H World Group Limited (HTHT) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Huazhu Group Limited Q3 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today’s conference call is being recorded. I would now like to hand the conference over to your first speaker today, Ms. Ida Yu. Thank you. Please go ahead.

Thank you, operator. Good morning, good afternoon, or good evening, depending on where you are in the world and thanks to all of you for dialing in today. Welcome to Huazhu third quarter 2019 earnings conference call. Joining us today is Mr. Ji Qi, our Founder, Executive Chairman; and CEO, Ms. Jenny Zhang, our Executive Vice Chairlady; and Mr. Teo Nee Chuan, our CFO. They will review our strategy and the Q3 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. Reconciliation of those measures to comparable GAAP information can be found in our 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 in the Investor Relations section of Huazhu Group website at ir.huazhu.com. Now I will turn the call over to Mr. Ji. Ji Qi please?

Hello, everyone. Today I’ll share of Huazhu's long-term growth path with you from my perspective as a company Founder. Building a world-class hotel company has always been in my mind. I will also be thinking of what steps are required to get there. I think that our current plan typically follow a curved line progress in growing a publishment to growth to maturity and often to decline. How do we avoid this or to common decline? My view is that when the curve begins pointing downwards you have to find a new function, a new power and new direction till the curve takes off again. For the curve would continue it's up and sustainable, the company must process robust innovative capability and resilience. Our company, Huazhu Group, will be world-class global company only after it has reached sufficient scale and strength in geographic areas also outside China. On slide two similar to the wave principle, as I've just mentioned, I separated Huazhu's historical hotel group result part into four big waves. The first wave started back in 2005 is our HanTing brand. Now a leading economical brand serving vast majority of the Chinese population. With the increase in core capital portfolio income, we are well prepared for the next wave with our midscale hotels. Back in 2010, we started to develop the JI brand as the pioneer for the midscale hotel segment. It took a number of years for us to establish JI brand awareness. But by 2015 we had a profitable JI brand business and also reasonable scale. I still remember there were a lot of concerns from our private investor section, questioning our brand to develop this midscale hotel brand. They will worry about uncertainty for this new midscale segment, because of their negative impact on our company' short-term profitability. Today JI Hotel, JI brand is the leading and a popular midscale hotel brand with 2,059 hotels. We plan to open up at least 400 JI brand hotel in 2020. With Huazhu's strong position in the midscale and economical segments, I'm now thinking how to capture the opportunity, as next wave for the luxury and upscale segment. I think that either can take an even longer time for us to build a new luxury and upscale brand from the scratch. Because these brands require richer stories and service qualities, that's why we choose to enrich our luxury and upscale brand portfolio through acquisition. This will help to shorten our own learning period and we will benefit from new perspective of our employees in a newly acquired business. Our recently announced acquisition of DH is perfect service fit to our luxury and upscale brands. This acquisition also initialize our footprint in the countries of China, as we have now planned to occur in our sales support. Please now turn to slide three. We just reached our first 5,000 hotels milestone. We aim to achieve the 10,000 hotels milestone within the next three to five years. Now we turn to slide four. The brand is the second of China hotels rooms, as a percentage of the overall lodging industry in China is about 20% only. This is a low compared to 40% in Europe and 70% in U.S. Therefore there's still much long procedure consolidation in China and we are confident that Huazhu is in the favorable position to be the leading consolidator. Now slide five, we can see that with the acquisition of Deutsche Hospitality, Huazhu now has a rich brand platforms in each segment up to the luxury and up to Upscale segments. The figure consolidates the China lodging industry. Turning to slide 6, please. If you look at the Marriott, first part, 30 years ago in 1990, 95% of Marriott rooms in the U.S. is a home-based, so looking internationalization. Marriott shares of home country rooms declined over the next 10 to 20 years to about 80% of the global total. Now 30 years later in 2019 even after takeover of Huazhu Hotel Group with a great international present, Marriott still has about 36% of the rooms in this space. Likewise Huazhu have just decide to grow outside our home countries. We still have 96% of our homes in China after consolidation Deutsche Hospitality Hotel acquisition. Let’s say we still think, we still continue to have a mature presence in our home country going forward. This will be very exciting journey and I hope you will be with us along the way. With that, I will hand over to Jenny who will walk you through our statistical procurement in the quarter. Thank you.

Thank you, Qi Ji, and hello to everyone. Please now turn to slide 8 and let's review Huazhu's three areas of strategic focus this year. First of all, we are continuing the rapid expansion of our hotel network. Secondly, we are focusing on innovative technology applications to improve the guest experience and our operational efficiencies. Third, the strategic deployment in our Upscale hotel segments. As we turn to slide 9, note the lighter blue bars on the left, shows strong acceleration of our hotel openings during Q3. With more device hotels opened every day triple that of Q3 2018. Among the net increase of 486 hotels in Q3, 46% was contributed by our soft brands. We are delighted to see our reacceleration of soft brand start to bear fruit. In the first nine months of 2019, the darker blue bars on the right showed that we added 921 net hotels about 200% year-over-year growth. As we expect future hotel expansion to accelerate, given our strong growing pipeline as shown on page 10. We have a pipeline of 1,736 in hotels, equivalent to 34% of our hotels in operation. This ratio has improved from 23% at Q3 last year. The strong growth is mainly attributed to franchise and manachised business, which was 97% of our total unopened pipeline. Technology is essential for Huazhu's sustained growth. Today, I would like to share some remarkable achievements with Huazhu. First of all, on Page 12, on Page 11 our loyalty program continued to increase and reached 139 million members by the end of Q3 2019. It represents a 46% CAGR from year 2011. Secondly on Slide 12. The advanced booking through our online travel reservations contributed about 40% of our total room bookings. More than 45 million people downloaded our Huazhu's smartphone app, 45 million and more than 25 million people are following Huazhu or WeChat. Our digital booking and a digital in-house functions have attracted more and more members to choose our online reservation channels. The strong central reservation capability significantly accelerates the ramp-up of our new hotels and also help mature hotels to maintain a high occupancy. Third, about 53% of our overall transaction value is processed through online payment. This includes both advanced payment through central reservation tools as I just mentioned and QR codes scanning payments at hotels. We offer online payment services through traditional credit cards as well as mobile payment means such as Alipay, Apple Pay WeChat Pay and a Union Pay. The easiness of payments significantly enhanced our customer experience when they deal with us. Finally, I want to update you on our progress in the upscale segment. As shown on Slide 14, our Joya Hotel in Chengdu, Taikoo Li is scheduled to greet guests by the end of 2019. Three more Joya Hotels will open in the first quarter of 2020, two in Shanghai and one in Hangzhou. In addition, next year, the second urban hotel under the Blossom Hill brand will open in Shanghai, after a very successful Blossom Hill Hotel in Beijing. Let's move to Slide 15. I would like to take this opportunity to elaborate our recently announced acquisition of Deutsche Hospitality or DH. DH is a leading German operator with a rich heritage dating back to 1930. Its flagship brand Steigenberger is a reputable luxury hotel brand across Europe, North Africa and the Middle East. DH has five brands, 118 hotels in operation and a 36 in pipeline across 19 countries. The dedicated DH management team has multinational experience for hotel development and operations. DH forecasted its 2019 revenue of €490 million with an EBITDA of approximately €40 million. At an enterprise value of about €700 million, the valuation of the acquisition is approximately 17.5 times 2019 forecast EBITDA. We expect through growing this business, the forward multiple is expected to decrease to about 10 after three years. We expect this deal to close in January 2020 upon the completion of certain customary conditions. Please allow me to share all of you about this deal. First of all, let's turn to Slide 16. We think DH is the deal of the right size. As you can see on a pro forma basis, assuming DH is part of Huazhu today, DH would account for 4% of Huazhu's rooms, 27% of Huazhu's revenues and a 9% of Huazhu's EBITDA. The transaction value is approximately 7% of Huazhu's market count. This is a deal size that is meaningful, but not too big for us as a first step of going international. Secondly, Huazhu and DH form a very complementary brand portfolio. Most of DH brands are positioned in Upscale and the Luxury segment. As shown on Slide 17, post acquisitions, DH will account for 79% of Huazhu's room in Luxury and Upscale segment and 3.1% and 0.4% in Midscale and Economy segments respectively. We are glad that the new brands and the existing portfolio of DH will strengthen Huazhu's position in the Luxury and Upscale segment. Thirdly, this deal helps Huazhu to establish a geographic footprint in Europe, Middle East, and Africa. As shown on Page 18, the geographic coverage of the two companies have no overlap. So, it's going to be a meaningful step for us to establish a global hotel network. A global network has a natural synergy of channeling customers to their familiar brands and thus achieving an advantage in attracting customers all over the world. On top of what we just shared, the synergies that will be generated after this acquisition will also include the following as shown on Page 19. First of all, the DH brand will have the accelerated expansion by leverage Huazhu's current strong presence in China. And secondly, Huazhu will successfully establish our initial footprint into Europe, Middle East, and Africa. Thirdly, we envision our Huazhu's loyalty program and our direct sales capability will help DH to strengthen their competitiveness in their existing markets and also help their operation of their current hotels. Finally, Huazhu's leading technology will help improve our DH operations even further. We expect improvement in the back office operational efficiency and customer interfaces going forward. For those investors on today's call, we have not yet experienced any of the wonderful DH hotels, we would like to quickly brief you through some of their pictures of the new brands who are going to join part assembly in a couple of months. So on slide 20 and 21, I want to give you a quick flash on Steigenberger hotels and the resorts. Under which brand, we have 60 hotels, housed in historic traditional buildings as well as lively city residences, we also offer health and beauty houses that at the very heart of nature. On slide 22, the intercity hotel brand offers more than 40 upper mid-range urban hotels, all of which are located within easy walking distance of railway station, airport or other public transportation hotpots. Slide 23 highlights the Maxx/Steigenberger brand, a new and current massive concept, which places the focus on essentials in accordance with this motto, maximize your stay. On slide 24, just in the city branded hotels, reflect metropolitan Lifestyle and draw upon the local music and culture set. Last, but not least, on slide 25, Zleep hotels is well positioned and well-known brand in Scandinavia, which offer service and design at a great deal for the many. With that, I will hand the call over to Teo. Teo will walk you through our Q3 operational and financial results in more detail. Teo, please?

Thank you, Jenny, and hello, everyone. We are very excited to report our third quarter results, with double-digit growth in our number of rooms, net revenues and EBITDA. As shown on slide 27, at the end of Q3 this year, we had a total number of 504,000 rooms, an increase of 23% from the end of Q3 2018. Total turnover at hotel level, reached RMB 9.9 billion, an increase of 19% from a year ago. Our net revenues increased by 10% from RMB 2.8 billion to RMB 3.1 billion in Q3, 2019. Our adjusted EBITDA stood at RMB 0.9 billion for Q3, 2019 as compared to CNY 1 billion in the third quarter last year. However, the pro forma adjusted EBITDA would have been RMB 1.1 billion or 36.3% of net revenue in Q2 2019, if excluding the impact of our significant investment in development teams, upscale brand hotels, IT capabilities and foreign exchange loss related to our investment in Accor shares. Our investment in development teams have started to be reflected in our increasing pipeline hotels was our investment in IT has begun to reward us by the increasing share of online central reservations and online payments, which will help to drive our sustained future growth. Please now turn to slide 28. In Q3, our blended RevPAR dropped by 0.8%. The ADR grew by 2.6% contributed by an increasing mix of mid and upscale and upgraded hotels with higher ADR. However, the higher ADR was offset by a 3 percentage point decrease in occupancy. Lower occupancy was largely attributable to the softer macroeconomic environment. Turn to slide 29. Our same-hotel RevPAR declined by 3.8% in Q3. Our ADR dropped by 1.1% and our occupancy decreased by 2.5 percentage point’s year-over-year, mainly attributable to softness in macroeconomic conditions. RevPAR growth trends into 4Q 2019 has remained relatively weak and still slow business travel demand. Despite a 3 percentage point decrease in the same-hotel occupancy, our matured hotel occupancy still remains high at 9%. This occupancy level still outperformed the industrial average by 20 percentage points. In this connection, we continue to see more growth opportunities through further consolidation in the Chinese lodging industry. Moving on to financial results on slide 30. Our net revenues grew by 10.4% in Q3, in line with our guidance of 9% to 11%. As we look at revenue components, net revenues from our leased and operated hotels increased by 2 percentage year-over-year, and net revenues from our manachised and franchise hotels were up 34% compared to last year. In Q3, revenue that was contributed by our asset-light manachised and franchise business model contributed 30.7% of our total revenues, up by 5.4 percentage points from last year. We expect the contribution from our franchise segment will continue to increase going forward. We have consistently made good progress in our midscale hotel segment, as shown on slide 31. In Q3, revenue from mid and upscale hotels increased by 0.3% to RMB 1.7 billion, accounting for 57% of the total hotel revenues, up from 51% a year ago. Let's now turn to slide 32 and look at operating income and margin. The reported income from operations was RMB 703 million compared to RMB 775 million last year. The reported operating margin was 23%, 5 percentage points lower compared to 2018. The lower operating profit and margin was mainly due to our investment in hotel development teams, upscale hotels and IT capabilities. Excluding these investments, the pro forma income from operations would have been RMB 803 million compared to RMB 775 million last year. The pro forma operating margin would have been 26.3% compared to 28% in Q3 last year. As we updated our last quarterly earnings call, we have increased the headcount of our development teams. The result has been positive. We have seen unopened pipeline hotels increased by 88% to 1,736 at the end of Q3, as compared to 934 at the end of Q3 last year. The faster hotel network expansion will bring in revenue and operating profit when they are opened. Another area where we have invested is in our IT talent pool. As Jenny explained in her presentation earlier, our technology capabilities allow us to drive both operational efficiencies and better customer experience. As Jenny also mentioned earlier, we have recorded a higher share of advanced online central reservations and online payments. These changes benefit our financial performance. Our technology team is also working on a good number of other projects, which we will incorporate into our hotel operations. We will share these developments with you at a later time. As also mentioned by Jenny earlier, we made a strategic deployment into the Upscale hotel segment by expanding our team in securing a number of strategically located properties in Shanghai, Beijing, Hangzhou and Chengdu for our Upscale brands. This has caused our payroll costs and pre-operating expenses to increase as compared to last year. We will start to see benefits from the sale of these Upscale hotels as we start operations and generate revenue from the end of 2019 forward. We believe all these investments will bring in additional revenue and drive margin expansion in the coming periods. In this quarter, we also recorded a lower other operating income as compared to 2018. This is mainly due to a compensation received from land loss on termination of facilities hotels totaling RMB40 million in Q3 2018. Moving on to the cash flow status on slide 33. In Q3 2019, we recorded a net cash from operations of RMB1 billion after deducting the CapEx for maintenance and new developments of RMB390 million, the free cash flow generated in Q3 was RMB617 million. We generated approximately RMB503 million from the sales of our investments. We use this process to repay approximately RMB605 million of our offshore syndication loan. At the end of Q3, our cash and cash equivalents and restricted cash balance was approximately RMB4.5 billion. Please now to slide 34. On how we plan to fund our Deutsche Hospitality acquisition. This will be an all cash transaction. We will use a new syndication bank borrowings of €440 million and the balance using our own cash. The bank borrowings will be in euros, bear an interest of 2.3% before tax. Post transactions, our net debt EBITDA multiple will reach 2.89 times. This is well within the four times limit of our borrowing covenants. However, we plan to use the cash generated from our operations as well as cash from our disposal of investment to pay down these bank borrowings in the coming years. This will help us to reduce our net debt-to-EBITDA multiple to below 2.5 times. Finally, on Slide 35, our guidance. We will maintain our full year revenue guidance of 10% to 12%. In 2020, we expect to open approximately 1,700 hotels. This 1,700 numbers represent an accelerated hotel opening target as compared 2019. With that let's go to the Q&A.

Ladies and gentlemen, we will now begin the question-and-answer session [Operator Instructions] Your first question today comes from the line of Tian Hou from TH Capital. Please go ahead.

Good morning, management. I have a few questions. One is in China this year one of the main theses is to go lower [indiscernible]. So I'm wondering if this thesis is applicable to Huazhu or not? That's number one. Number two, for the hotels we're planning to open next year, how many do you expect are going to be the least self-lease and operated? So that is one question. And also related to this new hotel opens. We already have more than 5,000 hotels. And as related to Hi Inn [ph], so what are the challenges for the management you guys envision you're going to face? That's my question. Thank you.

Hi. I think I will answer the second question and how many leased and operated hotels to be opened next year. And then I'll leave the other two questions to our Chairman, Qi Ji. Next year-over-year, we plan to open approximately 1,700 hotels, of which 25 of which is leased and operated and the rest is a manachised hotels.

[Foreign Language]

Hi, I will translate the answers of Mr. Ji, to your first question, in order to reach 10,000 hotels in the next three to five years, going down to the lower-tier city is inevitable, and it's -- we must go down first. The top management team and also the key members of development team has down three times grassroots survey in the three cities -- in the three trips in the Northwestern part, Central part and East part of China, and the feedback is very positive. We are confident that our flagship brands like HanTing and JI Hotel and also some soft brand hotels who have very positive return -- of all of the soft brand hotels, we have a very positive return in these low-tier cities because, first of all, lack of the good quality products in those cities. So, the second is that the rental cost is very low in these cities. So, we could provide really good product with more spacious area in the cities. And we believe the upper Midscale and Upscale brands like Crystal Orange, like Joya and others will follow the later steps of the JI Hotel and HanTing after these two brands fully established in those areas.

[Foreign Language]

Okay. So there are two folds of our answer to your questions. First of all, hotel is actually a very labor-intensive work. And as we develop larger and larger, there's a -- we're going to manage like more than 10 -- sorry, 100,000, even 200,000 people. So, therefore, we're going to improve our technology and reduce the reliance of the people by providing more cloud-based, for example, PMS, AI technology and other et cetera. It is not only just a reduced reliance people. It is also important to improve the efficiency of their work, help them to make a better and savvy position based on the daily work. That's one fold. The other fold is that is actually hotel is a human business, talking about the client service. And it's very important that we give enough caring and respect to our associates and creates a very good working place for our employees. So therefore, we're going to strengthen our development in coaching and career development and also all the -- sorry, the -- all the other kind of facilities to provide a better workplace, for example, the dormitory and also the uniform and all kinds of related to this to our people.

Thank you. Thank you for the answers.

Your next question comes from the line of Ken Chong from Jefferies. Please go ahead.

Hi, management. Congratulations on the strong results. I've had a few questions. First is on the hotel operating guidance next year, I just want to get a sense on also the net hotel cluster next year. And also, will we still emphasize on soft brands next year? And how many of them carry as are going be from soft brands and if there are any margin different from our hotel portfolio? The second question is regarding the acquisition of Polish Hospitality. I understand most of the hotels are in the lease and operate model. And they have a meaningfully lower EBITDA margin than our group. I'm just wondering how would this impact our margin next year when we consolidate? And also, when they have 36 hotels under the pipeline, how would that impact our opening? Thank you very much.

Hi Ken.

Hi.

To answer your first question is on the guidance on the closure, we expect that the closure will be approximately the same amount of the number of hotels in this year. I think you'd be in the range of approximately like 300 is number one. Number two is that, of the 1,700 hotels that we're opening approximately like 500, which will be in the soft brands. The take rate is actually lower because this -- we are in the face of developing and building a scale to study kind of soft brand hotels. So we do not expect that the net profit contribution from this hotel will be significant in the coming year. And only until that we view a certain skill, I would say that in the next few years that we start to see a more meaningful profit contribution from the soft brand hotels. Regarding -- your second question is for Deutsche Hospitality. Approximately, right now, there are more than -- 62% of which are actually leased hotels. So I would say that going forward is currently our new opening guidance of 1,700 hotels does not include the pipeline of Deutsche Hospitality yet. So we would need to actually -- after the closure, then we will actually see the -- how come we will incorporate the numbers in the next year's guidance. And the second question is about the Deutsche Hospitality margin is that, yes, the Deutsche Hospitality have actually a lower EBITDA margin compared to Huazhu. But having said that, what we have been -- is that we update in corporate numbers is that our EBITDA margin will very reduced, but having said that, it is -- we are talking about an increasing EBITDA that we are talking. And I would say that, if you look at it from a separate perspective, because we think that there is a significant potential and synergy, as mentioned by Jenny earlier, we will bring in the brand into China for fast expansion in China, and also that we would actually export some of our technical capabilities and loyalty programs to help them to improve their operating efficiencies in their home base.

Okay. Thank you very much.

Your next question comes from the line of Justin Kwok from Goldman Sachs. Please go ahead.

Hi. Good morning. Thanks for taking my questions. Perhaps, I got two questions for Mr. Qi. The first one is about -- well, very exciting to see you spend more time in the front line on the company. What would be a strategic focus for you in the coming one to two years? What exactly do you want to achieve as you take on more management duties on a day-to-day basis? And the second thing, it's also very interesting to see you getting more brands on the upscale side with DH acquisition. From the overall brand portfolio point of view, are you now quite happy with what you're having, which is already over 20 brands? Or do you think that in the next one to two years, you are still on the acquisition for more brands, as a focus? Or are you actually more looking at the M& A angle for you to expand into overseas? And just two questions. And then another question, probably more near term, as you give out a bit more guidance in 2020 on your opening, what would be the sense on the RevPAR side on the same-hotel basis. [Foreign Language]

[Foreign Language] Let me now answer the question on our outlook on RevPAR. I will say that, at the current stage is that we -- I would say into Q4 is that -- and we see that, the trend is actually quite similar when compared to Q3, where we would see that there was still some softness in occupancy, due to the slow in business, and we haven't seen a recovery yet. And I will say that there was a lot of talk about government who's things as well as the tolling of the China-U.S., kind of, trade war. But having said that, as I mentioned in the earlier conference call, there is always a flip flop between the response from the U.S., where recently, the Trump administration has also heightened up some of the conflicts again. So this may have a negative impact on the Chinese economy. But having said that, you expect that the RevPAR trend going forward to be approximately maybe flat, I would say, either flat or maybe may move down, slightly down to the slightly negative territory in the coming 12 months.

[Foreign Language]

Okay. So as we all know, there are a lot of certainty rising in the past one year, no matter the U.S.-China relationship also a lot of change in domestic U.S. and also what's happening in Hong Kong recently. That's one shot at the international geopolitics environment. And then the second is in the business segment of travel industry, BAT is very active as well as OTA and also there's an emergent entrants called OU. So there's a lot of things happening. And so that's created uncertainty of our business environment. Facing this situation, while I didn't spend enough time previously in the past years at the front line, but we realize, considering all the external factors it is important for me to take the CEO role and enhance our management capacity at the top level together with Jenny. And meantime, we will also bring more young and broad of Huazhu to create the environment and the opportunity for them to contribute to the next development of our company as well. And coming back to your question. First of all, the focus of the next two years, we think right now, it's a kind of downturn, overall macro-wise, it is a challenging external environment. But usually, winter is the good time for the strong players. We think our capabilities in loyalty program management capability as well as the IT system will help us to enable more and more individual hotels help us to connect and build a more chain effect in this industry. So we think we could help the entire industry to go through this cycle better and create a more resilient industry. And also, we have a lot of employees, like 200,000, 300,000 employees who are -- lead a very average life and who didn't have the chance to go to the college and we feel very strong responsibility to our employees as well as our franchisees. So, we would like to share the responsibility and task with them together. And talking about the acquisition of DH, first of all, I would like to emphasize that China was still the focus of our growth because the development potential as well as the speed of China is unprecedented compared to other geographies in the world. And talking about DH, it's -- the management team is very professional and stabilized, taking the CEO, Thomas Willms, for example, his three generation is the hotel leaders and he feels very strong price as well as loyalty through these companies. Our acquisition, so our view, first of all, is that the upscale brands as well as luxury brand has a big potential of growth in China. And we would like to buy this international brand because we all observe that the international brand can -- usually is advantaged compared to local brands in the Upscale segments. That's why we would like to bring more international brand into China in complementing our local brands in the Upscale segment. As you referring back to my chart of the four ways, this acquisition is actually laid ground for our preparation of enter into the Upscale segment. Secondly, this acquisition size, we think is a reasonable size, not too big, not too small. We would like to be patient and take step-by-step approach to develop the overseas growth platform.

Your final today comes from the line of Lina Yan from HSBC. Please go ahead.

Hi thank you. Thank you management for taking my question. Like, I very much agree with the Chairman's comments that you have to continuously involve in the new business drivers for the business. So, I still have a question regarding the DH acquisitions. Huazhu's share has enjoyed a premium valuation versus your peer hotel operators in China because investors like your asset-light model and also, you have been focused on the limited service formats. When -- after you like acquired DH, how can you make sure like the DH asset is not a drag on your total return on invested capital? Specifically, when you talk about the plan to bring their upscale brands into China, I'm wondering what kind of positioning you are thinking about? Are they going to be like the full-service hotels normally for luxury brands or it's kind of like -- it will be a similar type like Joya, like a limited service version in China? Thank you very much.

[Foreign Language]

This question is about the brand of the DH. So, first of all, there are two major brands under this DH platform, one is the Steigenberger. It's a legendary story brands in Germany from the 4-star, 5 Star in the luxury segment. For example, there's the World Economic Forum, there's a leading comfort value is in the Steigenberger hotel in Davos. There's another brand called Intercity. It's a 4-Star hotel as well. It has a relationship with the Deutsch Railway. And our positioning for these two brands is the following: The Steigenberger will be a standard 5-Star hotels, tailored for management contract, and it will be a full service hotel rather than limited service. And typical clients will be government and real estate – sorry, real asset developer. And Intercity is more like a 4-star hotel and for business occasions, it can be full-service and sometimes limited service. This brand will probably will develop faster than the foodservice Steigenberger. And in general, we think the China's development of these 2 brands will be fairly quick. And we anticipate the growth will -- sorry, the site will exceed Germany in the midterm probably. Okay, operator.

Thank you, ladies and gentlemen. That is all the time we have for questions today. Today's conference call has now concluded. Thank you for participating. You may now disconnect.