GreenTree Hospitality Group Ltd. — Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone 2019 fourth-quarter filing. Financial statements are prepared under U.S. GAAP and audited by Ernst & Young Hua Ming LLP. Unless otherwise stated, amounts are in RMB thousands; U.S. dollar translations use RMB6.9618 per US$1.
Business context
GreenTree is a Cayman Islands holding company operating primarily in China through hotel-management subsidiaries. Its asset-light model is heavily weighted toward franchised-and-managed hotels. At year-end 2019, the network included 3,957 hotels and 290,026 rooms across 339 cities, including 3,923 franchised-and-managed hotels and 34 leased-and-operated hotels. The company completed acquisitions of Argyle in April 2019 and Urban Hotel Group in November 2019.
- Approximately 99.1% of hotels were franchised-and-managed.
- Franchised-and-managed hotels generated 76.8% of 2019 revenue.
- The company reported approximately 44 million individual members and more than 1.51 million corporate members.
- Direct channels generated approximately 93.5% of 2019 room nights; OTAs generated approximately 6.5%.
Key financial and operating metrics
| Metric | 2018 | 2019 | Change/comment |
|---|---|---|---|
| Total revenue | RMB905.6 million | RMB1,091.8 million | Increased 20.6% |
| Franchised-and-managed revenue | RMB692.9 million | RMB838.4 million | Increased 21.0%; 76.8% of total revenue |
| Leased-and-operated revenue | RMB212.7 million | RMB253.4 million | Increased 19.2% |
| Income from operations | RMB505.2 million | RMB504.6 million | Decreased 0.1% |
| Operating margin | 55.8% | 46.2% | Decreased 9.6 percentage points |
| Net income | RMB371.2 million | RMB437.8 million | Increased 17.9% |
| Net income attributable to ordinary shareholders | RMB371.7 million | RMB442.7 million | Increased 19.1% |
| Net margin attributable to ordinary shareholders | 41.0% | 40.5% | Decreased 0.5 percentage points |
| Adjusted EBITDA | RMB530.2 million | RMB594.1 million | Increased 12.1% |
| Adjusted EBITDA margin | 58.6% | 54.4% | Decreased 4.2 percentage points |
| Net cash from operating activities | RMB555.0 million | RMB513.9 million | Decreased 7.4% |
| Cash, cash equivalents and restricted cash | RMB1,267.3 million | RMB342.2 million | Decreased substantially |
Hotel operating indicators also softened: total occupancy declined from 82.1% to 80.9%, while average daily rate increased from RMB164 to RMB170 and RevPAR increased from RMB135 to RMB137. Franchised-and-managed RevPAR rose from RMB134 to RMB137, while leased-and-operated occupancy declined from 68.0% to 66.1%.
Liquidity, debt and capital allocation
- Year-end cash and cash equivalents were RMB319.8 million; restricted cash was RMB22.3 million. The company also held RMB437.3 million of short-term investments and RMB560.0 million of long-term time deposits.
- Short-term debt was RMB60.0 million at year-end, bearing interest at 4.60%. The filing does not indicate material long-term corporate debt at the consolidated level.
- Operating lease obligations totaled RMB771.2 million, including RMB98.1 million due within one year. Other long-term liabilities totaled RMB118.1 million.
- 2019 investing cash outflows were RMB1,220.0 million, driven by acquisitions, property and equipment purchases, investments, time deposits and loans to related parties and franchisees.
- 2019 financing cash outflows were RMB212.2 million, primarily reflecting RMB227.0 million of shareholder distributions.
- The company declared dividends of US$0.30 per ordinary share in January 2019 and US$0.25 per ordinary share in December 2019. Future dividends remain discretionary and depend on cash needs, legal restrictions and distributions from PRC subsidiaries.
- Restricted net assets of PRC subsidiaries totaled RMB509.4 million, and statutory reserves totaled RMB63.0 million, limiting transfers to the Cayman Islands parent.
Material changes versus 2018
- Hotel count increased by 1,200 year over year, from 2,757 to 3,957, and rooms increased from 221,529 to 290,026.
- Argyle and Urban expanded the brand portfolio and increased property, equipment, intangible assets and goodwill. Year-end intangible assets rose to RMB496.3 million and goodwill to RMB100.1 million.
- Selling and marketing expenses increased 79.3% to RMB85.0 million, reflecting advertising, promotion, personnel and listing anniversary expenses.
- General and administrative expenses increased 94.2% to RMB185.0 million, reflecting IT, legal, due diligence, merger and acquisition, consulting, share-based compensation and acquired-company costs.
- Hotel operating costs increased 23.5% to RMB338.8 million, outpacing revenue growth and reducing operating margin.
- Gains from equity securities improved from a RMB57.8 million loss in 2018 to a RMB55.3 million gain in 2019, contributing materially to net income.
- Bad debt expense increased to RMB38.4 million, including provisions related to loans, sublease income and other exposures.
- The company adopted revenue-recognition guidance and presented prior periods on an adjusted basis. Initial franchise fees are recognized over the franchise term rather than primarily at hotel opening, and membership-program accounting changed.
Guidance, outlook, risks and unusual items
Management stated that it expected lower total revenue in the first quarter and full year of 2020 because of COVID-19, but did not provide a clear quantitative full-year forecast. As of March 31, 2020, 93% of hotels were operating and occupancy exceeded 50%, compared with a reported low of 21.5%. The filing states that the ultimate impact could not be reasonably estimated.
- COVID-19 and operating risk: Travel restrictions, quarantines, closures and lower reservations could reduce occupancy, revenue and franchisee fee collections, while fixed lease and staffing costs could pressure margins.
- Regulatory and licensing exposure: Eight of 34 leased-and-operated hotels lacked fire-prevention safety inspection certificates; three lacked public-area hygiene permits; two lacked special-industry permits; and two catering hotels lacked food-operation permits. The company had reviewed permits for only 3,131 of 3,923 franchised-and-managed hotels.
- Internal controls: Management concluded that disclosure controls and internal control over financial reporting were ineffective at December 31, 2019 due to material weaknesses involving U.S. GAAP and SEC reporting expertise and related-party transaction controls. Remediation was ongoing.
- Tax contingencies: Unrecognized tax benefits were RMB261.6 million, primarily related to transfer pricing and expense deductibility. The filing states that RMB261.6 million would affect the effective tax rate if ultimately recognized.
- Related-party transactions: The company made loans to GTI and affiliated catering entities. Amounts due from related parties totaled RMB31.7 million at year-end, including RMB8.4 million due from GTI and RMB20.1 million due from Aotao.
- Franchise and property risk: The business depends on franchisee compliance, renewals, property leases, permits, service quality and payment capacity. The company terminated 75 franchised-and-managed hotels in 2019 for failure to meet brand or operating standards.
- Marketable securities: Equity investments were subject to market volatility; year-end equity securities totaled RMB207.0 million, and 2019 included realized gains and mark-to-market losses.
- Governance and ownership: GTI held 83.9% of Class A shares and all Class B shares, representing approximately 93.7% of voting power. The dual-class structure and controlled-company status concentrate control with founder Alex S. Xu.
- Audit oversight: The auditor issued an unqualified opinion on the financial statements but did not audit internal control effectiveness. The filing also notes that the auditor’s China-based audit work was not subject to PCAOB inspection.
Most important facts for an investor to verify
- Reconcile 2019 earnings quality by separating recurring hotel and franchise operations from equity-security gains, interest income and other non-core items.
- Assess whether the decline in occupancy, operating margin and operating cash flow continued after year-end, particularly during COVID-19.
- Review the collectability and collateral supporting loans to franchisees, related parties and third parties, as well as the increase in bad debt provisions.
- Verify the status and remediation of missing hotel permits, lease registrations, property-use inconsistencies and related regulatory penalties.
- Track remediation of the material weaknesses in U.S. GAAP reporting and related-party transaction controls.
- Evaluate the cash available to the parent after considering PRC restrictions, restricted cash, time deposits, lease commitments, acquisition payments and future dividends.
- Review acquisition valuations, goodwill, indefinite-lived trademarks and the performance of Argyle and Urban after consolidation.
- Confirm the effect of the 2019 revenue-recognition adoption on comparability with earlier periods.