H World Group Limited (HTHT) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Huazhu Group Limited Q3 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would like to hand the conference over to your first speaker today, Mr. Jason Chen [ph]. Thank you. Please go ahead.

Thank you, Karina. Good morning and good evening, everyone. Thanks for joining us today. Welcome to Huazhu Group 2020 Third Quarter Earnings Conference Call. Joining us today is our Founder and CEO, Mr. Ji Qi; our President, Mr. Jin Hui; our Chief Digital Officer, Ms. Liu Xinxin; and our CFO, Mr. Teo Nee Chuan. 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 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 obligations 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. Reconciliations of those measures to comparable GAAP information can be found in our earnings release that was distributed last Friday. As a reminder, this conference call is being recorded. The webcast of this conference call as well as supplementary slide presentation is available on Huazhu Group's website at ir.huazhu.com. With that, now I will turn the call over to Mr. Ji Qi. Please.

Good morning and good evening, everyone. Thanks for joining us today. 2020 is a challenging year for China lodging industry due to the impact of COVID-19. However, we are very glad to see the whole industry is recovering, thanks a lot to the Chinese government's effective preventing measures and a cooperation from Chinese people. In addition, the recovery is also supported by various government stimulus policies released post the COVID-19 pandemic. Starting with the first slide. This year, the year of 2020 is also a very special year for Huazhu. It's our 15th anniversary. We also successfully completed our Hong Kong secondary listing in September, which is another big milestone for Huazhu. The secondary listing not only brought us more capital but also enhanced our company's competition in the whole market. Moving to pages 3 and 4. Every company has 2 slides -- 2 sides. Despite this huge challenge, COVID-19 also provided a golden opportunity to speed up consolidation in the upcoming years. Looking back to the last 2 decades of each crisis, such as SARS in 2003 and financial crisis in 2008, the chain penetration of China lodging industry accelerated. We believe it should repeat this time. In fact, compared with 2019, we saw the total number of hotel rooms decline by 3.7% as of Q3 2020, while chain hotel rooms actually increased by 2.8% during the same period. Therefore, we think industry leaders like us will see the consolidated markets. Now we move to Page 6. Huazhu is not a traditional hotel company. We build our unique 3-in-1 super composite business model. Business includes brand, traffic and technology. Brand is fundamental. It means combine strong brand portfolio with a massive hotel network to achieve dominant offline presence. Our near-term target is to reach 10,000 hotels in 1,000 cities by 2022. Traffic is crucial. It means more and more Europe sales driven by strong policy program. Technology is a catalyst. It means future developing and utilization and to utilizing advanced technology to achieve full digital process and improve operational efficiency. We think the lodging industry is entering into a new stage. Our 3-in-1 super composite business model will still be in the leading position in supporting our long-term growth. Now I will turn the call to Jin Hui to discuss our 2020 strategy review. Thanks.

Thanks, Ji Qi. Good morning, everyone. Before we review our 2020 strategic review, I would like to firstly share with you our China business recovery situation and update. Please turn to Slide 8. From the occupancy rate, by fourth week of November, our weekly average occupancy rate was roughly 76%, which was 2.6 percentage points compared to last year. We're also very happy to see there were several weeks, actually, the occupancy rate was higher than last year same period. However, according to the STR data, the entire China lodging industry occupancy rate was only 62%, which was 7.2 percentage points lower compared to last year. Therefore, we can see that Huazhu continuously leading the recovery and achieved higher than industry recovery by 14 percentage points. Turning to the Slide number 9. It shows our current recovery trend of the RevPAR. The trend also shows the tick shape to recover -- recovery trends mentioned by Ji Qi earlier. In September, our blended RevPAR has recovered to roughly 100% level compared to 2019. And in October, the recovery also achieved roughly 98% compared to 2019, which is close to 100%. However, considering the uncertainties might -- brought by the current recurrency -- recurrency of COVID-19 in Shanghai and the future potential of recurrency of COVID-19 in some other regions, during the winter season, we still hold quite cautiously optimistic view for the next 1 to 2 quarters. Turning into the Page 10. It shows that was our 3 key strategic focus for 2020. There were 3 main parts. The first one is on the accelerated quality hotel expansion, and second one is on the multi-dimensional direct sales, and the last one is the global technology-based shared service platform. Me and Liu Xinxin will introduce an update on these 3 areas. I will firstly discuss on the accelerated quality hotel expansion area. And after my part, I will let Liu Xinxin introduce on the direct sales and global technology-based shares service platform part. Okay. Please look at Slide number 11 for the hotel expansion. This year, we focused on more quality expansion. By looking at our new signings of hotels this year, from the first quarter to the third quarter, we have been seeing that our soft brand's signing numbers has been declining, while our standardized brand's signing numbers has been accelerating. We also optimized our soft brand strategy. First of all, we redefined our soft brand strategy by removing soft brand hotels that do not meet our quality standard as well as raising the entry threshold for the soft brand hotels. And also, our soft brand now has been serving as our reservoir of our -- for our standardized brand and the preparation for the future standardized brand expansion. And also, we have been continuously upgrading our products to enhance our product quality. You can look at our Slide number 12. In the Slide 12, that shows that we have introduced and launched our new version for HanTing brand and Hi Inn brand. For the HanTing brand, we upgraded from 2.0 to 3.5, and Hi Inn brand, we upgraded from 4.0 to 6.0. Also in the Page 13, for our acquired brands, we also introduced and launched our Orange and Crystal Orange brands from 1.0 to 2.0 version. In Slide 14, on the hotel expansion, we also focus on more lower-tier cities' penetration this year. At the end of October, there were roughly 44% of our net openings of hotels come from the Tier 3 and below cities, close to 50% of our net openings. By looking at our existing hotels and pipelines. In the existing sales network, there were roughly 70 -- roughly 33% of sales comes from the third tier -- 3-tier and lower -- below cities, and there were roughly 50% of the pipeline comes from the lower-tier cities. Now turning into the Slide 15. As Ji Qi mentioned earlier, post the COVID-19, there will be a consolidation acceleration. By looking into Huazhu's new signings data, which also shows this trend, from the January to October, the first 10 months, our conversion rate achieved 59%, which was higher than last year, 54%. This is a very clear trend on the consolidation acceleration. With that, Liu Xinxin will give you an update on the sales and technology areas.

Thanks, Jin Hui. Good morning and good evening, everyone. As shown on our Slide 15, we are glad to see a very strengthening recovery of direct sales post the COVID-19 outbreak in Q1. In Q3, rooms night contributed by members have recovered to nearly the same level of last year at roughly 75%, and the central reservation contribution of room nights also recovered to the same level of last year at 56 percentage. As of Q3, we have total over 115 million members, which we think still small as our target is to sell broad population. Therefore, we continually develop new strategy to further expand our membership base. Move on to Page 17. Our current strategy for attracting new member focus on entire life cycle of customers' hotel staying, from before check-in to after check-out. Customers who scans the QR code, we provided to become our member for using various facilities and functions of our hotel, such as room TV projection, laundry service and invoice service and so on. Compared to previous major way to convert nonmember to members through the frontdesk staff, our new multiple touch point strategy is much more -- most and efficient without incremental staff cost. Turning to Page 18, corporate sales is another key focus this year. Since Q1, we have been putting a lot of efforts to divest corporate clients and helping an initial fruitful outcome in Q3. By the end of Q3, our total corporate clients increased by 33% to 12,000 compared to 2019 year-end. We are directly linked with B2B and Huazhu's app from headquarter to headquarter, particularly corporate-to-corporate. And in Chinese, we call it [Foreign Language]. Also, our penetration to top 3,000 public listed companies ranked by market cap and revenue increased to 30% in Q3 compared to only 10% in 2019. We are aiming to have 100% penetration rate by the end of 2021. Move on to Page 19. Given the increase in corporate clients, our room lines contributed by corporate clients increased to 10% in Q3 from 8% in Q1, up 10%. More importantly, as our hotel rooms are still expanding, the absolute number of room nights contributed by corporate clients increased more significantly by over 40% year-over-year to nearly 4 million in Q3. Moving to DH. Recall that we announced a 500-day digitalization planned for DH in Q1 earnings release. As of Q3, we had achieved a lot of progresses from various aspects, as shown in Slide '20. Despite in -- despite the second wave of COVID-19 pandemic, prolonged recovery in Europe. But our digitalization plan remains unchanged. We expect the whole process to be completed by the middle of next year. We would like to fully utilize why China's confidence of high operational efficiently and advanced technology capabilities to further optimize the DH operation for better efficiency and profitability in the future. In conclusion, as mentioned by Ji Qi earlier, direct sales is an enhancer and technology is essential and catalyst. Both are crucial part of our 3-in-1 super composite winning formula to support its long-term sustainable growth. Hence, we would continually reinforce our direct sales efforts and further develop our advanced technology capability. Now I will turn the call to Teo to discuss our Q3 operational and financial review. Thanks.

Thank you, Xinxin, and good morning, everyone. As Ji Qi mentioned earlier, this dynamic will have to accelerate the lodging industry's consolidations. As shown on Slide 22, at the end of Q3, we had a total now of 6,507 hotels with 634,087 of rooms in operations, an increase of 26% from Q3 2019. Excluding the 23,322 rooms of Deutsche Hospitality hotel rooms, at the end of Q3, Legacy Huazhu also recorded a room inventory growth of 21%, with 610,765 rooms at the end of Q3. Our China operation has been steadily recovering since Q2 this year. We achieved a RevPAR close to [12%] in September and October and more than 9% in November. However, we need to remain cautious during the coming winter as we have seen some resurgence of COVID-19 in selected cities in China that could potentially impact our recovery in December and for the next couple of months into 2021. Our European business has also been recovering steadily in Q2 up to late September. However, the second wave of the pandemic in Europe since late September has impacted a number of countries in Europe. For example, a number of countries imposed lockdowns from the beginning of November that causes a decline in hotel occupancy. I will share more at the later part of my presentation. Our system-wide hotel turnover recorded a positive 7% of increase from CNY 9.9 billion in Q3 last year to CNY 10.5 billion this year. Excluding DH, legacy Huazhu hotel turnover would have declined by 1% to CNY 9.8 billion. We will have separate discussions on our blended RevPAR for legacy Huazhu and DH because the pandemic impacted these 2 regions at a different timing with different effects. Move on to Page 23. As mentioned by Jin Hui earlier, our blended RevPAR up for legacy Huazhu has been recovering steadily and has reached approximately 100% in September compared to 2019. However, for the entire of Q3, our RevPAR still declined by 17% to RMB 179. The ADR increased by 11% to CNY 218, and now occupancy decreased by 6 percentage points to 82% in Q3. With the recovery of RevPAR in China, we are glad to report that we have reported a positive EBITDA of more than CNY 850 million in Q3 for our Chinese business as compared CNY 137 million in Q2. Turn to Page 24. In Q3, DH recorded 52% decline in blended RevPAR to EUR 35. This reflects a gradual recovery since July as compared to more than an [18%] decline in Q2. DH blended RevPAR declined to EUR 35 in Q3 compared to EUR 75 -- EUR 74 last year. DH ADR decreased by 5% to EUR 93, while occupancy decreased by 50 percentage point to 38% from 76% last year. Subsequently in Q4, due to the second outbreak and lockdown in certain countries in Europe, our RevPAR dropped further in October and beginning part of November and started to recover in the later part of November. Please see our financial results on Slide 25. Our net revenues increased by 3% in Q3 year-over-year, better than our previous guidance of 0% to 2%. Excluding DH, legacy Huazhu revenue dropped by 10.5 percentage, within our guidance of 10% to 12%. Breaking down the revenue growth in Q3. Our net revenue from our leased and operated hotels increased by 2% year-over-year and net revenue from our manachised hotels increased by 6% year-over-year. Excluding DH, our leased revenue would have declined by 18%, while our manachised revenue would have increased by 4%. In Q3, revenue contributed by our asset-light manachised business model accounted for 32% in total revenue, 1 percentage point from 31% in Q3 2019. However, if we exclude revenue from DH, which mainly comprise of revenue from leased and operated hotels, legacy Huazhu's revenue contribution from the manachised business model would have improved by 5 percentage points to 36%. We expect the contribution from our manachised business will continue to increase going forward. The contribution from DH in the midscale -- mid and upscale hotel segment, as shown on Slide 26, in Q3, the revenue from mid and upscale hotels increased by 9% to CNY 1.9 billion. Excluding DH, revenue from mid to upscale hotels would have reduced by 16% to CNY 1.5 billion. Economy and midscale hotels have been the bedrock of legacy Huazhu's business. These 2 segments contributed a total of 96% of our revenue. Including DH, the revenue split would have been: economy, 39%; midscale, 49%; and upscale, 12%, respectively. Let's now turn to Page 27 for the operating profit and loss. The reported loss from operation was CNY 200 million compared to operating income of CNY 703 million last year. Due to a strong recovery trend in our China business, legacy Huazhu recorded operating profit of CNY 523 million while legacy Huazhu -- legacy DH recorded an operating loss of CNY 723 million [ph] in Q3. Excluding DH, hotel operating cost was CNY 1.94 billion compared to CNY 1.95 billion in 2019. The higher hotel operating costs mainly was due to the higher rental expenses. It was due to increase in rental expenses, depreciation and amortizing costs, consumables that was related to several new upscale leased and operated hotels that had started business in this year. In addition, higher other operating costs also included a provision for impairment for assets related to terminated leased and operated hotels of CNY 15 million. As mentioned during our earnings call in March, we took this opportunity to mobilize our team to improve our cost structures, including but not limited to streamlining the office headcounts. The effects have gradually been reflected in our selling and general administrative costs. Excluding DH, we recorded a lower selling and general and administrative expenses and other operating income of CNY 230 million in Q3 compared to last year of CNY 381 million. In particular, the selling expenses were lower by CNY 12 million. General and administrative expenses were lower by CNY 42 million compared to last year. In addition, we recorded a high amount of tax refunds of CNY 100 million on income tax previously paid in 2019. Including DH, the selling and administrative expenses other operating income was CNY 832 million. The amount is significantly higher than CNY 206 million recorded in Q2 2020, because in Q3, we recorded a goodwill impairment of CNY 437 million related to DH due to the prolonged timing of recovery in our European business. In addition, DH recorded a subsidy income and insurance compensation received due to business disruptions totaling CNY 137 million in Q2 that has not been recurred in Q3. As also mentioned by our -- during our earnings call presentation in the previous quarters, we will slow down our pace in leased, operated -- hotel openings for our upscale hotels and focus more on development of our manachised business. This has been reflected in the lower pre-operating expenses compared to Q3 2019 and Q2 2020. Turn to Page 28. Our adjusted EBITDA declined to CNY 184 million compared to CNY 901 million last year. Our adjusted net income declined from CNY 434 million to negative of CNY 218 million. Excluding DH, legacy Huazhu recorded an adjusted EBITDA of CNY 853 million, approximately 5 percentage points lower compared to Q3 2019, and net income of CNY 476 million, approximately 10% higher than 2019. Due to the impact of COVID-19, we made a provision on the group related to DH acquisition totaling CNY 437 million. This has been reflected in both our adjusted EBITDA and adjusted net loss of CNY 218 million under legacy Huazhu -- legacy DH. The non-GAAP pro forma adjustment mentioned on this page include the unrealized gain or losses from the fair value changes of equity securities related to our investors [indiscernible]. Let's move on to the update on the financial impact from the COVID-19 onto our Chinese business on Page 30. As mentioned by Jin Hui, our China operation has been recovering since the last few quarters. We managed to generate CNY 1.2 billion of operating cash flow in Q3. We expect our revenue to continue to recover in Q4. However, we need to be cautious for the resurgence of COVID-19 during this winter. During the last few quarters, we managed to first secure the approval from the syndication loans to amend our financial covenants in April. With this amendment, we raised $500 million of convertible bond in May, which helped to support Huazhu share price. With the immediate liquidity risk anticipated, our stock price improved and we reached CNY 5.2 billion in equity from our Hong Kong secondary listings in September. As mentioned in our previous call, we had a convertible note totaling $425 million that provided investors a right to put the notes back to Huazhu on November 2, 2020, should the convertible price is below $100 million [ph]. All the liquidity improvement measures mentioned above helped to improve the investor conference -- the confidence in the convertible bond of $425 million. Consequently, we only received a $6,000 of redemption request from the convertible bond investment on November 2, 2020. This convertible bond will now -- not to be due for repayment until the end of 2022. I'm also happy to report that Huazhu's current share price is currently above the conversion price of this 2017 convertible notes. With the proceeds raised and our operating cash flows, we had repaid a number of our bank borrowings, including the full repayment of the revolving facilities of $500 million. This will not only allow us to reduce the interest payment on our bank loans, but also have the flexibility to be drawn down in the future when the need arises. We will also use a portion of these proceeds to repay CNY 900 million of the Chinese bank borrowings with higher interest rates. Helped by recovery in Chinese market and also our cost-cutting, we have recorded a positive EBITDA since May. At the end of June, we had a cash balance of CNY 6.6 billion and unutilized bank facilities in China of CNY 4.1 billion to finance our operations. Coming to the financial impact of COVID-19 on Deutsche Hospitality on Page 31. At the peak of COVID-19 in Europe at end March, early April, the local government has requested close to 3/4 or 73% of these hotels to contain the spread of COVID-19 virus. Since May, European government has gradually reopened the economy following some early success in the containment of this pandemic. In this connection, we saw a steady recovery of occupancy up to 42% at the end of September. However, this recovery trend had been reinterrupted by the second wave of COVID-19 in certain countries in Europe. The German government has instructed a lockdown from early November to early January. In this connection, we have seen the RevPAR to drop below EUR 10. In November, we have, however, seen the occupancy and RevPAR trend to improve back to EUR 16 at the last week of November. We have restarted the negotiation with landlords to defer the rental repayments. In addition, we have also put our staff on temporary furlough and froze our headcounts and reduced discretionary spending and capital expenditure. We have also secured long-term financial support from the local German banks totaling EUR 38 million to support DH operations. Turning to Page 32 on guidance. We expect our net revenue for 2020 Q4 to grow by 0% to 3% or declined by 4% to 7%, excluding Deutsche Hospitality. We maintain our gross soft opening target of 1,600 to 1,800 in 2020. On the other hand, we estimated our hotel closure to be in the range of 550 to 600. With that, please open the floor for questions. Thank you.

[Operator Instructions] Your first question comes from the line of Justin Kwok from Goldman Sachs.

Perhaps I got three questions, two more on the strategic side and one on -- more on the recent operations. The first one on the strategic side is that, as you mentioned about the market consolidation post COVID and not to raise the crisis, what are you seeing in terms of the M&A landscape, be it in onshore China or in other markets that you operate, like in Europe or the rest of Asia? What's your appetite now? And what are you seeing in terms of opportunities? Are you very ready to make a move or are you close to make a move on that side? The second question is about the high-end hotel business. It seems that in the past 40 minutes of presentation, there wasn't a lot of discussion on the high-end hotel business segment. Can you share a bit more on what's the progress there in terms of how the DH brand would be potentially rolled out in China, et cetera? What are your preparation on that? And the last one about more recent operations. Obviously, your occupancy is more or less back to pre-COVID level. What are your expectation now on the room rates, especially into 2021? Do you expect to see some resumption of like-for-like growth in your room rates overall in China? That's the 3 questions.

So basically, for the top-tier companies, like us, and other choose owned companies actually, those choose and owned companies supported by us and be supported by the capital markets. But post the COVID-19, we have been seeing some minor opportunities, is more like the cooperation instead of a major M&A. Not only for introducing the DH brands to the mainland China, we also introduced several new products, such as Joya Hotel and [Hua Ting Tao] Blossom. And as a Chinese old saying, that we have to build our house during the sunny days. So basically, currently, the overall market is still during a quite tough period. So Huazhu is always trying to move back in advance before the market gets too hot. So as we have been dominating or we have been quite -- have a strong presence in the middle scale and economic hotels, we want to move a step forward to enter into the upscale market. Okay. In terms of the ADR recovery, so actually, you have been seeing that the OCC has recovered roughly the same level as 2019. However, for the ADR recovery, it really depends on the entire lodging industry recovery, especially for the middle upscale and upscale segment. Because as you can see, post the COVID-19, this middle upscale and upscale hotels, ADR has been under quite a lot of pressures. We also analyzed a very mature market in the U.S. in terms of the hotel recovery after the crisis. We have been seeing that the trend is kind of similar, that OCC has been leading the recovery while ADR has to be followed. As they’re expecting that the vaccine will be available in the next 1 or 2 quarters, so we are remaining quite confident that ADR could be – continuously trend up. And I think, especially for our very good presence in terms of the economic and the middle-scale hotels, we think the ADR for these segments could be recovered slightly faster. However, for the upscale and – middle upscale and upscale segment, it’s probably going to take a longer time.

Your next question comes from the line of Billy Ng of Bank of America.

I have two questions here. First of all, I just want to follow-up on the RevPAR questions that Justin just asked. Can you tell us a little bit more on the same-store RevPAR trend? I think from the presentation, you guys showed that the blended RevPAR is largely recovered at this point. But can you tell us a bit more on the same-store RevPAR trend at this point and what you are seeing recently? And also in terms of the revenue guidance for the fourth quarter, what's the implied same-store RevPAR that you guys are using in order to get to the 4% to 7% decline of the revenue from China for the fourth quarter 2020? That's my first question. And I will ask another question later, yes.

Billy, this is Teo. The revenue guidance is actually based on the blended RevPAR rather than same-store RevPAR. The same-store RevPAR was actually slightly below the blended RevPAR because the blended RevPAR, taking into account of the new hotels opening, okay? So it's like a couple of percentage below. However, if they are actually taking line by line, the recoveries in the blended RevPAR also reflects the same hotel RevPAR recovery as well. Now to answer the second question, is that the -- in November -- in October, November, we have seen pretty strong recoveries in Q4. However, it's that the -- because there is some resurgence in the, particularly in the bigger cities like Shanghai and Tianjin, we have actually taken a more conservative look on -- outlook on the blended RevPAR for December. So we are actually expecting approximately 85% to 90% of recoveries. So -- but let's see how it goes. But so far, the trend is actually on the positive side, actually at the high end or even slightly higher than the higher end of estimates. But there are still 3 more weeks to go. So we have to remain cautious and we watch the numbers closely. Thank you.

And my second question is, in terms of your presentation, you guys also showed that the Tier 3, Tier 4 cities' exposures is increasing, and more than half of the pipeline will come from the Tier 3, Tier 4 cities' exposure. And I just wonder, can you tell us roughly what kind of profitability for the franchisees in Tier 3, Tier 4 cities achieving right now in terms of the return and in terms of the margin? And how does that compare to the Tier 1, Tier 2 cities' franchisees? And also in terms of RevPAR, going forward, what do you think the difference between Tier 1, Tier 2 cities and the Tier 3, Tier 4 cities hotel RevPAR? Is that going to be like a 30%, 40% difference? Or what should be the right number to think of?

Billy, it's Teo again. Now I think to answer the questions on the profitability of the lower-tier cities. Now this is still how we see it. I would say that the hotel operations, the largest cost of hotel, which is actually rental, people cost and depreciation and amortizations. Now we have to acknowledge that currently, at this moment, what we have seen is that the RevPAR for the lower-tier cities are actually lower compared to the higher-tier cities, okay? But having said that, is that the stronger recoveries in lower-tier cities, actually, you can see that they closer to maybe the range of the higher-tier cities. So actually, the RevPAR has been pretty good or even slightly better compared to the higher-tier cities. However, the rental cost in the lower-tier cities are much lower. The people costs are much lower, while the depreciation and amortizing costs are relatively the same compared to the higher tier cities. Now I won't be able to comment exactly on the exact profitability to the franchisees. But having said that, what we have seen -- what the franchisees said back -- is when they are making the investment decisions on opening up Huazhu's hotels, they are not comparing the hotels in higher-tier cities. The reason is because in -- for the hotel business, it's a local business. The local franchisees, they have connections in the lower-tier cities to secure the properties. On the other hand, they were not able and they do not have access to the business network in the higher-tier cities to secure the properties. So they are not comparing that. It's number one. Number two is that with the excess of the properties in lower-tier cities, they are actually comparing -- by opening Huazhu hotels compared to other brands in the local areas or compared to the other commercial activities in the local areas. We have to acknowledge that the business activities in lower-tier cities are slightly lower because of this lower disposable income. But on the other hand, is that they would -- for our franchisees, what they are looking for is getting the better yield of per square meter for the properties that they have access, to the property they have access to. This is number one. Number two, from Huazhu perspective, is that Huazhu's fee revenue is actually on the percentage of the total hotel turnover. And from our perspective, it's that because -- Huazhu's operating leverage is very high because the way we operate using the centralized operating platform. Our incremental cost compared to our fee revenue is minimal, so this is actually a win-win situation for both the franchisees as well as Huazhu. Thank you.

Just one quick follow-up is -- sorry. Just -- so in terms of the RevPAR difference between Tier 1 and Tier 3, Tier 4 cities, is that widening or is that narrowing? And how much exactly are we talking about right now?

The RevPAR trend is actually narrowing. The recovery -- as I mentioned earlier, is that the recoveries for -- the RevPAR in the lower-tier cities is actually higher compared to the higher-tier cities. So the gaps are actually narrowing.

I just want to give some supplement information in terms of our lower-tier cities' penetration strategy. So over the past 15 years, we have been serving roughly 300 million to 400 million urban people, populations. But we are targeting to serve up to 1.4 billion populations for all the -- or consumers. And by doing this, we can further strengthen our direct sales and serve more customers. Thank you.

[Foreign language]

For the lower-tier cities’ penetrations, because over the past few years, the urbanization rate for the – in the lower-tier cities has been increasing, and we have been seeing the population in this lower-tier cities has been also increasing. And until now, what we have observed, that actually in the lower-tier cities, our middle-scale hotels performed pretty well. And especially, for example, our JI Hotels, actually, their performance has exceeded our previous expectation. So going forward, in terms of our lower-tier cities’ penetrations, we will use both middle-scale brands and economic brands. So we think both are going to work. Thank you.

Your next question comes from the line of Lina Yan from HSBC.

My question is regarding the structure of the new store -- new hotel opening while you maintained the 1,600 to 1,800 new opening. But judging from the 9 months new hotel additions, the opening like in midscale seems to be like below the target in the beginning of the year. So I'm wondering if this is like something temporary? Or it's going to like be last for -- like for a while, this kind of like shift in opening mix towards more economy-type? Because as Teo mentioned, like our same hotel RevPAR is normally a couple of percentage points below the blended RevPAR because we always have this like a mix type of drivers. But this year, it's kind of like different from previous years. So I want to understand this point.

Okay. I will discuss the -- I will answer your questions. So due to the COVID-19 pandemic impact, basically, a lot of middle-scale and middle upscale hotels due to the delay for the construction given the low liquidity, especially in the second quarter, so there will be some of the delay for the new openings. And secondly, we have to say there is a possibility that a lot of franchisees who used to focus on the middle to upscale hotels, but due to the heavy CapEx and the impact by the COVID-19, they're probably going to delay their demand.

Specifically for the Starway brand hotels, actually, we have been -- we have been increase -- or we have been rising the entry thresholds for the Starway franchisees, and we also increased the quality standard as well. So that's another reason for this particular brand to have less openings this year.

Okay. That's very clear. But is there any data you can share, for example, the monthly opening? Have we seen like picking up in the opening of new midscale hotels?

We have been working on our new openings plan for next year 2021, and we have been deciding to have the middle-scale hotels openings to return to the previous general, normal level.

I just want to add one more note. We – actually, we have seen that in November, December, we have seen that the hotel openings for the midscale has picked up the pace. Thank you.

I would like to hand the conference back to today's presenters. Please continue.

Thank you, everyone, for taking your time with us today. And we look forward to connect with you again in the coming quarters. This concludes the call today. Thank you very much. Bye-bye.

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