look forward to talking to you over the next week when we are in Hong Kong for meeting, investor meeting, and looking forward to talking to you in the next earnings call in May. Thank you. Bye-bye.

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