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…

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…

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…

[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.