Covid Disruptions Chop Into GreenTree Profit, As It Tries To Focus On Future

Key Takeaways:

• GreenTree Hospitality’s revenue rose 16% in the third quarter on new property openings, but revpar for existing hotels was down 1.8% year-on-year
• Company looks undervalued compared with domestic rivals, but ranks stronger than international peer Accor

By Doug Young

It’s only two trading days since hotel operator Greentree Hospitality Group Ltd. GHG reported its latest results for last year’s third quarter. And yet, somehow, they already seem outdated in these unpredictable Covid times.

The key phrase in its latest report comes in the “outlook” section, where GreenTree gives guidance for the fourth quarter and beyond with the condition of “assuming the recent resurgence of Covid-19 outbreaks remains under control in China in the coming quarters.”

Anyone in China this past week knows that assumption is already wrong, which looks bad for hotel operators as we head into the important Lunar New Year travel season. If the latest trends continue, that travel season will end up largely a non-event as Beijing and local governments throughout China urge everyone to skip the usual trips home for this year’s holidays.

As we write this, the three major cities of Xi’an, Zhenghzou and Tianjin are all in partial or complete lockdowns, meaning people can’t travel to and from those places even if they wanted to. Then there’s the growing list of “medium-risk” cities like Shanghai, where a handful of cases have been detected, with the result that people from those place are also highly discouraged from travel.

And the list goes on, guaranteeing the upcoming travel season will be another disappointment for hotel operators like GreenTree.

Sensing that, investors have been selling the company’s stock to the tune of a 5.5% decline in the two trading days since the results were announced. Year-to-date, the stock, which was already undervalued compared with its domestic peers, is down 16%. The recent weakness contrasts strongly with a year ago, when the global hotel and travel sectors were performing quite well as many expected the group to rebound sharply once the pandemic faded in 2021.

Obviously, that didn’t happen. GreenTree points out the sector has been on a roller-coaster ride lately characterized by a broader rebound punctuated with a growing number of “interruptions” each time a new Covid outbreak occurs. The first of those occurred in Nanjing last July and August, though business rebounded from that relatively quickly and was back to pre-pandemic levels by September.

But then, things took a downturn in the first week of November, as a number of cities reported new cases, causing business to fall to 81.3% of pre-pandemic levels in the first week of that month, GreenTree said. Things had again almost recovered to 100% of pre-pandemic levels by the end of December, only to enter the latest period of difficulty that looks set to remain in place at least through mid-February when the curtain falls on the Beijing Winter Olympics.

“This has been an extraordinarily tough period, but it is one that has been shared across the industry,” GreenTree CEO Alex Xu said in a statement. “As for ourselves, we feel certain that we will get through the current pandemic wave given the resilience of our business model and the experience that our team and franchisees have accumulated while combatting Covid-19.”

Investing for the Future

Despite all the present troubles, one thing that’s relatively certain is that the pandemic should end eventually, even if no one is sure exactly when. Accordingly, companies like GreenTree continue to invest for a future when things might return to more normal conditions. In that regard, the company continued to forge ahead in the third quarter with its strategy of focusing on franchised hotels in the mid- and upper-end of the market.

The company opened 182 new hotels in the latest quarter, bringing its total to 4,626 by the end of September – up about 10% from the same time a year earlier. The vast majority of its properties are franchised, with only 62 that are self-leased and operated. That follows a broader industry trend that has seen hotel operators worldwide focus on the more profitable and less costly business of providing management services for their brands to third-party property owners.

While GreeTree should be commended for staying the course and continuing to develop its network for a post-Covid future, things certainly don’t look to positive in the present.

The company actually managed to eke out some growth for the latest reporting period, with revenue up 16.3% year-on-year to 310.4 million yuan ($49 million) in the quarter. That rise was driven by the addition of new hotels to its network rather than improving performance at existing ones. Reflecting that, the company’s revpar – a widely-watched industry indicator that takes into account both room occupancy rates and prices – actually fell 1.8% year-on-year during the quarter to 118 yuan. Revpar was down by an even bigger 21% from the pre-pandemic third quarter of 2019.

As individual hotels performed weakly and costs rose nearly 50% with new property openings, the company’s profit sagged by nearly half to 50.2 million yuan. The company forecast full-year revenue would rise 25-30%, which looks good on the surface. But it’s actually quite weak when one considers that revenue rose 40.4% in the first three quarters of the year.

The analyst community remains relatively bullish on GreenTree, with seven analysts polled by Yahoo Finance giving an average price target of $13.84 – nearly double the company’s last close of $7.21. Of the two analysts who have given ratings so far in January, one rates GreenTree a “strong buy” and the other a “buy.” The number is down from the roughly half-dozen analysts who typically rated the company in previous months, probably due to all the uncertainty surrounding the sector.

From a valuation perspective, price-to-book (P/B) ratios are probably the best gage of how investors see the group right now, since revenue and profit are quite unstable. Using that metric GreenTree has a P/B of 2.4, making it relatively undervalued compared to domestic peers Huazhu HTHT and BTG Hotels (600258.SS), which have P/B ratios of 7.3 and 3, respectively. But it’s still more strongly valued than France’s Accor (AC.PA), operator of the Sofitel and Novotel chains, which has a P/B of 1.7.