H World Group Limited (HTHT) Q4 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to Huazhu Group Limited 2020 Fourth Quarter and Full Year Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded. I would like to hand the conference over to your speaker, Mr. Jason Chen [ph]. Thank you. Please go ahead.

Thank you. Good morning and good evening, everyone. Thanks for joining us today. Welcome to Huazhu Group 2020 fourth quarter and full year 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 might 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 was a challenging year. COVID-19 pandemic strongly affected both our China and European business. However, now we're happy to see our China business recover strongly throughout the year, especially in the second half of 2020. Thanks to Chinese government effective prevention measures and the cooperation from Chinese people. More importantly, our hotel networks and the pipeline continued expanding in 2020. Thanks to our dedicated employees, our powerful brand and a solid execution. For our European business, also is still being impacted by COVID-19 pandemic. Our utilization plan progress also we took the opportunity to make some organizational change and prepare for patient recovery. Moving to Slide 2, we believe that COVID-19 pandemic has not trended [ph] long time gross potential of China lodging. Following China, new circulations economic development model mentioned by President Xi, Huazhu has taken credit for our long term gross. We continue to emphasize our China focused strategy. We targeted to open 10,000 hotels in [indiscernible] city, our China by 2022. Our future turnkey will not only focus on speed but also on quality just like we've seen before. Secondly, we continue to focus on innovation. We build our business around the three more super composition model combined brand traffic and technology. We push with a full digitalization of hotel to provide a better service for customers to improve hotel efficiency and to make more profits for our franchises. Last, but not least, we've seen an upgrade in our organizational capability is key. Our hotel networks are keeping growth. We're penetrating into low tier cities. In the meantime, we are trending in Europe. We're also speeding up the development of our hotels, all this strategy moves require organizational transformation and the talent. With that, I'll turn the call to Jin Hui, for our 2020 review and 2021 strategy focus.

Thank you, Ji Qi. Before we talk about the strategic focus of 2021, I'd like to review our achievement in 2020. Please turn to page 5. First of all is accelerated quality hotel expansion, although affected by the pandemic, the gross opening of our hotel in 2020 still reached 1,649 and the pipeline has increased to 2,449 from the 2,262 by the end of 2019. From the beginning of 2020, we pay more attention to the quality expansion. We redefine our nonstandard hotels and use this as the of our development of standard brands. Meantime, we've been upgrading our product. We've been launching the new version of HanTing 3.5, Hi Inn 6.0 and the version 2.0 of Crystal Orange and Orange. We strengthened the direct filed capabilities through multi channels. At the plateau level, we launched the multitouch point to attract members, such as Wi-Fi, team projection etcetera and we equipped sales staff at the local sales level to push for the local sales and we keep on developing new corporate customers. The contribution corporate members increased to 10% by 2020 from 8% by 2019. Lastly, is the rolling out of global technology base to shared service platform. In China, we've been upgrading our infrastructure, for example, the rollout of PMS 2020 and meantime we're working on the digitalization of the DH. I'd like to briefly introduce the first quarter performance of 2021, please turn to page 6. Due to the impact of the COVID-19 several provinces and cities like Hebei, Shanghai and Beijing, our occupancy has been declining in January and also because of the stay local policy by the government for the spring holiday, the occupancy in Chinese [indiscernible] dropped to the lowest point, but actually rebounded pretty fast after Chinese holiday driven by the strong travel demand, the occupancy has been increasing fast. Now especially after the March 16 people can travel freely in the low risk zone through their health -- the green coat of their health card. So actually the travel limit has been removed mostly. By March 13 the occupancy of Huazhu reached to 79% only 7% lower than the same period of 2019. Huazhu's performance is actually 21 percentage higher than the national average. On Page 7, it shows the recovery of our RevPAR following the same trend of occupancy due to the COVID-19 impact in January and February the RevPAR is only 70% and 56% of the 2019 number but in March 23, the RevPAR has returned to 87% of 2019's number. Anticipating the upcoming holiday season for example [indiscernible] and Labor Holiday and also the gradual rollout of COVID-19 vaccine, we anticipate that the net RevPAR of 2021 is going to reach this 90% to 95% of 2019 if we exclude impact of January and February, the RevPAR of March to December is rebound to 95% to 100% of 2019. The strategic focus of [indiscernible] stay the same as the 2020. We will continue to focus on the rapid expansion of quality hotel network, multidimensional direct bill and global technology platform. Ji Qi and I are going to talk about execution of these three strategic focus, I'll start with rapid expansion of quality hotel network and Ji Qi will follow later. From 2021, we launched a new standard to define the quality hotel from four dimensions only in the hotel specify the four dimensions can be defined as the hotel in [indiscernible]. First of all, with satisfied customers quality hotels should center on customer experience based on the rating of customer and of course has the minimum standard for safety and cleanliness that's our bottom line and also reach a certain standard in brand exposure and also the loyalty members we purchase etcetera. We're certainly happy the quality hotel should pay attention to the workers, with their working experiences, provide respect and dedication in the work environment, provide them development and promotional opportunity in the work, incentify them and thus to help them to provide a good service to the customers. Franchises is the cornerstone of our business. Therefore, profitable franchise is the third criteria. By using the big data of Huazhu, we choose the right locations for hotel and make the right investment decisions and also we start to the GOP management of single store to provide such service and enhance the franchises of the quality. Last is the central reservations contribution from the members. We're going to continue to recruit new member at a single store level and enlarge the size of Huazhu launching program, which is also very important to the long-term growth of Huazhu. We've been penetrating into lower tier cities from the strong hotel breakdown the hotels located in third year and below city contribute to 38 percentage of the fourth quarter of 2020 from 36 percentage in the first quarter. From the pipeline of hotels, the contribution of hotels from third year and below cities increased to 52% in the fourth quarter from 45% in the first quarter. Having said that, while we're pushing to penetrating [ph] the absolute hotel number in Tier 1, Tier 2 cities actually also increasing. On Page 11, we shared information of the cities we covered by our hotels. By March 22, we covered 734 cities and if we add pipeline hotels, the coverage increased to 932 cities. In all standards, the target market of China City is actually more than 2,200 so wide base is still very large. The coverage of current hotels is only 33%, including pipeline it's only 42%. On Page 12, I'd like to introduce the new member of DH the Chairman of Supervisory Board and also the new management team. First of all Mr. Andrew [ph] is the Chairman of Supervisory Board DH. He used to be the CEO of Germany [ph] and also the board member and he was also the previous CEO of DH. Marcus [ph] is the new CEO of DH who joined the company in November last year. He has accumulated more than 24 years experience in travel industry. He has served in Europcar, Gulf Air and also Steinberger before. [indiscernible] is the new CFO of DH who joined in last November. Before that he worked as the CFO of [indiscernible] is subsidiary of Thomas Cook Airlines. On Page 13, we'll talk about the DH brand development in China which has been very steady. By the end of 2020 in our pipeline there are five intercity hotel and three match by Steinberger hotel. As shown on Page 13, our intercity hotel in [indiscernible] next to highway patient is actually in the trial operation stage already and the other hotel, other interesting hotels in Shanghai is already under construction. We also made a very progression in the development of upscale hotels. On March 22, we signed up the management contract of Steinberger and Steinberger Icon of [indiscernible] National Exhibition Center Hotel. The total room counts are reaching 1,000 rooms and also have the facility of 170,000 square meters conference rooms. We think the corporation is just the start and we're going to foresee more and more cooperation later on. Now, let me turn to - the microphone to Xinxin who is going to introduce our strategic focus in sales and technology. Thank you, Xinxin.

Thanks, Jin Hui. Despite the COVID-19 pandemic impact, we still expanded our membership base from roughly 150 million by the end of 2019 to near 170 million by the end of 2020. Our strong direct sales capability was also one of the critical factors to drive our strong and better than industry recovery during 2020. Going forward, we would further emphasize on building even stronger multidimensional direct sales capabilities, majorly, from four aspects, including in-store sales, H-World app, corporate customers and cross-industry alliance as shown on Slide 15. I will discuss one by one. For the in-store sales, the left hand side of the slide displays our [indiscernible] for attracting new members in our hotels, with minimum acquisition cost. Customers could scan the QR code we provided to become our member for using various facilities, service and functions of our hotel. Such as room TV projection, laundry service and invoice service and so on. However only attracting new members are not enough. We also need to return them, and transfer them to be repeated customers. Therefore, we further empower our offline hotels by providing comprehensive technique tools and systems such as CRM systems and online hotel operation system for helping them to better understand customer needs and further improve service quality. By doing so, we believe our offline hotels will not only have capacity to attract new members, but also to transfer them into loyal customers, with high repurchasing rate. Moving to our H-World app. We will launch our H-World, the new version, we call it Version 3.0 app in upcoming few days. Comparing to the older versions, the new app will provide more membership privileges, more efficient services through embedding innovative functions, such as online check-ins and more value-added services, such as remote room facilities to come true and those newly added functions in the upcoming new app. We will be targeting to further improve our user experience and hence higher repurchasing rate. Moving to next slide. The corporate customer development was also another area where we put a lot of efforts during 2020. We are very happy to see a very good outcome we achieved during the last year. Our penetration rate to the top-3000 public listed companies reached to 32% by the end of 2020 compared to only 10% in 2019. Right hand side of the slide are some of corporate customers we've signed with recently. You may see the covering all kinds of state-owned enterprise, global companies and online corporations. We believe that corporate customer, we still play a very important role for our direct sales strategy, especially considering we are significantly penetrating into the high-end segment. Although we have nearly 170 million members now, we still think this is still very small as our target is to serve a broader population. Therefore, a part of - apart from above-mentioned strategies to increase members organically, we are also attempting to a cross industry alliance, with those large traffic aggregator platforms. We name it B2B2X align strategy. Also we call it the fourth traffic strategy internally. Please move to Slide 20. For the B2B2B models, we attempting to corporate with those platforms, which are often used by corporations. We would connect our reservation systems with those platforms and enable their corporate customers to easily book our hotels. For the B2B2C model, we will typically cooperate with those, frankly used our large traffic consumer platform, highly relevant to hotel services, such as map, airline billings and car hailing, e-commerce, online video to attract the new customers. Moving to DH, despite the COVID-10 pandemic is still affecting our European business, our digitalization project still remains progressing with the funnel spread for the last 100 days. We expect the whole process to be completed by middle of 2021, we would like to fully utilize Huazhu China's core competence of high optional efficiency and other one, the technology capabilities to further optimize the DH operation for better efficiency and profitability in the future. That would be a very solid basis for natural development in European market. In conclusion, as mentioned by Qi Ji earlier, innovation is one of the important strategies for Huazhu. Also direct sales is enhanced and technology is additive and catalyst, both a critical part of our three-in-one super composite winning formula to support Huazhu's long-term sustainable growth. Hence we would continually reinforce our direct sales efforts and further develop our advanced technology capabilities. With that, now I will turn the call to Teo to discuss our Q4 and 2020 full year operational and financial review. Thanks.

Thank you, Xinxin. Good morning or good evening to everyone wherever you are. Let's move on to our operational and financial review for 2020. As shown on slide 23 at the end of 2020, we had a total number of 6,789 hotels, with 652,162 of rooms in operations, an increase of 21% from the end of 2019. Excluding the room inventory from DH, which was consolidated into Huazhu from January 2nd, 2020, legacy Huazhu room inventory would have been 628,135 at the end of 2020, an increase of 18% from the end of 2019. Despite the prolonged lockdown due to COVID-19 pandemic, we accelerated our hotel openings at the second half of 2020. However, due to the impact of COVID-19 impacting both our China - Chinese and our European business, total hotel turnover at the hotel level declined by 6% to the RMB33 billion, excluding DH total turnover would have reduced by 12% to RMB30 billion from a year ago. Turn to Page 24, legacy Huazhu blended RevPAR for Q4 2020 have recovered through the 97% level of 2019 level. The ADR in Q4 2020 has almost recovered to 2019 level to RMB231, while occupancy in Q4 is 1 percentage point lower compared to 2019. For the full year of 2020, due to the lockdown and travel restrictions as a result of COVID-19 in China, particularly during the first half of 2020, our RevPAR declined by 25 percentage points - 25% to RMB149 compared to last year. This was attributable to a drop in ADR by 11% and a drop of occupancy by 13 percentage points compared to last year. Please turn to Page 25. Our legacy DH business has been severely impacted by COVID-19 pandemic in Europe since March 2020. Our European business recovered during the last summer and since been negatively impacted by the second and third wave of the pandemic since September 2020. Many European countries imposed lockdown in order to contain the pandemic. For example, the German government initially planned to impose a lockdown from November to early December in 2020, then extended to January in 2021, and then they go on to February and now to April 18, 2021. The German government also recently announced hard travel restriction during the coming Easter holiday in April. These travel restrictions significantly impacted our RevPAR. On Page 25, legacy DH blended RevPAR for Q4 2020 declined by more than 24% to EUR31 compared to Q4 2019. The ADR dropped by 22% to EUR76 and the occupancy dropped by 45 percentage points compared to Q4 2019. For the full year in 2020, the blended RevPAR declined by more than 50% to EUR31, attributed to a lower ADR and significantly lower occupancy. We will provide an update on how we fought with extended COVID-19 in Europe later in my presentations. Please see our financial results on Slide 26. Our net revenue grew by 6% in Q4, but declined by 9% for the full year of 2020. These revenues trend were better than our previous guidance. Breaking down the revenue growth in Q4, 2020, net revenues from our leased and operated hotels improved by 5% year-over-year and net revenues from our manachised and franchised hotels was also up by 7% year-over-year. In Q4 2020, as revenue mix of our DH business that we acquired in early 2020, had an early - has had higher weakening of leased and operated hotels revenue. Revenue contributed by asset light manachised business models accounted for 33% in total revenues, same as 2019. Excluding DH revenue contributed by asset-light manachised models improved by three percentage points to 35% in Q4 2020. We expect the contribution from our manachised business will continue to increase going forward. Please turn to Slide 27. Due to the COVID-19 impact in 2020, our revenue from mid and upscale hotels decreased by 3% to RMB6 billion, accounting for 54% of the total net revenue. Excluding revenue from DH, revenue from mid and upscale hotel would have been decreased by 28% to RMB4.5 billion. Let's now turn to slide 28 on the operating income and margins. The reported loss from operations for Q4 2020 was RMB134 million, compared to a profit of RMB486 million last year. The loss from operation had already considered a non-cash fixed asset impairment, totaling RMB140 million related to our hotels - two hotels in DH, which we plan to close upon expiry of the leases as well as a couple of hotels in China. Excluding the impact of these fixed asset impairments, we are close or even better than breakeven. Excluding DH, which had continuously been affected by the second and third wave of COVID-19 since September 2020 as well as the fixed assets impairment, legacy Huazhu recorded an income from operation of RMB315 million in Q4 2020. The hotel operating costs and other costs for Q4, 2020 was RMB2.7 billion. As mentioned above, this amount included a non-cash fixed asset impairment of RMB140 million related to hotels that we plan to close. Excluding DH, the hotels' operating cost amounted to RMB2 billion compared to RMB1.9 billion in Q4 last year. Higher hotel operating costs were mainly attributed to higher lease cost, depreciation and amortization cost, consumables related to our leased and operated hotels opened in Q3 and Q4, 2020 and also in China, a RMB20 million fixed asset impairment related to hotels that to be closed in China. As Jin Hui mentioned during his presentation earlier, going forward, we would use asset light approach to spit out the development of our upscale hotel brands in China. In these connections, we recorded a lower pre-opening expenses in Q4 2020 and we expect that this trend to continue going forward. In Q4, we recorded a selling and general administrative expenses of RMB399 million. Excluding DH, our SG&A expenses were RMB388 million compared to RMB375 million in Q4 last year. The higher selling expenses in Q4 was mainly due to the several major promotional events, including but not limited to five session of the Huazhu World Conference held in Guangzhou, Changsha, Chengdu Beijing and Shanghai in Q4. And also a setting up of local areas, our direct sales team to boost our 2B business as Xinxin mentioned in her presentation earlier. The higher rent expenses was partially offset by a lower G&A, a general and administration expenses due to headcount reduction exercised 2020 Q1. Turn to Slide 29 on the operating income and margin for the full year. The reported loss from operations was RMB1.7 billion compared to a profit of RMB2.1 billion last year. Excluding DH, again which had continuously been affected by the second wave of COVID-19, Legacy Huazhu recorded a loss from operation of RMB100 million in 2020. The hotel operating costs and other costs for the full year in 2020 was RMB9.8 billion. Excluding DH, the hotel operating cost amounted to RMB7.4 billion compared to RMB7.2 billion for 2019. Higher operating costs were mainly attributed to higher lease cost depreciation, amortization and consumables related to our new lease and operated hotels that has been open in 2020. As mentioned in earlier page, we will use a new approach to speed up development of our upscale hotel brands and therefore, we have recorded a lower pre-opening expenses in 2020, totaling RMB288 million compared to RMB502 million last year. We expect to record a lower pre-opening expense cost going forward. For the full year in 2020, we recorded a selling and general administration expense of RMB1.8 billion. Excluding DH, our selling and general administrative expenses was RMB1 billion compared to RMB1.3 billion last year. The lower SG&A costs were attributable to our aggressive cost cutting and headcount restructuring taken place during Q1 2020. Turning to Page 30, our adjusted EBITDA decreased to RMB375 million in Q4 2020 compared to RMB854 million last year. This amount had considered a fixed asset impairment of RMB140 million mentioned - that I mentioned earlier, that had been recorded in both DH and Huazhu China business. Excluding DH, legacy Huazhu adjusted EBITDA was RMB764 million, representing 11% decrease compared to last year due to the resurgence in pandemic in selected cities within China during November and December in 2020. In Q4, we recorded an adjusted net loss of RMB8 million, excluding DH recorded an adjusted net income of RMB300 million, representing a 27% decrease in adjusted income due to lower RevPAR. The non-GAAP pro forma adjustment mentioned on this page included unrealized gain or losses from fair value changes of equities related to our investments such as core shares. Turning to Page 31, for adjusted EBITDA and net income for the full year of 2020, our adjusted EBITDA loss was RMB244 million in 2020. This amount has considered goodwill impairment of RMB437 million in Q3 and fixed asset impairment of around RMB272 million, which gives out a total of RMB700 million in 2020. Excluding these two non-cash impairments, our adjusted EBITDA would have been in the positive territory. Excluding DH, legacy Huazhu recorded a positive adjusted EBITDA of RMB1.1 billion. The chart on the right hand side shows that we have recorded an adjusted net income-loss of RMB1.8 billion in 2020.Excluding DH, legacy Huazhu recorded an adjusted loss of RMB459 million. Coming to Page 33 on COVID-19 update. When we first reported to you on the impact of the COVID-19 impact in June 2020, we were experiencing negative operating cash flow and significant cash shortfall. We also had significantly overhanging risk from the potential default of our $1 billion syndication loan due to a drop in EBITDA that failed to meet the financial covenants. There was also a huge potential redemption risk from our $475 million convertible bond due to our depressed share price that fell below $0.30. We came a long way since last June. As mentioned by Jin Hui earlier, our China business has been recovering very strongly from the pandemic, and so is our EBITDA and operating cash flow. In addition, we raised a $500 million from a convertible bond issuance in May 2020. We further raised approximately $900 million from our secondary listings on the Hong Kong Stock Exchange. With this cash, we managed to reduce our net debt position from a close to RMB10 billion at the end of Q2, to RMB5 billion at the end of Q4, 2020. The overhanging risk of reaching the financial covenants in the $1 billion syndication loan had been fully resolved. We have overachieved the financial covenants waiver condition that requires Huazhu China business to record a minimum of RMB1 billion adjusted EBITDA during the second half of 2020, being recorded a RMB1.5 billion adjusted EBITDA for our China business during that period. The risk of convertible bond redemption has also been resolved following the recovery of Huazhu share price. They were almost zero redemption and a put back in early November 2020. From now on, this RMB475 million convertible bond will only be redeemed or converted into Huazhu shares at the end of 2020. We're pleased to share that both of our convertible bonds are well in the money. Therefore, the convertible bond investors will more likely to convert their shares into Huazhu shares. At the end of 2020, we had approximately RMB7 billion of cash on hand in addition, legacy Huazhu unutilized bank facilities totaling RMB6.5 billion. This cash and bank facilities will allow for Huazhu to further pay down Huazhu's bank debt in 2021 and also to be used whether to any unforeseen circumstances. Coming to the financial impact of COVID-19 on Deutsche Hospitality on Page 34. As mentioned in my earlier presentations, our European business has encountered the second and third wave of COVID-19 pandemic. German government imposed a locked down, which had initially planned to at beginning of December and now extended to April 18, 2021. The German government has also announced strict lockdown during the Easter holiday. This has greatly affected our business in Europe. To compensate for the business loss, the German government has extended the scope and the duration of government subsidies, in addition to the salary subsidies on [indiscernible] has also that we had been receiving. Based on our estimates, the government subsidy to be received will cover the shortfall in EBITDA due to expansion of lockdown in 2021. We will only record that income upon the receipt of such cash. Similar to our action in China, we have been negotiating with the land lords to reduce the rental payments. They have been supportive. In addition, we have also put our staff on temporary furlough and frozen our headcounts and reduced discretionary spending and capital expenditure. We expect the maximum cash flow gap to be in the range of EUR40 million to EUR50 million for our German operation in the full year of 2021. We are also in discussion with our local banks in Germany for banking support. They have been supportive. Turning to Page 32 on guidance. Compared to Q1 2020, we expect our net revenue for 2021 to grow by 8% to 10% or 61% to 63%, excluding Deutsche Hospitality. For the full year for 2021, comparing to 2020, we expect our revenue to grow by 50% to 54%. To provide a more meaningful comparison by comparing with 2019, we expect our net revenue for 2021 to decline by 7% to 9% or decline by 12% to 14%, excluding Deutsche Hospitality. For the full year of 2021 compared to 2019, we expect our revenue to grow by 36% to 40% or 15% to 19%, excluding DH. As mentioned earlier, Chinese government imposed a stay local policy during the Chinese New Year period, which had negatively impacted our business in January and February 2021. Excluding the first two months in 2021, we expect our net revenue to grow, to grow by 7% to 9% compared to Q1 2019, of 1% to 3%, excluding DH. For the last 10 months in 2020, for the remaining last 10 months in 2021, we expect our revenue to grow by 45% to 49% or 36% to 40% if excluding DH. We expect our gross hotel openings target of 1,800 to 2,000 in 2021. On the other hand, we estimate our hotel closure to be in the range of 500 and 550. With that, please open the floor for Q&A.

[Operator Instructions] And our first question comes from the line of Justin Kwok from Goldman Sachs. Justin, your line is now open.

hanks for taking my question and glad to hear about the strong recovery for - March to date, since the - - more like the further reopening of the country. I got two kind of top-down questions I want to check in. The first one, that's on the expansion plan and the other one is on the high-end segment. So on the first one is, with [indiscernible] mentioning about the progress, it seems like you guys are very well on track to achieve [indiscernible], the 1,000 cities and 10,000 hotels sometime in next year. So can I check in as to what do you think would be the next milestone for the company going beyond into the next like three, four, five years in terms of number of cities, in terms of the size of the portfolio? And with that in mind, what would be the split of the segment? And also the split of the cities by that as a check? Perhaps I'll throw on the other question as well, which is on the high-end side. I'm glad to see that you making progress with the transaction with Sunac. But can you also share a bit on what you're seeing on aggregate on your high-end sector expansion plan, because you still have some of your own brands now like Joya and also InterCity, which is not - which are not in the joint venture. What are you seeing on the growth and the trajectory for these brands as well? Thank you.

Okay. So we foresee there are promising growth potential in all segments, Justin, not just the upscale but also economy and midscale. And we think, as we penetrate into lower-tier cities, the majority of the development will be focused on midscale and economy and we will add more upscale hotel in the Tier 1 and Tier 2 cities. Our target is to reach one - sorry 10,000 - 15,000 hotels in the next five years and we believe majority will continue to be a midscale and economy hotels.

So Huazhu targets of all segments growth, not only economy mid-scale but also upscale and resort hotels. Therefore, I wanted to echo Chairman Ji's point on the organizational capability. We require all kinds of organization, transformation and also the talent pools. So in the upscale segment, we see more more diversified demand from various customers. Therefore, we deploy a multi-brand strategy in the upscale segment. For example, InterCity will follow the deployment of high-speed train network in China to facilitate the transportation. And Joya represents more about the confidence, the new style of Oriental culture. So in short, there'll be different kinds of hotels catering to different kinds of the customer need. Next question please.

Yes. All right, thank you.

[Operator Instructions] And our next question comes from the line of Billy Ng from Bank of America. Billy, your line is now open.

I also have two questions. So my first question related the revenue assumption, the revenue guidance for 2021. Can you tell us a little bit more in detail, I know you guys mentioned about excluding January, February the RevPAR growth assumption should be somewhere about like or RevPAR assumption is based on 95% to 100% of 2019 level. If we look at the revenue growth assumption of 50% to 54% growth in 2021, what will be the assumption for the same-store RevPAR growth compared to 2019 for the China portfolio and also for the DH portfolio. And that's my first question.

Okay. I'll say that for the Chinese portfolio. is that for the same for hotel RevPAR, I think that our RevPAR assumption will be in the range of 95% to 100%. And then for the Deutsche Hospitality, we have actually revised downwards, so in fact that, I will give you a specific one but because that, this is for the German operations because the timing and the completion of lockdown is still very uncertain, but we have put in appropriate range to cover any potential shortfall.

Okay, I see. And for the 95% to 100%, that's the same-store number, same-store RevPAR assumption right?

Right.

Okay and how is it like the recent trend, like as you just mentioned, the recovery was quite strong in March. If this recovery is somewhat different from the last one, meaning like what's that led by Tier 3, Tier 4 city and also in terms of specifically Shanghai recovery, are there anything that you notice that's worth sharing?

Okay. In March, I think our recovery has - well, our occupancy has reached approximately like 87% already. And this has already been considering the client, the ramp up, particularly that before the mid of - before the [indiscernible] the party conferences before the end of the January of - or the 10th of March, and subsequent to that, there was a big rebound. So, considering that, the things that we did for March, we estimate the occupancy to be around in the range of like 87%.

I see. And my second question actually related to the cost side and also I think if I misinterpret - correctly, the company has about RMB140 million write-down and so like, if we take that out, how should we think about the 4Q cost structure because it seems like that, there's still some increase compared to 3Q. And if we think about 2021 cost structure, is the fourth quarter the right place to start? And just based on that too, to kind of extrapolate for the 2021 number?

It's a good place to start, but on the other hand, is that, we will share more - or some of our programs. Because in 2021, is that we are not only in the full recovery - in the recovery stage, but we are also in the aggressive mode in expansion, in both our developments, and also our sales efforts. So we would be - we'd shed more during the Q1 conference.

Okay and quickly for the --

…it's a good guide. It's a good guide.

Sorry. Yeah, and for RMB140 million write-off, what's the split between Deutsche Hospitality and our China portfolio?

The RMB140 million, of that is the RMB120 million is related to Deutsche Hospitality, related to two hotels and RMB20 million is related with the China business.

And your next question comes from the line of Sijie Lin from CICC. Your line is now open.

I have two questions. The first is on upscale business. So for the JV with Sunac, we target to finance like 1,200 hotels in pipeline in five years. So how many could we expect to open in this year and next year? And how should we evaluate that impact on P&L? And also, could we see cooperation with other real estate companies in the near future or we may wait deals, cooperation with Sunac to achieve some progress and success. This is my first question. Thanks.

Okay. Our collaboration with Sunac is the first breakthrough of our upscale hotel segment. Up to today, we plan there will be 26 hotels signed up in this year and another 50 hotels to be signed up next year, because it's actually, it's a good leverage on [technical difficulty] vast majority, vast asset ownership in different kind of hotels and also it's a network in the real estate world. We expect this JV not only work of their current portfolio of Huazhu-Sunac there will also be more collaboration with other real estate developers. But having said that, the estimation of opening of luxury hotel, upscale hotel is a little bit hard to update right now because it takes a longer time to finish the construction and the RevPAR. So we'll provide more detailed and accurate estimation later on. And the collaboration of Sunac - between Sunac and Huazhu is just a first breakthrough and we expect to have more similar kind of a cooperation with different kinds of asset owners, not just a real estate developer, also government-related entities and also financial institutions, et cetera. I wanted to provide some background data to all of you about the development of upscale segment, by looking at our peers like Intercontinental, Marriott and Hilton, they've been in China for long time. Take Intercontinental for example, they're being entering into China more than 36 years. They have 256 hotels in operation, meaning they open seven hotels per year. Upscale per year the Marriott opens 11 upscale hotels per year. So I think we are going to accelerate our expansion in upscale hotel segment and use some more innovative structure and approach.

Thank you so much. So my second question is that in the longer future, so when the market share of top players in hotel industry grow a lot and the competition become increasingly intense, would we see a decrease in franchisee?

So actually we think the franchise resemble the value a top players can provide to the industry. Huazhu has been make significant effort to increasing our empowerment to industry through the innovation in business model and also organization power. Therefore, we think considering our enhanced capability to provide value to the industry and considering the still low penetration of the top players in the market, especially Huazhu in the upscale segment and also considering the further consolidation opportunities available there, we think there is still very healthy track for the take rate increase in the franchise business. So for example, if you look at the contribution all our central reservation system, we provide more and more bookings through our system compared to outside channel, which is going to generate more fee to us.

Thank you so much. There are no further questions at this time. Speakers you may 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. Bye-bye.

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