The budget hotel operator's first-quarter revenue fell 7.1% as profits from its core hotel business were wiped out by a restructuring of its new restaurant business.
Key takeaways: GreenTree Hospitality's hotel revenue rose 8.8% in the first quarter, much of it due to the addition of new hotels. The company's sales fell 4.6% for the quarter as China's year-long travel recovery began to lose steam.
Doug Young
The budget hotel market in China's many smaller cities is huge and profitable, but it also lacks investor respect — a reality reflected in the latest valuation of GreenTree Hospitality Group (GHG.US), the clear leader in China's budget hotel industry, whose average room rate in the first quarter of this year was just 169 yuan ($23) a night.
GreenTree's latest results, released on Tuesday, make it clear that there's more to it than just its ultra-low rates, which are the result of the company's focus on smaller Chinese cities, where many might consider RMB 100 a night too expensive. The company's first-quarter results also highlighted several trends in the industry, most notably a softening of China's travel market that seemed inevitable after a strong post-COVID recovery in 2023.
The results also contained some positive signs for the company's year-old restaurant business, which it acquired from a controlling shareholder last year. The acquisition was made by an insider, which probably surprised some, but the diversification effort seemed to make plenty of sense strategically. Not surprisingly, the business had some big issues that needed to be addressed, most of which now appear to be resolved.
After all, GreenTree trades for a low price-to-earnings ratio of just 6.5, partly because its shares have fallen 32% so far this year, in contrast to the modest gains of most U.S.-listed Chinese companies. Its U.S.-listed rivals, pricier hotel operators H World Group (HTHT.US; 1179.HK) and Atour (ATAT.US), trade at 21 and 18 times earnings, respectively, while Shanghai-listed Jin Jiang (600754.SH) trades even higher at 24 times earnings.
Given the company's low price-to-book multiple, two analysts who cover the company have recently become more bullish on the stock, upgrading it to “buy” and “strong buy” in June from “hold” and “underperform” a month earlier. At least some investors see room for growth in the stock, and GreenTree shares rose 2.8% after the company's earnings report on Tuesday.
That said, we take a closer look at the company's latest financial results, which reflect the industry trends discussed above and also highlight that GreenTree is a relatively well-run company.
Hotel operators in China were hit like the rest of the world as people avoided traveling during the pandemic. In fact, China's downturn was worse than the rest of the world because strict restrictions made domestic travel very difficult as the government tried to contain the disease.
China's lodging industry recovered from the pandemic last year, roughly a year behind the rest of the world, as China subsequently relaxed its COVID-19 measures. But while the rest of China's consumer lodging industry began to lose steam around mid-2023 due to growing consumer caution, the hotel recovery was surprisingly robust throughout the year. But now even that recovery is starting to lose steam, as reflected in the latest results for Greentree and its peers.
Falling revenue
At the highest level, GreenTree's total revenue in the first quarter was RMB352 million, down 7.1% year-on-year, due to a restructuring of its restaurant business which we'll explain in more detail later. Revenue from its hotel business actually increased 8.8% to RMB275 million, accounting for more than three-quarters of the company's total revenue.
But the hotel business's gains came mostly from new openings, with GreenTree adding 109 properties to its portfolio during the quarter, bringing the total to 4,256 by the end of March.More notable, GreenTree's revenue per room (revpar), the hotel industry's most closely watched metric that combines occupancy rates with actual room prices, fell 4.6% year-over-year.
GreenTree's first-quarter sales decline was not entirely unexpected, but it outpaced Atul's 2.7% decline in the first quarter. H World Group continued to post modest growth in this metric, with figures for its China-based hotels up about 3% for the quarter. GreenTree said first-quarter trends in its hotel business will continue in the second quarter, with revenue expected to grow 7% to 12%, but sales to continue to decline at the same rate as the first-quarter decline.
And the restaurant business was the biggest drag on Greentree's overall performance. Restaurant revenue, mainly from its Danyan dumpling chain, fell nearly 40% year-on-year to just 78 million yuan, which the company attributed to a “strategic repositioning of the business.” Since completing its acquisition last year, it has been closing underperforming stores, particularly those inside supermarkets.
As a result, the company's store count fell to 185 at the end of March, down from more than 236 when the acquisition was completed last year. Chairman Alex Xu said during GreenTree's earnings call that the company's overhaul is nearly complete and that it plans to open 45 to 50 new stores by the end of this year, bringing the number of stores back to the level it was at when the acquisition was completed. As it expands, the company plans to focus on independent stores and put more emphasis on franchising.
“At this point in time, I think it is important to place emphasis on the profitability of each store rather than size or size, and to build our food and beverage business on a solid foundation,” he said.
As the reforms near completion, GreenTree reported that its restaurant business achieved a key milestone by breaking even in the first quarter, improving from a loss of RMB2.2 million in the same period last year. Improved performance in the company's hotel business helped its first-quarter net profit increase 76% year-on-year to RMB57.3 million. The company's cash and short-term investments also increased to RMB1.5 billion by the end of March, from RMB1.3 billion three months earlier, reiterating that the company is operating relatively well despite some challenges.
The bottom line for GreenTree is that it will probably remain a second choice for investors who prefer higher-margin luxury hotel operators, but the company's extremely low valuation, at least for now, could tempt some bargain hunters and drive a rise in the stock price later this year.
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