H World Group Limited (HTHT) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Huazhu Group Limited First Quarter 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. And I would now like to hand the conference over to Huazhu Group. Please go ahead.

Thank you. 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 First Quarter 2020 Earnings Conference Call. Joining us today is Mr. Ji Qi, Founder and Executive Chairman of Huazhu Group; Mr. Jin Hui, Huazhu China CEO; Ms. Liu Xinxin, Chief Digital Officer; Yunhang Xie, Chief Strategy Officer; Mr. Teo Nee Chuan, CFO; and Ms. Ye Fei, VP of Strategic Investment. 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 provision of the United States Private Security 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 laws. 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's website at ir.huazhu.com. Now I will turn the call over to Mr. Qi. Mr. Qi, please.

Good morning, everyone. I would like to start by sharing my thoughts on the industry recovery. Instead of a V shape, the recovery is more like a tick shape due to the wide spread of the COVID-19 and resurgence in some place like Beijing. In China, our recovery is in place with the lifting of traveling rejections and other preventive measures. Although the second wave in Beijing is set recently, the possibility of a massive spread is low. We see continued improvement of hotel occupancy under RevPAR. In Europe, Germany is relatively ahead of recovery. Recently, Germany and some European countries started to stop the land border checks and have removed travel restrictions, which will further boost the recurring of lodging industry there. About 80% of DH hotels housing reopened. Local markets have a faster recovery, as we can see on Page 3, based on Huazhu's number in 2020. Room nights sold to local market as a percentage of room nights available has reached the same level as last year and even exceeded slightly. While the room nights sold to nonlocal market as a percentage of room nights available is still catching up. This is also thanks to our strong local sales team. Everyone in this industry is affected. Companies of new business models are under more pressure due to the nonstandard products. International hotels in China are affected more because of the international travel restrictions. This COVID-19 pandemic is a greatest challenge and also a test to the lodging industry. We are restructuring our organization, mainly in the following 4 areas on Page 5. First, streamline our head office by combining departments and reducing headcounts. Head office becomes a platform, which provides services to different business units and regions. Second, decentralize the organization. A dedicate respond probability to regional office and people at the front line; third, build a formal talent program to change and retain young people and give them more opportunity to grow. Fourth, set up Huazhu China for China business and the Huazhu Group for International. China is our home market and the most important market. We will use Singapore as a place for international expansion. Now I will turn the call to Hui. Hui, please.

[Foreign Language]

[Interpreted] Hello, everyone. I'm Jin Hui, the CEO of Huazhu China. Before we start to share about our thoughts about the strategy in 2020, I would like to review our hotel recovery in China.

[Foreign Language]

[Interpreted] So after the worst first half of February, since the second half of February, we already started revamp -- reboot our team very quickly. In order to make sure the safety of our staff members and also the guest, we try to keep the hotels as -- open as soon as possible.

[Foreign Language]

[Interpreted] By second quarter, 97% of our hotels has resumed operations. Due to the preventive measures and the border control by the government and also the second wave of the COVID-19 in Beijing, by June 29, we still have 157 hotels under government requisition.

[Foreign Language]

Meantime, our occupancy rate is also on the trajectory of recovery. Please refer to Page 8.

[Foreign Language]

[Interpreted] During the week of June 14 to 20, the average occupancy of our operating hotel has been back to 74%. Meantime, this number reviewed by STR China is 47 of the industry comps. So [Audio Gap]

[Foreign Language]

[Interpreted] The resurgence of COVID-19 in Beijing since June 11 did have a negative impact on our operations. However, we also see the Chinese government took very thoughtful, quick reaction to this situation. Therefore, we keep very cautiously optimistic.

[Foreign Language]

[Interpreted] On Page 9, it shows the recovery curve of our RevPAR. It is -- it actually means the same-hotel RevPAR in 2020 as the percentage of 2019. It reflects the comment Chairman Qi just mentioned, the tick-shaped recovery. By the 28th of June, our RevPAR of the same-store has been back to the 65% of last year.

[Foreign Language]

[Interpreted] Next, I'm going to shed the light on the strategic directions of 2020. There are major 3 areas.

[Foreign Language]

[Interpreted] So the first one is the accelerated quality hotel expansion. Second is build the multidimensional direct sales capability. And third, is build the global technology-based shared service platform. The President of Huazhu China, Ms. Liu Xinxin, is going to join me to share the 3 major strategic points with us in the next few slides.

[Foreign Language]

[Interpreted] Talking about the growth strategy of our stores. Looking at the chart of the hotel pipeline, we can see, even with the COVID-19, the pipeline by the first quarter still keep the same level as last year, slightly over last year's number. And also in the pipeline structure, there is a clear trend of the further penetration into the lower-tier cities. In terms of segment hotels, majority of our hotels are still in the economy and mid-scale segment, which is more resilient and profitable. But in the upscale and mid-upscale sectors, we-- our pipeline remain strong as well.

[Foreign Language]

[Interpreted] On Page 12, we compare the new signing of hotels from January to May of 2020 versus 2019. You can see the number is almost the same level as last year. Therefore, it shows the strong confidence from our franchisees in us.

[Foreign Language]

[Interpreted] So why do franchisees chose us? There are major 4 reasons. First of all, the consolidation and the further penetration of chain hotel is inevitable. Joining the chain can help our franchisees to further smooth the market risk. Second, Huazhu is quite famous for the high operating efficiency and low-cost structure, therefore, translating to higher profitability. This is even more evident in the COVID-19 and downward macro economy. The franchisees have cared more about the cost and efficiency. Third, Huazhu has very strong membership system with in-house volume. Therefore, it's going to bring very strong and stable customer flow to the franchisees. And lastly, and most importantly, I would like to say Huazhu's organization is very nimble and has very strong agility, responded to the COVID-19 very quickly and adaptable. Therefore, our franchisees' reliance is further strengthened through this COVID-19.

[Foreign Language]

[Interpreted] Besides the pipeline situation, I would also like to share with you our development in the upscale sector.

[Foreign Language]

[Interpreted] Our in-house brand, Joya and the Blossom House, have enjoyed very good recovery, above industry average. Compare the occupancy number versus the upscale sector of STR's comp, the occupancy of Joya and Blossom Hill is ahead by 20 percentage points. This is also -- for example, take Blossom House as example, because the travel restriction for international markets, resurgence of the local market travel really drives the performance of Blossom Hill.

[Foreign Language]

[Interpreted] Except for our Chinese type of upscale brand like Joya and Blossom House, we're going to also bring the upscale brand of DH into China. In the very soon future, we will see the 3 brands hotels launched in China, including Steigenberger, IntercityHotel and MAXX.

[Foreign Language]

[Interpreted] Now I'm going to turn the microphone to Liu Xinxin and she's going to share the strategy in marketing and sales. Thank you.

Thank you, Jin Hui. Good morning, everyone. I would like to share with you about our strategy focused on multi-dimensional direct sales. Let's turn to Page 14. Huazhu has demonstrated strong online direct sales capabilities, particularly during the COVID-19 outbreak. Due to the pandemic and travel restrictions, online customer bookings declined significantly. Contributions from online travel agencies of our total bookings also decreased. As of May 2020, customers booked through online travel agencies was still 4 percentage points lower compared to last year. On the other hand, customers that book through Huazhu on Central Reservation recorded a sharper rebound, much stronger than the OTAs. As of May 2020, contributions from Huazhu's own Central Reservation exceeded the 2019 level. We also take this opportunity to further strengthen our offline direct sales capabilities. Please turn to Page 15. Our efforts for offline direct sales were channeled through our local on-site sales as well as through our corporate sales initiatives. As Ji Qi mentioned earlier, local travel market recorded a faster recovery during this pandemic. For local sales effort, we work to establish relationships with the local community, local government, local enterprise located within certain geographic radius around our hotels. On the other hand, corporate sales initiatives focused on establishing the relationship with our corporate customers, we customized our sale products to meet the needs of customers with different lodging needs. We also created direct booking and settlement IT solutions that can be connected to our B2B corporate customers, all these automation systems are up. These solutions enable our corporate customers to book easily based on their staff, different travel budget level and also the ease of monthly settlement directly with the company, combining hundreds of hotel bills into 1 single payment per month. The number of our B2B corporate customers grew to more than 300 in June 2020. This corporate accounts are the like of Haier, the electrical appliance company; Hikvision; China National Grid are just to name a few. Now let's turn to Page 16. I would like to share with you more about another strategic focus on global technology-based shared service platform. Technology and efficiency has always been the key business enabler for Huazhu and our globalization strategy. Let's turn to Page 17. IT integration is the first and the most critical step for DH integration with Huazhu. We adopted a 1 IT system strategy and plan of 500 days doing that to empower DH digitalization so that DH can deliver a seamless and consistent guest experience; the efficiency-driven hotel operation; and centralized business model for global strategy. The 1 system strategy includes 6 programs of 1 infrastructure, 1 channel, 1 CRS, 1 CRM, 1 PMS/ERP and 1 backbone support system. This afternoon, we will officially launch our global loyalty program in Germany. At the same time, customers can book DH hotels in Europe through Huazhu's app. We are replicating our proven China digital approach from Huazhu to DH. Now let's turn to Page 18. Eventually, we will introduce 42 in-house developed applications by Huazhu technology in 3 phases that will help DH to enhance the operation efficiency, improve customer experience and direct sales capabilities. With that, I will turn the call over to Teo, please?

Thank you, Xinxin, and good morning, everyone. As shown on Slide 20, at the end of Q1, we had a total number of 5,953 hotels with 575,488 of rooms in operations, an increase of 31% from the end of 2019. Excluding the 115 DH hotels at the end of Q1, legacy Huazhu recorded a room inventory growth of 26%, with 552,352 rooms at the end of Q1. As mentioned by Jin Hui earlier, the COVID-19 pandemic has a significant impact on our China business since January '20, and started to impact our DH business in Europe from early March onwards. In order to contain the spread of the pandemic, government in both China and Europe imposed strict social distancing measures and travel restriction, et cetera, that caused a decline in our hotel occupancy. Our system-wide hotel turnover recorded a 32% decline from CNY 7.2 billion in Q1 last year to CNY 4.9 billion this year. Excluding DH, Legacy Huazhu hotels turnover would have declined by 49% in to CNY 3.7 billion. We will have a separate discussion on our blended RevPAR for Legacy Huazhu and DH because the pandemic impacted these 2 regions at a different timing. Turn to Page 21. Our blended RevPAR for Legacy Huazhu, excluding hotels under requisitions, declined by 58% to RMB 75 in Q1. The ADR decreased by 15% to RMB 189, and our occupancy decreased to 40% from 81% in Q1 last year. As mentioned by Jin Hui earlier, our weekly average occupancy has increased to 74% during mid-June before dropping to 34%, following the resurgence of the COVID-19 cases in Beijing. With the recovery of RevPAR in China, we are glad to report that we have recorded a positive EBITDA in May. Turn to Page 22. DH recorded a small growth in blended RevPAR in January and February this year. However, as COVID-19 pandemic started to spread in Europe from early March, DH blended RevPAR declined by 22% to EUR 46 in Q1 compared to EUR 59 last year. DH ADR decreased by 6% to EUR 89, while the occupancy decreased by 10 percentage points to 52% from 62% last year. DH RevPAR dropped further in April, but it started to recover in May when Europe started to reopen its economy. DH occupancy has recovered to 23%, and the RevPAR also recovered to EUR 33 at the end of June. We reopened 91 hotels or 79% of DH portfolio at the end of June. Please see our financial results on Slide 23. Our net revenue declined by 16% in Q1 year-over-year, within the better end of our previous guidance. Excluding DH, Legacy Huazhu revenue dropped by 46%, also at the better end of our previous guidance. Breaking down the revenue growth in Q1, net revenues from our leased and operated hotels declined by 11% year-over-year, and net revenue from our manachised, franchised hotels declined by 30% year-over-year. Excluding DH, our lease revenue would have declined by 53%. In Q1, we also provided a one-off waiver in the management fees on our franchised hotels that were located in Wuhan, and we also provide the waiver for hotels that remained open during the lockdown of the various cities as well as hotels that is -- has been requisitioned by the government. The impact of this onetime fee waiver amounting to approximately CNY 74 million in Q1. This will have a direct impact on our EBITDA and net profit. In Q1, revenue contributed by our asset-light manachised business models accounted for 23% in total revenues, 5 percentage points lower from 20% in Q1 2019. However, if we exclude the revenue from DH, which mainly comprises of revenue from leased and operated hotels, Legacy Huazhu revenue contribution from asset-light manachised business model would have improved by 7 percentage points to 35%. We expect the contribution from our manachised business in China will continue to increase going forward. The contribution from DH in the mid and upscale hotel segments, as shown on Slide 24. In Q1, the revenue contribution from mid and upscale hotels increased by 12% to 1.4 billion. Excluding DH, revenue from mid to upscale hotels would have reduced by 45% to 700 million. Economy and midscale hotels has been the big rock of Legacy Huazhu business. These 2 segments contributed to approximately 90% -- 97% of our revenue. During the last few months, we have seen a quick recovery in these 2 segments in China. Including DH, the revenue would have been 28% for economy, 46% for mid-scale and 26% for upscale hotels, respectively. Let's now turn to Slide 25 on the operating cost -- on the operating loss. The reported loss from operations was CNY 857 million, compared to operating income of CNY 264 million last year. The operating loss in Q1 mainly contributed by Legacy Huazhu of approximately CNY 700 million and DH of CNY 100 million. As mentioned by Xinxin earlier and also during our earnings call in March, we took this opportunity to mobilize our team to improve our cost structures, including, but not limited to, the negotiation with the landlords and reduced rents, streamline head office headcount, work shift sharing, et cetera. Our total operating costs, excluding DH, was CNY 1.7 billion, lower than Q1 in 2019. Excluding DH, selling and general and administrative expenses in Q1 were also lower at CNY 229 million compared to CNY 277 million last year, and Q4 -- also compared to our Q4 of CNY 375 million last year. The effect of our cost-cutting effort has not been fully reflected in our Q1 results. For example, the payroll cost reduction from the streamlining of our head office headcount was partially offset by a one-off severance pay. The revised rental terms takes longer time to renegotiate and realize. And another thing is that the timing of the receipts of the compensations from the government as well as issuance by DH for the furloughed employees and the interrupted operations will only be reflected in the subsequent quarters. Therefore, the cost savings will gradually -- be gradually reflected in the future quarters. As mentioned in our earlier earnings call presentation, we will also slow down our pace in the leased and operated hotel openings and focus more on the development and on franchised business. This has been reflected in the lower pre-operating expenses compared to Q4 2019. Turning to Page 26. We recorded a negative CNY 704 million adjusted EBITDA compared to a positive CNY 528 million last year. Our adjusted net income declined from CNY 222 million in Q1 2019 to a negative CNY 1 billion in this year. Our adjusted EBITDA and net income was also impacted by the one-off mentioned fee waiver of CNY 74 million and the delayed cost savings measures mentioned earlier. In addition, due to the impact of the COVID-19, we made certain provisions on the number of our long-term investments that were not directly related to our core hotel business, totaling approximately CNY 100 million. In addition, there was also a ForEx loss of CNY 57 million that was related to the currencies in euro and as well as the -- so this has been fully -- this impact would have been reflected in both our adjusted EBITDA and adjusted net loss of CNY 1 billion. The non-GAAP pro forma adjustment mentioned in this page included the unrealized loss from the fair value changes of equities related to our investments such as a core share of approximately CNY 1 billion. Let's move on to the update on the financial impact of the COVID-19 to our Chinese business on Page 28. We expect our revenue for Q2 and Q3 to be lower than 2019. And we -- later on we will expect that our revenue in China to drop by approximately 35% to 37% in Q2 2020. As mentioned in our previous presentation, we will then in the process to seek an approval from the syndication bank and then our financial covenants. Now we are happy to report that we have secured approvals from the bank to defer the financial governance taxing to June 2021 next year. We also managed to secure a 500 -- issue a USD 500 million convertible note in May. We have used these proceeds to repay a portion of our revolving credit facilities under the syndication loan. This will not only allow us to reduce the interest payment on our bank loan, but also have the flexibility to be drawn down in the future when the need arises. As mentioned in our previous call, we have a convertible note totaling USD 475 million that provide investor rights to put the note back to Huazhu on November 2, 2020. Should the CD price is below 100. After that date, the right to put will last. Therefore, we will reserve the cash from the issuance of the new convertible bonds for the probable redemption of this convertible notes on November 2. As of yesterday, the price for the convertible notes was traded above $100. I'm talking about the convertible note that we had to put for November and later this year. Helped by the recovery of the Chinese market and also our cost-cutting efforts, we have recorded a positive EBITDA in May. At the end of June, we have a cash balance of RMB 4.8 billion and unutilized bank facilities of CNY 4.9 billion to finance our operations. However, the pandemic is not over yet. There are still uncertainty on the pace of recovery. Therefore, we will continue to implement strict cash management practice in order to build further up our safety cash reserves to meet any future uncertainties. Coming to the financial impact of COVID-19 on Deutsche -- on DH on Page 29. At the peak of COVID-19 in Europe at end of March or -- and early April, the local government has requested to close 84% or 73% of our hotels to contain the spread of COVID-19 virus. Since May, the European government has gradually reopened the economy following the early success in the containment of the pandemic. At the end of June, DH managed to reopen 79% or 91 of its hotels. Similar to our actions in China, we have started to renegotiate with the landlords to defer the rental repayments. They have been supportive. In addition, we also -- we have also put our staff -- temporary staff under furlough and frozen our headcount, cut and reduced discretionary spending and capital expenditures. In addition, we have also secured a long-term financial support from the local German banks totaling EUR 45 million to support our business operations. Turning to Page 30 on the guidance. We expect our net revenue for Q2 2020 to decline by 31% to 33% or 35% to 37%, excluding DH. We maintain our gross hotel openings target of 1,600 to 1,800 in 2020. On the other hand, we estimated our hotels closure to be in the range of 350 to 450, including the planned closure of 350 -- 300 to 350 and another 50 to 100 hotels impacted by COVID-19. With that, please open the floor for Q&A.

[Operator Instructions] The first question we have is from the line of Justin Kwok from Goldman Sachs.

Perhaps I'll start with 2 questions. The first one is about the recovery path of your operations in both China and also in Europe. I guess we already just finished the calendar of Q2, and then we're now just stepping to the Q3. So can I get a sense on what are you looking at in terms of the target for both the occupancy and also the room rates into the end of Q2 or into Q3, what are you looking at? That's the first question. The other question is about Mr. Qi's earlier comments at the beginning of the call that you look at the industry, you have noticed a very fast recovery of the local market demand when compared to that of the same city market demand, and also the challenge that you have already seen for the new business model and international operators in the market. So with that in mind, how would you look at -- how would you derive your upcoming new product openings or your product setting in view of these 2 market phenomenon?

[Foreign Language]

[Foreign Language]

[Interpreted] Okay. Hi, everyone. Jin Hui. I would like to comment on the recovery in China first. In our slide, you can see that actually the recovery trajectory is healthy. In Q2, the RevPAR of 2020 has already reached 65 percentage of last year. So it's a push curve of the recovery.

[Foreign Language]

[Interpreted] We have to say that the resurgence of the COVID-19 in Beijing does have a negative impact on our operation.

[Foreign Language]

[Interpreted] We keep cautiously optimistic about the future operation because the uncertainty of the COVID-19. It depends on -- it highly depends on the government's counter measures.

[Foreign Language]

[Interpreted] Our government took very thoughtful measures to counter the Beijing resurgence of COVID-19. Therefore, we're generally positive about the outlook of our RevPAR recovery. Our estimation is that by Q4, our RevPAR will reach around 85 percentage of the last year's operation.

[Foreign Language]

[Interpreted] And our government is also -- took a different preparation in order to contain this COVID-19. We are very confident about our government's reaction.

[Foreign Language]

[Interpreted] Having said that, there is also a chance of resurgence of COVID-19 in some areas of China. However, we are prepared for that kind of situation.

[Foreign Language]

[Interpreted] Okay. I would like to comment on second question by Justin and then Qi may talk about the DH later. So you may find this through our previous reporting, we invested in companies something like OYO and Ni Hao, which is like the aggregator of nonstandard small hotel. This type of business model is under extreme test of COVID-19. It is much harder for the nonstandard product to take off in China. Therefore, first of all, we stick to our hard brand standard. Second, even when we launch our soft brands, we have very specific product standards and which might involve certain level of renovation of the hotels. It's not a pure aggregator of the hotel. Although the COVID-19 has a very negative impact of -- but we still keep a very strong devotion and investment into the product development.

Justin, to answer your questions on Deutsche Hospitality, let me just recap that. In Europe and in Germany, the COVID-19 started to impact on the -- in that continent as well as our business in Europe, starting from early March. And in March -- at the end of March and in the beginning of April, the cities was too badly hurt. The fact is that we have closed down approximately -- our hospitality -- more than like 90% of hotels during that period. But since then in Germany -- but the government in Germany has taken a very swift and very decisive control on -- to contain the pandemic. And I will say that by the end of June, we have seen that we have reopened approximately like 91 of our hotels or 79% of our portfolios. And our occupancy has like rose from the lowest point of like 13% to 23% at the end of June as well. And the RevPAR also rose to like EUR 23 as well. And while we will -- we have been cautious about the growth -- the recovery going forward, as we experienced in China is that the pandemic may reemerge in some of the areas that is least expected. But the Germany government has been taking very strict actions in restarting the economy as well while also taking into account of the protection measurements to prevent the second reemergence. Having said that, is that -- I would say that in Q2, is that the impact on our Europe business is it will be a low point. And based on the experience in China, we expect that the recovery in occupancy in Europe will start to recover in Q3, particularly in -- during the summer and going to the autumn. With that, is that -- the Europe reopening is still at the very beginning stage is yet to be seen -- and to see how the different countries in Europe are working together to contain the virus together. Because in Europe, all the countries, there are many countries that are connected to each other.

The next question we have is from the line of Billy Ng from Bank of America.

I also have 2 questions. And the first question is more like the follow-up questions of Justin's regarding to the recent trend and we noticed that the RevPAR after the Beijing's small outbreak, decline again -- or decelerate a little bit again. But it has been about 3 weeks now. Have we seen that trend stabilize and we see a recovery of that trend and reacceleration of that trend? Or is it still kind of decelerating as of right now? And also, how does that compare the situation outside of Beijing? Have you seen traffic pattern change a bit after that outbreak outside of Beijing as well? And then my second question is about -- on the cost side. I noticed that like the -- in Q1, the overall EBITDA decline is higher than the revenue decline, thus, suggest that cost is increasing. And I understand you explain a little bit of -- there are some one-off items. And -- but can you tell us a little bit more how much of the one-off items impacted 1Q? And what should we expect in terms of second quarter when we forecast the cost? Is it still kind of increasing? Will some of the accrual happen in 1Q actually will be -- will not be better in the second quarter? Yes, those are my 2 questions.

[Foreign Language]

[Foreign Language]

[Interpreted] Beijing is probably the most important business and tourism center city of China. Therefore, it has the impact of the outflow of the travelers from Beijing. The occupancy in Beijing remains at a low level, therefore, because the government has imposed very strong preventive measures to contain the pandemic. Therefore, it drags down the occupancy of Huazhu network by 10%, reset the occupancy back to the later half of May. We do see a slowly and gradual recovery of occupancy in Beijing. And right now, we enter into the second 14 days. So therefore, we think after the 2 14 days, the situation will be better.

Let me address your question on the cost side. As I mentioned in my presentation, there are a number of items which actually impact -- our EBITDA in Q1. Number one is that we provided a one-off management fee waiver for our franchisees in Q1, while we say that until April is that the -- because for those hotels that had been like located in Hubei and Wuhan area. And number two is that for the hotels that has been keep on reopened during the lockdown, during that period, the impact of that is approximately like CNY 74 million, CNY 74 million. And going forward, because this is a one-off fee management waiver, so going forward, that we will collect that in the subsequent quarters, is number one. Number two is that we also -- I also mentioned that the -- a number of our costs for the streamlining of our headcount and head office, as you can see that I presented approximately the saving in this year will be approximately like CNY 400 million. None of that has been reflected in Q1. The main reason is because the cost saving has been more than offset by the severance costs that we paid to these employees. So the impact is not yet reflected. And number three is that we are still undergoing renegotiation with our rental -- with our landlord. And none of the rental reduction has been reflected in Q1 as well. So -- and in addition to that is that the CNY 1 billion loss we are talking about also include DH. In DH, the business actually started to decline in March. And the compensation that they are going to receive on the furloughed employees as well as the business interruptions, they are going to receive in the subsequent quarters. So we're going to record that in the subsequent quarters as well. So I'll say that the -- in addition to that is that in Q1, we also make provisions approximately CNY 100 million on our long-term investment, not related to our core hotel business. The main thing is that there will be the office sharing business that we have. We fully provided for that. The investment that we talk about in these hotels, where it's quite similar to the OYO model is that we also fully provided for that, approximately to CNY 100 million. In addition to that is that we also recorded a CNY 57 million loss on the ForEx loss due to the declining of the renminbi compared to our euro currency. So with these 3 combined impact is that our adjusted EBITDA and net income is quite similar or even slightly higher compared to our revenue decline. Going forward is that with the recoveries of the franchise fee that they can collect from our franchisees because the waiver has been lapsed; number two is that with no more compensation that we're going to pay out to our employees, the cost savings from the reduction in staff costs, where it started to flow into our profit and loss accounts. In addition to that is that we will also reflect the rental reductions going forward in the next few quarters as well. So that's about it.

The next question we have is from the line of Lina Yan from HSBC.

Okay. So my first question is regarding to the numbers. So you mentioned in May your EBITDA has been positive. So can you reiterate what will be your breakeven RevPAR for hotels in China, and therefore, DH? Maybe in China, what would that be for like Huazhu hotel and for the upper scale hotel, respectively? So that will be my next -- first question. And after the answer, I'm going to ask the next question.

Okay. The breakeven level of our China business, we are talking about is like including tax, it will be approximately RMB 131, RMB 131 on an overall basis, it's number one. Number two is that on the DH is that I would say that the number is a little bit of fluctuating. The main reason behind that is because the subsidies that we received from the government relating to the furloughed employees, it is not certain depending on which hotels we are talking about. The approximate 40% of the staff costs are being subsidized. So that one is a bit uncertain. But having said that, is that we see the impact of the -- our DH operations in our overall profitability is not that significant because the -- for example, in Q1, the impact of the loss from DH is approximately like RMB 100 million, something like that.

Okay. Got it. But in China, like do they have -- do you have the breakeven RevPAR for upper scale hotels like Joya, like this?

So we look into the breakeven. Because Huazhu has significant share operations with centralized operating platform, so the things that we are looking into the group's -- the China operation's breakeven EBITDA, we are looking at the blended REVPAR.

Okay. Do you have that for self-operated and franchised and managed structure?

It's Blended. It's blended.

Blended.

We need to pay for direct cost for all these operated hotels. But on the other hand is that the franchise business has a significantly higher contribution margins that would also help to reduce the level of the breakeven RevPAR.

Okay. And my second question, I wanted to ask about the sales and marketing. So you mentioned in the presentation on your local like staff sales force and the corporate sales. So could you briefly compare that with the OTA? How is it different from the OTAs like the sales strategies? And what is the cost of acquisition, like by having your own like a local sales force like -- and comparing with acquiring traffic from OTA?

[Foreign Language]

[Foreign Language]

[Interpreted] Huazhu has been emphasizing the importance of direct sales and the high loyalty of the members. Actually, the B2B sales is also part of the direct sales.

[Foreign Language]

[Interpreted] So we keep recruiting the new members at the lowest cost, as low as possible. And also we encourage the repurchasement from our members.

[Foreign Language]

[Interpreted] B2B sales is also a very strong supplement to our current local sales.

[Foreign Language]

[Interpreted] So the daily contribution from the B2B customers has already exceeded the level of last year, and we continue to take different measures to strengthen the stickiness with our business clients, B2B customers.

[Foreign Language]

[Interpreted] All the B2B sales leads are from the sales leads of the front line and they collaborate on our local sales together.

[Foreign Language]

[Interpreted] The cost of acquisition is pretty low, and we are going to continue to push this effort.

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

Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]