H World Group Limited (HTHT) Q2 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Huazhu Group Q2 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, August 22, 2018. I would now like to hand the conference over to your speaker for today, Ms. Ida Yu. Thank you. Please go ahead.

Thank you, [Ivy]. Good morning, everyone. Thanks to all of you for dialing in today, and welcome to our second quarter 2018 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 Q2 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. Huazhu 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 supplementary slide presentation is available on the Investor Relations section of Huazhu Group's website at ir.huazhu.com, H-U-A-Z-H-U dot com. Now I would like to turn the call over to Jenny. Jenny, please?

Good morning, everyone. I am pleased to report that Huazhu continues to deliver a very strong second quarter results both operationally and financially. As shown on Page 2 of our presentation, our blended RevPAR continue to grow with a double-digit at 13%. As a result, our net revenues increased by 26%. With a better RevPAR and increasing scale, our operating income margin extended by 4 percentage points from 21.9% a year-ago to 26.6%. Accordingly, our adjusted EBITDA margin also reached 38.3% up from 35.7% a year-ago. Later, Teo will provide more financial data. Let me walk you through our strategic focuses this year. The three focuses that shown on Page 3 are the fast expansion of midscale hotels and the focus on continuous growth in the same-hotel RevPAR and the innovation in upscale hotel segment. Let's take a look at the progress in mid and upscale hotel growth first. Page 4 shows the fast expansion in our hotel counts and the room counts. At the end of Q2 this year, our mid and upscale rooms inventory increased by 39% from a year-ago, accounting for 34% in total rooms in operation. As shown on the right hand side of the page, our pipeline for mid and upscale rooms accounts for approximately 80% of the total number of rooms in the pipeline up from 57% a year-ago. Our diversified mid and upscale hotel brand portfolio with very profitable hotel operating models continues to attract franchisees into our hotel network. Today, I’d like to highlight two brands, Mercure and Crystal Orange. Let’s take a look at Mercure set. We're not only – have extending three hotels as our release scale of flagship. We also successfully relaunched Mercure, since we acquired master franchisee rights of this brand early 2016. At the time, the brand only had seven franchised and manachised hotels in operation and two in pipeline. As shown on Page 5, at the end of Q2, we have 28 Mercure hotels in operation and a 44 in pipeline. We opened five Mercure hotels in August and then we'll open one more before the end of August, giving our total hotel opening of six within this month alone. In the first half of 2018, the same-hotel RevPAR for Mercure brand grew by 10.2%. In addition to a remarkable RevPAR performance, this rent has also been fully integrated into the Huazhu operating platform with the application of all the technologies and the procedures, which allow it [run with Quanjude] level of efficiency. For example, the staff-to-room ratio is currently at 0.2% representing a 40% savings in headcount and personnel costs compare with these regional model. And on Page 6, we also demonstrated a very successful integration of Crystal Orange. As you may recall, we consolidated Crystal Orange, back offices, operation within 100 days after the acquisition. Since the beginning of 2018, more efforts have been made to drive higher revenue growth and improve the efficiency at the hotel level. At the same time, we've accelerated the expansion of this brand. The same-hotel RevPAR grew by 8.7% in the first half of 2018, faster than 7.7% in the comparable period last year. The hotel development also accelerated at the end of Q2 2018, we had 182 Crystal Orange hotels in operation, an increase of 44 hotels from a year-ago. Meanwhile, the number of hotels in the pipeline also grew from 65 a year-ago to 113 by the end of Q2 this year. Cost wise, staff-to-room ratio is reduced from 0.26 to 0.22. Our sizable loyalty member base and a strong centralized booking boost Crystal Orange’s direct sales by 10 percentage points from 62% to 72%. Clearly, we still have further room of improvements going forward, but we are very excited about the first year results and are confident that we will achieve more with a Crystal Orange in the next few years. In summary, on Page 7, we have a good progress in the Midscale and Upscale segment. As a result, the revenue contributions from our mid and upscale hotels have continued to increase. In Q2 2018, the revenue from mid and upscale hotels increased by 62% to RMB1.2 billion, accounting for 49% of our total net revenues, up from 39% a year-ago. With that note, let's shift to the second strategic focus area of growing the same-hotel RevPAR. The result in this front is attributable to three factors. The first one is of course Company level efforts, and the second is the macro economy and the demand in this market, and the third one would be the industry-wide supply situation. Recently, we have received a lot of questions over the slowing down in consumer retail sales. And investors also would like to understand, how will that impact the lodging industry? I would try to share our view and observation while reporting our Q2 RevPAR performance as they are related. First of all, I will take a few minutes to look at a consumer retail sales growth and domestic travel expenditure growth from 2012 to 2017 as shown on Page 8. As you can see, the domestic travel expenditure growth has consistently a much faster than consumer retail sales in China. And in recent years 2016 and 2017, the domestic travel expenditure growth significantly outperformed the consumer retail sales growth. Therefore, we are confident that the travel demand has driven by general economy, increased affluence in the society and the lifestyle change in this country will continue to grow robustly and exceed the growth rate in retail sales. Therefore, we are not significantly concerned about some of the recent trend in the consumer retail sales growth fluctuation. Turning to Page 9, Huazhu’s same-hotel RevPAR performance has been growing in line with China domestic travel expenditure growth. Although, the last year comparable RevPAR base was very high at 8.3%, we continue to record a 7.9% same-hotel RevPAR growth in Q2 this year. If we take a deep dive of the same-hotel RevPAR growth number, we should take a look at Page 10. The main attributor is the ADR growth as we continue to attract customers who are willing to pay a little bit more and looking for better quality products. And then for the first time, we have put our own occupancy performance should at – through should at with the China industry average. As you can see, our occupancy has been consistently high with some seasonal fluctuation from 86% to 96% during the past few years. And the China hotel as an industry, the occupancy has been fluctuating between 63% to 72%. So Huazhu as a Group has also formed industry by 17 percentage points to 24 percentage points among the different quarters. I would like to reiterate that this result has been achieved with the background that Huazhu has been growing fast with gross hotel openings of 737 and 665 in 2016 to 2017 respectively. We are confident that we will be able to maintain a very strong occupancy trend as well as growing our ADR going forward. Recently, we received some further questions on the RevPAR growth outlook and how will that impact Huazhu’s financial performances. I want to share with you a little bit more of history to how to predict the future. Please turn to Page 11. The top part of this chart shows the same-hotel RevPAR growth history for Huazhu from 2011 to 2017. As I mentioned earlier, there are three factors impacting the same-hotel RevPAR growth. Number one, the Company level efforts. Number two, the macro economy and the demand situation. And number three, the industry level supply situation. As you can see, before 2015 the general demand has actually been strong. However, Huazhu was really focusing on expanding our network and was not really particularly making efforts, in terms of improving the same-hotel RevPAR growth. And the industry supply has been growing very fast, but economy hotels which was the only segment we played a few years ago. So with that, you can see our RevPAR growth was not that great before 2015. However, since 2016, our effort has been shifted to better quality as well as our more brand building efforts. And that has significantly changed the trend of our same-hotel RevPAR growth. Therefore, there might be some fluctuation at a macro level, but as far as our strategy is steady and we continue to invest in the quality and brand building, we believe we will outperform our competitors in terms of same-hotel RevPAR growth. And at the second level, if you look at the second part of this page, we also showed our EBITDA margin from 2011 to 2017. Despite the fluctuation of our same-hotel RevPAR, the EBITDA margin actually has been quite consistently growing year-after-year mainly because we have been adopting an asset-light model and that help us to sell-through different economic environment as well as fluctuation in supply demand. So going forward, we will continue our asset-light model with a continuous focus on product innovation that meets evolving needs of our consumers and the franchise owners. Let's move to the third area, which is our innovation and exploration in the upscale segment. I am happy to report our progress in this segment on Page 12. Just a week ago, we announced a strategic acquisition of Blossom Hill Hotels & Resorts. [Indiscernible] and positioned as an upscale resort brand. Blossom Hill provides luxury, boutique hotels and resorts with aesthetic decor and cultural touch. We see this acquisition as a win-win combination for both Huazhu and Blossom Hill. With the addition of Blossom Hill to our hotel portfolio, we are able to offer more diversified choices to over 100 million HUAZHU Rewards members. At the same time, this acquisition will improve Blossom Hill's occupancy levels, cost efficiency, and will also accelerate their expansion. By integrating Blossom Hill with our existing hotel portfolio and providing more choices for our customers, we aim to further strengthen Huazhu's presence in the Upscale Hotel and Resort segment. With that, I will hand the call over to Teo, who will walk you through our Q2 operational and financial results in more detail.

Thank you, Jenny. Good morning, everyone. Please turn to Page 14. At the end of Q2, 2018, our total number of hotels in operation has reached 3,903. During the first half of 2018, we opened 274 hotels with 65% under the mid and upscale brands. During the same period, we closed 117 hotels. Considering the acquisition of Blossom Hill and our robust pipeline, the full-year target for Blossom Hill hotel opening has been revised upwards from 650 to 700 to 680 to 730. As part of our quality control exercise, we will also tighten up our quality control by terminating certain franchisees who fail to maintain the quality standards through product upgrades and procurement from the authorized suppliers through Huazhu centralized procurement platform. In this connection, we will also revise-up the full-year target for hotel closure from 200 to 240. Page 15 shows that our hotel pipeline has reached 839 at the end of Q2, a record high number. Those hotels in the pipeline are expected to open during the next 6 months to 18 months. In this connection, we are confident of our hotel opening target for this year. Turning to Page 16, in Q2, our group blend RevPAR grew by 13.2 %. These was driven by an increase of ADR of 13.8% year-over-year mainly due to the increasing mix of mid-scale hotels, RevPAR increase from better quality economy hotels. Let's move on to the financial results on Page 17. Our net revenue grew by 25.9% year-over-year in Q2, hitting the high-end of our guidance. Breaking down the revenue growth in Q2, net revenues from our leased and operated hotels improved by 23% year-over-year and net revenues from our manachised and franchised hotels were up 37% year-over-year. In Q2, revenues from manachised and franchised hotels accounted for 24.3%, up from 22.5% a year-ago. With our asset-light group model, we expect to see the revenue contribution from manachised and franchised hotels will continue to grow going forward. As demonstrated on Page 18, our Q2 operating profit grew by 53.2% and the operating margin expanded by 4.7 percentage points year-over-year to 26.6%, mainly driven by operating efficiency and partially offset by increase in pre-opening expenses. Our hotel operating costs and other operating costs as a percentage of net revenue increased by 2.3 percentage points year-over-year. This was mainly due to our improved blended RevPAR and better operating efficiencies from scales. The pre-opening expenses as a percentage of net revenue increased by 2.1 percentage points as there were more midscale hotels under constructions compared to last year. The SG&A expenses and other operating income as a percentage of net revenues decreased by 0.3 percentage points year-over-year. This other operating income in Q2 included a RMB35 million of compensation received from Crystal Orange selling shareholder at the final settlement on the sales and purchase transactions. Excluding this one-off compensation, the Q2 operating margin would have expanded by 3.3 percentage points instead of 4.7 percentage points. The higher SG&A expenses, in Q2 was mainly due to increase in personnel costs relating to new hotel developments, design teams for the midscale hotels, the team for information technology, and a quarterly accrual of a long-term profit bonus. In 2017, we accrued the entire sum of the long-term profit sharing bonus in Q4 2017. Turning to Page 19, as mentioned in our Q1 conference call, a new accounting rules accessible effective from January 1, 2018, required companies reporting under the U.S. GAAP to reflect the unrealized gains and losses from the fair value changes relating to the previously known as available for sales investments in the income statements. The unrealized losses in Q2 from equity securities was due to the lower share price at the end of Q2 compared to those at the end of Q1. These unrealized losses will have a significant impact on our GAAP net income going forward. To better reflect our core financial performance, we excluded the impact of these fair value changes in presenting our adjusted EBITDA and net income. However, the adjusted EBITDA and net income on this page, has not excluded the effect of EBITDA received from Accor totaling RMB103 million and also a foreign exchange loss of RMB131 million also which is also related to our investment in Accor. The strong RevPAR growth and better operating efficiency drives our profitability. In Q2, our adjusted EBITDA increased by 35% year-over-year to RMB965 million, while our adjusted EBITDA margin expanded by 2.6 percentage points from 35.7% to 38.3%. Our adjusted net income increased 39% year-over-year to RMB558 million, while the adjusted net income margin expanded from 20.1% to 22.1%. The adjustment mentioned on this page, include the share-based compensation and unrealized losses from fair value changes from equities securities. Moving on to cash flow status on Page 20. In Q2, our net cash from operations reached RMB1.1 billion, while the CapEx for maintenance and new developments totaled RMB192 million. As a result, the free cash flow in Q2 was RMB948 million. In this quarter, we used this portion of our excess cash to repay RMB535 million of our U.S. dollar syndication loans. At the end of Q2, we had cash and cash equivalents and restricted cash of approximately RMB4.5 billion. Finally, our guidance on Page 21. For the third quarter in 2018, we expect our net revenue to grow 10.5% to 12.5% and we also maintained our full-year revenue growth rate ranging from 18% to 22%. As for the hotel openings, as mentioned earlier, we have revised with the full-year gross hotel openings from 650 to 700 up to 680 to 730 after considering the acquisition of the Blossom Hill hotels. With that, let's open the floor for questions.

We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Billy Ng from Bank of America Merrill Lynch. Your line is open.

Hi. Good morning, management. I have two questions. The first one actually is just a follow-up with Jenny’s comments regarding the macro economy slowed down, and we saw that as you described like the Company should be more defensive to the sector and the Company should be able to grow the EBITDA even during a downturn. But can you share what you see so far in terms of the most recent RevPAR data and also in terms of franchisees interest in opening more hotel has the recent slowdown in economy start to impact these two metrics a little bit?

Honestly speaking, travel industry is a lagging industry, when there is any economic fluctuation. So we haven't really seen any meaningful change in terms of the demand. There was some fluctuation in the first two weeks of July in the travel demand, mainly because quite a few provinces actually started the children’s summer holiday much later than the regular years. That had some impact for a couple weeks. And other than that, the demand situation we are seeing continued to be strong.

Okay, thanks. And just follow-up on that is our Q3 revenue guidance of growing 10.5% to 12.5%, what kind of RevPAR assumption growth that we have factored in?

So Q3 numbers is not released to the public yet. We will address that when we closed the quarter.

Okay. And then separate questions regarding the Blossom Hill’s acquisition. Can you tell us a bit more in terms of the valuation that we pay and the company’s P&L, the target company P&L. And also in terms of strategy, is there a possibility to bring this resort type of brands to the Tier 1 City like Shanghai and Beijing?

Hi, Billy, this is Teo. The purchase valuation for the entire stake of the company is approximately RMB650 million. I mean disclosing our 6K, we expect that with the full realization of the [indiscernible] revenue and cost strategy, we expect the EBITDA multiples would be approximately 13 times.

Okay, thanks.

Coming to the – whether we would actually explore the possibility of actually moving the brand into the Tier 1 cities, well, this is definitely a possibilities.

Okay. Thank you.

Your next question comes from the line of Justin Kwok from Goldman Sachs. Your line is open.

Thanks. Good morning. Maybe I have two broader questions. One on the strategic move to the upscale high-end hotels and the other one on the margins; on the first slide, you made a slide talking about the progress on the Mercure and also now you have another Blossom Hill acquisitions. I want to get a sense on these strategic move to the upscale? Are you prepared to do a lot more M&As in the space? Or are you prepared to grow your own brands like Joya, Grand Mercure into a much larger pie? And in that line, are you prepare also to acquire more assets in order to kind of build some flagships to showcase your brand? That's the first part. The second question on the margins, I think as Teo mentioned, excluding some of the one-offs items, your operating margins is around 3 plus percentage point up on year-over-year basis. How are you seeing this trend into second half and also to the next two to three years? Is it more a sustainable trade or was it the other considerations that we should look for? Thanks.

Okay. I want to address your first question and ask Teo to address the second one. We see a clear trend of consumption upgrade in China. Therefore, we have been moving our portfolio and expanding in midscale and now into upscale segments. So we are really following our consumers in that growth strategy. In term of acquired brand and growing our own brands, those two strategies are combined in our practice. We would typically acquire brand which is complimentary to our existing portfolio and then use all the strength in developments and in operational excellence and efficiency to strengthen that brand and grow it into a meaningful player in the market. We have found that for quite a few brands already. If you look back, we see that for ibis and ibis Styles, we talk about them in earlier quarters. We successfully did that for Mercure. We also achieved very good results with Crystal Orange. So we will repeat in that practice for Blossom Hill, which today is still very small. But we see a lot of potential in this brand. At the same time, you can see our homegrown brands are also doing very well. HanTing, it continued to expand with a very strong same-hotel RevPAR growth, JI Hotel phenomenal growth, together also with the good RevPAR performance. Our new debates like Manxin and also received a very good review from the consumers. CitiGO was really a flat in our new innovation in urban hotels. So we have actually being a very successful in launch – both in our homegrown brands as well as extending the acquired brands. We believe, we are becoming the heart of brands in the hotel industry in China.

Hi, Justin.

Hi.

Let me address the second questions on margin. In the previous call, we have been mentioning that we've given our asset-light model and with increasing the scale and our centralized operating platform. We will continue to see some improvement in our margin expansion that you would expect that 1 percentage to 1.5 percentage point increases in margin going forward as well. Of course is that the RevPAR would be – perform much better than you add more couple percentage point to a margin.

Okay. Thanks.

Your next question comes from the line of Tallan Zhou from Deutsche Bank. Your line is open.

Good morning, management. I have two questions. First question is, I hear that July the school vocation has been delayed for one-week. So how does that actually impact your RevPAR growth? The second question is, in terms of the guidance, is it possible for us to breakdown a little bit, for example, how much will be contributed by the new hotel opening and how much will be found the RevPAR growth? Thanks.

Okay. Hi, Tallan. Let me answer your questions. I think because that the starting either risk that we have not disclosed our – I would say that our monthly RevPAR as what the impact is. But what we have been seeing is that during the first two weeks of July, as mentioned by Jenny, there was some, delays starting of the holidays in some of the province in China. As a result is that the RevPAR growth – I would say that wasn't be slower at the beginning of two weeks. But in the second half of July and continuous into August, we see that the RevPAR has actually increased very strongly, coming back to a more normal level. So we do not – we are not disclosing the RevPAR numbers until to be close our books in September.

Okay. The second question is about your guidance. Any chance you can breakdown a little bit, for example, how much will be contributed by the new hotel?

We have a quite a bit of new hotel openings in Q3 and Q4. But these hotels – they are mainly in the ramp up period, so the impacts are not expected to be significant.

Okay. Thanks Teo.

Your next question comes from the line of Juan Lin from 86Research. Your line is open.

Hi, good morning. Thank you for taking my questions. My first question is the plan of hotel closure. You mentioned the reason you have terminating the franchisees is related to quality standards and procurement process. Could you please elaborate this issue? Are you expecting more hotel shutdown due to the similar issue and are there any costs and expenses associated with these shutdown process? Second question is related to the acquisition of Blossom Hill. It seems that positioning of Blossom Hill is quite different from your existing hotel portfolio. I wondered that whether it means that we are shifting or expanding our focus into the holiday hotel and resort sector, what types of difficulties and synergies do you think we would have in operating Blossom Hill in the future? Thank you.

In terms of quality improvements, of course we have a clear quality standard for each brand. If you look at the closure, the closure mainly focused on a few brands. The first one is HanTing, which is mainly due to when the franchisee agreement expires we generally require the franchisee to invest into a renovation of their hotels. And in the case where the franchisees refused to do so, we will not continue to renew their contract. So that has resulted in some numbers of closures for HanTing. And the closure for Starway, Elan and Hi Inn is mainly due to our entry quality control in the past few years hasn’t been as strict as we are today. Therefore, as we raise the bar, some of the franchisees couldn't keep up with the new standard and typically it's off to a friendly discussion, we agreed in between the two parties to remove the slack from their property. So those are the main closure due to quality issues. And in terms of Blossom Hill, number one, we clearly see a very fast growing demand for resort and holiday facilities for the Chinese consumers. Blossom Hill definitely has been a very well established brand in that regard. At the same time, we don't think a brand should be viewed as a wholly location-based brand. That means, a brand is starting with the resort product can also open their urban version, and the urban started brand can also open their resort version. So we don't really view Blossom Hill going forward as a pure resorts brand. And we are also going to use some of our other brands to enter into the resort market. As you rightly pointed out, the operation as well as sales and marketing of the resort property could present different demand on the capabilities going forward. We're working on that and we believe we will gradually become a leader and expert in that domain.

[Operator Instructions] Your next question comes from the line of Carlton Lai from Daiwa. Your line is open.

Thanks for taking my question and excellent results. I think my first question is regarding the staff ratio between mid and upscale hotels and economy hotels. I notice that the Mercure brand is now at 20 staff per 100 rooms, which I think to me, that looks pretty low for a midscale hotel brand, and I think as much lower than the Mercure hotels in other countries. So just wondering what the difference between the staff ratio between your higher end hotels and your economy hotels are and how do you maintain a level of quality despite a fewer staff? And my second question is regarding just on your debt levels, if I'm not mistaking your FCF, your free cash flow in the second quarter of 2018 is a record high for a quarterly basis. So can we expect faster paydown of debt going forward? And just lastly, I understand that, Jenny, now you're part of the Board of AccorHotels, just want to see if there's anything specific that you’re trying to achieve or in terms of cooperation with AccorHotels Group in the future? Thank you.

Let me address the staff to room ratio first. As we discussed with the different analysts in the past, in core of Huazhu, we are very technology driven company. So in our operation in the hotel we have adopted a very advanced technology, including things like automatic check-in, check-out machines, and mobile-based system to facilitate the room cleaning and the maintenance. So we also have our own proprietary CRM, PMS systems, and so we manage our operations both frontline and back office somewhat differently from the traditional operators to achieve a much higher level of efficiency. So in summary as a fact of the secret recipe I’d say it's our continuous effort and the investment into technology.

Hi, thank you. This is Teo. To address your question on the debt level and use of our excess cash, yes, I’d say the majority – I’d say almost all of our debt were actually offshore, is accurate to make all the syndication loans in the U.S. dollars as well as the margin financing in the euro dollar. And majority of – most of our cash is actually onshore. We have generated quite a bit of excess cash within China and we are working with the authorities on the numbers which get approval, so that we can get some cash outs [indiscernible] we would use some of the cash to paydown the debt.

Thank you. And I think just last question on the – being on the Board of Accor’s, or expecting anything different going forward?

I am sorry. Can you repeat the question?

Yes, sure. I think Jenny is now on Board of AccorHotels Group. I just want to see if there's anything that we're looking for a specifically or are they going to be anything different going forward in terms of cooperation with the AccorHotels?

Our coverage with Accor has always been stable and healthy. So as of today there is – we are continually working very well with Accor at the many different fronts.

Thank you.

Your next question comes from the line of Mr. Praveen Choudhary from Morgan Stanley. Your line is open.

Thank you. Good morning, Ji Qi. Good morning, Jenny. Good morning, Teo. Thanks very much for the presentation. Congrats on good results. A couple of questions for me. First of all the guidance of 10.5% to 12.5%, I see these numbers not being a good reflection in future. So hearing me out here, basically in Q2 you had a revenue growth of – let's say 28%, but majority of the growth came from the F&M business, which is very profitable, which grew at 37%. My question is, would you be able to give us some guidance of your third quarter revenue growth in F&M business please?

The disclosure, we do not [indiscernible] the revenue from the franchised and manachised business as far as the recent operated business. I would say that – let me give a little bit color on our revenue guidance for Q3. Now Q3 has traditionally been our strongest quarter, but having said that is that they are affected by the number of seasonality as well as effectible. To give some little more color is that during the first two weeks of July, as we mentioned earlier, is that there was some delays commencement of the holidays in some of the provinces in China. That actually causes some of the issue that resulted in slower start for the Q3. In addition, is that at the end of September, we will say the second half of September, we have Mooncake festivals which will actually have some impacts on our RevPAR as well as occupancy. But last year, comparing in 2017, the Mooncake festivals actually falls during the October holiday. The first week of October holidays, which impact this actually offset by the October holiday. So actually considering the impact of this Mooncake festivals as well as the slower start in July, we actually said that our revenue growth guidance at 10.5% to 12.5% in this quarter.

Understood. Thank you, Mr. Teo. I'm going to drill down a little bit more if you don't mind. I know you can’t answer this question. What we are trying to understand is that the room growth, because you already given the guidance in terms of what will be number of hotels in third quarter and fourth quarter. If you see that the growth will itself be more than 10% just on number of rooms. And so the fact that you’re saying that you’re revenue will be only 10% to 12%, it just implies a RevPAR growth of very small number, which is what everybody is asking you. Considering that we understand the Moon festival in July weakness, even then, do you see the – and then as Jenny mentioned, the demand is actually pretty robust excluding these things. Do you expect the RevPAR growth to above mid single-digit because Q2 was so strong at 7.9%, if the demand is still strong, we should expect – by the way, this is like-for-like? The actual RevPAR is significantly higher because you are adding significant number of midscale units as you explained. So this number just doesn't tally, I mean I know how to explain this but it doesn't make sense to have a very low reported RevPAR number based on your guidance or you’re low volume your guidance, so that you can beat in Q3, if that's the case, happy to hear that too?

I think [indiscernible] is our growth going forward mainly driven by the franchise and the management business. And the revenue contribution typically only one tenth offer leased hotel. So despite in our room count growth will be more than 10% by the revenue contributions on the manachised hotels are going to be a smaller proportionally to the leased hotels that makes a change, we will have a significant impact on the revenue growth number reported.

Exactly, why I asked the first question of knowing about F&M growth, but I understand you can answer that. My other question is related to the Blossom Hill, assuming that you mentioned RMB50 million or so of EBITDA. May I know, is it related to the existing EBITDA and what occupancy level was that RMB50 million EBITDA because if it is a lower occupancy and as you ramp it up, maybe you can make more money out of that? Secondly, if the RMB50 million do come in fourth quarter, why didn't you raise your guidance a little bit assuming that number should be embedded in the full-year? Thank you.

Let me address your question on Blossom Hill. Blossom Hill has been a very respected brand in the market. Across the different markets, their RevPAR has been approximately RMB400 to RMB600 and that's quite comparable to the upscale hotels in those markets. And the occupancy level because it's a currency of pure resource play the occupancy is not at high as the urban hotels we are running today. Nevertheless, we believe after we connect them into our loyalty program that we will have a meaningful boost to their occupancy level. As you can see from the performance of Crystal Orange, we had a significant improvement in occupancy, especially the central reservation through such connection into the loyalty program. So we believe the improvement will also happen to boost them heal after we complete the integration.

The question also was about did you not try to increase the guidance for full-year with the help of Blossom Hill a little bit or too small to matter?

Blossom Hill is very, very small. The room cost is, I think – yes it’s only 570 rooms as of today. So I don't think you will have a material impact on our revenue guidance.

Got it. Thank you. And then one last housekeeping question if you may. What was the percentage of revenue EBITDA and net income from Crystal Orange in Q2 please? I'm not sure if you already disclosed it.

It is approximately like 14%.

For all three lines?

Yes. Combined together the Crystal Orange as a percentage of the total revenue.

Okay. Thank you so much. Thanks again.

Thank you for your question.

Your next question comes from the line of Mingge Wu from CITIC Securities. Your line is open.

Hi, management. I have two questions here. The first is could you provide some updates on HanTing 2.0 upgrading process. So how much of – and how much of the economy upscale same-hotel RevPAR growth is contributed by the upgrading? And the second question is according to STR industry wise, the gross rate of supply have exceeded that of demand in June and July. But before Q2, in most of cases demand has outpaced this pipe. So can you share some nice on your understanding on supply and demand situation because the pipeline Huazhu also reached that historical high? Thank you.

Sorry, I didn’t hear clearly. Can you repeat your first question again? You go for one question out of the other.

Okay. So the first question is can you provide some updates on HanTing 2.0 upgrading process, and how much of the Q2 economy hotel, same-hotel RevPAR growth is contributed by the upgrading of HanTing 2.0?

Okay, the HanTing 2.0 upgrade is currently running at approximately 45%. So in this quarter is actually the busiest quarter. There will be more upgrades like catching up maybe in Q4 of this year. And what we have been seeing is that the product upgrades for the HanTing as well as the quality to it is actually pushing up the RevPAR increase for both the existing hotel as well as upgraded hotels. So what are we seeing is that the overall HanTing growth has been – the RevPAR growth is approximately like coming to 8%, which is very strong.

All right. Thank you. And the second question is, can you shed some nice – your understanding about the supply and demand situation, because according to the STR global data, the gross rate of supply has exceeded that of demand in June and July, but before in most of cases, demand has outpaced the supply?

I do not have access to those numbers that you currently have. But what we have been seeing is that the – actually the difference between the economic segment hotel as well as the midscale hotel segment. What we have been seeing is that the brand concentration in the economy segment has been increasing. It is mainly due to the exit of the existing, particularly the single branded hotels in this segment. But on the other hand, is the supply for the midscale hotels has been increasing at a very fast pace. But having said that is that we do see that there are market capacity for this market segments where we’re currently – the supply is currently is actually slower than the demand. As a result, we have been seeing that – in our midscale hotels, we've been seeing that our RevPAR dividend increased at more than 7%.

Great. Thank you. End of Q&A

Excuse me, presenters. Please continue.

Sorry for those of you in the queue. And due to the time limits, we have to conclude the call today. And we are happy and open for those who want to communicate with Huazhu. And we look forward to update you in the next quarter. Thank you.