GHG.US

The budget hotel operator’s revenue fell 7.1% in the first quarter, as gains for its core hotel business were wiped out by an overhaul for its newer restaurant operation

Key Takeaways:

  • GreenTree Hospitality’s hotel revenue grew 8.8% in the first quarter, though much of that was due to the addition of new hotels
  • The company’s revpar fell 4.6% for the quarter, as China’s yearlong travel rebound began to lose momentum

  

By Doug Young

China’s market for cheap hotel rooms in its many smaller cities is huge and quite profitable, but also lacks respect from investors. That reality is evident in the latest valuation for GreenTree Hospitality Group Ltd. (GHG.US), China’s clear leader in the space for cheap rooms that the company charged just 169 yuan ($23) per night for, on average, in this year’s first quarter.

GreenTree’s latest results, released on Tuesday, are obviously more complex than just this ultra-low room rate, which is the result of the company’s focus on China’s smaller cities where many might consider 100 yuan per night as pricey. The company’s first-quarter results also highlighted a number of industry trends, most notably a softening of China’s travel market that seemed inevitable after a nice post-Covid rebound in 2023.

The results also included some encouraging signs for the company’s year-old restaurant business, which it purchased last year from its controlling shareholder. The purchase probably raised some eyebrows due to its insider nature, though the diversification drive seemed logical enough strategically. Not surprisingly, the business had some major issues that needed addressing, and most of those now appear to be fixed.

The bottom line is that GreenTree trades at a lowly price-to-earnings (P/E) ratio of just 6.5, which owes at least partly to a 32% decline in its stock so far this year – a sharp contrast with modest gains for most U.S.-listed Chinese companies. U.S.-listed rivals H World Group (HTHT.US; 1179.HK) and Atour (ATAT.US), which both operate pricier hotels, trade at multiples of 21 and 18, respectively, while Shanghai-listed Jin Jiang (600754.SH) trades even higher at 24.

In a nod to its low multiple, two analysts who cover the company have recently become more bullish on it, raising their ratings to “buy” and “strong buy” in June from “hold” and “underperform” a month earlier. At least some investors appear to see some upside potential in the stock as well, with GreenTree shares rising 2.8% after the results were published on Tuesday.

All that said, we’ll take a deeper dive into the company’s latest results that reflect the industry trends we’ve mentioned above, and also seem to highlight that GreenTree is a relatively well-run company.

Like their global peers, Chinese hotel operators took a beating during the pandemic as people reined in their travel. If anything, China’s downturn was even more severe than other parts of the world due to tough restrictions that made domestic travel very difficult as the government tried to contain infections.

China’s industry bounced back from the pandemic last year, trailing the rest of the world by about a year, due to China’s later relaxation of Covid restrictions. But while other consumer-facing industries in China started to lose momentum around mid-2023 amid growing consumer caution, the hotel rebound remained surprisingly strong through most of the year. But now even that rebound has started to run out of steam, as reflected in the latest results from GreenTree and its peers.

Sagging revenue

At the highest level, GreenTree’s overall revenue fell 7.1% year-on-year in the first quarter to 352 million yuan, dragged down by an overhaul for its restaurant business that we’ll detail shortly. Revenue for the hotel business actually rose 8.8% to 275 million yuan, making up more than three-quarters of the company’s total.

But the hotel business’ gains were mostly driven by new openings, as GreenTree added 109 properties to its portfolio during the quarter, bringing its total to 4,256 by the end of March. More revealing was a 4.6% year-on-year decline in GreenTree’s revenue per available room (revpar), the most widely watched metric for the hotel industry that combines room occupancy rates with actual room prices.

GreenTree’s first-quarter revpar decline wasn’t completely unexpected, though it did outpace a 2.7% decline for Atour in the first quarter. H World Group managed to continue posting small growth for the metric, with the figure for its China-based hotels up about 3% for the quarter. GreenTree said first-quarter trends for its hotel business would continue in the second quarter, forecasting revenue growth of 7% to 12%, while revpar would continue to fall at a similar rate to the first-quarter decline.

Then there’s the restaurant business, which was the biggest drag on GreenTree’s overall results. Revenue for that business, mostly from the company’s Daniang dumpling chain, plunged nearly 40% year-on-year to just 78 million yuan, which the company attributed to a “strategic repositioning of this business.” It has been closing underperforming stores since completing the acquisition last year, most notably stores based in supermarkets.

As that happened, its restaurant count fell from more than 236 when the purchase closed last year to 185 by the end of March. Chairman Alex Xu said on GreenTree’s earnings call that the overhaul is mostly finished, and the company plans to open 45-50 new restaurants by the end of this year, bringing its total back to around the level when it completed the purchase. As it expands, it will focus on standalone stores, with greater emphasis on franchising.

“Focusing on the profitability of each store and building the restaurant business on the sound foundation, I think, is more important than the scale and the size at this moment,” he said.

As the overhaul neared completion, GreenTree reported the restaurant business achieved an important milestone by breaking even in the first quarter, improving from a 2.2 million yuan loss in the year-ago period. Better performance by the company’s hotel business helped it record an overall net profit of 57.3 million yuan in the first quarter, up 76% from a year earlier. The company’s cash and short-term investments also rose to 1.5 billion yuan by the end of March from 1.3 billion yuan three months earlier, again underscoring that this is a relatively well-run company despite some of its challenges.

The bottom line for GreenTree is that it will probably remain a second-tier choice for investors who prefer operators of higher-end hotels with better margins. But the company’s extremely low valuation could tempt some bargain hunters, at least for now, potentially providing some upside for the stock in the second half of the year.

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