GreenTree Attracts Investors With New Green Shoots

Key Takeaways:

• GreenTree Hospitality’s revenue from its organic hotel business rose 17% in the first quarter, as its revpar rose by an even stronger 25%
• The hotel operator also closed its purchase of two restaurant chains during the quarter, which will become strong contributors to its revenue

By Doug Young

China’s post-Covid rebound is providing a big boost to its hotel operators, as travelers return to the road after three years of restrictions that severely curtailed their movement. But some new preliminary first-quarter data from GreenTree Hospitality Group Ltd. GHG seems to tell a larger story of a company that is slowly getting its act together after a period of turmoil.

Investors seem to like the story, bidding up the company’s shares by 3.6% in Wednesday trade in New York after the announcement came out. The stock has also performed well over the last few months, up nearly 60% so far this year and more than double a low from last October.

So, what’s the story behind this company and its nascent return to investor favor?

China’s post-Covid rebound is certainly part of the story. But problems with a couple of partnerships that were hurting the company now appear to be mostly resolved. And in its latest update, GreenTree also disclosed that it completed the acquisition of two restaurant chains in March, after first disclosing its plan to buy them in May last year.

We’ll return to those two elements in more detail shortly. But first we’ll review some of the data from the latest update for this company that is often overlooked, as it lives in the shadows of higher-profile, more upscale Chinese hotel operators like Atour ATAT, H World Group HTHT and Shanghai Jin Jiang (600574.SH).

All of the operators were hammered over the last three years as China rolled out tough restrictions that strongly discouraged domestic travel to limit the spread of Covid. Everyone reported a dismal year for 2022, which included some of the toughest restrictions, as China tried to combat the spread of the highly contagious Omicron variant, before finally abruptly canceling nearly all those restrictions last December.

GreenTree was representative of the group, reporting its revenue plunged 21% in the second half of last year to 488 million yuan ($68 million). The situation was especially bad in the fourth quarter, when its revenue per available room (revpar), a widely watched industry metric, fell 11.6% year-on-year.

GreenTree previously said January this year was a weak month as people stopped traveling during a massive wave of Covid infections that followed the relaxation of restrictions. But then things began to pick up around the Lunar New Year holiday in late January, and business was actually well ahead of pre-Covid levels by the national Labor Day holiday at the start of May.

As things improved, GreenTree’s revenue from its organic hotel business rose 16.8% in the first quarter from a year earlier to 252.6 million yuan, according to the latest update. Its revpar for the period rose by an even stronger 24.8%, largely due to a big jump in occupancy rates. The company pointed out that revpar during the Labor Day holiday was actually at 120% of pre-Covid levels from 2019.

As a result of those improvements, GreenTree’s first-quarter income operations for its organic hotels rose about 400%, or fivefold, to 57.2 million yuan. “The first quarter of 2023 marked a fresh beginning thanks to the recovery in the hospitality industry and the entire economy in China,” GreenTree said in a statement.

Sour Partnerships

Next, we’ll return to the other non-Covid elements that seem to be getting investors more excited about GreenTree than its peers these days.

In its last earnings report in April, covering the second half of 2022, the company disclosed it had stopped consolidating data from its affiliated Argyle chain of hotels into its results due to a dispute with the chain’s founder. Revenue from those hotels had previously accounted for 2.4% of the company’s total in 2021.

GreenTree also sold its stake in the Urban hotel chain last November, which previously accounted for another 8.8% of its revenue in 2021. While there’s no mention of any dispute, GreenTree’s decision to sell the chain strongly suggests it didn’t view the brand as strategic. Despite that, those two brands represented more than 10% of the company’s business, meaning their loss would automatically drop its revenue by around that amount regardless of the operating environment.

Still, the loss of two problematic assets will undoubtedly help the company improve its focus on its core brands going forward, and probably improve its margins as well.

GreenTree’s entry to the restaurant business was a separate, concurrent move to diversify into a related business. That move saw the company complete its purchase of the Da Niang dumpling chain, which had more than 200 self-operated and franchise stores at the end of March, and the smaller Bellagio chain with 36 stores.

GreenTree bought the chains from its own controlling shareholder, so there was probably never any doubt the deal would be completed. Such a purchase looks relatively smart, since GreenTree can now start to significantly expand the two chains by introducing them into its more than 4,000 hotels at the end of March.

GreenTree disclosed that the two chains generated between 118.5 million yuan and 136.5 million yuan during the first quarter, equal to about half the revenue it generated from hotels during that period. Thus, if it can rapidly expand those chains into its hotels, its restaurant revenue could quickly overtake revenue from its core hotel business.

The improving environment, combined with the addition of the restaurant business, have led analysts to forecast GreenTree’s revenue and profit will both rise about 67% this year from 2022 levels, compared with 58% growth forecast for Atour, 43% for H World and just 13% for global chain Hilton Worldwide HLT, whose big business rebound occurred a year earlier.

Following its recent stock gains, GreenTree now trades at a price-to-earnings (P/E) ratio of 14, based on analyst forecasts for its 2023 profit. While that’s not meteoric, its still much higher than it was at the start of the year. Still, that ratio is well behind the 25 for Atour and 32 for H World, which are more upscale and lack GreenTree’s previous distractions. That means there could be some more upside in GreenTree’s shares if it can show its partnership troubles are behind it, and also quickly show some strong growth potential for its two new restaurant chains.