H World Group Limited (HTHT) Q1 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to today's Huazhu Group Limited First Quarter 2019 Earnings Conference Call. [Operator Instructions] I must advice you that this conference is being recorded today, the 23rd of May 2019. I would now like to hand the conference over to your speaker today, Ida Yu. Thank you. Please go ahead.

Thank you, Operator. Good morning, everyone. 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 Q1 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. Now I would like to turn the call over to Jenny, Jenny please.

Good morning, everyone. Welcome to our conference call. Let's turn to Page 2 of the presentation. At the end of Q1 this year, we had a total number of 4,396 hotels, an increase of 15% from the end of Q1 2018. The total turnover reached RMB7.2 billion, an increase of 17% from a year ago. Our net revenues increased by 14% from RMB2.1 billion to RMB2.4 billion in Q1 2019. Our adjusted EBITDA stood at RMB528 million for Q1 as compared to RMB559 million in the same quarter last year. To help you understand the fluctuation in our EBITDA we have done from pro-forma adjustments. The pro forma adjusted EBITDA would have been RMB610 million or 25.5% of net revenue, if excluding the increased spending in upscale hotel investments, development teams and IT capabilities in Q1 2019. We believe such investments are necessary when we invest those into our strategic focus area, they are going to fill our sustained future growth. Before we walk you through the strategic highlights in Q1, let me remind you about our three focus areas this year on Page 3. First, we accelerate expansion of hotel network. Secondly, we focus on the Innovative Technology Applications to improve guest experience and operational efficiency. Third is the strategic deployment in upscale segment. Please turn to Page 4. We had a record-breaking hotel openings in the first quarter, with an average of 2.5 hotels gross or two hotels net opened every day. We added net 166 hotels in Q1 2019, up from 71 hotels in Q1 last year, an increase of 130% year-over-year. And we expect future hotel expansion continue to accelerate given a strong growing pipeline. As shown on Page 5, we had a pipeline of 1,311 hotels at the end of Q1 this year, which represented 30% of hotels in operation up from 19% and 14% for Q1 2018 and Q1 2017 respectively. The significant growth in hotel openings and the pipeline building was the result of our attractive brand and our strengthened development team. We continue to be defer our development team since the second part of last year. The team is now headed by Mr. Sun. He has been on this job since October 2018. Mr. Sun joined Huazhu in 2016 as the CEO of Upscale Hotel Division and Group EVP. He was recently promoted to Global Chief Development Officer in charge of hotel development for all Huazhu brand both in China and overseas markets. Mr. Sun has a very impressive track record in his 25 years of experience in hospitality industry. With the successful record in brand building, management of Upscale Hotels and international acquisition, we expect Mr. Sun to lead our development efforts to another level going forward. As shown on Page 7, I would also like to update you on our fast expansion in Mid and Upscale hotels. At the end of Q1 this year, our Mid and Upscale groups inventory increased by 45% from a year ago, accounting for 40% in total growth in operations. As shown on the right hand side of the page, our pipeline for Mid and Upscale rooms accounted for approximately 82% of the total number of rooms in the pipeline, up from 80% a year ago. Our diversified Mid and Upscale hotel brand portfolio with profitable hotel operating models continued to attract potential franchisees into Huazhu's hotel network. As part of our Fast Expansion strategy, we have decided to re-accelerate our soft brand to consolidate the Independent Hotels in China, which account for approximately 80% of the supply. As shown on Page 8, Huazhu has three soft brands including Hi Inn, Elan and Starway covering economy upto Midfield segment. In addition, we are going to introduce a new soft brand Madison in the next few months for Upscale segment. With the acceleration strategy, we now expect smaller hotels and make it more flexible and affordable for hotel owners to join Huazhu and benefit from our operational excellence. We expect to open 300 to 400 new soft brand hotels in 2019, compared with that 100 net openings in 2018. Secondly, let's take a look at our innovative technology application to improve guest experience and operational efficiency. In Huazhu, the digitalization and automation have been rooted in our daily job. In the following pages, I will share with you some examples. As shown on Page 9, we leverage technology to enhance customer into actions. Huazhu Rewards, our loyalty program has more than 126 million members, contributing about 76% of room nights service. Most of these room nights are booked through our Huazhu app. Huazhu app has more than 36 million downloads with over 500,000 daily active users. In addition, we have more than 18 million Wechat followers and over 12 million users on WeChat Mini Program. Furthermore, we breakdown the full cycle of guest booking and [indiscernible] into 16 mobile touchpoints and improved their experience with us. For instance the feature of self room selection online embedded in Huazhu app has been by over 20 million customers, about 92% of the users who have experienced this like it. Next on Page 10, we apply technology also to enhance the customer experience in their check in and check-out process. Our guests are now getting familiar with our automatic check-in check-out through our link hotel terminal equipment to simplify the front desk work process. It takes only 10 seconds to complete checking through the machine. It also has a function of facial recognition and views direct link to Public Security Bureau Database. This equipment has been installed in more than 1500 Huazhu's hotels. We also sell this equipment to other hotels. In large hotels where multiple reception staffs are needed, every two machines can replace one staff according to somewhat - the adopters of our machine. Furthermore, our Innovative Technology Applications have been made to drive cost efficiency and quality consistency. We have built a centralized online procurement system to serve all Huazhu hotels. Hotel owners can easily complete their online purchase of hotel supply with higher quality at lower cost. Uptil now we have more than 200 suppliers and 5,000 SKUs on our procurement system. Transactions of RMB400 million were completed in Q1 2019 through this system. Thirdly, let's take a look at our Strategic Deployments in Upscale segment. We are pleased to announce Blossom Hill first urban hotel in Beijing Hou Hai opened this March. As shown on Page 12, this is a conversion from VUE hotel. The price range is between RMB1,000 to RMB1,500 per room night. We are glad to announce that in April in the first month it gets into the Blossom Hill brand, this hotel achieved RevPAR growth of 6.8% year-over-year . I'm also excited to report that we have enhanced leadership for our Upscale hotel segment. Mr. XIA Nong joined Huazhu in April serving as Global CEO of Upscale Hotel Division and the Group EVP. Mr. XIA has over 20 years of international hospitality and travel management experience. His work experience in international hotel groups will add great value to Huazhu's strategic deployment in Upscale segment. We expect to bring you more updates on our Upscale hotel progress in the following quarters. With that, I'll turn the call over to Teo. He will walk you through our operational and the financial results in detail, Teo, please.

Thank you, Jenny. Good morning, everyone. Please turn to Page 15. In Q1, our Group blended RevPAR grew by 2.9%. The RevPAR growth was driven by an increase in ADR by 6.9% year-over-year, contributed by a 2.9% year-over-year increase in mature hotels Rev ADR and an increasing mix of Mid and Upscale and upgraded hotels. Our occupancy stands at 81% in Q1, 3 percentage points lower compared to 84% a year ago. The lower occupancy was largely attributed to the softer macroeconomic environment, as well as higher base in Q1 2018. Turning to Page 16, our same-hotel RevPAR growth was flat at Q1. Our ADR improved by 2.9% and partially offset by a lower occupancy of 2.8%. We observed a softer visitations to the Spring Trade Fair and conference in March compared to last year. This has resulted in the lower occupancy in our hotels in Q1. This trend continued into April, but we had seen a recovery in May this year. This trend is consistent with our original forecast earlier this year, given that the Chinese government has put in place a number of stimulus to reboot the economy since Q4 of 2018. However, given the recent escalation in the China and US trade war, we need more data to determine if this recovery trend will continue into Q2 and subsequently in subsequent quarters. Moving on to the financial results on Page 17. Our net revenues grew by 14.2% in Q1 in line with our guidance of 13% to 15%. Breaking down the revenue, net revenues from our leased and owned hotels improved by 8% year-over-year and net revenue from our manachised and franchised hotels were up 30% compared to last year. In, Q1 revenue from our asset manachised and franchised business model contributed 27.8% of our total revenue, up by 3.5 percentage points from last year. We expect the contribution from our franchised business will continue to increase going forward. As Jenny, mentioned, we made good progress in the Midscale segment. Revenue contribution from our Mid and Upscale hotels continued to increase. As shown on Page 18 in Q1, revenue from Mid and Upscale hotels increased by 30% to RMB1.3 billion, accounting for 54% of the total hotel revenue up from 47% from a year ago. Turning to Page 19, the operating income and margin, the reported income from operations was RMB264 million compared to RMB306 million last year. The reported operating margin was 11.1%, 3.6 percentage points lower compared to 2018. The lower operating profit and margin was mainly due to a lower same hotel RevPAR in our hotel and also our increased investment in hotel development teams, Upscale hotels and IT capabilities. Excluded these investments, the pro-forma income from operations would have been RMB351 million, compared to RMB306 million last year. The pro-forma operating margin would have been 14.7%, the same level at Q1 2018. These investments does not bring in any revenue at a current stage, but they will generate revenue in the future. We had increased the headcounts for our development team, the results have been very positive. We have seen our pipeline hotels increased by 76% to 1,311 at the end of Q1 compared to 744 hotels last year. This fast hotel network expansion will bring in revenue and operating profit when they are opened. Another area where we invested are our IT talent pools. As Jenny demonstrated in her presentation earlier, our technology capabilities allow us to draft both operational efficiencies and customer experience. Our technology team is also working on a number of other projects, which we will incorporate into our hotel operations going forward. We will share more details on this project with you at a later stage. Last but not least, we have made a strategic deployment into the Upscale segment to expanding our Upscale hotel teams and secure a number of strategically located properties in Shanghai, Beijing, Hangzhou and Chengdu for our Upscale hotels. This has caused our payroll costs and pre-operating expenses to increase compared to last year without any revenue contribution until next year in 2020. We believe these investments will bring additional revenue and drive margin expansion in the coming years. Turning to Page 20 on our cash balance position. At Q1 2019, we have approximately RMB4.5 billion in cash. In Q1, we paid our cash dividend of RMB659 million to our shareholders. Capital expenditure during this period was RMB384 million. We have also successfully remitted out RMB2.5 billion to our offshore bank accounts. This cash has been partially used to repay RMB120 million of our offshore revolving bank borrowings in Q1 and a further RMB130 million as of US dollar has been used to be repay the offshore revolving - our borrowing facilities in April. At the end of Q1, our offshore cash balances and bank borrowing facilities available to drawdown totaling USD350 million. As we generate most of our cash in China, we had sufficient cash to repay for all our tax expenditure in China. Finally, on Page 21 our guidance, we revised our full-year gross opening target to 1,100 to 1,200 hotels. We estimate to close about 200 hotels to 250 hotels in 2019. We expect our Q2 net revenues to grow 13% to 15% year-over-year. With that let's open the floor for questions.

[Operator Instructions] And our first question comes from the line of Justin Kwok from Goldman Sachs. Justin, your line is now open.

I have two questions in mind. The first one, it's on the soft brands and the other one is on the ever bright investment platform. Perhaps the first one I guess is either just to Mr. Teo or Jenny on that side. On the discussion on the re-acceleration for the soft brand with the Huazhu platform, can I get some color on the scale that you're looking at in terms of the expansion in the near-term and also in the longer-term, the economics that you believe that this would bring in. And also how do you see the competitive landscape with other operators like Oyo or other OTAs in the market. The other question it's - we saw some news flow on the ever bright investment platform which you are involved. Can we get a sense on the CapEx that the Company is expected to be committed or the economics that it will potentially bring in. Thank you.

Let me take the first question and ask Teo to answer your second question. Our soft brands as we elaborated in the presentation we just gave, we expect to open 300 to 400 new hotels under those four brands. And we - this is for us is truly a re-acceleration because we opened very few of those hotels last year. We re-accelerated because we see the potential expansion in the independent hotels and we also see the need of the independent hotels that they need join a brand, join a distribution network to help them achieve better returns on their investment. And we look back at our current system, we realize that we need to be more flexible to embrace those hotels. So we had developed slightly different distribution approaches, slightly different fee structure to accommodate their needs. We developed the soft brands hoping and also targeting that this is going to be a growing and a profitable business for us. Of course, we can also generate meaningful value in the two order franchisees joining those brands, those record a win win approach to this business, as well as of course in our many other business. So this is not the same as what some of the other players like Oyo and OTA are doing. They are pouring a lot of cash into the market, trying to develop large inventory. And I believe many of those are trying to generate profit through distribution. And we believe our value is more comprehensive and we don't expect to generate large losses because of the soft brands in the business. As I said earlier, we expect it to be a growing and a profitable business for us.

I just seem to answer your second question that the reason, the purpose for us to participate in some of the properties fund hotel and properties fund is to actually help to secure the management rights on the strategically located properties. As we - in fact that we had mentioned that I think last year or the year before that we would like to keep the expenditure limit limited to approximately RMB1 billion. At this stage, we have spent approximately - we have invested approximately RMB600 million in these areas and we have RMB400 million to go. But on the other hand, we expect that some of these funds because they will - we will come to a stage where they will exit from some of the properties, they recycled back that capital back into the pool so to release more investment going forward. Thank you, Justin.

Yes, thank you. But would you expect any like a pull mode or the earnings coming in from these investment is that - how would that be captured in your P&L?

Well, the management fee - the management chair that you will be going into we will be treated as manachised house.

But investment to the fund itself, would you earn money and then would you focus through like some of the associated JVs?

We participate in these funds through an LP and as LP and GP role. So we may actually earn some GP fees which we use to offset some of the cost, - the gain from LP will be treated as disposal gain when they exit.

And our next question comes from the line of Dylan Chu from CLSA. Dylan, your line is now open.

Great, thanks for the opportunity. I have two questions. The first question is about our strategic development - deployment in Upscale segment. As you mentioned, this is quite a commitment with lot of investment upfront and revenues and profitability opportunities later on. Could you please just share with us little more just about what kind of opportunities that you saw on the ground that made you decide to focus on upscale and investing in this segment at this particular point in time. And sort of related to this, what would be the full-year pre-opening expenses that you expect for 2019. Second question is on the leased and owned segment of the business. The first quarter hotel operating expenses were slightly ahead of expectations. So, could you please provide little bit color in terms of how should we think about leased and owned portion of the business cost inflation going forward. I think alternatively what would you think should be the required same hotel RevPAR for this owned business to offset cost inflation this year. Thanks very much.

Let me pick up your first question and ask Teo to explain the results and the forward thinking about leased and operated hotels. Our Upscale hotels contribute a significant portion of the GMV in China's hotel market. In the Tier 1 city typically the 4-star and 5-star hotels will contribute about 40% of the GMV and in lower tier cities like Tier 2 and Tier 3, they can also contribute anywhere from 20% to 40% of the GMV. So this is a very large market that we haven't penetrated much into yet. We see this as a huge potential. And therefore we have made quite a few efforts in those areas. The first effort is really to use our own investment, the leased hotels in particular to build flagship. For example, we opened the first Joya Hotel in Shanghai and we signed another four flagship deals for Joya, two in Shanghai, one in Pudong right next to the Huangpu river has a great view and also very close to Lujiazui the Financial District. And the second Shanghai was just signed yesterday, we choose at Soho, the new Soho building at [indiscernible] which is also very rich and elegant area of the city. We signed one deal in Hangzhou, the Zhejiang the CBD area of Hangzhou and the fourth one in Chengdu, the type Yuri which is also the heart of the city . So those four new hotels will incur significant preopening expenses, but we believe this is a worth investment. Similarly, we also invest in one Grand Mercure in Guangzhou, which will be opened very soon. And so all those efforts into the upscale segment is opening new hotels will incur quite some expenses in particular in the form of pre-opening and the loss incurred in the rents up period. And then secondly, we made a significant investment last year to acquire Blossom Hill and we are going to rename the English name now to VUE in the next few months. This brand is very well recognized, but we need some time to train thereon. So in Q1 this new brand still incurred some operating losses. So we view all those as our investment into the upscale segment. Our intention is to build up our brand, improve our capabilities and then attract management contract and gradually penetrate into this segment.

Taking up that the losses, the investment in the upscale segment which include the pre-operating expenses and the loss on the Blossom Hills it was approximately RMB5 million in Q1. The pre-operating expenses and the investment that we expect we'll put in to the Upscale segment will be in total approximately RMB200 million in 2019. Okay? The second, can you repeat your second question leased and operated hotels?

The second question is about the cost and inflation trend in the leased and owned hotels. So what would you think would be the same hotel RevPAR required to offset cost inflation this year?

The same hotel RevPAR increased to offset the cost inflation will be approximately 1.5%. Our leased and operated hotels - same hotel RevPAR increased in Q1 was 0.7%. It is actually below the 1.5% the breakeven point for the cost inflation. On the other hand is that our operating margin has been helped by an increase in the contributions from our manachised business. So in other words is that the manachised - our asset light manachised business that actually more than offset the decline in profitabilities in the leased and operated hotels. But given that the because of the lower operating margin from leased and operated hotels, the operating margin from this hotel operation has declined.

Okay, got it. Thanks very much.

Just to add on the explanation Teo just gave, of course we experienced some profit decrease in our matured leased and operated hotels. Basically, the decrease is in the range of RMB50 million, RMB60 million - RMB60 million in Q1. However, our operating profit increased from the management of franchised hotel more than RMB130 million. So we believe the core business is of course experiencing some fluctuation because of the macroeconomic situation because of our well balanced structure of leased and the management hotels, the matured brand profit actually are still increasing. So we are confident that we have a very resilient mix in terms of our management and leased hotels.

And our next question comes from the line of Tian Hou from TH Capital. Tian, your line is now open.

The question is regarding the ADR trends. So if I look at the ADRs for the existing the same hotel RevPAR at RMB176 in Q1, it's 0.4% year-on-year growth. And so what is the trend on the same hotel RevPAR going forward. And also what's the trend for the blended RevPAR going forward, that's the question.

Talking about the - okay, - given that the - our increasing mix from the Mid and Upscale hotels, our average ADR is actually increasing. Our Volume in hand is that given that the challenge from the macro economy is that we expect the RevPAR for the first half itself is flattish. And then we expect that maybe that we see how it goes is that in the second half, we expect EBITDA to recover which maybe low-single digits kind of RevPAR. But for the blended because a significant number 82% of our new hotels are in the mid to Upscale hotels in the Upscale segment this invariably will actually bring up the average RevPAR on the blended RevPAR, so by a couple of percentage points compared to the same hotel RevPAR.

The second question related to the total hotel network. So each year you guys have a hard target of new openings. So I wonder what is the geographic allocation, so for example, the Tier 1 cities, what is the percentage - will be at the end of 2019 or 2020, what is the percentage of second-tier cities, so is there this kind of a target?

In fact that our majority of new openings I would say that for Q1 fiscal is approximately like 60%. And I will say that the - there was - outside the leased and operated hotels majority of our openings are in higher tier cities, whereas for the managed it is more evenly spread out.

And our next question comes from the line of Lina Yan from HSBC. Lina, you may now ask your question.

I have two small questions. So one is on the store closure, you also increased the store closure target to 200 and 250 from 150 and 200 before. So I'm wondering like was this related to the increase in gross opening from the opening of soft brands or it's just higher like a closure like from our like own brands like - versus our own brands like opening. So this is the first question. Thank you.

See, our closure of 200 and 250 I would say that majority of which actually related to the older hotels which their lease has been expired or that they are related to certain properties, where the landlord decided to actually put other use and terminate the lease. And maybe also due to the government rezoning et cetera. So and yes you are right, majority of the brands are actually related to the smaller and older hotels are in the economy segment.

So my last update was out of the total closure 20% or 30% will be on owned and leased. So this - is there any update on the closure on owned and leased numbers?

[Indiscernible] is approximately the same number. The increase is actually related to the manachised business.

And also you just mentioned for Upscale, the total loss will be RMB200 million. So this RMB200 million will be allocated between the pre-opening expense and the loss from the during the ramp up stage right half and half?

No, the RMB200 million is actually related because we secured a number of - a significant number of the properties this year and last year - this year. And the majority of which is that mainly coming at RMB200 million is pre-operating expenses for this strategy for fresh hotels.

So it's mainly your increase in pre-opening. Yes. Thank you very much. Yes. That's all my questions. Thank you.

And your next question comes from the line of Juan Lin from 86Research. Juan, your line is now open.

My first question is on the full-year gross opening target given that we have already raised the full-year gross opening target, could you please give us some color on the full-year revenue growth outlook. And how should we expect RevPAR growth in the full year in 2019. Second question is on soft brands, if you could please elaborate a little bit on strategy in soft brand business and provide some little bit of update where this business segment is possible. Thank you.

And so first net net, let me address your questions on the revenue growth. Given that we have increased what you call the new hotel opening target, we have not - we still have - we do not have much data on the RevPAR growth going forward. So we are actually maintaining our annual revenue growth target of 15% to 17% - 15% to 19%. So we like to keep that is because number one is we expect the additional hotels - additional opening of hotels will bring in additional revenue. But on the other hand it may be offset by lower RevPAR that we have previously guided. We previously guided approximately 3% on the same hotel RevPAR growth. But given the current U.S. and China trade war, we expect that the RevPAR growth to slow-down to even a lower single digit, so that the offset it maybe we would like to - correct we will still maintain the annual growth, revenue growth of 15% to 19%.

Thank you, Teo. And the question on soft brand?

I think I already explained that part to Justin which is the first question of the call but I don't mind in briefly repeat it again. We re-accelerate the soft brands to increase our network by providing more flexibility to embrace those independent hotels. And we expect this business to be a growing business and a profitable business.

[Operator Instructions] And our next question comes from the line of Carlton Lai from Daiwa Capital. Carlton, your line is now open.

Just two quick questions. I think my first one again is relating to your soft brands. I understand the strategy behind that and how we are still awaiting our consolidation of independence. But the same time, there could be a potential risk for by lowering the requirements or increasing flexibility. It can potentially lower our hotel experience or quality control. So I just wanted to ask, how are we controlling that quality going forward or in the long run. That's my first question. And my second question is regarding over your ambitions outside of China. We know it does seem like we are getting more serious here with a global CDO. So just wanted to see if there's any new thinking here and what our ambitions is globally and not just on China.

On your first question, we have actually a good quality control process in place when we developed our soft brand. Most of the hotels when they joined us top brand they also need to putting - sitting investment to improve their facility up to our brand standards. So you know shouldn't assume that we would just take the hotels as they are and to become you know one of our hotels. We pay particular attention through security to the items that relating to actually to customer experience to make is in the, like a linen, like the cleaning standards, breakfast and so on. And so I believe we have that capability to strike the right balance between speed and quality where we develop our soft brands. And on the China macro economy, I don't want to pretend as the expert because they are already a lot of news and information in the market. In general, we do experience some softness in the economy in the first quarter, but you know, as we shared with you guys earlier. Number one, all our portfolio concentrates economy and the lease scale hotels which are resilient in the economy fluctuation. And the secondly, we have more than 80% of our hotels are under the franchise in the management model and which is reasonably stable compared with higher levels in the lease model. So we believe this mix will also may cut quite resilient through the different economic cycle.

Actually my second question was regarding the ambitions outside of China. So I understand you already have a Singapore property in the pipeline, now that you have a dedicated development officer for - are we more ambitious here. Are we planning on exploring other countries too?

We are looking at different opportunities being in different countries outside of China. You know by now we are doing the exploration stage and we will definitely keep all shareholders updated we are making any meaningful progress.

And our next question comes from the line of [indiscernible] from Bank of America Merrill Lynch. [indiscernible], your line is now open.

Thank you for taking my question and I have question for Teo. So what is our latest expectation for operating margins for our full-year 2019?

Our operating margins, in fact I think I demonstrated earlier, our operating margin from our hotel operations is actually pretty flat. But having said that, we invested some money into these development teams, the IT capabilities and the upscaled hotels. Detailed about operating margin by a couple of percentage points but, this is not what is not helping original expectations of the recovery will be much stronger in starting from May, but that did not following the Chinese [indiscernible]. So with that it becomes little more uncertain. So originally we expected the operating margins will actually from the - our core operations will actually goes up and then and offset by the investments into the areas I mentioned earlier. But now that we may - given the current situation we expect, yes the operating margin may drop a little bit, a couple of percentage points given the current situation. But are we have yet to more - we need more data to see in other simple RevPAR growth in the coming quarters to see where our operating margin will end.

And our last question comes from the line of Leon Chik from JPMorgan. Leon, you may now ask your question.

Just on the issue of extra cost for making improvements to efficiencies IT automation and all that. First question is, where would that be recorded in G&A cost or staff costs. And the second question is a pretty much finished in first Q or still heightened for the rest of the year. Thanks.

The increase in the investment generally reflected into a couple of areas. Number one is increasing in the payroll costs. This is actually reflected in the - mainly in the G&A expenses and the other one is actually the pre-operating expenses. We do not expect the - we do not expect that this investment will actually spot in Q1. This investment will continue on for the entire 2019 without having revenue coming in from these hotels and these investments. So we expect that with the higher hotel openings maybe, I mean the second half of this year or maybe next year from the additional development team that will bring in more revenue and operating margins going forward. The same goes for the upscale hotels.

Thank you so much. And there are no further questions at this time. And I'll hand back over to the management for the closing remarks.

Thank you everyone for your questions. We look forward, to talking to you in next quarter. Thank you.

And that does conclude the conference for today. Thank you for participating. You may all now disconnect.