Hello, everyone. Thank you for standing by. Welcome to Huazhu Group's Q3 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require further assistance, please press zero. I would now like to hand the call over to your first speaker today, Mr. Jason Chen from the company. Please go ahead.
Thank you. Good morning and good evening, everyone. Thanks for joining us today. Welcome to Huazhu Group's 2021 third quarter earnings conference call. Joining us today is our Founder and Chairman, Mr. Ji Qi, our CEO, Mr. Jin Hui, our President, Ms. Liu Xinxin, our CFO, Ms. Chen Hui, and our Deputy CFO, Ms. Ye Fei. Following their prepared remarks, management will be available to answer your questions. Before we continue, please note that the discussion today will include forward-looking statements made under the Safe Harbor provision of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed here today. A number of potential risks and uncertainties are outlined in our public filings with the SEC.
Huazhu Group does not undertake any obligations to update any forward-looking statements except as required under applicable laws. On the call today, we will also mention adjusted financial measures during the discussion of our performance. Reconciliation of those measures to comparable GAAP information can be found in our earnings release that was distributed yesterday. As a reminder, this conference call is being recorded. The webcast of this conference call, as well as supplementary slides presentation, is available on Huazhu Group's website at ir.huazhu.com. With that, now I will turn the call over to Mr. Ji Qi. Mr. Ji, please.
Good morning and good evening, everyone. Thank you for joining us today. There's an old saying in Chinese, [Foreign language], which means a heavy shower rarely lasting for a day. I was optimistic at the beginning last year. Though the pandemic is just a heavy shower, not a light one. However, I didn't expect that it was more like the yellow plum season in Shanghai, pouring back and forth. The persistent COVID-19 variations and the recurrence from last year had brought serious impacts and uncertainties to the lodging industry, and also seriously affected consumers' traveling activities. It also had brought varying degrees of disruption to our hotel construction and opening progress from time to time. Undeniably, the longer-than-expected existence of COVID-19 had been weakening the franchisees' confidence and the willingness to invest in lodging market.
In the past few years, concerning the increasing influence of external online traffic, we have been consistently implementing a large-scale expansion in order to be more independent. However, recently, we had witnessed the complexity and the challenges of global macroeconomy and international politics worsened by COVID-19. At the same time, Chinese government has been continuously promoting the supply-side structural reform and optimization from quantitatively to qualitatively. With such backdrop, we reviewed our strategy and decided to adjust our goals from previously mega scale goals to lean growth. Going forward, it means in addition to the absolute size of a hotel network, we will continuously provide better product and refine the service to improve customers' experience. We hope our hotel products represent a truly craftsman spirit, become more durable, environment friendly, and bring sustainable benefit to our franchisees.
Meantime, we will further utilize our core competencies such as loyalty program, technology, and supply chain capability to support our franchisee to overcome the recent difficulties, manage hotels more easily, and achieve better profitability in the long run. The lean growth strategy will be carried out by our new management team, CEO Mr. Jin Hui and President Ms. Liu Xinxin. Both of them have been with Huazhu for a long time and made a tremendous contribution to the company. I would like to thank them for their strong commitment and the current challenging environment to take the new roles, and I believe that they will be a strong leadership team for Huazhu for the new chapter of growth. With that, I will turn the call to Jin Hui to update our recent business development. Thank you.
[Non-English content].
Thank you, [Non-English content]. As mentioned by [Non-English content] before, Huazhu's future growth strategy will be adjusted from mega scale growth to lean growth. In fact, Huazhu has already implemented its COVID-19 prevention measures since the initial outbreak of COVID-19 back to 2020. In order to provide safe stay safety to our customers, Huazhu has required all its hotels to use intelligent contactless services, including self check-in and checkout, robot delivery, online check-in, through Huazhu's app and so on. It's enabled our customers to spend less time in public and lobby areas to reduce the risk of virus transmission and cross-infection.
[Non-English content].
In May 2020, Huazhu released the Comfort 360 white paper, which is the first white paper in the China lodging industry. It is the first professional cleaning standard report for Chinese lodging industry. In the beginning of this year, with our concept of Quality Hotel, Huazhu further upgraded our Comfort 360 program. The upgraded version mainly focus on two areas. One is COVID-19 prevention safety and the second one is the customer experiences. [Foreign language]. At the same time, we also used both of our online big data management and offline quality check to ensure the implementation of this program.
[Non-English content].
In details, Comfort 360 program will assess the hotel quality from four key dimensions to ensure a 360-degree great customers experiences without any dark corners. Hotels can only be certified as Quality Hotel, when complied with all four dimensions, which including central procurement standard, hotel facility standard, hygiene standard and safety standard.
[Non-English content].
As of now, 67% of our hotels in operation had complied with all above four standard. Hotels, products and service quality are very critical parts for our future Lean growth strategy. Therefore, our Comfort 360 program will consistently being upgraded to ensure the best quality of hotel and services to be provided to our customers for better staying experiences.
[Non-English content].
Next, please turn to slide five. I will review our RevPAR recovery trends over the last year. Since January till now, COVID-19 recurred eight times totally in either small or large scale. As you can see from the figure, those large scale outbreaks with spreading over to many provinces and cities have significantly impacted our RevPAR recovery.
[Non-English content].
The most recent resurgence began in November, had already spread over to more than 20 provinces, which again significantly impacted our November RevPAR recovery. As of 23rd of November, the month to date RevPAR only recovered to 68% of 2019 level.
[Non-English content].
As Ji Qi mentioned in the beginning, the persistent COVID-19 recurrences and the traveling restriction imposed by the government has significantly impacted our construction progress, as well as franchisees willingness on timely hotel openings.
[Non-English content]
Please turn to slide six. The figure shows our monthly number of hotel openings for 2021. Taking August and October as an example, which had a big impact from COVID-19 resurgence. Before the COVID-19 occurred, according to our pipeline and hotels in construction, our planned hotel openings were 169 and 134 hotels in each month respectively. However, due to the COVID-19 impact, there was a gap of over 80 hotels between our planned and actual number of hotel openings.
[Non-English content].
Please turn to page seven. As you can see, our new signings has grown relatively healthy at 41% by the end of September 30th. The total new signings achieved over 2,100.
[Non-English content].
In addition, along with our lower tier cities penetrations, our hotels in pipeline and in operations which from the lower tier cities contributes over 57% and 54% respectively.
[Non-English content].
In fact, undeniably, consistent resurgence of COVID-19 had putting a lot of impacts to our franchisees' willingness and confidence. Compared to the first two quarters, our new signing speed slowed down a little bit in the third quarter. Therefore, under current uncertain situations and market conditions, our franchisees becomes more careful.
[Non-English content].
Please turn to slide eight. As Ji Qi said previously, our future growth will focus more on lean growth. For this strategy, franchisees operation performance and profitability is one of the most important part. Therefore, we launched a new franchisee caring policy in June.
[Non-English content].
The franchisees caring policy mainly including one, provided up to two months of 50% management fee discount for franchisees whose hotels are located in middle or high risk areas in China. Secondly, the deferred payments on management fee and the CRS fee. Certainly, help every qualified franchisees to obtain up to RMB 1 million bridge loan from financial institutions.
[Non-English content].
Huazhu is the only hotel groups which provides management fee discounts to franchisees in middle or high risk areas in China in the industry. As one of the leading company, we will go through the recent tough period together with our franchisees.
[Non-English content].
Moving to our progress of upscale hotel development, please turn to page nine. The pictures in the slide show some of our upscale hotels opened during this year. As of September 30th, Huazhu totally opened ten upscale hotels and signed up 44 upscale hotels. Those opened and signed hotels covers various brands such as Steigenberger, Blossom House, Song Hotels and so on
[Non-English content].
Moving to page ten. In addition to above, our joint venture company Yongle Huazhu is recently rebranding around 20 upscale hotels, which were previously operated or managed by other hotel groups. In addition, we had already transferred the core system of these upscale hotels to Huazhu's own system within only 30 days, achieving another milestone.
[Non-English content].
To rebrand around 20 upscale hotels within such short time period could significantly help Huazhu to further penetrate into high-end hotel segment and grab more market share there. However, undeniably, this also brings many challenges to Huazhu.
[Non-English content].
For the high-end hotel segment, we are still in the experimental stage. Huazhu is good at operating the limited service hotels, but for the upscale hotels, there are still some shortcomings, such as branding, operations, talent, cultivation, and organizational adjustment, which brings many challenges to the company on how to figure out a great way to better operate the upscale hotels. However, we are very confident that Huazhu has the capability to its own way for a unique operation in the market.
[Non-English content].
Moving to slide 11. We continuously invest in our IT development. Our IT investment mainly focus on two aspects: To C for the customer and To B for our franchisees.
[Non-English content].
At To C level, we are devoting on further strengthening our direct sales capability and building up an omni-channel marketing and selling system. To B level, we are devoting to achieving a full cycle empowerment for our franchisees through hotel location selection, hotel construction, hotel operation and so on. Although Huazhu's IT capability is in the leading position in the market, we're still seeing a lot of room for further improvements. For example, for To C side, our single hotel sales capability and customers acquisitions capability can be further improved. Also, a more precise revenue management as well as various digitalization application across all hotels and organizations still see a plenty of room for the improvement.
[Non-English content].
For To B side, a better urban planning and a more precise location identification are also seeing many improving potentials. Putting them together, we would further leverage our technology and data capability to drive more precise business empowerment to achieve our Lean growth strategy in the future.
[Non-English content].
As I mentioned before, although the persistence of COVID-19 recurrence impacted our business operations, we are happy to see our members, our loyalty programs, especially our corporate members contribution achieved another great result for the third quarter. Please turn to page 12.
[Non-English content].
As of the end of 2021, our total number of members continuously grow to nearly 190 million, even considering the high base.
[Non-English content].
Please turn to page 13. Our CRS contribution also improved from 56% in third quarter 2020 to 60% in third quarter 2021. At the same time, along with our lower tier cities penetration strategy, the CRS contribution in lower tier cities is very close to the higher tier cities.
[Non-English content].
As of the third quarter of 2021, CRS contribution in tier three and below cities achieved 59%, which is only one percentage point below compared to tier one and tier two cities at 60%.
[Non-English content].
Please turn to page 14. The room nights contributed by our corporate customers are also further increased from only 9.6% in third quarter last year to 11.8% in this quarter. Especially in the upper middle and upscale hotel segment, the increase in corporate customers contribution is more significant. As of the end of the quarter, the room nights contributed by corporate customers for our upper middle and upscale hotel segment achieved 30.2% and 35.4% respectively. Both improved by five percentage points compared to the same period of last year.
[Non-English content].
With that, I will turn the call to Ye Fei to discuss our third quarter operation and financial performance.
Thank you. Good morning or good evening to everyone, wherever you are. Let's move on to our operational and financial review for the third quarter of 2021. As shown on slide 16. Our hotel network expanded by 14% in Q3 to 723K compared with 634K in last year. Excluding DH, Legacy Huazhu's hotel network expanded by 14% year on year to roughly 700K in the third quarter of 2021. For our hotel turnover in the third quarter, our total hotel turnover grew at 15% year on year to RMB 12.2 billion in the third quarter. This was mainly due to our continuous network expansion in China and the recovery of DH's operation, while offset by the negative impact of COVID-19 resurgence in Nanjing since late July. Excluding DH, Legacy Huazhu Hotel Network grew 14% year on year to RMB 12.2 billion in the third quarter.
DH's year on year growth is around 32%, more attributable to the improvement in hotel occupancy. Turn to page 17. Legacy Huazhu's blended RevPAR for the third quarter 2021 declined 18% compared to 2019. The ADR in the third quarter was flattish compared to the one in 2019 at RMB 246. While occupancy in the third quarter is 16 percentage points lower compared to 2019, it was mainly due to the COVID-19 resurgence in Nanjing, as mentioned above. Turn to page 18. Our Legacy DH business saw continuous recovery in the third quarter 2021. Therefore, our Legacy DH blended RevPAR for the third quarter 2021 grew 36% to EUR 48 compared with the third quarter of 2020. The occupancy improved by 11 percentage points compared with the third quarter 2020, and ADR improved by 6% to EUR 99. For the same period of 2019, actually, the RevPAR is EUR 77.4.
That means there's still a long way for the recovery. Please see our financial results on slide 19. Total net revenue grew by 12% year-on-year to RMB 3.5 billion in the third quarter of 2021. Excluding DH, Legacy Huazhu recorded a 7% year-on-year growth rate to RMB 2.9 billion, which was in line with our previous guidance. Legacy Huazhu recorded slower revenue growth, mainly due to the COVID-19 resurgence in Nanjing starting from late July and August. Breaking down the revenue of third quarter, lease and owned revenue increased by 10% year-on-year to RMB 2.3 billion revenue. Excluding DH, the lease and owned revenue of Legacy Huazhu grew by 4% year-on-year to RMB 1.8 billion.
Net revenue from managed and franchised hotel grew by 13% to CNY 1.1 billion, mainly driven by the strong growth of network expansion in China. Due to the further expanding hotel networks with SLI model, the managed and franchised revenue contribution enlarged to 32% in the third quarter of 2021 at the group level. Currently, we can say the main driver is due to the managed and franchised business in China. Now, let's move on to the cost and profitability section on slide 20 to 20. The hotel operating cost for the third quarter 2021 was CNY 2.9 billion, increased by 17% year-on-year. For Legacy Huazhu, it recorded CNY 2.3 billion hotel operating cost, indicating a 17% year-on-year growth.
The increase was mainly attributed to, first, higher rental cost of the new upscale and upper midscale hotels and the recently acquired CitiGO portfolio in May. Second, higher hotel level personnel costs, as well as we keep growing hotel network and rapidly. Third, some reclassification cost from SG&A to other hotel operating costs. For Legacy DH, it recorded RMB 630 million hotel operating cost, indicating a 15% year-on-year growth. The increase was mainly due to variable costs increased along with the business recovery, such as short-term workers, food and beverage, and consumables. As we mentioned in the previous quarters, our future expansion of upscale will mainly use SLI model. Therefore, our pre-opening costs declined by 64% year-on-year to only RMB 15 million in third quarter 2021.
Having said that, with caution, we are still evaluating and investing in this hotel at good location at right price. Our SG&A in the third quarter 2021 increased by 14% to RMB 577 million, mainly driven by the increase of Legacy Huazhu. Excluding DH, the SG&A for Legacy Huazhu increased by 29% year-on-year to RMB 435 million. This was mainly due to the more headcount for various departments, such as BD team to further penetrate into lower-tier cities, corporate sales team to boost direct sales from corporate accounts, upscale business unit to support our leapfrog in this new era, and lastly, technology team for various projects in both China and DH.
In third quarter 2021, the reported operating income was RMB 72 million compared to a loss of 201 million last year and a positive 629 million a quarter before. The year-over-year improvement was mainly driven by the DH business recovery and one-time non-cash goodwill impairment of RMB 437 million booked in the third quarter 2020, but offset by the weaker China business performance. Apart from COVID-19's impacts for China business, the quarter-over-quarter profit decline was due to the RMB 20 million government subsidy received during the third quarter for DH, compared to over 300 million RMB booked in Q2.
Excluding DH, Legacy Huazhu's operating income in the third quarter 2021 was RMB 239 million compared to RMB 523 million last year and RMB 763 million a quarter ago. Turn to page 21. Our adjusted EBITDA income, RMB 385 million in the third quarter 2021 compared to RMB 184 million a year ago. DH's EBITDA loss in the third quarter 2021 was RMB 115 million, narrowing from RMB 669 million last year. Similar reason mentioned at the previous slide. Excluding DH, Legacy Huazhu recorded adjusted EBITDA income of RMB 500 million, declined by 41% in third quarter of 2020 due to the impact of COVID-19's resurgence in Nanjing.
In the third quarter of 2021, we recorded adjusted net loss of RMB 46 million, narrowed from a loss of RMB 218 million a year ago. Excluding DH, Legacy Huazhu recorded an adjusted net income of RMB 117 million, declining from RMB 476 million in the 2020 third quarter. The non-GAAP pro forma adjustment mentioned on this page included unrealized gains or losses from fair value change of equities related to some of our investments. Coming to the cash position on page 22, our net debt remains healthy at RMB 5.2 billion at the end of Q3, and there's no risk of breaching the financial covenant of $1 billion syndication loans. Our cash balance is RMB 5.4 billion, and the unutilized bank facilities worth RMB 7 billion.
The cash position will allow Huazhu to further pay down the bank debt in 2022 and also be used to weather any unforeseen circumstances. Now let's zoom in a bit into DH. As of November 23, 2021, 71% of the entire German population has received at least one shot, and 68% of the population was fully vaccinated. Along with the growing inoculation rate and the receding third wave COVID since August, restrictions were gradually eased for people who are fully vaccinated or who have recovered from COVID. DH business recovery started in the second quarter and continued in the third quarter during the summertime. Now it's even stronger in October.
However, considering the re-emergency of the fourth COVID wave in Europe right now, with dramatically rising seven-day incidence rate since early November, the recovery trend becomes unpredictable again. It was determined by the unfolding of the pandemic and the future government policies on travel restriction. As far as I know, the German government has urged the unvaccinated people to be vaccinated as soon as possible, because there are still around 30% people, in order to protect themselves and others. Meanwhile, DH is continuing to implement further cost reduction and cash flow measures, especially regarding personnel and the lease costs. The impacts of the further lockdowns will be partially offset by the extension of government subsidy. In addition to the subsidy recorded in Q2, relating to the 2020 lockdown, in October, DH has submitted a new application for government subsidy related to 2021 lockdowns.
Turning to page 24 on guidance. Considering the latest round of COVID-19's impacts since late October and also the fourth wave in Germany, Huazhu expects for the fourth quarter of 2021, the net revenue growth will be in the range of 6%-10% compared to the fourth quarter of 2020, or reduction of 4%-8% if excluding DH. To provide a more meaningful guidance excluding the impact of COVID-19, Huazhu expects the net revenue growth will be in the range of 12%-16% compared to the pre-COVID-19 results in the fourth quarter of 2019, or net revenue reduction to be in the range of 7%-11% if excluding DH.
Referring to the above-mentioned impacts, our full-year revenue guidance is lower to the range from 20 to 26% or a range from 26% to 30% if excluding DH. To provide a more meaningful guidance excluding the impacts of COVID-19, Huazhu expects net revenue growth will be in the range of 11%-15% compared to the pre-COVID-19 results of 2019, or a reduction from 0% to 4% if excluding DH. With that, let's open up for Q&A. Thank you.
Thank you. As a reminder, if you'd like to ask a question, please press star one on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. First question comes from the line of Billy Ng of Bank of America. Please go ahead.
Thanks, and good morning, management team. I have two questions. The first question is, we noticed the opening pipeline, the company now has 2,800 hotels in the pipeline. I want to get the view from the management that, among the 2,800 hotels, how many of them could be open within the next 12 months? And are there any hotels at risk given the current situation, some of the franchisees who signed up may change their mind and drop their project? That's my first question. Then I have a second question.
[Non-English content].
Okay. I think in terms of our pipeline and conversion to the opening for the next year, as I mentioned previously, you know, both the supply chain as well as the construction progress has been impacted significantly. The previous planned construction period, which was roughly 6-7 months, which was delayed by the COVID impact, increased some of the uncertainties. However, for our overall pipeline, we still think the majority of them can be converted without the COVID impact. We still be very cautious to continuously evaluating the situation for the next years.
Keep it and thanks. My second question is actually related to the high-end hotel. It seems like the company already has at least 10 high-end hotels in operations. So like I just wonder if you can provide a bit more color and update on these hotels in terms of their RevPAR, their GOP, rates and margin, and then also in terms of take rate, what kind of take rates can we get from them? Thanks.
[Non-English content].
Okay. In terms of our high-end hotels, in terms of the take rates. Given that our high-end hotel management are using the full management contract, you can just refer to those international brands such as Marriott and IHG. We charge the similar rates compared to those international players. In terms of the operation situation, as I mentioned before, given the COVID impact, those newly opened hotel has significantly impacted by the COVID, and we are still in a ramp up period for those newly opened high-end hotels.
However, in terms of the operation in the future, we still going to leverage our Huazhu's core competence in terms of the highly efficient operations to reduce the cost and IT capability to empower all those high-end hotels through the shared service. We believe that we can achieve the GOP 20% higher compared to other players in the future.
[Non-English content].
In addition, we are very happy to see that since the initial opening of our Steigenberger Hotels & Resorts in Jinan, we achieved a 100% occupancy rate within one month. Also, our membership or our CRS contribution for the upscale hotels also achieved 30%. Thank you.
[Non-English content].
Thanks, Jason.
Thank you for the question. Next question comes from the line of Robin Pang of UBS. Please go ahead.
[Non-English content]. Now the Chinese real estate enterprise has been suffering from a lot of issues, and will the cooperation between the company and Sunac be influenced?
[Non-English content].
Thank you. We actually I personally discussed with the management team with Sunac recently. Undeniably, the Chinese real estate industry has been impacted quite significantly, given you know the macro and the political changes and the new policies, especially for the residential property. That definitely will, you know, cause some of the concern on the liquidity of those real estate companies, which is, there is the likelihood that some of the real estate companies will choose to, you know, sell their commercial properties.
[Non-English content].
I would remind a little bit because for the hotel property, it has relatively high liquidity compared to others. Given the current situation, the hotel property will concern more on the efficient operations, which is Huazhu's core competency. Therefore, we think at the current situation, Huazhu has the core competency to provide the high efficient operations which could be potentially benefit from this.
[Non-English content].
The higher GOP, the higher portion from the Chinese customers and IT capability, will be the key dimensions for those hotel operators or hotel owners to consider, yeah.
[Non-English content].
Therefore, currently, our joint venture with Sunac Yongle Huazhu, this joint venture company has no impact from the current situation and the current market conditions. We still hope and confident that we can further enlarge our scale and provide a better operations through this joint venture management company.
[Non-English content].
I hope there will be a relatively large scale new hotel opening within this joint venture company next year.
Thank you. The next question comes from the line of Simon Cheung of Goldman Sachs. Please go ahead.
Hello. Thanks for taking my question. I think I have two questions. Just on the first one, I understand, you know, the message about, you know, the difficulty to secure contract as well as opening hotel, given, you know, the COVID situations. I just wanted to get a sense to what extent was also it driven by maybe the housing market downturn or, and also the liquidity situations in China. And then I have another follow-up.
[Non-English content].
Given the persistent COVID-19 recurrence over the last year, actually we can definitely see there is a supply decline, especially for the independent hotel. Well, this actually provides some of the good opportunities for Huazhu, positioned currently to consolidate the industry. As we can see currently, I think since late November currently the situation in China gets much better. We also see a strong business recovery currently. Therefore, in the future, we still believe that no matter the demand or the supply decline will also create a very healthier market condition for us.
[Non-English content].
Especially for the economy and the midscale limited service hotel segment, we still see there's a lot of, you know, demand coming through. In addition, there is also within-province travel, the leisure traveling within provinces, still having a quite strong demand.
[Non-English content].
In the upper middle and upscale hotel segment, we're also working hard to trying to convert those existing hotels. We have been doing a lot of, you know, this kind of works since the year beginning. Thank you.
Thanks for the answer. My second question is related to, I guess, exactly to your earlier point about, you know, the opportunity to consolidated markets. Wanted to get a sense how management is thinking, you know, about, potentially using their balance given, you know, the difficulty to gain more, net adds, you know, organically. Also, you know, if you can provide us with some hotel add guidance, has that been changed for the full year? Or even if you can give us some color for even next year if possible. Thanks a lot.
[Non-English content].
In terms of the M&A opportunities, we want to always keep open-minded to this kind of opportunity. We are very happy to see some of the potential opportunity which can help us to fulfill the brand, you know, different hotel segment. We are very proactively looking for this opportunity. For details, I think Miss Ye Fei could discuss more later.
[Non-English content].
Apart from very simple M&A, we also use different ways such as, you know, management and joint venture or cooperation in different area in China. We have been working on this for the entire 2021, and we have some, you know, great details can be shared to the market shortly.
All right. Thank you a lot. Much appreciated. Thank you.
Thank you for the question. In the interest of time, I would like to hand the call back to the management for closing.
Thank you everyone for taking your time with us today, and we look forward to connect with you again in upcoming quarter. Thank you. Bye bye.
That does conclude the conference call for today. Thank you for your participation.