H World Group Limited (HTHT) Q4 2019 Earnings Report, Transcript and Summary

Hello, ladies and gentlemen. Thank you for standing by, and welcome to the Huazhu Group Limited Q4 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] Today’s conference call is being recorded. I’ll now turn the call over to your speaker and host, Ms. Ida Yu. Please go ahead, Ida.

Thank you, Albert. Good morning, and good afternoon or good evening depending on where you are in the world, and thanks to all of you for dialing in. Welcome to Huazhu’s fourth quarter and full-year 2019 earnings conference call. Joining us today is Mr. Ji Qi, our Founder, Executive Chairman and CEO; Ms. Jenny Zhang, our Executive Vice Chairlady; Mr. Jin Hui and Ms. Liu Xinxin, our Co-President; Ms. Chen Hui, our CFO; and Ms. To Nee Chuan, our CFO. 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 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’s website at ir.huazhu.com. Now, I will turn the call over to Mr. Ji. Qi Ji, please.

Good morning, everyone. I would like to start with a quick review of our strategic achievements in 2019, as shown on Page 2. The first focus is our continued fast expanding growth task. In 2019, we achieved gross opening of 1,715 hotels, exceeding the midpoint of our original plan by 50%. Our pipeline grew to 2,262 hotels, twice over the number by the end of 2018. Secondly, our focus on innovative technology applications to improve guest experience and operational efficiency. In 2019, our online booking increased to 40%, up from 35% in 2018. Our online payments increased to 53%, up form 47% in 2018. Besides, we are delighted to report that Huazhu online procurement generated a GMV of RMB3.8 billion, an increase of 72% from 2018. Thirdly, our focus on strategic deployment in upscale hotel segment. We’ve opened four new Blossom Hill and two new Joya hotels. Moreover, we have completed the acquisition of DH, further expanding Huazhu’s upscale brand portfolio and overseas presence. Looking into 2020, China and the world are battling against COVID-19. Two months ago, all cities in China were blocked down and the Chinese government placed a series of travel restrictions to prevent virus transmit. Hotel business has been impacted significantly, no new orders and free cancellations result in zero hotel revenues. On the other hand, all hotel owners have to bear a big memorable monthly cash outflows for rental costs and labor costs. How to cope with the situation then? It seems that hotel closure and staff layout are the brightest decision. To keep hotels open means you have to devote additional results to suffer more loss and even rent high-risk of cross-infection during pandemic. However, at Huazhu, we keep our promise to provide a safe and a clean state to our customers during their trips. As an industrial leader, Huazhu has our owner persistence. After addressing all the possible risk and opportunities, we choose to keep hotels open and keep our staff and customers safe, backed by a well-established platform. Fortunately, so far we have kept zero cross-infection at our hotels. In addition, we are encouraged by more possible hotel reopening and improved occupancy and RevPAR since early March. How can we achieve that? Well, since the outbreak in China, Huazhu has set up a risk crisis task force that compromise [sic] [comprised] of a centralized command center, supported by 18 regional sub-command centers. This task force communicates on the daily basis to mobilize all available resource and coordinate efforts from all parties within and outside of Huazhu network. In addition, we are leveraging our internal information platform, a work SOP called H-Tone, to communicate our organized our collaborate – collaborative efforts, so that our employees and franchisees have timely access to critical information at their finger tips. To further elaborate on our key measures. One, we announced a new layoff and a new pay cut on hotel staff, they are the core asset of our business. As Executive Chairman and CEO, I personally take a zero salary. Our top and senior management take a 30% to 50% salary cut. Second, for the sake of our customers, we keep hotel open and provided them a reliable lodging for regular and special purpose during the outbreak. Third, and for our franchisees, we provide timely emergency hotel safety supplies and make sure to get managers back to hotels. Local sales team try all their best to get more governance – government and corporate orders and sales quarantine room packages. In addition, we are the first in China to apply a temporary policy for fee reduction for our waves and expanding the city coverage from Wuhan to all over the country when the COVID-19 spread escalated. I would like to thank our employees, franchisees and partner- partners for their great contributions to sustain the business. Now we’re in the initial recovery stage, despite of the temporary challenge and disruption to our business. As a leader, we are confident about long-term growth for Chinese – for China’s lodging industry and our great potential for consolidating, particularly to empowering the independent hotels after joining the Huazhu’s brand family. The aspects we will focus on achieving our long-term growth target include: one, proactive sales force for sales efforts; second, accelerated hotel expansion; third, strengthening digitalization; fourth, organization restructuring. which keep us driving to establish a world-class hotel network. Today, Jin Hui and Xinxin, our Co-Presidents also joined our prepared remarks on this call. They have played critical roles in leading Huazhu through the darkest moment since the outbreak. They lead our 18 regional separate command centers to take every proactive measures to make the staffs and customers safe to reduce the adverse impact on our nearly 6,000 hotels. With that, I will hand the call over to Jin Hui. Jin Hui, please.

Thank you, Qi Ji. Good morning, I’m Jin Hui, I will use Chinese to share with you about the outbreak. [Mandarin] [Interpreted] First of all, I want to say just like what Qi Ji mentioned, Huazhu has done a terrific job in front of battling against the COVID-19. So since the outbreak in January 20 and the lockdown of Wuhan City on January 23, during the stage one, Huazhu has demonstrated very swift response. We formed centralized command center and 18 regional sub-command center and we have had 43 meetings. Leveraging the very powerful supply chain, we enable each hotel and staff with sufficient supply for the emergency. During the Chinese New Year, we have most of the hotel managers back to their position and organize their work and stabilize their staff in hotels. So we developed the SOP for the virus prevention and provide the all staff training to help them to prevent the virus. A week later, China has entered into the peak moment of the COVID-19, however, the operation of our hotels did not stop. As a leading hotel companies in China, we fulfill our social responsibility. Cumulatively, there are more than 500 hotels, which has been taken over by the government for medical uses and quarantine purpose. Just adding to that, the government paid us for that. We also provide prevention measures for our customers. For example, the 26-step cleaning process and also we provide health insurance for the staff and customers as well. In the second-half of February, the companies start to resume their work and the people returned to their job. Huazhu has already entered into the stage three, we start to use multiple channels to do sales. In no time, we provide the quarantine room for the returning worker. We provided numerous measures to help our franchisees to navigate through this COVID-19. For example, assisting our franchisees in obtaining bank loans. We provide legal counseling service. We reduced our management fees for temporary moment and also we provide different service to their staff back to work. Also we mobilized all the staff in Huazhu to do all kinds of sales efforts in the company. Through all kinds of efforts, right now, we have 93.5% of our hotels are in operation, up from the level 50% days ago. On Page 11, you can see our occupancy for operation hotels has already reached 62% as of yesterday. It’s all the way up from single-digit days ago and we are way ahead of the industry peers. Okay. So we got a lot of appreciation and understanding from our franchisees, who really appreciate our help in providing timely supplies and also keep the hotel running. I just wanted to mention these two letters from some of our franchisees. On Page 12, it’s from an owner of HanTing Hotel, Mr. Duan. He said, in spite of difficulties in logistics lockdown, Huazhu’s timely provision of emergency hotel safety supplies made it possible to keep our hotel open for our guests. And on the next page. it’s also from the owner Mr. Liu of HanTing hotel in the tourist city, Huangshan, he said, I’m grateful to Huazhu’s on-site sales team. They went out to fill my room when OTA travelers really slowed down. Now my hotel occupancy hit 75, about 30% higher than the branded chain hotel next door. Joining Huazhu, is my smartest choice. Now, I would like to invite my colleague, Xinxin to introduce how we implemented this work.

[Mandarin] Good morning, everyone. I think what Hui mentioned just now, at the beginning of February, we readily launched the new sales package, We call it the name as Hsinchu, as shown on Page 14 for much more details. Hsinchu offer rooms with higher standards of cleanliness and safety, such as 26-step cleaning process, intelligent non-contact services and COVID-19 health insurance free for members. And into sales packages is applied across the entire chain for not only online, but also offline. Accordingly, our proactive sales force, especially our onsite team, greatly supplement to our online sales channel during the past two months. They actively searched for all possible needs from local governments, corporates, partners and individual travelers. With the the development of COVID-19, we have continuously kept the evolving needs for retaining workers and inbound travelers, combined online, onsite and B2B sales together. Our multi-dimensional direct sales strategy has shown the strong capability and the flexibility in both good and challenging period. As a result, it enables Huazhu to always outperform our peers. Page 15 shows a summary of Huazhu’s industry-leading intelligent non-contact services. For the past few years, Huazhu has continuously invested ability efficiency value driven by technology and innovation, such as our online booking app, service check-in, check-out and robot delivery, all of them become our selling partner today and enhance our leading position at this special period when customers requested for safety. Now I’m very happy to share some data points with you. Since January 1 to March 24, we have more than 6 million online payment orders and about 1.7 million times of online room selection. During the same period, at Huazhu hotels, our Huazhu Hotel is self-service check-in, check-out machine processed more for than 1 million customers. The robot delivered the food and supplies to guests for about 240,000 times. On Page 16, the other in-house technology tool to improve our efficiency at H-Tone, Huazhu. Huazhu’s work app, we have equipped our staff with the most efficient work app to generate effective two-way communication and to enable us consistently high- quality hotel network across more than 400 cities in China. During the past two months, we have issued timely and complete SOP guidelines through H-Tone to our hotel staff. We have quickly collected 100,000 staff health and travel online report. This is very important. Just to keep in mind, the COVID-19 broke out during the Chinese New Year holiday. So a great number of employees returned to their hometown for family reunion. In addition, we have provided 24 hours hotline, psychological counseling keep our hotel staff mentally healthy as well. Of course, every hotel manager some made online report twice a day for our close monitoring. By taking to account for about the next Page of 17, so far, Huazhu has done very successfully job with zero customers and staff cross-infections at hotels. Yes, it’s zero. And highest occupancy as a branded chain of 15 to 20 percentage points higher than our second close peer. With that, I will turn the call over to Teo, who will walk you through our operational and financial results for 2019. Teo, please.

Thank you, Xinxin. Good morning, everyone. As shown on Slide 19, at the end of 2019, we had a total number of 5,618 hotels with 536,876 rooms in operation, an increase of 27% from the end of 2018. We accelerated our hotel openings at the second-half of 2019. Our total – the total revenue – the total turnover at our hotel level has reached RMB35 billion, an increase of 19% from a year ago. Turning to 20. For the full-year in 2019, despite the economy headwind, our blended RevPAR was 30. It increased by 0.1%, excluding our soft brands with a lower ADR, our blended RevPAR increased by 0.8%. The ADR increased by 3.6%, contributed by an increasing mix of mid and upscale and upgraded hotels with higher ADR. However, the increase in ADR was offset by a 3 percentage point decrease in occupancy. The lower occupancy was largely attributable to the softer macroeconomic environment. Focusing on RevPAR numbers on a per quarter basis may sometimes miss out the bigger picture on the company’s core competitive strength, which is clearer EBIT look at longer trend. On page 21, we set out our blended RevPAR for the last 12 years and compare that with two of our peers in China. Huazhu had consistently recorded a higher blended RevPAR compared to our peers, either in an up cycle or on a down cycle. More importantly, this competency gap has been widening since 2016. These reflects Huazhu’s core competitive strength in our operational capabilities. Please see our financial results on Slide 22. Our net revenues grew by 8.5% in Q4 and 11.4% for the full-year of 2019, in line with our previous guidance. Breaking down the revenue growth in 2019, net revenues from our leased and operated hotels improved by 3% year-over-year and net revenues from our manachised and franchised hotels was up 32% year-over-year. In 2019, revenue contributed by our asset-light manachised business models accounted for 29.8% in the total revenues, up 4.7 percentage point from 25.1% in 2018. We expect the contribution from our manachised business will continue to increase going forward. We have made – we have constantly made good progress in our midscale hotel segment. As shown on Slide 23, in 2019, the revenue from mid and upscale hotels increased by 23% to RMB6 billion, accounting for 3% of total net revenues, up from 50% a year ago. Let’s now turn to Slide 24 on the operating income and margin. The reported income from operation was RMB2.1 billion, compared to RMB2.3 billion last year. The reporting operating margin was 18.8%, 4.5 percentage points lower compared to 2018. The lower operating profit and margin, mainly due to our investment in hotel development teams, upgraded upscale hotels and IT capabilities. Excluding this investment, the pro forma income from operations would have been RMB2.5 billion, compared to RMB2.3 billion last year. The pro forma operating margin would have been 22.8%, 0.7 percentage lower compared to the pro forma margin recorded last year. The lower pro forma margin was mainly due to certain one-time compensation received in 2018, totaling RMB79 million and also a one-time lease related compensation paid in 2019 of RMB24 million. As we updated our last quarterly calls – earnings calls, we have increased the headcount of our development team. The result has been positive. We have seen our new hotel openings accelerated in Q4 and the unopened pipeline hotels doubled to 2,262 at the end of 2019, compared to 1,105 last year. The faster hotel networks will bring in revenue and operating profits when they are opened. Another area where we have invested is in our IT talent pools. As Ji Qi and Xinxin explained in their presentation earlier, our technology capabilities allow us to drive both operational efficiencies and better customer experience, particularly during the challenging operating environment during the COIVD-19 outbreak. As Ji Qi mentioned earlier, we have recorded a higher online central reservation and online payments. 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 during our earlier earnings call presentation in the previous quarters, we made a certain strategic deployment into upscale hotel segment by expanding our team and securing a number of strategically located properties in Shanghai, Beijing, Hangzhou and Chengdu for our upscale hotels. This has caused our payroll costs and preopening expenses to increase as compared to last year. These hotels will start to generate revenue in 2020 when they are opened. We believe these investment will bring in additional revenue and drive margin expansion in the coming periods. In this quarter, we have – we also recorded a lower other operating income compared to 2018. This is mainly due to the reason I mentioned above, which is one-off compensation received in 2018 and one-off lease related compensation paid in 2019. The pre-operating expenses as a percentage of net revenue was 4.5%, increased by 2.0 percentage points. The increase was mainly attributable to the construction of upscale brand hotels in 2019. The SG&A expenses and other operating income as a percentage of net revenue increased by 0.3 percentage points year-over-year. The increase in selling and marketing expenses was mainly due to expansion of our sales and marketing team to strengthen our directional channels, increased bank charges for online payments and higher commission fees paid to online travel agencies. And this – and the increase in general administrative expenses was mainly due to our investment to expand our hotel development teams, upscale brand hotels and IT capabilities. Turning to Page 25. Our adjusted EBITDA increased by 2.4 percentage points to RMB3.3 billion, compared to RMB3.2 billion last year. The non-GAAP pro forma adjustments mentioned on this page included the unrealized gain or losses from the fair value changes of equity securities related to our investments such as cost shares, while the pro forma adjustments also take into account of our investment in development teams, IT capabilities and upscale brands. Excluding these pro forma non-GAAP adjustments in 2019, our pro forma adjusted EBITDA increased by 2.4 percentage point year-over-year to RMB2.7 billion, while our pro forma EBITDA margin also improved by 1.2 percentage points to RMB33.7 million from 32 – from 32.5 percentage last year. Let’s move on to the financial impact from the COVID-19 to our China business on Page 27. As mentioned by Jin Hui earlier, this pandemic has a significant impact on our business. The strict but effective containment measures by the Chinese government such as travel restrictions and lockdowns has caused our hotel occupancy and revenue to drop significantly for a three months period starting from February. And we expect it to take another further three or to more months to recover. We expect the impact of this pandemic will have caused our revenue to drop by 44 – 45% to 50% in Q1 2020 in China. Our hotel – our major hotel operating costs, such as rental and people costs, however, are relatively fixed. In this connection, we have taken strict actions to start negotiating with our landlords on rental relief and/or deferment. We adopted a targeted cash flow security method, where we work backwards to reduce or eliminate all discretionary spendings, freeze headcount in head office, reduce and postponement of our capital expenditure based on our cash flow situations. The objective is to build a safety cash reserve balance to account for any unforeseen circumstances. We also took this opportunity to streamline our head office headcount and reorganize our corporate activities, so that we will come out from this pandemic leaner and more efficient. Based on our estimate, the cash shortfall, excluding any bank borrowings, was in a range of RMB400 million to RMB500 million. Since the lockdown of Wuhan City due to the pandemic, Huazhu has reached out to our banks for support. Our bank has been very supportive, they have reduced the interest rates on their bank facilities to below the bank lending rates. More importantly, they also extended additional facilities to Huazhu. At the end of 2019, Huazhu had unutilized bank facilities of RMB1.7 billion. At March 26, which is yesterday, Huazhu had unutilized bank facilities of RMB2.1 billion. Such bank facilities will allow Huazhu sufficient cash resource to face with any uncertainty that may be forthcoming. I also would like to share with you on our other liquidity position. As of December 2019, Huazhu had short-term bank borrowings – short-term debt totaling RMB8.5 billion, or approximately US$1.2 billion. This short-term debt comprises of syndication loan of $500 million, convertible bond of $475 million and US$230 million of bank borrowings that has been fully pledged in cash. The short-term syndication loan of $500 million was previously used for the acquisition of Crystal Orange in 2017 and it was due in May 2020. This syndication loan has been fully refinanced in January 2020 by a new syndication loan that is due in December 2022, which is three years away. The convertible bond of $475 million was a five-put-three [ph] expiring in November 2022. The reason why we reclassified this note in short-term debt because of the three-year put in – embedded in this convertible bond. The CB investors have the right to put the note back to the company on November 2, 2020, which is later this year. If Huazhu shares on 2020, to fall below, say, $30, after that date, the investor will hold onto this note until it’s expiry in November 2020 when the investor can decide either to convert the note into Huazhu shares at a predetermined price at approximately US$45 or request the company to repurchase a note from them on that date. The remaining balance of the short-term debt was bank borrowings fully pledged by cash. This is for the dividend planning purposes. This loan will be repaid using their cash pledged to the banks. In January, we raised a new syndication loan totaling US$1 billion to refinance our old syndication loan of US$500 million mentioned above and also for the acquisition of Deutsche Hospitality. This syndication loan requires Huazhu’s net debt-to-EBITDA ratio to be kept within 4.5 times. As mentioned, our efforts to reduce our cost mentioned above will have a positive impact on our cash flow. However, according to the accounting treatment under the U.S. GAAP, any rental cost reduction will have to be spread out throughout the life of the lease periods, this will not be helpful to our EBITDA in 2020, particularly in first-half of the year. In this connection, we are proactively seeking a 12 months waiver from our syndication banks. We have secured the approval from the three regional banks and they are helping us to secure a single approval from the participating banks. Based on our initial discussion with a major participants in China, the result is expected to be favorable. Coming to the financial impact of COVID-19 on Deutsche Hospitality on Page 28. Firstly, Deutsche Hospitality had a good start in 2020. It exceeded the monthly revenue budget in both January and February this year. However, due to the COVID-19 the local government has requested it – requested Deutsche Hospitality to close its hotels to content the spread. Therefore, we expect the business will be affected in Q2 and Q3 this year. Similar to our actions in China, we have started negotiating with the landlords to defer the rental payments. They have been very supportive. In addition, we have also put our staff on temporary furlough and frozen our headcounts. We can – we also cut or reduce discretionary spending and capital expenditures. The German government is also making arrangement to compensate the company for staffs under furlough. We expect the maximum cash gap to be in the range of €30 million to €60 million and we are also in discussion with our local bank in Frankfurt for the banking support, they have also been supportive. Turning to Page 29 on guidance. We expect our net revenue for 2020 Q1 to decline by 15% to 20%, or 45% to 50% if we would exclude the revenue from Deutsche Hospitality. We maintain our gross hotel opening target of 1,600 to 1,800 in 2020. On the other hand, we estimated our hotel closures to be in the range of 350 to 450, including the planned closure of 300 to 350 and another 50 to 100 hotels impacted by COVID-19. With that, please open the floor to questions.

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Justin Kwok from Goldman Sachs. Your line is now open. Justin?

Good morning. Thanks for taking my question and hope everyone is staying safe and healthy. I got three questions, two related to the sector and I have the last one related to Europe. For the first two questions on the sector, can I get a sense on how management is seeing the potential behavioral change for the travel industry regarding both the business travel and leisure travel after the entire COVID-19 is being settled? How would you expect the way business – the way leisure travelers will behave differently going forward? The second question on the sector is about the competition landscape. With 2019 actually to focus on the investor was on some of the new entrants into the China market and/or some of the mid to smaller chain players being turning a lot more aggressive in going into expansion. How do you see these landscape in 2020 and 2021? The last one is actually on Deutsche Hospitality. How would management guide in terms of the EBITDA contribution for this segment – for this newly acquired company in 2020, given the operating leverage how should investors think about the contribution? Thank you.

Sorry, Justin, let me translate the questions to our management here. [Mandarin]

[Mandarin]

Okay. So sorry, Mr. Liu has several, sorry, she – let me just translate the first part of her answer. So before the COVID-19, I think the pattern of the business traveler and leisure traveler remained the same. During the pandemic, yes, we have to say the traffic of business travelers did slowdown, because the business activity has been stopped. However, the demand of local customers did rise. And as Huazhu, we have the full scale sales capability, no matter, it’s online and offline, we combine them together just like what Ji Qi mentioned before. We equipped our local sales with IT equipment. We also promote all staff sales among the organization.

[Mandarin]

So we will further develop our corporate sales activities toward business travelers need. And we also anticipate the rise of leisure demand in upcoming April. And in short, we will utilize all kinds of tools to grasp all the sales opportunities.

[Mandarin]

So first of all, as we mentioned before in the presentation, the scale effect and also the chain capability will really make the leading companies like ours stand out during the pandemic.

[Mandarin]

Huazhu is advantaged in terms of our high efficiency and cost control, which will further stand out in the future competition compared to the high-cost operator.

[Mandarin]

We are very positive about our growth potential in the next three years. Our target is open one – sorry, 10,000 hotels in 1,000 cities. I’m very pleased to report that we have already signed up 300 over hotels, no matter, it’s a hard brand and soft brand in our network in Q1.

Jenny?

[Mandarin]

Min Zhang -- Executive Vice Chair-lady [Mandarin] Can you hear me?

Yes, Jenny, we can hear you.

Okay. Yes. DH, as we acquired it, we expect it to contribute significantly to our revenue, based on 2019 revenue. Pro formally, it would increase account for about 25% of the Huazhu in pro forma this year. So it was expected to be a major revenue contributor. However, because most of their hotels are on the leap model, their margin is much lower than our China operation. So the profit contribution expectation was only around 5% to 10%. This year, with COVID-19 situation, it’s a little bit unpredictable. But our German team, the European team is also doing their best to fight for protecting our customers and our staff and also help the business to sail through the water and expect a rebound when the situation stabilizes. We appreciate the leadership team we have in Europe and they have done a very good job so far.

All right. Thanks for taking my questions, perhaps I’ll leave sometime for other analysts. Thank you. Good luck.

Our next question comes from the line of Billy Ng from Bank of America. Your line is now open. Billy?

Okay, thanks. Good morning, everyone, and appreciate all the important data point and information and we really appreciate that you share that on a timely basis. I have two questions. One is regarding your current occupancy rate of 62%, which is very encouraging. Just wonder, can you break down the demand, of that 62% how much is related to quarantine demand? How much is business? And how much is – if there is still any leisure lapse, can you give us some color on that number? And then I have another question.

[Mandarin]

So just like Xin Liu mentioned, cumulative there are over 500 hotels have been taken over by the government as a quarantine purpose.

[Mandarin]

So we find that so called the safety room or quarantine room actually take about 80% of the room sold.

[Mandarin]

And 50% of the demand is actually from local demand, local business like the people returning to work.

[Mandarin]

So majority of our business is actually for the returning worker for the corporate needs, returning work for the corporate need and also the quarantine room for the customers.

[Mandarin]

And in mid of March, we start to find the demand from the real business travelers start to pick.

Okay. And can I follow-up on that. Do you see the leisure travel picking up a bit during the May 1 Golden Week?

May 1? Are you talking about May 1 Golden Week?

Yes.

Okay. [Interpreted] Okay. So we expect the demand from the leisure will come up at the second-half of April and we are preparing different sales package for that wave of demand. We also started to do pre-sales promotion for our customers, enable them to plan their travel in advance throughout the year.

Okay. I have a second question is regarding the CB, I think Qi mentioned about the CB put option. And I just wonder if I understand correctly, is that – if the share price stay below $30 and then that put option will not be impacted or they can still use the put option or the put option has to be used when the share price is above $30. And also like any plan to deal with that like, because I think the CB currently it’s trading below par, so like any plan to take advantage of this opportunity?

Okay. See, the CB has a three-year put on, which is on November 2 of 2020. The investor can choose to put the notes back to the company if our – the probability for them to put back the stock to the company if the share price is far below – was below $30. And maybe that if it is far below $27, then the probability is even higher. So even though the – and I just want to be – clarify, even if the share price on July 29 may not be 100% of the investor will put their shares. But below $27, it’s more likely than not that they will put out their shares. So what we have been in – doing in preparing for that is that, we’re actually lining up, we’re actually working on two measures including, but not limited to arranging for line of credit to bridge the purchase of this CB for the future issuance. That will help us to actually drawdown the facilities to buy back the shares – buyback the note if the investor chose to put the share on November 2 of this year.

All right. Thank you. Thanks. Thank you.

Thank you. Your next question comes from the line of Tian Hou from T.H. Capital. Your line is now open. Tian?

Yes. Good morning, management. A couple of questions. What is preopening expense in 2020? So I could imagine it’s much – it’s going to be much lower than last year.

Yes. [Multiple Speaker]. Sorry.

Okay. I have two questions. So the number two is, for the hotels that government used for quarantine the patients, what are you going to do with those hotels afterwards? Thank you.

Okay. Let me answer the first questions, and I’ll ask my colleague to answer the second one. The preopening expenses in 2020 is expected to come down by at least like half of 50%. So the preopening expenses to be in the range of like $250 million in 2020, compared to 2019 of around $500 million.

Okay.

[Mandarin]

Okay. Through our hotel network over – close to 6,000, we have already have over millions of customers staying with us. Right now we don’t have any single case of cross-infection, but we did find confirmed cases of some of our guest. We strictly follow our SOP and report to the related government authorities and then provide quarantine service to the guest and also the hotels in a no time.

I had some clarification to the background. When the management discussed rules used for quarantine purpose, they are two totally different types of quarantine need. The majority of the quarantine we provide actually are for workers travel from one part of the country and go back to work in another part of country. China government is strictly requiring anyone who has traveled from one place to another before they go back to work and get back to their normal leaning space, there are certain requirements that they need to stay separately in another place for 14 days. So then a lot of the companies have to use hotel rooms for that purpose. And we timely provide service to those companies and meet their needs. And only a small percentage of the – very few hotels are really used to quarantine patients. So I don’t think there will be any major issue for those hotels after our street cleaning process to go back to normal business.

Okay. That’s very helpful. So I may have one more question. So I read some news that the hotels actually were hard to maintain business. So last year, we have recruited a lot of franchisees and added lot of hotels under our network. Do you see some closure of those franchisees you recruited last year and in 2020? And so what’s our – what are your measurement to help them to stay in business? Thank you.

Hi. Let me take your questions. First and foremost is that, as Jin Hui has mentioned earlier is that, we have actually helped – during this period we help them – number one, we help them to keep the hotel open. And number two is that, we also provide consultancies to the landlord, so that we could help them to negotiate with the landlord to reduce or defer the rental repayments is number two. And number three is that, using our operating capabilities, we are actually trying to help them to manage human resources, so that they could optimize the headcount to – for the lower occupancy in the hotels during the pandemic period is number three. And number four is that, we have also reached out, also Jin Hui mentioned is that, we also asked our banks to help the franchisees. We introduced the banks to the franchisees themselves without providing guarantees on Huazhu’s part to provide a short-term financing at a lower interest rate to help them to kick start their operations, so that they could get over it and get part of game. So with that, the response has been very positive. The bank has been very supportive as well. And as I mentioned in my guidance, in addition to our normal plan closure, we estimated approximately 100 to 150 hotels to be closed due to the COVID-19 pandemic.

Okay. That’s very helpful. Thank you. That’s all my questions. Thank you. Good luck.

Thank you.

There are no further questions at this time. I now hand over to you, presenters, for your final remarks.

Thank you, everyone, for taking your time with us today, and we look forward to deliver more – give you more updates in the future. Thank you. Bye-bye.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.