Business Context and Reporting Period
GreenTree Hospitality Group Ltd. filed its annual Form 20-F for the fiscal year ended December 31, 2018. The filing provides full-year audited U.S. GAAP results, not a separate 2018 fourth-quarter income statement; therefore, Q4-specific financial values are not clearly provided. The Cayman Islands holding company operates primarily in China through hotel-management subsidiaries.
The business is predominantly franchised-and-managed: 2,728 of 2,757 hotels, or 98.9%, were franchised-and-managed at year-end. The network covered 290 cities, with 221,529 rooms in operation and 430 additional hotels contracted or under development.
Key Financial Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | RMB945.0 million | RMB778.1 million | Up 21.4% |
| Franchised-and-managed revenue | RMB731.8 million | RMB584.6 million | Up 25.2% |
| Leased-and-operated revenue | RMB213.2 million | RMB193.5 million | Up 10.1% |
| Income from operations | RMB535.0 million | RMB387.5 million | Up 38.1% |
| Net income | RMB393.6 million | RMB285.1 million | Up 38.1% |
| Net income attributable to ordinary shareholders | RMB394.1 million | RMB285.4 million | Up 38.1% |
| Net margin attributable to ordinary shareholders | 41.7% | 36.7% | Up 5.0 percentage points |
| Adjusted EBITDA | RMB609.7 million | RMB467.0 million | Up 30.6% |
| Adjusted EBITDA margin | 64.5% | 60.0% | Up 4.5 percentage points |
| Net cash from operating activities | RMB554.9 million | RMB476.7 million | Up 16.4% |
2018 earnings per Class A and Class B ordinary share were RMB3.97, compared with RMB3.12 in 2017.
Operating Metrics
- Total hotels increased from 2,289 to 2,757; rooms increased from 190,807 to 221,529.
- Total occupancy declined modestly to 82.1% from 82.6%, while average daily rate increased to RMB164 from RMB157.
- Total RevPAR increased to RMB135 from RMB130. Franchised-and-managed RevPAR rose to RMB134 from RMB129.
- Franchised-and-managed occupancy declined to 82.3% from 82.9%; leased-and-operated occupancy declined to 68.0% from 70.3%, while leased-and-operated RevPAR increased to RMB139 from RMB131.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were RMB1.264 billion at December 31, 2018, compared with RMB162.0 million at year-end 2017.
- Short-term investments were RMB685.5 million and trading securities were RMB307.7 million. The trading securities were primarily shares of 22 Chinese A-share companies.
- Total assets increased to RMB3.014 billion from RMB1.756 billion; total liabilities increased to RMB1.151 billion from RMB1.023 billion; total shareholders’ equity increased to RMB1.863 billion from RMB733 million.
- The company had RMB60.0 million of short-term bank debt outstanding at year-end, bearing interest at 4.60% and maturing in one year. The filing does not identify material long-term corporate debt.
- Operating lease obligations totaled RMB572.7 million, including RMB82.1 million due within one year. Total contractual obligations, including other long-term liabilities, were RMB669.3 million.
- Management stated that operating cash flow and existing cash were expected to satisfy working-capital needs for at least the next twelve months.
Material Changes Versus the Prior Comparable Period
- Growth was driven primarily by the addition of 465 franchised-and-managed hotels and higher franchised RevPAR. The company opened 554 hotels and closed 86, for a net increase of 468 hotels.
- Hotel operating costs increased 20.2% to RMB281.0 million, but declined slightly as a percentage of revenue because of the larger contribution from the asset-light franchised model.
- General and administrative expense fell 21.7% because 2017 included RMB38.0 million of one-time share-based compensation. Excluding that item, 2018 general and administrative expense increased 13.9%.
- Trading securities produced a RMB57.8 million loss in 2018, versus a RMB59.2 million gain in 2017, including a RMB72.2 million mark-to-market loss in 2018.
- Income tax expense declined to RMB160.2 million from RMB186.7 million, and the effective tax rate declined to 28.5% from 39.5%, primarily because 2017 included higher withholding taxes.
- Financing cash flow was positive RMB662.8 million, primarily reflecting RMB837.5 million of IPO proceeds, partly offset by RMB200.5 million of shareholder distributions and RMB30.8 million of IPO costs.
- Investing cash flow was negative RMB181.8 million, including RMB138.5 million of property and equipment purchases, RMB166.8 million of loans to third parties, RMB54.1 million of loans to franchisees and RMB772.5 million of short-term investment purchases, partly offset by investment maturities and disposals.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide quantified 2019 revenue, earnings or RevPAR guidance. Management emphasizes continued expansion primarily through franchised-and-managed hotels, brand diversification, technology investment, selective acquisitions and conversion of certain leased-and-operated hotels.
- The company planned to gradually liquidate trading securities and place unused cash in interest-bearing accounts or less volatile investments, subject to market conditions.
- The company adopted new revenue-recognition guidance on January 1, 2019 using the full retrospective method. Management expected the standard to reduce reported 2018 revenue by approximately RMB25.6 million for comparative purposes because initial franchise fees would be recognized over franchise terms. Loyalty-program changes were expected to reduce 2018 revenue by approximately RMB7.3 million and selling and marketing expense by approximately RMB3.0 million.
- A material weakness in internal control over financial reporting remained as of December 31, 2018, relating to insufficient accounting expertise for U.S. GAAP and SEC reporting. Management expected remediation efforts to continue through 2019, but did not assure that the weakness would be fully remediated.
- Regulatory and licensing exposure is significant. Among 29 leased-and-operated hotels, 10 lacked fire-prevention safety inspection certificates, three lacked public-area hygiene permits and two lacked special industry permits at year-end. Of 2,524 franchised-and-managed hotels whose documentation was reviewed, some had not provided required licenses or certificates.
- The company reported 25 pending legal proceedings relating to franchised-and-managed hotels, three relating to leased properties, two copyright proceedings and one guest-negligence proceeding. Management had not established a litigation reserve because it did not believe material losses were probable.
- Unrecognized tax benefits were RMB169.6 million at year-end, including RMB130.3 million that could affect the effective tax rate if ultimately recognized. The company is subject to PRC tax examinations for non-transfer-pricing matters from 2013 through 2018 and transfer-pricing matters from 2008 through 2018.
- Substantially all operations and revenue are in China, creating exposure to Chinese economic conditions, regulation, foreign-exchange controls, RMB volatility, property and lease rights, competition, franchisee performance and labor compliance.
- The company had RMB307.7 million of trading securities and recognized a substantial mark-to-market loss in 2018. It also had RMB106.5 million of loans receivable at year-end, primarily to franchisees and third parties.
- The company is controlled by GTI and Alex S. Xu through a dual-class share structure. GTI held approximately 94.0% of voting power, and 26% of the company’s ordinary shares had been pledged to Pudong Development Bank as security for GTI-related borrowing.
- The filing states that the auditor is PCAOB-registered but was not inspected by the PCAOB because the auditor is located in China. The company also disclosed uncertainty regarding whether it was a passive foreign investment company for U.S. tax purposes in 2018.
Most Important Facts for Investors to Verify
- Reconcile the annual filing with any separate 2018 Q4 earnings release, since this 20-F does not provide a clear standalone fourth-quarter financial table.
- Assess recurring franchising economics separately from IPO proceeds, government subsidies, investment gains or losses, foreign-exchange translation effects and other unusual items.
- Review the impact of ASC 606 adoption on 2018 comparative revenue, deferred revenue, franchise-fee timing and loyalty-program accounting.
- Monitor remediation of the material weakness in internal controls and the first required management assessment under Section 404.
- Evaluate licensing, fire-safety, hygiene, lease-registration and property-use deficiencies across the hotel network and any resulting closure, penalty or remediation costs.
- Review the concentration and liquidity of cash, wealth-management products, trading securities and loans receivable, including exposure to market losses and counterparty defaults.
- Assess the effect of the dual-class structure, controlling shareholder arrangements and pledged shares on governance and ADS-holder protections.
- Verify subsequent acquisitions, investments and dividends announced after year-end, including the January 2019 dividend of US$0.30 per ordinary share or ADS and planned acquisitions of Argyle and Urban Hotel Group.