CEO INTERVIEW: One Year After IPO, GreenTree Celebrates Record Growth Despite Challenges
GreenTree Hospitality Group Ltd. (NYSE: GHG), one of the fastest-growing hotel chains in China, celebrated one year of being a publicly traded company last week as it continues to push the expansion of its network domestically and overseas.
The Shanghai-based company rang the closing bell on the New York Stock Exchange Wednesday, as exactly a year ago it lifted off in trading, raising $143 million in its first outside fundraising since it launched with GreenTree Inns in 2004.
Having floated at $14 per American depositary share, the stock of GreenTree nearly doubled in mid-June, then slipped, as the slowdown in China's economy, further weakened by the trade tensions with the United States, worried investors and sent stocks sliding across industries. On Friday, shares in the company closed at $13.83 apiece. Although it gained 6 percent on the day, that was still below its IPO level a year ago.
The company operates a number of mid- to up-scale and economy brands and has established a franchise network in approximately 10 percent of cities in China. The remaining 90 percent present the untapped possibilities for GreenTree, said Alex Xu, the company's founder, chairman, and chief executive officer.
Since its initial public offering, GreenTree has added 468 hotels to its portfolio, bringing the total to 2,757 hotels by the end of 2018. Its loyalty program grew by 8 million additional members, including 4.2 million paying members and counting 29 million total.
For the full year 2018, the company reported revenue of $137.4 million, up 22 percent from 2017, and net income of $57.2 million, or 65 cents per share, also 22 percent higher year-over-year.
Recently, the company announced acquiring a major interest in the Argyle Hotel Management Group (Australia) Pty. Ltd., which owns eight mid-scale and upscale brands, mainly in Southwest China, Southeast China, and some hotels in Southeast Asia. It also acted as a cornerstone investor in the Hong Kong IPO of Zhejiang New Century Hotel Management Co. Ltd, which operates 150 mid- to upscale hotels.
In a conversation with CapitalWatch, Xu called the highly competitive hospitality industry in China a "marathon." He talked at length about GreenTree's progress in the year following its IPO, its merger and acquisition strategy, and running the race in providing affordable, stylish comfort to travelers in China. Selina Yang, the company's chief financial officer, also contributed to the interview.
CapitalWatch: Happy anniversary! It must have been a very exciting year for you. What was transforming for the company during this period that spurred its growth? What was challenging?
Alex Xu: It's a big difference compared with a year ago.
We had to become more focused and disciplined. Now, we have many more investors who are looking for companies continuing high-speed growth. They gave us resources, as well as clarity and focus in our business. Our institutional investors are very experienced and very supportive, so we enjoyed a wide range of support from quality major institutional global shareholders since our listing.
Our growth rate in the last year has been record high, even though the economy, globally speaking, has been more challenging. We are blessed to be based in China where there is such a huge consumer economy. It's just mind-boggling from my point of view. We just couldn't have enough resource, talent, and technology to go all over the country.
With resources from our public shareholders, we will continue to grow indefinitely in China. And that's what last year has transpired since the IPO process.
CW: Selina, same question for you: how has the company changed since its IPO?
Selina Yang: I think GreenTree has changed in two aspects. We have become more concentrated on our business in the mid-scale and economy segments. Of course, we have more pressure than before, so that led us to work harder and push every one of our departments to work harder.
We also feel that if we forecast the future development of the company, we should invest more in our technology, as well as improve our membership program. Those are some improvements since the IPO.
CW: Since the IPO, the company's stock has been up and down on the NYSE, rising as high as $25.10 per share, then sliding again. When you look at the stock price now, what are your thoughts?
Xu: I believe that will be corrected in the long run. People will realize what a great value our company can offer. The company has a very healthy profit margin and cash flow.
This problem is temporary because some of our largest shareholders don't want to sell because they cannot find an alternative better investment. I think, in a short period of time, we will address our liquidity. Hopefully, the market will continue on the solid growth path and the share price will correct to reflect the long-term intrinsic value of the company.
Last year, we started a dividend policy, instead of just offering a share buyback, because even though the share buyback can improve the share price, we know that would also reduce our liquidity. The company always takes responsibility in making sure everybody's interests are protected, especially our franchisees', our employees', and our shareholders'.
CW: Acquisitions are a major part of the company's strategy, and one of the latest was the Argyle Management Group. Tell us about your acquisition and expansion approach.
Yang: GreenTree is the only hotel company that has developed by purely organic growth.
When we search for proper companies for acquisition, we always target companies that are complementary to our geographic coverage, our portfolio structure, and our team. We are very careful about our investors' money.
Being present in just 290 cities in China, we have a lot of room to grow.
Xu: Because in the past we invested our own funds, we are very cautious and risk-sensitive with the money from outside investors. And we are also very sensitive to our franchisees' investments. When they decide to invest, we are very careful in helping them evaluate a site and the economics of that hotel, making sure they have a very quick payback period.
Even when there is a slowdown in the economy, their return rate would not be impacted. We have a group of franchisees and a major accomplishment that we are proud of is that we have supported and enabled – empowered – nearly 3,000 entrepreneurs to start a business that became successful.
The Argyle Group was one of the most distinguished we could find in this process. It is one of the largest luxury hotel companies, operating mainly in China and Southeast Asia. The majority of their presence is still in China. They also have a portion of their presence in Southeast Asia, with a hotel under development in Australia, to Nepal, to the Philippines.
There are more than 3,000 cities in China. Our company has been growing in the past 15 years, but we are only present in less than 10 percent of the cities in China. So, there are 90 percent of cities that are still untapped for our kind of affordable, value-priced, and stylish economy- to mid-scale hotels.
We believe the future of hospitality in Asia is in China. Our company's strategy is going to be totally focused on China, because of the stage of the economy and the population, as well as a more disposable income for people there.
Many people want to have new experiences, travel, see China, and we are in that experience-based economy. That's our near-term expansion plan.
CW: What about in the long term? You have said that by 2025, you want to become one of the largest hotel chains and the most profitable for franchisees not only in China but globally. Is that still one of your goals?
Xu: That's right. In the long term, in the next three to five years, when we have more market share and stabilize our operations in China, then we will definitely look into growing globally.
That will benefit our customer base and will give us more markets to tap into, as well as larger-scale consumer traveling within our network. [We seek] to become truly global in the hospitality industry.
Currently, if we partner with companies that have a presence outside China, it will naturally help us to expand globally. But initially, our focus is going to be China. If we are slowly moving outside China, it's going to be where our GreenTree members and partners are going, because a lot of them are visiting nearby countries.
CW: Looking back at the year, it has been challenging for many industries, with the trade war affecting some businesses and China's economic slowdown affecting others. That uncertainty also reflects on stock markets. Did you feel any of that effect?
Xu: Even though there are ongoing trade tensions between the two countries, in the long run, it will be sorted out. Every economy has its ups and downs, and I think the Chinese government has managed the situation very well.
We have not seen a downturn since we have been in the market. Even though this slowdown could be seen in the production sector, the internal consumption, especially, the sector we focus on, has not experienced or observed a downturn. In the last quarter, our occupancy has stayed the same compared with a year ago. No really active changes.
That's because we have always been focused on building these services. We have our customers' interests in mind, so we do not want to overprice our products and make them less affordable. Companies still have to travel, they only reduce the travel budget. They may encourage their associates to travel in the value-priced chain and the economy- to mid-scale. Our business model and our products and services were always planned taking into consideration this up and down cycle.
Our company will always be able to manage, even on the downside of the economy, with our growth rate not being impacted or changed at all. During a downturn, we sometimes see more demand for our products and services because we can help our franchisees to do a better job. We provide maximum support with the least amount of costs and franchise charges. So, on our platform, everybody can win.
In the past year, we have been growing at a faster rate than before. The share price – sometimes, it is impacted by many factors, such as a company's market cap. Our liquidity, because it is rather low, not very many big companies can purchase our shares. In addition, most of our shares are held by institutional investors who are very bullish in terms of China's economy and our future.
CW: Lastly, let's talk about competition. The hospitality industry in China is very competitive. What distinguishes you from other players?
Xu: Although there is some competition, the market has seen phenomenal growth.
There are some competitors, but that is the nature of any business. I think that some of our overseas investors are asking about competition, but we feel that it is healthy competition. While in the short term, the market may be crowded, in the long run, those responsible with their operations will scale, as well as improve the consistency and the quality of their services.
As we generate a healthy cash flow both in the up and down times, the company's financial foundation will become the largest and GreenTree will grow to be the best company in the industry.
It's a marathon, but we firmly believe that, in perspective, our industry and our company are the most promising and we are very thankful for your support, and our partners' and shareholders' support on this side of the world.
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