Greentree Hospitality Group Ltd. annual report, Q4 FY2021

GreenTree Hospitality Group Ltd. — Form 20-F Summary

Reporting period: Fiscal year ended December 31, 2021. The filing is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP and include audited results for 2019–2021. Amounts are primarily in RMB; U.S. dollar translations use RMB6.3726 per US$1.

Business Context

GreenTree is a Cayman Islands holding company operating primarily in China through its subsidiaries. It operates a multi-brand hotel platform spanning economy, mid-scale, mid-to-upscale and luxury segments. The company relies predominantly on an asset-light franchised-and-managed model.

4,659 hotels and 337,153 rooms in operation at year-end 2021, including 4,593 franchised-and-managed hotels and 66 leased-and-operated hotels.
1,225 additional hotels were contracted for or under development.
Franchised-and-managed hotels represented approximately 98.6% of hotels in operation.
The network covered 367 cities in China; 67.7% of operating hotels were in Tier 3 and lower cities.
Approximately 91.4% of room nights were sold through direct channels and 8.6% through online travel agencies.

Financial and Operating Metrics

Metric	2019	2020	2021
Revenue	RMB1,091.8 million	RMB930.0 million	RMB1,206.1 million
Income from operations	RMB504.6 million	RMB319.3 million	RMB153.9 million
Net income attributable to ordinary shareholders	RMB442.7 million	RMB261.3 million	RMB117.4 million
Net margin	40.5%	28.1%	9.7%
Adjusted EBITDA	RMB523.4 million	RMB355.5 million	RMB325.3 million
Adjusted EBITDA margin	47.9%	38.2%	27.0%
Net cash from operating activities	RMB513.9 million	RMB295.3 million	RMB361.0 million
Net cash used in investing activities	RMB1,220.0 million	RMB111.6 million	RMB928.4 million
Cash, cash equivalents and restricted cash	RMB342.2 million	RMB633.7 million	RMB320.6 million

Revenue mix in 2021: Leased-and-operated hotels generated RMB392.0 million, or 32.5% of revenue; franchised-and-managed hotels generated RMB774.4 million, or 64.2%; other revenue was RMB39.8 million, or 3.3%.

Hotel operating indicators: Total reported occupancy was 71.1%, average daily rate was RMB164 and RevPAR was RMB116 in 2021, compared with 68.7%, RMB152 and RMB105, respectively, in 2020. The filing contains an inconsistent later table that reports 63.4% occupancy for franchised-and-managed hotels, while the principal operating table reports 71.3%; this value should be verified against the filed financial exhibits.

Material Changes Versus 2020

Revenue increased 29.7%, primarily from newly opened hotels and improved hotel operating performance following the COVID-19 disruption in 2020.
Franchised-and-managed revenue increased 14.3% to RMB774.4 million. Recurring franchise fees increased to RMB698.1 million, partly offset by fee reductions and waivers provided to franchisees.
Leased-and-operated revenue increased 72.6% to RMB392.0 million, reflecting higher RevPAR and 29 new leased-and-operated hotels, partly offset by three closures.
Hotel operating costs increased 62.2% to RMB651.4 million, driven by higher rent, personnel, utilities, consumables, depreciation and ramp-up costs.
General and administrative expenses increased 117.9% to RMB356.0 million, primarily due to bad-debt provisions, new leased-and-operated hotels and higher consulting expenses.
Income from operations fell 51.8%, and net income attributable to ordinary shareholders fell 55.1% to RMB117.4 million.
The effective tax rate increased from 31% to 49%, partly because certain bad-debt provisions and share repurchase-related items were not deductible.
Adjusted EBITDA declined 8.5%, and the margin contracted from 38.2% to 27.0%.
Operating cash flow improved 22.2% to RMB361.0 million, but investing cash outflow increased substantially due to capital expenditures, acquisitions, investments and loans to franchisees and related parties.

Debt, Liquidity and Capital Allocation

Year-end bank debt was approximately RMB708.0 million, consisting of RMB356.0 million of short-term loans, RMB50.2 million of current long-term debt and RMB301.8 million of non-current long-term debt.
Weighted-average interest on short-term bank loans was 4.71%. Long-term borrowings generally carry fixed rates of 5%.
Cash, cash equivalents and restricted cash were RMB320.6 million, while short-term investments were RMB557.5 million and investments in equity securities were RMB158.0 million.
2021 financing activities generated RMB255.6 million, including RMB808.0 million of bank-loan proceeds, partly offset by RMB250.0 million of repayments and RMB320.3 million of shareholder distributions.
Future minimum operating lease payments totaled RMB2.72 billion, including RMB242.2 million due in 2022.
Loans receivable totaled RMB538.5 million net at year-end, including RMB602.2 million of gross loans and a RMB117.9 million allowance. The filing identifies a material weakness related to the completeness of the bad-debt provision for franchisee loans.
RMB936.8 million of PRC subsidiary net assets, including paid-in capital and statutory reserves, was restricted from transfer to the parent through dividends, loans or advances.

Outlook, Transactions and Management Commentary

Management intends to continue expanding in Tier 3 and lower cities and to increase exposure to mid-to-upscale and luxury hotels. Approximately 68.4% of the current pipeline was in Tier 3 and lower cities.
The company planned further expansion of e-sports hotels, including a target to add 100 hotels over the following 12 months, and continued development of the Geli brand and other mid-to-upscale brands.
COVID-19 remained a material operating risk. Management stated that 2021 franchised-and-managed revenue remained 6.9% below 2019 levels and that future outbreaks or government restrictions could reduce occupancy, franchisee investment and fee collections.
No clear formal numerical revenue, earnings or margin guidance for 2022 is provided in the filing text.
In May 2022, after the reporting period, the company agreed to acquire Da Niang Dumplings and approximately 83.9% of Bellagio from controlling shareholder GTI for consideration equivalent to RMB399.8 million. The businesses generated combined unaudited 2021 revenue of approximately RMB740 million. Closing was expected in the second half of 2022, subject to customary conditions.
The consideration for the proposed restaurant acquisition is intended to settle outstanding amounts due from GTI and its subsidiaries. Amounts due from GTI and its subsidiaries reached RMB403.5 million as of May 16, 2022.
In May 2022, the company authorized a share repurchase program of up to US$20 million over 12 months.

Material Risks, Contingencies and Unusual Items

Internal controls: Management concluded that disclosure controls and internal control over financial reporting were ineffective as of December 31, 2021 because of a material weakness concerning bad-debt provisions for franchisee loans.
Licensing and compliance: Of 66 leased-and-operated hotels, various hotels lacked fire-safety, public-hygiene, special-industry or food-operation permits. Only 3,862 of 4,593 franchised-and-managed hotels had relevant permits reviewed by the company.
Franchisee and lease exposure: The company had 43 pending proceedings involving franchised-and-managed hotels, four involving leased properties and six involving trademarks. Litigation reserves were not established for matters in which management believed losses were unlikely or immaterial.
COVID-19 and fixed costs: Leased-and-operated hotels have significant fixed rent and personnel costs, creating operating leverage and downside risk when occupancy declines.
Related-party transactions: The company made substantial loans to GTI, Aotao, Beifu HK and other entities controlled by the controlling shareholder. These balances and the proposed restaurant acquisition create related-party concentration and governance risk.
China regulatory and market access risk: The company faces PRC restrictions involving data security, foreign exchange, overseas listings, regulatory access to audit work papers and the ability of the PCAOB to inspect its China-based auditor.
HFCA and delisting risk: Ernst & Young Hua Ming LLP had not been inspected by the PCAOB as of the filing. The company disclosed potential trading prohibition or delisting risk if applicable inspection requirements are not satisfied.
Tax uncertainty: The company reported RMB328.8 million of unrecognized tax benefits and RMB90.0 million of accumulated interest expense and penalties related to uncertain tax positions. PRC tax authorities could also challenge the company’s tax-resident status or withholding-tax treatment.
Foreign exchange and cash-transfer risk: Substantially all operations are denominated in RMB, which is subject to PRC currency controls. The company does not hedge its foreign-exchange exposure.

Most Important Facts for Investors to Verify

Reconcile the inconsistent 2021 franchised-and-managed occupancy figures of 71.3% and 63.4% in the filing.
Assess the collectability, collateral and related-party concentration of the RMB538.5 million net loans receivable and the adequacy of the RMB117.9 million allowance.
Review remediation progress for the material weakness in bad-debt provisioning and any subsequent auditor or management findings.
Verify the status and potential financial impact of missing hotel licenses, lease registrations, land-use issues and pending legal proceedings.
Evaluate the economics, fairness opinion, funding and governance safeguards for the proposed RMB399.8 million related-party restaurant acquisition.
Confirm current PCAOB inspection status, HFCA designation status and the continued NYSE listing implications.
Separate recurring operating profitability from non-core items, investment gains and the RMB95.4 million provision add-back used in Adjusted EBITDA.
Review 2022 occupancy, RevPAR, franchise fee trends, lease commitments and debt maturities before relying on the reported recovery from 2020.