Business Context and Reporting Period
GreenTree Hospitality Group Ltd. filed an annual Form 20-F for the fiscal year ended December 31, 2020, prepared under U.S. GAAP. The filing is annual rather than a standalone 2020 fourth-quarter filing; the source text does not provide a separate Q4 income statement or cash-flow statement. GreenTree is a Cayman Islands holding company operating primarily in China through subsidiaries and a predominantly franchised-and-managed hotel network. Its ADSs trade on the NYSE under “GHG.”
- 4,340 hotels and 315,335 rooms in operation at year-end, up from 3,957 hotels and 290,026 rooms in 2019.
- 4,300 hotels, or 99.1% of the network, were franchised-and-managed; 40 were leased-and-operated.
- 1,186 additional hotels were contracted for or under development.
- Hotels operated across 345 Chinese cities; 67.3% of operating hotels were in Tier 3 and lower cities.
Financial and Operating Metrics
| RMB millions, except percentages | 2019 | 2020 | Change |
|---|---|---|---|
| Total revenue | 1,091.8 | 930.0 | -14.8% |
| Franchised-and-managed revenue | 831.3 | 677.5 | -18.5% |
| Leased-and-operated revenue | 253.4 | 227.1 | -10.4% |
| Income from operations | 504.6 | 319.3 | -36.7% |
| Operating margin | 46.2% | 34.3% | -11.9 points |
| Net income | 437.8 | 244.7 | -44.1% |
| Net income attributable to ordinary shareholders | 442.7 | 261.3 | -41.0% |
| Net margin attributable to ordinary shareholders | 40.5% | 28.1% | -12.4 points |
| Adjusted EBITDA | 523.4 | 355.5 | -32.1% |
| Adjusted EBITDA margin | 47.9% | 38.2% | -9.7 points |
Revenue from franchised-and-managed hotels included RMB616.4 million of recurring franchise management fees, down from RMB776.4 million, and RMB61.1 million of initial franchise fees, up from RMB54.9 million. The company temporarily reduced recurring franchise and central reservation fees by 50% nationwide and waived those fees for requisitioned hotels and hotels in Hubei Province.
| Operating indicators | 2019 | 2020 |
|---|---|---|
| Total occupancy | 80.9% | 68.7% |
| Average daily rate | RMB170 | RMB152 |
| Total RevPAR | RMB137 | RMB105 |
| Franchised-and-managed occupancy | 81.1% | 68.9% |
| Leased-and-operated occupancy | 66.1% | 57.8% |
Cash Flow, Liquidity, Debt and Balance Sheet
- Operating cash flow was RMB295.3 million, down from RMB513.9 million in 2019.
- Investing cash flow was an outflow of RMB111.6 million, including RMB111.9 million of property and equipment purchases, RMB218.8 million of net loans to franchisees, and RMB65.8 million of equity-security purchases.
- Financing cash flow was an inflow of RMB115.5 million, primarily reflecting RMB160.0 million of short-term borrowings, partly offset by RMB70.0 million of repayments.
- Cash, cash equivalents and restricted cash totaled RMB633.7 million at year-end, including RMB611.4 million of cash and RMB22.4 million of restricted cash.
- Additional liquid and investment assets included RMB302.0 million of short-term investments and RMB490.0 million of long-term time deposits.
- Short-term bank loans totaled RMB150.0 million at December 31, 2020, bearing interest at 4.60% annually. The filing does not identify material long-term bank debt at the consolidated company level.
- Total assets were RMB4.095 billion and total liabilities were RMB1.845 billion. Shareholders’ equity was RMB2.250 billion.
- Contractual obligations included RMB1.035 billion of non-cancellable operating lease payments, plus RMB115.9 million of other long-term liabilities. Management stated that existing cash and operating cash flow should meet working-capital needs for at least the next twelve months.
Material Changes Versus the Prior Comparable Period
- COVID-19 reduced travel and hotel demand, causing lower occupancy, average daily rate and RevPAR and leading to temporary hotel closures and fee concessions for franchisees.
- Hotel operating costs increased 15.8% to RMB392.5 million despite lower revenue, primarily because of higher rent, depreciation and amortization, ten new leased-and-operated hotels, and the inclusion of Argyle and Urban operating costs.
- Selling and marketing expenses declined 11.3% to RMB75.3 million, while general and administrative expenses declined 6.7% to RMB172.6 million.
- Losses on equity securities were RMB36.8 million in 2020, compared with gains of RMB55.3 million in 2019. The 2020 result included approximately RMB40.8 million of mark-to-market losses.
- The company opened 538 hotels and closed 155, for a net increase of 383 hotels. Leased-and-operated hotels increased from 34 to 40.
- Net income attributable to noncontrolling interests increased to RMB16.6 million, mainly reflecting losses attributable to Argyle’s minority shareholders.
- Operating cash flow declined more sharply than net income, partly reflecting a RMB59.5 million decrease in deferred revenue and higher working-capital requirements.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide quantitative revenue, earnings or hotel-opening guidance. Management expects to continue expanding primarily through the franchised-and-managed model, diversify its brand portfolio, and pursue growth in China’s Tier 3 and lower cities and selected mid-scale to luxury segments. It also stated that it plans to liquidate equity-security holdings gradually, subject to market conditions, and place unused cash in interest-bearing accounts or less volatile investments.
- COVID-19 remained the principal near-term risk. Most disrupted hotels had resumed operations by December 31, 2020, but resurgences in several Chinese provinces and cities reduced occupancy in January 2021, and government policies discouraged travel during the New Year and Spring Festival period.
- The business is highly dependent on franchisees, who generated 72.9% of 2020 revenue. Franchisee liquidity, compliance, hotel quality, lease renewals and willingness to develop new properties are outside or only partly within GreenTree’s control.
- Regulatory and licensing exposures were significant. Among 40 leased-and-operated hotels, several lacked fire-safety, public-hygiene, special-industry or food-operation permits. The company had reviewed permits for only 3,739 of 4,300 franchised-and-managed hotels.
- As of year-end, the company reported 16 pending legal proceedings involving franchised-and-managed hotels, three involving leased properties and one involving trademarks. Management had not established a litigation reserve for cases in which it was the defendant because it did not expect material losses.
- Unrecognized tax benefits were RMB290.7 million, principally related to transfer pricing and expense deductibility; the filing states that the amount, if ultimately recognized, would affect the effective tax rate.
- Related-party financing and transactions were material, including 2020 bridge loans of RMB479.4 million to Aotao and RMB40.0 million to Da Niang Group, both reportedly settled by year-end.
- Management concluded that disclosure controls and internal control over financial reporting were effective at December 31, 2020, after remediation of material weaknesses identified for 2019 involving U.S. GAAP and SEC-reporting expertise and related-party transaction controls.
- The company remains exposed to PRC currency controls, potential PRC tax-resident treatment, limitations on PCAOB inspection of its China-based auditor, and possible U.S. listing or trading consequences under the Holding Foreign Companies Accountable Act.
- The company is controlled by GTI and Alex S. Xu. GTI held approximately 93.2% of voting power, and approximately 26% of the company’s ordinary shares were pledged to Pudong Development Bank in connection with GTI’s loan.
Investor Verification Checklist
- Verify the recovery trajectory of occupancy, ADR and RevPAR after 2020, including performance during subsequent COVID-19 resurgences.
- Assess whether recurring franchise fees recover after the temporary 2020 reductions and whether franchisee financial health supports the 1,186-hotel pipeline.
- Reconcile hotel-opening and hotel-closure data, including the reported 538 openings, 155 closures and 383 net increase.
- Review the collectability, collateral and concentration of RMB394.9 million of loans receivable, including RMB313.1 million attributable to franchisees and RMB81.9 million to third parties before provisions.
- Monitor the RMB290.7 million of unrecognized tax benefits, related-party transactions and the company’s transfer-pricing examinations.
- Confirm remediation of previously identified internal-control weaknesses and assess the implications of the auditor’s lack of PCAOB inspection access.
- Review outstanding licenses, fire-safety certificates, hygiene permits, property titles, lease registrations and designated property-use issues across the hotel network.
- Evaluate investment-portfolio volatility, including RMB242.4 million of current equity securities and RMB369.5 million of long-term investments at year-end.
- Confirm the ADS-to-ordinary-share ratio, which is stated as one-to-one in most of the filing but appears as eight ordinary shares per ADS in one corporate-governance disclosure.