GreenTree Hospitality Group Ltd. Reports First Quarter of 2019 Financial Results

• A total of 2,829 hotels with 225,757 hotel rooms were in operation as of  March 31, 2019, compared to 2,757 hotels and 221,529 hotel rooms as of December 31, 2018.
• Total revenues increased 20.1% from the first quarter of 2018 to RMB235.3 million (US$35.1 million)^[1] for the first quarter of 2019.
• Adjusted EBITDA (non-GAAP) increased 20.0% from the first quarter of 2018 to RMB133.9 million (US$19.9 million)^[1] for the first quarter of 2019.
• Net income increased 58.8% from the first quarter of 2018 to RMB134.0 million (US$20.0 million)^[1] for the first quarter of 2019.
• Core net income (non-GAAP) increased 18.0% from the first quarter of 2018 to RMB92.3 million (US$13.7 million)^[1] for the first quarter of 2019.
• Basic and diluted net income per ADS were RMB1.33 (US$0.20)^[1] for the first quarter of 2019.
• Basic and diluted core net income per ADS (non-GAAP) were RMB0.91 (US$0.14)^[1] for the first quarter of 2019.
• As of March 31, 2019, the Company had a strong pipeline with a total of 481 hotels contracted for or under development. During the first quarter of 2019, the Company opened 101 F&M hotels and one L&O hotel, compared to 80 F&M hotels for the first quarter of 2018.
• As of March 31, 2019, the Company had approximately 33 million individual loyal members (of which approximately 23 million are paid members) and over 1,320,000 corporate members, compared to approximately 29 million (of which approximately 21 million are paid members) and over 1,270,000 corporate members respectively, as of December 31, 2018.
• The Company sold approximately 94.2% of its room nights through its direct sales channels, including its individual loyal members and corporate members.
• The Company reaffirms guidance for growth in full year 2019 total revenues of 20-25% from 2018.

GreenTree Hospitality Group Ltd. (NYSE: GHG), a leading franchised hotel operator in China, announced its unaudited financial results for the first quarter ended March 31, 2019.

First Quarter of 2019 Operational Highlights

• As of March 31, 2019, GreenTree had 30 leased-and-operated ("L&O") hotels and 2,799 franchised-and-managed ("F&M") hotels in operation in 292 cities across China, compared to 29 L&O hotels and 2,728 F&M hotels in operation in 290 cities as of December 31, 2018. The geographical coverage of cities grew by 26 year-over-year, representing an increase of 9.8%.
• The Company opened 101 F&M hotels and one L&O hotel, 44 in the mid-scale segment, 14 in the business to mid-to-up-scale segment, 44 in the economy segment. Of the hotels opened, 6 hotels were in Tier 1 cities^[2], 20 in Tier 2 cities^[3] and the remaining 76 hotels in other cities in China, while the Company closed a total of 30 F&M hotels in the quarter.
• As of March 31, 2019, the Company had a strong pipeline with a total of 481 hotels contracted for or under development.
• The average daily room rate, or ADR, for all hotels in operation, was RMB162 in the first quarter of 2019, an increase of 3.9% year-over-year.
• The occupancy rate for all hotels in operation was 78.1% in the first quarter of 2019, a decrease of 1.1% year-over-year.
• The revenue per available room, or RevPAR, which is calculated by multiplying our hotels' ADR by its occupancy rate, was RMB127 in the first quarter of 2019, representing a 2.5% year-over-year increase.

"Thanks to our team's efforts, we delivered a strong first quarter with improved operating and financial performances, and strong execution on our expansion and strategic growth objectives. As of March 31, 2019, we were operating in 292 cities, further increasing of our geographical coverage across China. During the quarter we opened 102 new hotels, continued to grow our pipeline, and remained on track to open more new hotels in the remaining part of this year," commented Mr. Alex Xu, Chairman and Chief Executive Officer of GreenTree. "We took a number of strategic steps to strengthen our solid foundation for further growth in 2019 and beyond with a number of investments and strategic partnerships that complement our existing business. Beyond these, we remain engaged in exploring appropriate value-enhancing acquisition opportunities to help strengthen our hotel platform and increase long-term shareholder value."

Total revenues  for the first quarter of 2019 were RMB235.3 million (US$35.1 million)^[1], representing a 20.1% increase over the first quarter of 2018.The increase in the first quarter of 2019 was primarily attributable to the 101 F&M hotels new addition to our network, the addition of a new L&O hotel and the conversion of three F&M hotels to L&O during the third quarter of 2018, improved RevPAR for both F&M and L&O hotels as well as contribution from membership growth; and was partially offset by the renovation of seven L&O hotels during this quarter and the conversion of one L&O hotel to F&M during the fourth quarter of 2018.

• Total revenues from leased-and-operated hotels for the first quarter of 2019 were RMB51.8 million (US$7.7 million)^[1], representing a 13.6% year-over-year increase. The year-over-year increase in the first quarter of 2019 was primarily attributable to RevPAR growth of 2.1%, moderate sublease revenue growth, the addition of a new L&O hotel during this quarter and the conversion of three F&M hotels to L&O since the Third quarter of 2018; and was partially offset by the renovation of seven L&O hotels during this quarter and the conversion of one L&O hotel to F&M in the fourth quarter of 2018.
• Total revenues from franchised-and-managed hotels for the first quarter of 2019 were RMB183.5 million (US$27.3 million)^[1], representing a 22.0% year-over-year increase. Initial franchise fees increased 44.2% year-over-year in the first quarter of 2019, primarily due to the gross opening of 101 hotels in the first quarter of 2019 as compared to 80 hotels opened in the first quarter of 2018. The 20.6% increase from the first quarter of 2018 in recurring franchisee management fees and others was primarily due to RevPAR growth of 2.5% as well as growth in central reservation system ("CRS") usage fees, annual IT and marketing fees and hotel manager fees, which in turn resulted from the increased number of hotels and hotel rooms in operation.

Hotel operating costs for the first quarter of 2019 were RMB80.0 million (US$11.9 million)^[1], representing a 25.5% increase from the same quarter of 2018. The increase in the first quarter of 2019 was mainly attributable to costs associated with the expansion of our F&M hotels; one time cost related to the renovation of seven L&O hotels; higher rental costs, consumables, personnel costs, depreciation and amortization associated with the four new L&O hotels added to our portfolio since the third quarter of 2018 and one new L&O hotel opened in this quarter.

Selling and marketing expenses for the first quarter of 2019 were RMB24.7 million (US$3.7 million)^[1], compared to RMB10.5 million in the first quarter of 2018. The increase of 135.7% in the first quarter of 2019 was mainly attributable to one-time expenses for the Annual Conference for Celebrating the First Anniversary of our Listing on NYSE; and other minor expenses such as increased advertising and promotion expenses to improve our brands' market recognition including celebrity endorsement; and increased personnel, compensation and other costs (i.e. travel expenses) of business development personnel, as a result of the increased hotel openings.

General and administrative expenses for the first quarter of 2019 were RMB25.7 million (US$3.8 million)^[1], compared to RMB20.4 million in the first quarter of 2018. The increase of 26.1% in the first quarter of 2019 was primarily attributable to increased share-based compensation expenses, and increased R&D costs.

Gross profit for the first quarter of 2019 was RMB155.3 million (US$23.1 million)^[1], representing an increase of 17.5% from the same quarter of 2018. Gross margin in the first quarter was 66.0%, compared to 67.5% a year ago. The decrease was primarily due to increased operating costs mainly caused by rising staff numbers, and one-time cost related to the renovation of seven L&O hotels.

Income from operations for the first quarter of 2019 was RMB111.7 million (US$16.7 million)^[1], representing a decrease of 2.8%. Operating margin in the first quarter declined to 47.5%, compared to 58.7% a year ago. The decreases were mainly attributable to one-time expenses for the Annual Conference for Celebrating the First Anniversary of our Listing on NYSE.

Adjusted EBITDA (non-GAAP) for the first quarter of 2019 was RMB133.9 million (US$19.9 million)^[1], an increase of 20.0% from the same quarter of 2018. The adjusted EBITDA margin, defined as adjusted EBITDA (non-GAAP) as a percentage of total revenues, was 56.9% in the first quarter of 2019, compared to 57.0% in the first quarter of 2018. The margin decrease was mainly attributable to one-time expenses for the Annual Conference for Celebrating the First Anniversary of our Listing on NYSE.

Net income for the first quarter of 2019 was RMB134.0 million (US$20.0 million)^[1], representing an increase of 58.8% from the same quarter of 2018. Net margin in the first quarter was 56.9%, compared to 43.1% a year ago.

Core net income (non-GAAP) for the first quarter of 2019 was RMB92.3 million (US$13.7 million)^[1], representing a 18.0% increase from the same quarter of 2018. The core net margin, defined as core net income (non-GAAP) as a percentage of total revenues, was 39.2% in the first quarter of 2019, compared to 39.9% in the first quarter of 2018.

Basic and diluted earnings per ADS for the first quarter of 2019 was RMB1.33 (US$0.20)^[1], representing a 44.6% increase from the same quarter of 2018. Basic and diluted core net income per ADS (non-GAAP) was RMB0.91 (US$0.14)^[1] for the first quarter of 2019, representing a 7.1% increase from the same quarter of 2018.

Cash flow. Operating cash inflow for the first quarter of 2019 was RMB122.2 million (US$18.2 million)^[1], primarily due to improved operating performance across our hotel portfolio. Investing cash outflow for the first quarter of 2019 was RMB106.5 million (US$15.9 million)^[1], which was attributable primarily to changes in short-term investments,  and partially offset by purchase of property and equipment and other investments, mainly including short-term investments and long-term deposits. Financing cash outflow for the first quarter of 2019 was RMB197.6 million (US$29.4 million)^[1], which was attributable primarily to RMB208.0 million distributed to shareholders.

Cash and cash equivalents, restricted cash, short-term investments, investments in equity securities^[4] and time deposit^[5]. As of March 31, 2019, the Company had a total balance of cash and cash equivalents, restricted cash, short term investments, investments in equity securities and time deposit of RMB2,180.8 million (US$325.0 million)^[1], as compared to RMB2,260.5 million as of December 31, 2018, primary due to net operating cash flow and investments in equity securities, offset by dividend paid.

Recent Developments

In 2019, we intend to develop more hotels under the Wumian and GreenTree Apartment brands to meet the taste of young business travelers. During the first quarter, one Wumian hotel was under construction. GreenTree Apartment aims to provide long-term apartment rental services to urban white collars, especially newcomers to cities. Different from a standard mid-scale hotel, our apartments provide a more family-friendly living space and more community space. As of March 31, 2019, we opened 2 apartment hotels, of which one is L&O. For the first quarter of 2019, we added 8 more apartment hotels in our pipeline, and we plan to add total 30 apartment hotels into our pipeline during the rest of this year.

Yibon contributed one million paid members after the launch of our membership integration with them during March 2019. This year, we will continue to launch our membership integration with Argyle.

M&A and strategic investments are key growth strategies for GreenTree and the Company completed a number of strategic initiatives during the first quarter of 2019. First, on January 18, 2019, the Company invested in China Gingko Education Group Company Limited, or Gingko, a public company listed on the Hong Kong Stock Exchange ("HKSE") that had approximately 10,000 students enrolled in its university studying accredited 4 years full time BA/BS degrees all related to hospitality during the 2017/2018 school year. Gingko is currently ranked as China's No.1 hospitality university by the "Gaosan Web Association", a website with introductions to and rankings of universities in China. We will work together to cultivate professional talent for us and the hospitality industry in China.

Second, on January 28, 2019, the Company announced a strategic investment to become a major shareholder in Argyle. The Argyle hotel network consists of eight mid-scale and upscale brands, with footprints mainly in South West China, South East China, and Southeast Asia. Argyle's highly distinguished brand portfolio and geographic coverage are highly complementary to GreenTree's business.

Third, on March 11th, 2019, the Company acquired 4.95% in Zhejiang New Century Hotel Management Co., Ltd., or New Century, a company also listed on the HKSE. New Century operates and manages 150 hotels, ranging from mid-scale to upscale brands, with over 34,000 hotel rooms in 22 provinces. The two companies will explore opportunities for future strategic cooperation.

Fourth, on May 1, 2019, the Company announced an acquisition agreement to acquire a 70% equity stake in Urban Hotel Group. The Urban Hotel Group is a leading franchised hotel operator in China with strong brand portfolio and geographic coverage in China. It has more than 600 hotels in economy to mid-scale segment in Eastern and Northern China. The company plans to complete the transaction subject to customary closing conditions.

Adoption of New Revenue Recognition Accounting Standards

The Company adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) on January 1, 2019 on a full retrospective basis in the condensed consolidated financial statements. As such, prior period results have been adjusted to reflect the adoption of ASU 2014-09.

The most meaningful impacts of the adoption of ASU 2014-09 are as follows:

Under previous guidance, initial one-time franchise fee was recognized when the hotels opened for business and the Company had fulfilled its commitments and obligations. Upon adoption of new revenue standards the one-time franchise fee will be recognized over the term of the franchise contract.

Under previous guidance, the Company adopted the incremental cost model to account for membership program. The estimated incremental costs, net of the reimbursement received from the franchisees, are accrued and recorded as accruals for membership program as members accumulate points and are recognized as cost and expense in the accompanying consolidated statements of comprehensive income. Under new revenue standards, membership program is considered a separate performance obligation and the consideration allocated to the membership program will be recognized as revenue upon point redemption, net of any cost paid to the franchisees and other third parties.

Guidance

For the full year 2019, the Company expects growth in total revenues of 20-25% from 2018.

The guidance set forth above reflects the Company's current and preliminary view based on our estimates, may not be indicative of our financial results for the full year ended December 31, 2019 and is subject to change.

About GreenTree Hospitality Group Ltd.

GreenTree Hospitality Group Ltd. ("GreenTree" or the "Company") (NYSE: GHG) is a leading franchised hotel operator in China. As of March 31, 2019, GreenTree had 2,829 hotels, among which 2,799 are franchised and managed hotels. The Company had the highest proportion of franchised-and-managed hotels among the top four economy to mid-scale hotel networks in China. In 2018, GreenTree was the fourth largest economy to mid-scale hotel group in China in terms of the number of hotels according to a report from Shanghai Inntie Enterprise Management Consulting Co., Ltd. The Company has built a strong suite of brands including its flagship "GreenTree Inns" brand as a result of its long-standing dedication to the hospitality industry in China and consistent quality of its services, signature hotel designs, broad geographic coverage and convenient locations. GreenTree has positioned its brands to appeal to value-and-quality-conscious business travelers and leisure travelers.