UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
☐ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
OR
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31 2018., 2021.
OR
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
OR
☐ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to
Commission file number 001-38425
|
GreenTree Hospitality Group Ltd. |
(Exact name of Registrant as specified in its charter) |
Cayman Islands |
(Jurisdiction of incorporation or organization) |
2451 Hongqiao Road, Changning District |
Shanghai200335 |
People’s Republic of China |
(Address of principal executive offices) |
Contact Person: Dr. Yiping Yang, Chief Financial Officer |
+86-21-3617-4886 |
2451 Hongqiao Road, Changning District |
Shanghai200335 |
People’s Republic of China |
* (Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person) |
Securities registered or to be registered pursuant to Section 12(b) of the Act: |
GreenTree Hospitality Group Ltd.
(Exact name of Registrant as specified in its charter)
Cayman Islands
(Jurisdiction of incorporation or organization)
2451 Hongqiao Road, Changning District
Shanghai 200335
People’s Republic of China
(Address of principal executive offices)
Contact Person: Dr. Yiping Yang, Chief Financial Officer
+86-21-3617-4886
2451 Hongqiao Road, Changning District
Shanghai 200335
People’s Republic of China
* (Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| | | | |
Title of each class | | Trading Symbols | | Name of each exchange on which registered |
American |
| |||
Class A ordinary shares, par value | | GHG | | New York Stock Exchange, Inc. |
* | Not for trading, but only in connection with the registration of American Depositary Shares representing such Class A ordinary shares pursuant to the requirements of the Securities and Exchange Commission. |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
66,789,30068,286,954 Class A ordinary shares were outstanding as of December 31, 20182021
34,762,909 Class B ordinary shares were outstanding as of December 31, 20182021
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes ☒ No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
☐ Yes☒ No
Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | |
Large accelerated filer ☐ | Accelerated filer | Non-accelerated filer ☐ | Emerging growth company ☒ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| | ☐ | | |
U.S. GAAP☒ | | International Financial Reporting Standards as issued by the International Accounting Standards Board | | Other ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
☐ Item17 ☐ Item18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ☒ No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
☐ Yes ☐ No
GreenTree Hospitality Group Ltd.GREENTREE HOSPITALITY GROUP LTD.
FORM 20-F ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 20182021
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5 | |
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
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ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
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ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
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ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
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136 | |
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2
Conventions that Apply to this Annual Report on Form 20-F
In this annual report, unless otherwise indicated:
● | “ADR” or “ADRs” are to the American depositary receipts, which, if issued, evidence our ADSs; |
● | “ADSs” are to our American depositary shares, each of which represents one (1) Class A ordinary share; |
● | “Adjusted EBITDA” are to Adjusted EBITDA as calculated and presented in the “Summary Consolidated Financial and Operating Data”, “Selected Consolidated Financial and Operating Data”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and elsewhere in this annual report; |
● | “China” and the “PRC” are to the People’s Republic of China, excluding, for the purposes of this annual report only, Taiwan, the Hong Kong Special Administrative Region and the Macao Special Administrative Region; |
● | “GreenTree Inns” brand are to hotels operated under the GreenTree Inns and GreenTree Inns Express brands; |
● | “leased-and-operated hotels” are to hotels that we lease or own the premises and operate; |
● | “franchised-and-managed hotels” are to hotels that we manage pursuant to various franchise agreements; |
● | franchise agreements are to franchising agreements, management entrustment contracts and/or brand consulting contracts (as applicable); |
● | “RMB” or “Renminbi” are to the legal currency of China; |
● | “ramp up stage” are to hotels in operation that have been open for six or fewer months; |
● | “RevPAR” are to revenue per available room, which is calculated by multiplying our hotels’ average daily room rate by its occupancy rate; |
● | “shares” are to, collectively, our Class A ordinary shares and Class B ordinary shares, par value US$0.50 per share; |
● | “Tier 1 cities” are to the term used by the National Bureau of Statistics of China and refer to Beijing, Shanghai, Shenzhen and Guangzhou; |
● | “Tier 2 cities” are to the 32 major cities, other than Tier 1 cities, as categorized by the National Bureau of Statistics of China, including provincial capitals, administrative capitals of autonomous regions, direct-controlled municipalities and other major cities designated as “municipalities with independent planning” by the State Council; |
● | “Tier 3 and lower cities” are to cities in China other than Tier 1 cities and Tier 2 cities; |
● | “US$,” “U.S. dollars,” or “dollars” are to the legal currency of the United States; |
● | “U.S. GAAP” are to accounting principles generally accepted in the United States; and |
● | “we,” “us,” “our company” and “our” are to GreenTree Hospitality Group Ltd., our Cayman Islands holding company, and its subsidiaries, as the context requires. |
“ADR” or “ADRs” are to the American depositary receipts, which, if issued, evidence our ADSs;
“ADSs” are to our American depositary shares, each of which represents one (1) Class A ordinary share;
“Adjusted EBITDA” are to Adjusted EBITDA as calculated and presented in the “Summary Consolidated Financial and Operating Data”, “Selected Consolidated Financial and Operating Data”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and elsewhere in this annual report;
“China” and the “PRC” are to the People’s Republic of China, excluding, for the purposes of this annual report only, Taiwan, the Hong Kong Special Administrative Region and the Macao Special Administrative Region;
“GreenTree Inns” brand are to hotels operated under the GreenTree Inns and GreenTree Inns Express brands;
“leased-and-operated hotels” are to hotels that we lease or own the premises and operate;
“RMB” or “Renminbi” are to the legal currency of China;
“ramp up stage” are to hotels in operation that have been open for six or fewer months;
“RevPAR” are to revenue per available room, which is calculated by multiplying our hotels’ average daily room rate, or ADR, by its occupancy rate;
“shares” are to, collectively, our Class A ordinary shares and Class B ordinary shares, par value US$0.50 per share;
“Tier 1 cities” are to the term used by the National Bureau of Statistics of China and refer to Beijing, Shanghai, Shenzhen and Guangzhou;
“Tier 2 cities” are to the 32 major cities, other than Tier 1 cities, as categorized by the National Bureau of Statistics of China, including provincial capitals, administrative capitals of autonomous regions, direct-controlled municipalities and other major cities designated as “municipalities with independent planning” by the State Council;
“US$,” “U.S. dollars,” or “dollars” are to the legal currency of the United States;
“U.S. GAAP” are to accounting principles generally accepted in the United States; and
“we,” “us,” “our company” and “our” are to GreenTree Hospitality Group Ltd., our Cayman Islands holding company, and its subsidiaries, as the context requires.
This annual report on Form 20-F includes our audited consolidated financial statements for the years ended December 31, 2016, 20172019, 2020 and 2018,2021, and as of December 31, 20172020 and 2018.2021.
Our ADSs are listed on the New York Stock Exchange under the symbol “GHG.”
3
Not required.
Not required.
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The selected consolidated financial data shown below should be read in conjunction with “Item 5. Operating and Financial Review and Prospects,” and the financial statements and the notes to those statements included elsewhere in this annual report on Form 20-F. The selected consolidated statements of comprehensive income data for the years ended December 31, 2016, 2017 and 2018 and the selected consolidated balance sheet data as of December 31, 2017 and 2018 have been derived from our audited consolidated financial statements, which are included elsewhere in this annual report on Form 20-F. The selected consolidated statements of comprehensive income data for the year ended December 31, 2015, and the selected balance sheet data as of, December 31, 2015 and 2016 have been derived from our audited financial statements not included in this annual report on Form 20-F. Selected consolidated financial data as of and for the year ended December 31, 2014 have not been included, as such information is not available on a basis that is consistent with the consolidated financial data included in this annual report and cannot be provided on a U.S. GAAP basis without unreasonable effort or expense. The historical results are not necessarily indicative of results to be expected in any future period.
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| Year ended December 31, |
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| 2015 |
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| 2016 |
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| 2017 |
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| 2018 |
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| RMB |
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| RMB |
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| RMB |
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| RMB |
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| US$ |
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| (in thousands) |
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Selected Consolidated Statements of Comprehensive Income Data: |
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Revenues |
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Leased-and-operated hotels |
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| 210,687 |
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| 189,285 |
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| 193,542 |
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| 213,172 |
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| 31,004 |
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Franchised-and-managed hotels |
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| 424,033 |
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| 458,504 |
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| 584,589 |
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| 731,834 |
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| 106,441 |
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Total revenues |
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| 634,720 |
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| 647,789 |
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| 778,131 |
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| 945,006 |
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| 137,445 |
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Operating costs and expenses |
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Hotel operating costs |
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| (264,335 | ) |
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| (240,132 | ) |
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| (233,646 | ) |
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| (280,954 | ) |
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| (40,863 | ) |
Selling and marketing expenses |
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| (24,643 | ) |
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| (26,609 | ) |
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| (45,032 | ) |
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| (50,393 | ) |
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| (7,329 | ) |
General and administrative expenses |
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| (64,308 | ) |
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| (77,933 | ) |
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| (121,657 | ) | (1) |
| (95,262 | ) |
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| (13,855 | ) |
Other operating expenses |
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| (14,757 | ) |
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| (3,073 | ) |
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| (5,629 | ) |
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| (5,946 | ) |
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| (865 | ) |
Total operating costs and expenses |
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| (368,043 | ) |
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| (347,747 | ) |
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| (405,964 | ) |
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| (432,555 | ) |
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| (62,912) |
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Other operating income |
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| 21,095 |
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| 12,222 |
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| 15,284 |
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| 22,571 |
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| 3,283 |
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Income from operations |
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| 287,772 |
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| 312,264 |
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| 387,451 |
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| 535,022 |
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| 77,816 |
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Interest income and other, net |
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| 19,643 |
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| 22,039 |
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| 26,238 |
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| 49,660 |
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| 7,223 |
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Interest expense |
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| — |
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| — |
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| (1,443 | ) |
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| (542 | ) |
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| (79 | ) |
Gains (losses)from trading securities |
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| 25,545 |
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| 24,564 |
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| 59,165 |
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| (57,775 | ) |
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| (8,403 | ) |
Other income, net |
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| — |
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| 1,322 |
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| 1,191 |
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| 35,735 |
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| 5,197 |
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Income before income taxes |
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| 332,960 |
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| 360,189 |
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| 472,602 |
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| 562,100 |
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| 81,754 |
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Income tax expense |
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| (80,077 | ) |
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| (83,924 | ) |
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| (186,651 | ) | (2) |
| (160,186 | ) |
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| (23,298 | ) |
Income before share of loss in equity investees |
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| 252,883 |
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| 276,265 |
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| 285,951 |
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| 401,914 |
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| 58,456 |
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Share of loss in equity investees, net of tax |
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| (17,213 | ) |
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| (10,465 | ) |
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| (900 | ) |
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| (8,300 | ) |
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| (1,207 | ) |
Net income |
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| 235,670 |
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| 265,800 |
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| 285,051 |
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| 393,614 |
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| 57,249 |
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Net loss attributable to noncontrolling interests |
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| 123 |
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| 173 |
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| 349 |
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| 491 |
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| 71 |
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Net income attributable to ordinary shareholders |
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| 235,793 |
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| 265,973 |
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| 285,400 |
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| 394,105 |
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| 57,320 |
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4
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| As of December 31, |
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| 2015 |
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| 2016 |
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| 2017 |
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| 2018 |
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| RMB |
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| RMB |
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| RMB |
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| RMB |
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| US$ |
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Selected Consolidated Balance Sheet Data: |
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Cash and cash equivalents |
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| 505,857 |
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| 896,783 |
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| 161,964 |
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| 1,264,026 |
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| 183,845 |
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Property and equipment, net |
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| 141,394 |
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| 110,436 |
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| 96,669 |
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| 222,390 |
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| 32,345 |
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Intangible assets, net |
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| 5,981 |
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| 4,927 |
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| 3,727 |
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| 27,213 |
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| 3,958 |
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Goodwill |
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| 2,959 |
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| 2,959 |
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| 2,959 |
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| 5,787 |
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| 842 |
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Long-term investments |
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| 81,158 |
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| 35,497 |
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| 122,509 |
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| 112,219 |
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| 16,322 |
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Total assets |
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| 1,407,151 |
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| 1,875,751 |
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| 1,755,983 |
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| 3,014,390 |
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| 438,425 |
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Deferred revenue |
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| 151,101 |
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| 201,356 |
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| 253,361 |
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| 298,936 |
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| 43,478 |
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Total liabilities |
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| 629,947 |
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| 848,827 |
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| 1,023,378 |
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| 1,151,262 |
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| 167,444 |
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Total shareholders’ equity |
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| 777,204 |
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| 1,026,924 |
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| 732,605 |
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| 1,863,128 |
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| 270,981 |
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Total liabilities and shareholders’ equity |
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| 1,407,151 |
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| 1,875,751 |
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| 1,755,983 |
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| 3,014,390 |
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| 438,425 |
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|
| As of December 31, |
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| 2015 |
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| 2016 |
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| 2017 |
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| 2018 |
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Selected Operating Data: |
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Total hotels in operation |
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| 1,651 |
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| 1,964 |
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| 2,289 |
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| 2,757 |
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Franchised-and-managed hotels |
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| 1,611 |
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| 1,932 |
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|
| 2,263 |
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|
| 2,728 |
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Leased-and-operated hotels |
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| 40 |
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| 32 |
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| 26 |
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|
| 29 |
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Total hotel rooms in operation |
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| 146,176 |
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| 168,238 |
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| 190,807 |
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| 221,529 |
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Franchised-and-managed hotels |
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| 141,434 |
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| 164,207 |
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|
| 187,505 |
| �� |
| 217,795 |
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Leased-and-operated hotels |
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| 4,742 |
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|
| 4,031 |
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| 3,302 |
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|
| 3,734 |
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Number of cities |
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| 210 |
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|
| 234 |
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|
| 263 |
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|
| 290 |
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|
| Year Ended December 31, |
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| 2015 |
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| 2016 |
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| 2017 |
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| 2018 |
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Occupancy rate (as a percentage)(1) |
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Total hotels in operation |
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| 77.8% |
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| 80.4 | % |
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| 82.6 | % |
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| 82.1 | % |
Franchised-and-managed hotels |
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| 78.3% |
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|
| 80.9 | % |
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| 82.9 | % |
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| 82.3 | % |
Leased-and-operated hotels |
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| 66.8% |
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| 66.4 | % |
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| 70.3 | % |
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| 68.0 | % |
Average daily rate (in RMB) |
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|
|
|
|
|
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Total hotels in operation |
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| 152 |
|
|
| 153 |
|
|
| 157 |
|
|
| 164 |
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Franchised-and-managed hotels |
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| 152 |
|
|
| 152 |
|
|
| 156 |
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|
| 163 |
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Leased-and-operated hotels |
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| 160 |
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|
| 164 |
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|
| 186 |
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|
| 205 |
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RevPAR (in RMB) |
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|
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Total hotels in operation |
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| 118 |
|
|
| 123 |
|
|
| 130 |
|
|
| 135 |
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Franchised-and-managed hotels |
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| 119 |
|
|
| 123 |
|
|
| 129 |
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|
| 134 |
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Leased-and-operated hotels |
|
| 107 |
|
|
| 109 |
|
|
| 131 |
|
|
| 139 |
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| Year Ended December 31, |
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| 2015 |
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| 2016 |
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| 2017 |
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| 2018 |
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| RMB |
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| RMB |
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| RMB |
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| RMB |
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| US$ |
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| (in thousands, except for percentage) |
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Non-GAAP Financial Data |
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Adjusted EBITDA(1) |
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| 342,760 |
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| 360,509 |
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| 467,039 |
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|
| 609,716 |
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|
| 88,680 |
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Adjusted EBITDA Margin(2) |
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| 54.0% |
|
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| 55.7% |
|
|
| 60.0% |
|
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| 64.5% |
|
|
|
|
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Adjusted EBITDA (non-GAAP) is calculated as net income plus other operating expenses, income tax expense, share of loss in equity investees (net of tax), interest expense, share-based compensation, depreciation and amortization, losses from trading securities and other expense net, but excludes other operating income, gains from trading securities, share of gain in equity investees (net of tax) and other income net.
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5
The presentation of Adjusted EBITDA should not be construed as an indication that our future results will be unaffected by other charges and gains we consider to be outside the ordinary course of our business.
The use of Adjusted EBITDA has certain limitations because it does not reflect all items of income and expenses that affect our operations. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our operating and financial performance. Depreciation and amortization expense for various long-term assets, income tax and share-based compensation have been and will be incurred and are not reflected in the presentation of Adjusted EBITDA. Each of these items should also be considered in the overall evaluation of our results. Additionally, Adjusted EBITDA does not consider capital expenditures and other investing activities and should not be considered as a measure of our liquidity. We compensate for these limitations by providing the relevant disclosure of our other operating income/expense, depreciation and amortization, interest expense, gains/losses from trading securities, income tax expenses, share-based compensation, share of gain/ loss in equity investees (net of tax), other income/expense, net and other relevant items both in our reconciliations to the corresponding U.S. GAAP financial measures and in our consolidated financial statements, all of which should be considered when evaluating our performance.
The term Adjusted EBITDA is not defined under U.S. GAAP, and Adjusted EBITDA is not a measure of net income, operating income, operating performance or liquidity presented in accordance with U.S. GAAP. When assessing our operating and financial performance, you should not consider this data in isolation or as a substitute for our net income, operating income or any other operating performance measure that is calculated in accordance with U.S. GAAP. In addition, our Adjusted EBITDA may not be comparable to Adjusted EBITDA or similarly titled measures utilized by other companies since such other companies may not calculate Adjusted EBITDA in the same manner as we do.
A reconciliation of Adjusted EBITDA to net income, which is the most directly comparable U.S. GAAP measure, is provided below:
|
| Year Ended December 31, |
| |||||||||||||||||
|
| 2015 |
|
| 2016 |
|
| 2017 |
|
| 2018 |
| ||||||||
|
| (RMB) |
|
| (RMB) |
|
| (RMB) |
|
| (RMB) |
|
| US$ |
| |||||
|
| (in thousands) |
| |||||||||||||||||
Net income |
|
| 235,670 |
|
|
| 265,800 |
|
|
| 285,051 |
|
|
| 393,614 |
|
|
| 57,249 |
|
Deduct: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income |
|
| 21,095 |
|
|
| 12,222 |
|
|
| 15,284 |
|
|
| 22,571 |
|
|
| 3,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains from trading securities |
|
| 25,545 |
|
|
| 24,564 |
|
|
| 59,165 |
|
|
| — |
|
|
| — |
|
Other income, net |
|
| — |
|
|
| 1,322 |
|
|
| 1,191 |
|
|
| 35,735 |
|
|
| 5,197 |
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses |
|
| 14,757 |
|
|
| 3,073 |
|
|
| 5,630 |
|
|
| 5,946 |
|
|
| 865 |
|
Income tax expense |
|
| 80,077 |
|
|
| 83,924 |
|
|
| 186,651 |
|
|
| 160,186 |
|
|
| 23,298 |
|
Share of loss in equity investees, net of tax |
|
| 17,213 |
|
|
| 10,465 |
|
|
| 900 |
|
|
| 8,300 |
|
|
| 1,207 |
|
Interest expense |
|
| — |
|
|
| — |
|
|
| 1,443 |
|
|
| 542 |
|
|
| 79 |
|
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 38,048 |
|
|
| 16,109 |
|
|
| 2,343 |
|
Depreciation and amortization |
|
| 41,683 |
|
|
| 35,355 |
|
|
| 24,956 |
|
|
| 25,550 |
|
|
| 3,716 |
|
Losses from trading securities |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 57,775 |
|
|
| 8,403 |
|
Adjusted EBITDA (Non-GAAP) |
|
| 342,760 |
|
|
| 360,509 |
|
|
| 467,039 |
|
|
| 609,716 |
|
|
| 88,680 |
|
Currency Translation
Translations
This annual report on Form 20-F contains translations of Renminbi amounts into U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report on Form 20-F were made at a rate of RMB6.8755RMB6.3726 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 31, 2018.30, 2021. We make no representation that the Renminbi or U.S. dollar amounts referred to in this annual report on Form 20-F could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all.
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|
Not required.
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|
Not required.Special Note Regarding Forward-Looking Statements
6
Risks Related to Our Business
Our results of operations are subject to conditions typically affecting the hospitality industry.
Our results of operations are subject to conditions typically affecting the hospitality industry,This annual report contains forward-looking statements that involve risks and uncertainties, including the following:
changes in national, regional or local economic conditions;
natural disasters or travelers’ fears of exposure to serious contagious diseases;
changes in travel patterns;
changes in governmental regulations that influence or determine wages, prices or construction costs;
local market conditions such as an oversupply of, or a reduction in demand for, hotel rooms;
our ability to secure desirable locations for our hotels;
the attractiveness of our hotels to potential guests and competition from other hotels;
changes in occupancy and room rates;
increases in operating costs and expenses due to inflation and other factors;
our ability to develop and maintain positive relations with current and potential franchisees; and
the performance of managerial and other employees of our hotels.
Changes in any of these conditions could adversely affect our occupancy rates, average daily rates and RevPAR or otherwise adversely affect our business, results of operations and financial condition.
We are subject to various operational risks inherent in the franchised-and-managed business model.
Our success could be adversely affected by the performance of our franchised-and-managed hotels. As of December 31, 2018, we franchised-and-managed approximately 98.9% of our hotels, and we derived 70.8%, 75.1% and 77.4% of our revenues from those hotels in 2016, 2017 and 2018, respectively, which include revenues from membership fees of franchised-and-managed hotels. We plan to increase the number of franchised-and-managed hotels in operation to increase our national presence in China. Our franchisees may not be able to develop hotel properties on a timely basis, which could adversely affect our growth strategy and may impact our ability to collect fees from them on a timely basis.
We oversee and manage the operations of our franchised-and-managed hotels pursuant to various franchise agreements. However, we are not able to control the actions of our franchisees. Under those franchise agreements, our franchisees are typically responsible for developing hotel properties on a timely basis, bearing the costs and expenses of developing and operating the hotels, including costs of renovating the hotels to our standards and recruiting and employing hotel staff. However, if our franchisees have difficulties in accessing capital or are reluctant to make investments for the management or renovation of the hotels, we may not able to force them to secure the required capital and the quality of our franchised-and-managed hotels’ operations may be thereby diminished.
We normally require our franchisees to secure relevant governmental approvals and permits for operating the hotels in our standard franchise agreements and require that our franchisees provide us with some basic approvals and permits, including business license, special industry license and fire prevention safety inspection certificates. However, some of our franchisees may not be able to obtain such approvals or permits in a timely manner, or at all. See “— Failure to comply with government regulations relating to the franchise, hospitality industry, construction, fire prevention, food hygiene, safety and environmental protection could materially and adversely affect our business and results of operations.”
7
As many factors affecting the operations of those hotels are beyond our control, we cannot assure you that the quality of the services in our franchised-and-managed hotels are consistent with our standards and requirements. Although we send for routine inspection purposes regional managers and members of our quality control team to franchised-and-managed hotels on a regular basis, we may not be able to identify problems in their operations and make responses on a timely basis. As a result, our image and reputation may suffer, which may have a material adverse effectstatements based on our businesscurrent expectations, assumptions, estimates and results of operations.
In addition to quality standards, safety incidents such as fire accidents may occur at our franchised-and-managed hotels despite our supervision. Any such occurrence may result in substantial reputational harm toprojections about us and our brands. In addition, if such safety incidents occur at any of the franchised-and-managed hotels that do not possess the relevant licenses, permits or inspection certificate, there could be substantial negative publicity, thereby triggering large-scale government actions that could impact our entire hotel network, which in turn will have a material adverse impact on our business, results of operations and financial condition.
Although our proprietary information system can collect operational and financial data of each hotel, we may not be able to avoid fraud or manipulation of such data by some franchisees, which may adversely affect the ability to effectively respond to potential issues. In addition, many of our franchisees do not own the hotel land or the property but typically lease the property from landlords whoindustry. The forward-looking statements are either a property owner or a sub-lessor. We cannot assure you that all landlords who lease the hotel property to our franchisees have good and marketable title, or have unencumbered rights to lease or sub-lease the property to our franchisees. If any third party such as the ultimate property owners or relevant governmental authorities successfully challenge the lease of our franchisees, or if our franchisees fail to renew the leases when they expire, or if the landlords early terminate the lease, or if the properties or lands owned or leased by our franchisees are demolished, acquired or otherwise reclaimed by the government, our franchisees may have to close their hotels and thus terminate the franchise agreements and as a result, our business and results of operations may be adversely affected. Moreover, the term of the leases for some of the property of our franchisees is shorter than the typical term of our franchise agreements. We cannot assure you that upon expiration, these franchisees will be able to renew their leases in order to perform their franchise agreements with us.
We may not be able to renew our existing franchise agreements or renegotiate new franchise agreements when they expire.
We franchise hotels to third parties pursuant to franchise agreements. These franchise agreements may be renegotiated or may expire. The versions of franchise agreements we have used during recent years typically have an initial term of 15 to 20 years except for the franchise agreements with our GT Alliance franchisees and Shell franchisees. We plan to renew our existing franchise agreements upon expiration or renegotiate with our franchisees for new franchise agreements. However, we may be unable to retain our franchisees on satisfactory terms, or at all. If a significant number of our existing franchise agreements expire and new franchisees do not cover those expired franchises, our revenue and profit may decreasecontained principally in the future,sections entitled “Item 3. Key Information — D. Risk Factors,” “Item 5. Operating and our results of operations could be materiallyFinancial Review and adversely affected.
As the hospitality industry in China is highly competitive, the terms of our franchise agreements are influenced by contract terms offered by our competitors. We cannot assure you that the terms of franchise agreements for new franchised-and-managed hotels entered into or renewed in the future will be as favorable as the terms under our existing franchise agreements. If such agreements cannot be renewed on satisfactory terms upon expiration, our results of operations could be materially and adversely affected.
Failure to comply with government regulations relating to the franchise business model, hospitality industry, construction, fire prevention, food hygiene, safety and environmental protection could materially and adversely affect our business and results of operations.
Our business is subject to various compliance and operational requirements under PRC laws and regulations, which include public safety, construction, fire prevention, public area hygiene, health and sanitation and environmental protection, as well as requirements related to construction or decoration of hotel premises. The failure of any of our hotels to comply with applicable laws and regulations may incur substantial fines and penalties from the relevant PRC government authorities. Each hotel in our network must hold a basic business license and a special industry license issued by local government authorities and must conduct its hotel operations within the business scope of its business license. These hotels must also obtain various other licenses and permits. For example, if our hotels provide catering service, they are required to obtain a food operation permit. In addition, any project construction undertaken by our hotels may be subject to governmental approvals or filings requirements, and our failure to comply with the aforementioned requirements may subject us to fines or the suspension or even the cessation of operations, which could materially and adversely affect our business, financial condition and results of operations. In any event, we may not be able to obtain all permits, licenses, certificates and other approvals required by government regulations, which could negatively impact our business and significantly harm our reputation.
8
As of December 31, 2018, we operated 29 leased-and-operated hotels, including two hotels situated on properties owned by us. In addition, we started to operate a serviced apartment in 2018,which is in the process of applying for its required licenses. Out of our 29 leased-and-operated hotels, ten have not obtained the fire prevention safety inspection certificates and three have not obtained public area hygiene permits, two have not obtained special industry permits, and two of our leased-and-operated hotels engaged in the catering service business as of December 31, 2018 were in the process of applying to renew their food operation permits. Given the significant discretion local government authorities have in the examination of our application as well as other factors beyond our control, we may be unable to renew or obtain our food operation permits at all. In addition, we have only been provided with and reviewed the relevant governmental approvals and permits for the operation of 2,524 out of our 2,728 franchised-and-managed hotels in operation as of December 31, 2018, and have found that:
approximately 10.26% of these hotels did not provide us with the special industry license;
approximately 13.95% of these hotels did not provide us with the fire prevention safety inspection certificate; and
approximately 11.37% of these hotels did not provide us with the public hygiene license.
For our leased-and-operated hotels that have not obtained the necessary licenses, and to the extent that the franchisees who did not provide us with the licenses had not obtained the licenses prior to the commencement of their operations, the legal consequences will be as follows:
Business license: fines, suspension of operation, warnings, orders to suspend or cease continuing operations, confiscations of illegal gains or fines, and even up to 15 days of detention;
Special industry license: warnings or fines of up to RMB1,000 and even up to a 15-days detention. In addition, pursuant to various local regulations, hotels failing to obtain the special industry license may be subject to warnings, orders to suspend or cease continuing business operations, confiscations of illegal gains or fines.
Fire prevention safety inspection certificate: (i) suspension of construction of projects, and/or use or operation of the business; and (ii) fines between RMB30,000 and RMB300,000;
Public hygiene license: a range of administrative penalties dependingProspects,” “Item 4. Information on the seriousness of a hotel’s activities: (i) warnings; (ii) fines between RMB500Company — B. Business Overview” and RMB30,000; or (iii) suspension of operations for rectification, or revocation of public hygiene license; and
Food operation permit: (i) confiscation of illegal gains, food illegally produced for sale and tools, facilities and raw materials used for illegal production; or (ii) fines between RMB50,000 and RMB100,000 if the value of food illegally produced is less than RMB10,000 or fines of 10 to 20 times of the value of food if such value is equal to or greater than RMB10,000.
If any franchisee is subject to the foregoing legal consequences, whether fines or orders to suspend or even cease operations, due to its failure to obtain necessary licenses and permits or to comply with other requirements, our image and reputation may suffer, and such franchisee may defer making or refuse to make payments in breach of its franchise agreement with us. As we hold equity interests in certain of our franchisees, any regulatory non-compliance by such franchisees may also decrease the value of our investments. In either case, our business and results of operations may be adversely affected. Furthermore, as to certain hotels that are being converted from the leased-and-operated model to the franchised-and-managed model, if any franchisee refuses to return and uses any of our hotels’ permits in breach of their supplementary agreements with us, our company as the registered permit holder could be held liable for any regulatory non-compliance by our franchisees. See “— Our hotels being converted into franchised-and-managed hotels may not be able to obtain their own operational licenses or fail to pay us the rent materially and adversely affect our business and results of operations.”
In respect of our franchising business, we are subject to a comprehensive disclosure requirement when recruiting and managing our franchisees. In the past, we have not received penalties in relation to such requirements. However, our communication with our franchisees could be found in violation of these requirements in the future.
9
We are also required to file our sample franchise agreements and file annual reports with the provincial level counterpart of the PRC Ministry of Commerce for record-keeping purposes in connection with the execution, withdrawal and renewal of any amendment to franchise agreements in the preceding calendar year. After filing the initial information regarding the operations of our hotel franchise business, the information regarding the execution, withdrawal and renewal of any amendment to franchise agreements for the calendar year 2017 were not filed with the government authorities.
We began franchising our Gme, Gya and VX brands in 2017. However, we may not satisfy all the prerequisites for franchising our Gme, Gya and VX brands under relevant PRC laws and regulations. If the competent government authorities establish that we have no adequate qualification to franchise our Gme, Gya and VX brands, we could be subject to penalties including confiscation of relevant gain and fines between RMB100,000 and RMB500,000 for each such brand.
Furthermore, holders of 70% of equity interest in Yibon Hotel Group Co., Ltd., or Yibon, an equity investee of ours, have the right to exchange their equity interest in Yibon into our shares in 2020. If we are deemed to acquire control of Yibon after the exchange, Yibon will become one of our subsidiaries and we may bear the legal consequences if any of Yibon’s hotels are not in compliance with applicable PRC laws and regulations. Accordingly, any such non-compliance could adversely affect our results of operations and financial condition. If Yibon becomes one of our subsidiaries, we will also face challenges and related risks of integrating Yibon with the rest of our company. Following the exchange of the equity interests in Yibon, we will consolidate the results of operation of Yibon in our financial statements as a subsidiary. As a result, we will be exposed to the risks of Yibon’s business and financial results, which could negatively impact our results of operation and financial condition.
We may terminate franchise agreements earlier under certain circumstances, and we may have disputes with our franchisees which may materially and adversely affect our business and result of operations.
Our franchisees may terminate our franchise agreements in the event that, among others, the franchised-and-managed hotels’ performance is worse than they expect. Although they are not permitted to do so by our franchise agreements, the franchisees may still attempt to unilaterally terminate their franchise agreements. In such instances, we may have disputes with them, and it will be difficult for us to force them to continue the performance of our franchise agreements until they expire. If the franchise agreements are eventually terminated either based on a settlement between us and the franchisees or with a judgment or arbitral award which requires the franchisees to compensate us for our losses and costs, such compensation may not cover our losses which we have suffered as a result of the early termination, and we may no longer receive the franchise fees and related management fees from the termination. Furthermore, if our franchisees breach or terminate their franchise agreements with us before the hotel commences operation, we might not be able to grow our hotel network as planned.
Due to our rapid expansion in recent years, we have added a large number of new franchised-and-managed hotels into our hotel network, some of which may not be able to provide consistent and high-quality service to meet our standards. To avoid potential damage to our brand name and to ensure the quality of services provided to our guests, we may terminate our franchise agreements with such franchisees. In addition, if any of our franchisees defaults or commits wrongdoing and fails to cure defaults or wrongdoings, we may also need to terminate our franchise agreements. Although our franchise agreements typically allow us to terminate the agreements under many circumstances, our franchisees may dispute our termination or our claim and in such cases we have to submit such disputes for the settlement by courts or arbitration. For example, as of December 31, 2018 we had 25 pending legal proceedings in connection with the franchised-and-managed hotels. Also, we have in the past closed and may close in the future certain franchised-and-managed hotels as a result of disputes with the franchisees for their failure to comply with our requirements on, among other things, the punctual payment of our franchise fees or management fees, the decoration or operation standard, use of our brand, maintenance of the hotel condition and appearance, the avoidance of competition between the franchisees, including keeping appropriate distances between the franchised-and-managed hotels. For example, in 2018, we terminated 37 franchised-and-managed hotels that did not comply with our brand and operating standards. If a significant number of our existing franchise agreements are terminated early, our revenue and profit may decrease in the future.
In case of a dispute with our franchisees, even if such disputes can be resolved in favor of us, the disputes could divert our management attention, affect our brand image, and incur cost for us. There could also be situations where the franchisee is not in a position to sufficiently compensate us for losses which we have suffered as a result of their defaults or wrongdoings. If we eventually terminate any franchisees, we will lose such franchisees and can no longer collect franchise fees and management fees from them. If new franchisees do not cover those terminated franchises, our results of operations and financial conditions could be materially and adversely affected.
10
Our hotels being converted into franchised-and-managed hotels may not be able to obtain their own operational licenses or fail to pay us the rent materially and adversely affect our business and results of operations.
During the past few years, we have sought to convert some hotels from the leased-and-operated model over to the franchised-and-managed model through selling relevant business assets and handed over the management of such hotels, in most of the cases pursuant to an asset, business and personnel transfer agreement, or Transfer Agreements, to certain individuals or entities that have subsequently entered into franchise agreements with us and have therefore become our new franchisees. According to the Transfer Agreements, such new franchisees shall take over and operate such hotels on their own account and shall take the risks and enjoy the benefit of operating such hotels from the completion of the transfer contemplated by such agreements. However, the Transfer Agreements typically allow our franchisees under such arrangements to continue to use the hotel’s permits that were previously obtained by us and remain in the name of our company for a transitional period. As of December 31, 2018, some of the abovementioned new franchisees were still using our relevant hotels’ permits including one franchisee that acquired the business assets of one of our leased-and-operated hotels. However, all but three of these franchisees have executed a supplementary agreement which requires them to stop using and return to us our hotels’ permits upon execution of the supplementary agreements. Such supplementary agreements also require the franchisees to indemnify us against all losses, costs or liabilities incurred by us for their defaults under such agreements. However, if any franchisees refuse to return and continue to use any of our hotels’ permits, our company could be held liable as the registered permit holder for any regulatory non-compliance on the part of our franchisees. As a result, any breach by our franchisees of relevant regulations could cause us to incur relevant legal liability under PRC law, which may materially affect our brand image and our results of operations. In addition, in such instances, because the relevant leases have not been transferred to our new franchisees, we continued to be the tenants of the relevant hotel premises and we remain liable to pay the rent to our landlords, and may not thereafter be fully compensated by the new franchisees. As a result, our result of operations and financial conditions may be materially and adversely affected by the default of such franchisees. Furthermore, such arrangement between us and the new franchisees could be deemed as a sublease, and our landlords may claim that our subleasing arrangement without our landlords’ consent constitutes a default. In such cases, we may be required by our landlords to terminate sublease arrangements and compensate their losses, if any, which may further increase our costs and risks. Moreover, we may not be able to enforce our rights against the franchisees under the supplementary agreements, which would hinder our ability to prevent the franchisees from using our hotel permits and negatively impact our business and our reputation.
Our leased-and-operated hotels are subject to a number of operational risks.
For hotels under the leased-and-operated model, a significant portion of operating costs, including rent, is fixed. Accordingly, a decrease in revenues could result in a disproportionately larger decrease in earnings because the operating costs and expenses are unlikely to decrease proportionately. For example, the period during both the New Year and Chinese Spring Festival holidays generally accounts for a smaller portion of our annual revenues than the other periods, but the expenses do not vary in proportion to changes in occupancy rates and revenues. Major construction work near our hotel may also have a negative impact on the occupancy rate. We need to continue to pay rent and salaries, make regular repairs, perform maintenance and renovations and invest in other capital improvements for our leased-and-operated hotels throughout the year to maintain their attractiveness. Therefore, our leased-and-operated hotels’ costs and expenses may remain constant or increase even if their revenues decline. The operation of each leased-and-operated hotel goes through the stages of development, ramp-up and mature operation. Our involvement in the development of such properties presents a number of risks, including construction delays or cost overruns, which may result in increased project costs or forgone revenue. During the development stage, significant pre-opening expenses will be incurred, and at the ramp-up stage, which is usually six months, when the occupancy rate increases gradually, revenues generated by these hotels may be insufficient to cover their operating costs, which are relatively fixed in nature. As a result, most newly opened leased-and-operated hotels may not achieve profitability until they reach mature operations. We also may be unable to recover development costs we incur for projects that are not completed. Any expansion of our leased-and-operated hotel portfolio would incur significant pre-opening expenses during the development stage and relatively low revenues during the ramp-up stage of such newly opened leased-and-operated hotels, which expenses may have a significant negative impact on our results of operations. Properties that we develop could become less attractive due to market saturation, oversupply or changes in market demand, with the result that we may not be able to recover development costs as we expect, or at all.
We also may acquire or develop owned-and-operated hotels on a limited, case-by-case basis to seize unusually attractive business opportunities. Any such owned-and-operated hotels will be subject to risks similar to those of our leased-and-operated hotels. Such owned-and-operated hotels will also be subject to depreciation in the value paid by us for the underlying hotel property, which usually is influenced by macroeconomic and local political and economic factors.
As of December 31, 2018, we were in the process of liquidating four of our PRC subsidiaries and branches which previously operated leased-and-operated hotels. In liquidating such subsidiaries and branches, we need to complete various deregistration procedures, which may be time-consuming and therefore we cannot assure you that such subsidiaries and branches can be deregistered in a timely manner. In the future, we may need to liquidate more subsidiaries and branches which have ceased to operate leased-and-operated hotels.
11
The legal rights of our franchisees and us to use certain leased properties could be challenged by property owners or other third parties, which could prevent our franchisees or us from operating the affected hotels or increase the costs associated with operating these hotels.
For all of our franchised-and-managed hotels and all but two of our leased-and-operated hotels, we and our franchisees do not hold property ownership with respect to the premises under which those hotels are operated. Instead, we and our franchisees rely on leases or contracted management arrangements with third parties who either own the properties or lease the properties from the ultimate property owner. As of December 31, 2018, three of the ultimate owners of the properties of our leased-and-operated hotels failed to provide us with the relevant title certificates. As to these three ultimate owners, if they have not obtained and provided such title certificates because the relevant properties were constructed by such ultimate owners without having obtained or in violation of a construction project planning permit, our lease of such properties may be challenged or even invalidated by a government authority or relevant dispute resolution institution. Meanwhile, the property title certificates for the premises on which approximately half of our leased-and-managed hotels are located have a different designated use from the actual usage of those properties, and our lease of such properties may be challenged by relevant government authorities and subject us to cessation of operations or fines in an amount of up to RMB30,000 for each property or approximately RMB450,000 in aggregate. If the property owners’ title and the legal rights of our franchisees and us to the leases of such properties are successfully challenged by a government authority or dispute resolution institution as mentioned above, the development or operations of our hotels on such properties could be adversely affected.
In addition, we and our franchisees are subject to the risks of potential disputes with property owners or our immediate lessors and to forced closure of hotels by the government. Such disputes and forced closures, whether resolved in the favor of our franchisees and us, may divert management attention of our franchisees and us, harm our reputation or otherwise disrupt and adversely affect our business.
Where immediate lessors are not the ultimate owners of hotel properties operated by our franchisees and us, in some instances, no consent was obtained from the owners to sublease the hotel properties to our franchisees or us. A property owner’s failure to duly obtain the title to the property or a sub-lessor’s failure to receive any necessary approvals from the ultimate owner or the primary leaseholder, as applicable, could potentially invalidate the underlying lease or result in the renegotiation of such lease which may lead to less favorable terms. Some of the properties we or our franchisees lease from third parties were subject to mortgages at the time the leases were signed. In such circumstances and where consent to the lease was not obtained from the mortgage holder, the lease may not be binding on the transferee of the property if the mortgage holders foreclose on the mortgage and transfer the property, which could in turn materially and adversely affect the ability of our franchisees and us to operate the hotel facility located on such property. In the past, although our operations have not been disrupted simply due to the lack of title certificates or consent from the owners, such events could occur in the future.
We also sublease the property parts we do not use to third parties and in some instances where we have closed or converted our leased-and-operated hotels, we may also need to sublease the whole properties we leased for such hotels to third parties to save costs if our landlords do not agree to early terminate our lease. In some instances, no written consent was obtained from our landlords to sublease such property parts or the whole property to third parties. Our failure to receive any necessary approvals from our landlords could potentially invalidate the underlying lease or result in our default under such subleases, which may in turn affect our business. In addition, if our sub-lessees are not able to pay us rent in a timely manner or at all, we are obligated to pay the rent to our landlords on our own account. If we fail to pay such rent, we may be required by our landlords to terminate the sublease arrangements and compensate their losses, if any, which may adversely affect our result of operations and our financial condition.
If we are unable to compete successfully, our business, financial condition and results of operations may be harmed.
The hospitality industry in China is highly competitive. Competition in the industry is primarily based on room rates, quality of accommodation, brand name recognition, convenience of location, geographic coverage, service quality, range of services and guest amenities. We compete primarily with other economy to mid-scale hotel brands as well as regional and local economy hotels. We also compete with three- and four-star hotels, as we offer rooms with standards comparable to many of those hotels while maintaining competitive pricing. Furthermore, we compete with other hotels for guests in each market segment in which we operate, as our typical business and leisure traveler guests may change their travel, spending and consumption patterns and choose to stay in hotels in different markets. New and existing competitors may offer competitive rates, greater convenience, services or amenities or superior facilities, which could attract guests away from our hotels, resulting in a decrease in occupancy and average daily rates for our hotels. In addition, competition among franchised hotels is intense in attracting potential franchisees and retaining existing franchisees. We believe that hotel operators choose hospitality franchisors based on primarily the value and quality of a franchisor’s brand, reputation and service and the extent to which affiliation with that franchisor may increase the franchisee’s hotel occupancy rates and profitability. Any of these factors may have an adverse effect on our competitive position, results of operations and financial condition.
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We may not be able to successfully attract new franchisees and compete for franchise agreements and, as a result, we may not be able to achieve our planned growth.
Our growth strategy includes expanding through franchised-and-managed hotels by entering into franchise agreements with our franchisees. We believe that our ability to attract new franchisees and compete for franchise agreements with them depends primarily on our brand recognition and reputation, the results of our overall operations in general and the success of our current franchised-and-managed hotels. Other competitive factors for franchise agreements include marketing support, membership program, efficiency of our central reservation system, our ability to provide systems and support to assist franchisees to operate their hotels cost-effectively. The terms of any new franchise agreements that we obtain also depend on the terms that our competitors offer for those agreements. In addition, if the availability of suitable locations for new properties decreases, or governmental planning or other local regulations change, the supply of suitable properties for additional franchised-and-managed hotels could diminish. If the performance of our franchised-and-managed hotels is less successful than that of our competitors’ hotels or if we are unable to offer terms as favorable as those offered by our competitors, we may not be able to compete effectively for new franchise agreements and we may not be able to attract as many new franchisees as we expect. As a result, we may not be able to achieve our planned growth and our business and results of operations may be materially and adversely affected.
The leases of our franchisees and us could be terminated early, we and our franchisees may not be able to renew the existing leases on commercially reasonable terms and the rents paid by us or our franchisees could increase substantially, which could materially and adversely affect our operations.
The terms of leases for our franchised-and-managed hotels and leased-and-operated hotels typically provide, among other things, that the lease could be terminated under certain legal or factual conditions. If any such lease were terminated early, operations of the related hotel property may be interrupted or discontinued and costs may be incurred by us or our franchisees to relocate to another location. Furthermore, we may be liable to our lessors, guests, franchisees and other vendors and may be required to pay losses and damages due to our default under relevant contracts. As a result, our business, results of operations and financial condition could be materially and adversely affected.
Although we intend to coordinate with our franchisees to renew existing leases of our franchised-and-managed hotels, and to renew existing leases of certain of our leased-and-operated hotels, there can be no assurance that we and our franchisees will be able to renew such leases and maintain current hotel operations on satisfactory terms, or at all. In particular, we and our franchisees may experience increased rent payments and increased operating cost in connection with renegotiating leases. If we and our franchisees fail to maintain current hotel operations on satisfactory terms upon expiration of the leases, the respective operating costs of our company and our franchisees may increase, the ability of our franchisees to pay their franchise fees may decline, and overall profits generated from hotel operations may decrease. If we and our franchisees are unable to pass on increased costs to our guests through room rate increases, the operating margins and earnings of our company and our franchisees could decrease and our results of operations could be materially and adversely affected.
We may terminate our leases early for certain reasons and any failure by us to terminate a lease for cause may subject us to payment of liquidated damages.
Our leases typically allow us to terminate the lease early under limited circumstances, and in some instances, our leases contain a term which requires us to pay the contingent rent for our wrongful early termination of such agreements. In the past, we have early terminated some leases of hotel properties and closed our leased-and-operated hotels underlying such leased properties, and disputes arose between us and our landlords whereby we were demanded to pay the contingent rents and liquidated damages. If such disputes occur in the future, and resolved in favor of our landlords, we may need to pay losses and damages to the landlords and as a result, our business, results of operations and financial condition could be materially and adversely affected.
Our growth depends on our ability to increase revenues generated by our existing hotels.
While sales growth will depend in part on our plans for new hotel openings, deeper penetration into existing and new geographic markets and increased sales at our existing hotels will also affect our sales growth and will continue to be critical factors affecting our revenue and profit. Our ability to increase the revenues generated by our hotels depends in part on our ability to successfully implement our growth strategy and related initiatives. Our ability to penetrate further into the existing geographic markets where we already have a presence depends in part on our ability to successfully market ourselves and to maintain and increase sales to our existing members and attract more members to our membership program. We may not be able to achieve our targeted sales growth at our existing hotels, and sales at existing hotels could decrease. In addition, we may not be able to achieve our targeted level of expansion within existing and new geographic markets. The occurrence of any of such events may have a material adverse effect on our business, financial condition and results of operations.
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Our growth depends on our ability to grow the number of hotels in operation.
Our growth depends on our ability to open and profitably operate new hotels under both franchised-and-managed model and leased-and-operated model. In 2016, 2017 and 2018, we opened 401, 424 and 550 new franchised-and-managed hotels. In each of 2015, 2017 and 2018, we opened one, one and four new leased-and-operated hotels respectively. We opened no new leased-and-operated hotels in 2016. We plan to increase the number of our hotels in the future. We may not be successful in identifying and leasing or franchising additional hotel properties at desirable locations and on commercially reasonable terms or at all. In more developed cities, it may be difficult to increase the number of hotels because we or our competitors may already have operations in such cities. In less developed cities, demand for our hotels may not increase as rapidly as we expect. We also may incur substantial costs in connection with evaluating hotel properties and negotiating with property owners, including ones that we are subsequently unable to lease or franchise.
The growth in the number of hotels is subject to numerous risks, many of which are beyond our control. Among other risks, the following factors affect our ability to open and operate additional hotels profitably and achieve growth in the number of our hotels:
the availability and cost of suitable hotel locations;
the availability and cost of capital to fund construction or conversion;
cost-effective and timely construction of hotels (which construction can be delayed due to, among other reasons, labor and materials availability, labor disputes, local zoning and licensing matters, and weather conditions);
the ability of our company and our franchisees to secure required governmental permits;
the availability of qualified hotel management staff and other personnel;
our ability to enhance our reservation, operational and service delivery systems to support additional franchisees in a timely and cost-effective manner;
our ability to effectively and efficiently implement our development plan;
our ability to introduce our brands into new markets, any failure of which may adversely impact potential property owners’ or franchisees’ acceptance of and confidence in us; and
our ability to attract new qualified franchisees and to retain existing franchisees.
We may not be able to manage our expected growth, which could adversely affect our results of operations.
We have experienced substantial growth since our inception. We have increased the number of our total hotels in operation in China from eight as of December 31, 2005 to 2,757 as of December 31, 2018, and we intend to focus on developing additional franchised-and-managed hotels in different geographic locations in China and internationally, as well as growing through mergers, acquisitions and strategic alliances. This expansion has placed, and will continue to place, substantial demands on our managerial, operational, technological, financial and other resources. There can be no assurance that we will be able to effectively manage our growth. If our growth initiatives fail, and if we fail to integrate new alliances, merged entities or acquired targets into our network, our businesses and prospects may be materially and adversely affected.
Our planned expansion will also require us to maintain the consistency of our brands and the quality of our services to ensure that our brands do not suffer as a result of any deviations, whether actual or perceived. In order to manage and support our growth, we must improve our existing operational, administrative and technological systems and our financial and management controls, and recruit, train and retain qualified hotel managerial personnel as well as other administrative and sales and marketing personnel, particularly as we expand into new markets.
We cannot assure you that we will be able to effectively and efficiently manage the growth of our operations, recruit and retain qualified personnel and integrate new franchised-and-managed hotels into our operations, whether they are organically developed or strategically acquired. Any failure to effectively and efficiently manage our expansion may materially and adversely affect our ability to capitalize on new business opportunities, which in turn may have a material adverse effect on our business, financial condition and results of operations.
Acquisitions, financial investment or strategic investment may have an adverse effect on our ability to manage our business and harm our results of operations and financial condition.
If we are presented with appropriate opportunities, we may acquire or invest in businesses or assets. For example, in 2017 we acquired a 30% equity interest in Yibon Hotel Group Co., Ltd. and a 50% equity interest in Steigenberger (Beijing) Hotel Management Co., Ltd. In 2018, we acquired: (i) an additional 1% of the equity interest in Yancheng Zexin Hotel Management Co., Ltd., or Zexin, and our equity interest in Zexin increased to 51%; (ii) 70% of the equity interests in Foshan Baiqinghui Hotel Co., Ltd.; (iii) all of the business assets and a 70% interest in Donghe Zhenxing Hotel, in the Xuzhou Economic and Technological Development Zone; and (iv) all of the business assets and equity interests in Wumian Hotel, in the Xuzhou Economic and Technological Development Zone.
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The existing and future acquisitions or investments may expose us to potential risks, including risks associated with unforeseen or hidden liabilities, risks that acquired or invested companies will not achieve anticipated performance levels, diversion of management attention and resources from our existing business, difficulty in integrating the acquired businesses with our existing operational infrastructure, and inability to generate sufficient revenues to offset the costs and expenses of acquisitions or investments. In addition, following completion of an acquisition or investment, our management and resources may be diverted from their core business activities due to the integration process, which diversion may harm the effective management of our business. Furthermore, it may not be possible to achieve the expected level of benefits after integration and the actual cost of delivering such benefits may exceed the anticipated cost. Any difficulties encountered in the acquisition or investment and integration process may have an adverse effect on our ability to manage our business and harm our results of operations and financial condition. If a financial or strategic investment is unsuccessful, then in addition to the diversion of management attention and resources from our existing business, we may lose the value of our investment, which could have a material adverse effect on our financial condition and results of operations.
Furthermore, we have made loans to third parties including our franchisees, and other entities with which we have a business relationship. Although our loans to such third parties are generally secured by collateral or a guarantee, some of these third parties may not repay us, we may not be able to recover the loaned amounts of principal and any interest due, and we may thereby incur losses which could have a material adverse effect on our financial condition and results of operations.
Our expansion into new markets may present increased risks.
We plan to open new hotels in markets in China as well as internationally where we have little or no operating experience. Those markets may have different regulatory requirements, competitive conditions, consumer preferences and discretionary spending patterns as compared to our existing markets. As a result, any new hotels we open in those markets may be less successful than hotels in our existing markets. Guests and franchisees in any new market may not be familiar with our brands and we may need more time to build brand awareness in that market through greater investments in advertising and promotional activities than we anticipated. We may find it more difficult in new markets to hire, motivate and keep qualified employees who share our vision, passion and culture. Hotels operated in new markets also may have lower average sales or higher operating costs than hotels in existing markets. Sales at hotels operated in new markets may take longer than expected to ramp up and reach expected sales and profit levels, and may never do so, thereby affecting our overall profitability.
Our financial condition and results of operations may be materially affected if our strategy to diversify our brand portfolio and mix of hospitality offerings is not successfully implemented.
We intend to diversify our brand portfolio and mix of hospitality offerings with GreenTree Eastern, Gme, Gya, VX, Greentree Inns, Wumian, GT Alliance, Vatica and Shell branded hotels to cover market segments from economy to mid- to up-scale markets. We may not possess enough knowledge or experience in expanding into these new market segments and we may face more competition in such new market segments. In addition, the strategy to diversify our mix of hospitality offerings may increase the cash needs of our operations and may distract our management’s attention and energy. If such strategies are not successful, our business, financial condition and results of operations may be materially and adversely affected.
If we fail to maintain our relationships with our members and corporate account clients, our business and growth prospects could be materially and adversely affected.
Historically, we have derived a portion of our revenues from our members and from our cooperation arrangements with certain corporate account clients such as banks, airlines and other large companies. In 2016, 2017 and 2018, we sold approximately 96% of our room nights through our direct sales channels. We expect that these members and corporate account clients will contribute to the growth of our business in the near future.
We cannot assure you that our members will remain loyal patrons of our hotels and that our corporate account clients will agree to renew the relevant cooperation agreements upon their expiration, or enter into new agreements with us on substantially similar terms. Our negotiating position with corporate account clients also is limited given the competition in China’s hospitality industry. If we fail to enhance or maintain our relationships with our members, and the frequency of member stays at our hotels declines as a result, or if our corporate account clients decline to renew their cooperation agreements or propose new agreements with commercial terms less favorable to us, our business and growth prospects could be materially and adversely affected.
In addition, our members are allowed to redeem their bonus points for various gifts or merchandises offered by 168mall, which is operated under https://www.168.com. Although this domain name is owned by a third party, such activities might be deemed to be a business operated by us without an operating permit for value-added telecommunications services, and may subject us to regulatory investigation, order of rectification, and a fine. As of December 31, 2018, we ceased using the domain name previously owned by us, https://mall.998.com.
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If our franchisees are unable to maintain our hotels’ condition and appearance, our hotel occupancy rates may decline.
In order to maintain the condition and appearance of hotels in our network, our hotels require ongoing renovations and other leasehold improvements, including periodic replacement of broken or used furniture, fixtures and equipment. Such investments and expenditures require ongoing funding and, to the extent our franchisees cannot fund these expenditures from existing cash or cash flow generated from operations, our franchisees must borrow or raise capital through financing. Our franchisees may not be able to access capital and our franchisees may be unwilling to spend available capital when necessary, even if required by the terms of our franchise agreements. If our franchisees continue to operate hotels while they are under refurbishment or improvement, there may be instances where refurbishment or improvements would seriously disrupt hotel operations and adversely affect the revenues of the relevant hotels. If our franchisees do not make needed leasehold investments and improvements, our hotels could become less attractive to our potential guests, we could lose market share to our competitors and our hotel occupancy rates may decline. Moreover, disruptions and other risks associated with renovation and improvements could have an adverse effect on our business, financial condition and results of operations.
If the value of our brand portfolio or image diminishes, it could have a material and adverse effect on our business and results of operations.
Our continued success in maintaining and enhancing our brand portfolio and image depends, to a large extent, on the ability of our franchisees and us to satisfy customer needs by maintaining consistently high-quality services across our hotel network, as well as their and our ability to respond to competitive pressures. If we and our franchisees are unable to do so, our occupancy rates may decline, which could in turn adversely affect our results of operations. Our business may also be adversely affected if our brands, public image or reputation were to be diminished by the operations of any of our hotels, whether due to our franchisees failing to operate hotels according to our requirements, unsatisfactory service, accidents or otherwise. Our brand portfolio is integral to our sales and marketing efforts. In addition, the trademark “GreenTree Inn” in the U.S. was registered by a company owned by Mr. Alex S. Xu, our chairman and chief executive officer and currently used by a chain of eleven hotels in the U.S. owned by a company majority owned by Mr. Alex S. Xu. We cannot exert control over any of these hotels in the United States. If these hotels experience any quality issues or are involved in any incidents, despite the fact that our current operations are primarily in China, our reputation can be negatively affected, and the value and image of our brands can diminish. If the value of our brand image is diminished or if our brands do not continue to be attractive to guests and franchisees, our business and results of operations may be materially and adversely affected.
Our results of operations may fluctuate significantly due to seasonality and other factors.
The hospitality industry is subject to fluctuations in revenues due to seasonality. The seasonality of our business may cause fluctuations in our quarterly operating results. Generally, the first quarter, in which both the New Year and Spring Festival holidays fall, accounts for a lower percentage of our annual revenues than other quarters of the year. Furthermore, our overall results of operations may fluctuate significantly from period to period because of several factors, including the timing of new hotel openings, revenue loss associated with the temporary closure of existing hotels for refurbishment, and any losses incurred by our franchisees or us due to hotel closures. As a result, our results of operations may fluctuate significantly from period to period and comparison of different periods, or even the same periods during different years, may not be meaningful. Our results for a given fiscal period are not necessarily indicative of results to be expected for any other fiscal period.
Substantial defaults or delays in payment by our franchisees and corporate customers or the deterioration of the financial condition of our franchisees or corporate clients may have an adverse effect on our cash flows, working capital, financial condition and results of operations.
Our accounts receivable mainly consist of amounts due from our franchisees and corporate clients whose employees are guests in our leased-and-operated hotels. Our corporate clients may choose to settle with us directly, and we typically require our franchisees to pay various fees pursuant to their franchise agreements with us on a monthly or annual basis. Our franchisees and corporate clients may delay their payments beyond the time periods set forth in our agreed credit arrangements. Furthermore, in order to accelerate our expansion, we plan to use our surplus cash to finance the opening of new franchised-and-managed hotels by franchisees who have a proven track record with us. There can be no assurance that our franchisees will always repay us timely once we begin the financing plan. Our liquidity and cash flows from operations may be adversely affected if our accounts receivable cycles or collection periods lengthen or if we encounter a material increase in defaults of payment of our accounts receivable or repayment of the amounts we have lent to our franchisees.
Our operating results are affected by the ability of our franchisees to pay our franchise management fees. An extended period of hotel room vacancy or decrease in room rates, which may be the result of a variety of factors such as unfavorable economic conditions in China and globally, may adversely affect the operating results and financial condition of our franchisees. These negative operating conditions could result in the financial failure of our franchisees and result in the delayed payment of franchise management fees or other revenues derived from our franchised-and-managed hotels or the termination of their franchise agreements. As a result, our business, prospects and results of operations may be adversely affected.
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Failure to retain our senior management could harm our business.
We place substantial reliance on the hospitality and other consumer-service industry experience and the institutional knowledge of members of our senior management team. Mr. Alex S. Xu, our founder, chairman and chief executive officer, is particularly important to our future success due to his substantial experience in the property development, hospitality and other consumer service industries. We do not carry key person insurance on any members of our senior management team. The loss of the services of one or more of these members of our senior management team due to their departure or otherwise could hinder our ability to effectively manage our business and implement our growth strategies. Finding suitable replacements for Mr. Xu or other members of our senior management team could be difficult, and competition for such personnel of similar experience is intense. If we lose their services, our business may be adversely affected.
If we or our franchisees are not able to hire, train and retain qualified managerial and other employees, our brand and our business may be materially and adversely affected.
Our managerial and other employees manage our hotels and interact with our guests on a daily basis. They are critical to maintaining the quality and consistency of our services as well as our established brand and reputation. It is important for our franchisees and us to attract qualified managerial and other employees who have experience in hospitality or other consumer-service industries and are committed to high levels of service. There may be a limited supply of such qualified individuals in the cities in China where we and our franchisees have operations or where we intend to expand. In addition, it is difficult to ascertain and evaluate intangible criteria of candidates, and whether they will share our vision, dedication, passion and culture, during the recruitment process. We and our franchisees must hire and train qualified managerial and other employees on a timely basis to keep pace with our rapid growth while maintaining consistently high-quality services across our hotels in various geographic locations. Regular training needs to be provided to our managerial and other employees so that they are equipped with up-to-date knowledge of various aspects of our hotel operations and can meet our demand for quality services. We and our franchisees also need to offer opportunities for development and career advancement in order to retain qualified managerial and other hotel staff. If we or our franchisees fail to do so, the quality of our services may decrease in one or more of the markets where the hotels in our network are located, which in turn, may have a material and adverse effect on our brand and our business.
Interruption or failure of our information and operational systems could impair our ability to effectively provide our services, which could damage our reputation.
Our ability to provide consistent quality services throughout our hotel network depends on the operation of our proprietary information and operational systems, including our central reservation, hotel management, data analysis and inter-department support systems. Any damage to or failure of our systems could interrupt our service. Our systems are vulnerable to damage or interruption as a result of power loss, telecommunications failures, computer viruses, fires, floods, earthquakes, interruptions in access to our toll-free numbers, hacking or other attempts to harm our systems, and similar events. Our servers, which are maintained in Shanghai, may also be vulnerable to break-ins, sabotage and vandalism. Some of our systems are not fully backed up, and our disaster recovery planning does not account for all possible scenarios. In addition, our systems and technologies may become outdated and we may not be able to replace or introduce upgraded systems as quickly as our competitors or within budgeted costs for such upgrades. If we experience frequent or persistent system failures, our quality of services and our reputation could be harmed. The steps we need to take to increase the reliability and safety of our systems may be costly, which could reduce our operating margins, and may not be successful in reducing the frequency or duration of system failures and service interruptions.
Failure to maintain the integrity of internal or customer data could result in harm to our reputation or subject us to costs, liabilities, fines or lawsuits.
Our business involves collecting and retaining a large volume of internal and customer data, including credit card numbers and other personal information as our various information technology systems enter, process, summarize and report such data. We also maintain information about various aspects of our operations as well as our employees. The integrity and protection of our customer, employee and company data is critical to our business. Our customers and employees expect that we will adequately protect their personal information. We are required by applicable laws to keep strictly confidential the personal information that we collect, and to take adequate security measures to safeguard such information. Our security measures and those of our third-party service providers may not be adequate for the protection of our customer, employee or company data.
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In addition, computer hackers, foreign governments or cyber terrorists may attempt to penetrate our network security and our website. Unauthorized access to our proprietary internal and customer data may be obtained through break-ins, sabotage, breach of our secure network by an unauthorized party, computer viruses, computer denial-of-service attacks, employee theft or misuse, breach of the security of the networks of our third-party service providers, or other misconduct. Because the techniques used by computer programmers who may attempt to penetrate and sabotage our proprietary internal and customer data change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques. Unauthorized access to our proprietary internal and customer data may also be obtained through inadequate use of security controls. The laws and regulations applicable to security and privacy are becoming increasingly important in China. The theft, loss, fraudulent or unlawful use of customer, employee or company data could harm our reputation or result in remedial and other costs, liabilities, fines or lawsuits.
The Regulation (EU) 2016/679 of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC, known as the general data protection regulation, or GDPR, has imposed certain requirements on the processing of personal data relating to natural persons. GDPR requirements will apply both to companies established in the EU and to companies, such as us, that are not established in the EU but process personal data of individuals who are in the EU (and in the European Economic Area subject to the enactment of implementation procedures), where the processing activities relate to: (a) the offering of goods or services, irrespective of whether a payment of the data subject is required, to such data subjects in the EU; or (b) the monitoring of their behavior as far as their behavior takes place within the EU. Compliance with the GDPR will be a rigorous and time-intensive process that may increase our cost of doing business, and the failure to comply with the GDPR could expose us to sanctions from both a financial and business operations perspective. In addition, in case of control, non-compliance with the GDPR may expose us to damage to our reputation.
On February 1, 2013, China’s initial personal data protection guidelines, the Guidelines for Personal Information Protection in Information Security Technology Public and Commercial Service Systems, became effective, which guidelines set forth detailed requirements as to the protection of personal information and data collection, data processing, data transfer and data creation. Although these guidelines are voluntary and non-binding, we are advised by our PRC counsel that, going forward, further regulatory oversight of data privacy in China is expected. In addition, Amendment 7 to the PRC Criminal Law prohibits institutions, companies and their employees in the telecommunications and other industries from selling or otherwise illegally disclosing a PRC citizen’s personal information obtained during the course of performing their duties or providing services, or obtaining such information through theft or other illegal means. On November 7, 2016, the Standing Committee of the PRC National People’s Congress issued the Cyber Security Law of the PRC, which became effective on June 1, 2017. Pursuant to the Cyber Security Law of the PRC, providers of network products and services shall maintain the security of their products and services and shall comply with provisions regarding the protection of personal information as stipulated under relevant laws and regulations. Moreover, the Provisions on Protection of Personal Information of Telecommunication and Internet Users specifically regulates the collection, use, disclosure and security of personal information. Complying with these PRC laws and regulations may cause us to incur substantial costs or require us to change our business practices. See “Item 4. Information on the Company — B. Business Overview — Regulatory Matters — Regulations on Protection of Information on Networks.”
While we take various measures to comply with all applicable data privacyMatters” in this annual report. These statements involve known and protection laws and regulations of the PRC, our current security measures and those of our third-party service providers may not be adequate for the protection of our customer, employee or company data. In addition, hackers, foreign governments or cyber terrorists may attempt to penetrate our network security and our website. Unauthorized access to our proprietary internal and customer data may be obtained through break-ins, sabotage, breach of our secure network by an unauthorized party, computer viruses, computer denial-of-service attacks, employee theft or misuse, breach of the secure networks of our third-party service providers, or other misconduct. Because the techniques used in any attempt to penetrate and sabotage our proprietary internal and customer data change frequently and may not be recognized until launched against us, we may be unable to anticipate or protect against these techniques. Unauthorized access to our proprietary internal and customer data may also be obtained through inadequate security measures. Laws and regulations in China relating to security and privacy are becoming increasingly important. Any theft, loss, fraudulent, unlawful use or disclosure of customer, employee or company data could harm our reputation and result in remedialunknown risks, uncertainties and other costs, liabilities, fines or lawsuits.
Any failure to protect our trademarks and other intellectual property rights could negatively impact our business.
Our brand, trade name, trademarks and other intellectual property are critical to our success. The success of our business depends in part upon our continued ability to use our brands, trade names and trademarks to increase brand awareness and to further develop our brands. As of December 31, 2018, we had a total of 218 trademarks, 27 software registration certificates, one copyright and 11 patents registered in China. The expiration dates of our trademarks fall between 2019 and 2028, including “GreenTree Inn.” Once the ten-year term of our registered trademarks has expired, we will be able to renew our trademark registrations for another ten years upon paying a renewal fee. If we are unable to renew one or more trademark registrations, our ability to use such trademarks could be impaired, and our business and results of operations could be materially and adversely affected.
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Furthermore, the unauthorized reproduction or infringement of our trade name or trademarks or other intellectual property could diminish the value of our brand and its market acceptance, competitive advantage or goodwill. For example, our proprietary operational IT system, which has not been patented, copyrighted or otherwise registered as our intellectual property, is a key component of our competitive advantage and our growth strategy. As of December 31, 2018, we have received 27 software registration certificates for certain of our proprietary information and operational systems including our Central Reservation System (CRS), Property Management System (PMS) and certain other quality control systems. Although we have been granted software registration certificates in respect of some of our proprietary information and operational systems, these systems could be infringed upon by third parties, which may adversely affect our business, financial condition and results of operations. As of December 31, 2018, we also have received 11 patent registrations, including ten design patents for furnishings used in our hotels and one utility patent for a proprietary door design. Because the protection of a company’s intellectual property provided under PRC laws and regulations is less thanfactors that afforded under United States laws and regulations, the measures we take to protect our brands, trade names, trademarks and other intellectual property rights may not be adequate to prevent their unauthorized use by third parties. Furthermore, the application of laws governing intellectual property rights in China and abroad is uncertain and evolving, and could involve substantial risks to us. If we are unable to adequately protect our brands, trade names, trademarks and other intellectual property rights, we may lose these rights and our business may suffer materially. For example, in order to protect our brands, in the past we have filed lawsuits against certain hotel operators which had alleged to be our franchised-and-managed hotels but have not entered into any agreements with us.
We could also be subject to claims for infringement, invalidity, or indemnification relating to third parties’ intellectual property rights. Such third-party claims may be time-consuming and costly to defend, divert management attention and resources, or require us to enter into licensing agreements, which may not be available on commercially reasonable terms, or at all.
The restaurants operated by our hotels face risks related to instances of food-borne illnesses and other food safety accidents.
Some of our hotels directly operate the restaurant located in the hotels. The restaurant business is susceptible to food-borne illnesses and other food safety accidents. We cannot assure you that our internal controls and training will be fully effective in preventing all food-borne illnesses. Furthermore, our reliance on third-party food suppliers and distributors increases the risk that food-borne illness incidents could be caused by third-party food suppliers and distributors outside of our control and the risk of multiple locations being affected rather than a single restaurant. New illnesses resistant to any precautions may develop in the future, or diseases with long incubation periods could arise that could give rise to claims or allegations on a retroactive basis. Reports in the media of instances of food-borne illnesses could, if highly publicized, negatively impact restaurant sales, forcing the closure of some restaurants and affect our customers’ confidence in our hotel business. Furthermore, other illnesses, such as hand, foot and mouth disease or avian influenza, could adversely affect the supply of some of the restaurants’ food products and significantly increase such restaurants’ costs, which may also adversely affect the results of operations of the relevant hotels.
Accidents or injuries in our hotels may adversely affect our reputation and subject us to liability.
There are inherent risks of accidents or injuries in hotels. One or more accidents or injuries such as fire accident, slip and fall and accident during property renovation at any of our hotels could adversely affect our safety reputation among guests and potential guests, decrease our overall occupancy rates and increase our costs by requiring us to take additional measures to make our safety precautions even more visible and effective. If accidents or injuries occur at any of our hotels, we may be held liable for costs related to the injuries. Our property and liability insurance policies may not provide adequate coverage and we may be unable to renew our insurance policies or obtain new insurance policies without increases in cost or decreases in coverage levels.
In addition, if any incidents, particularly fire accidents, occur in any of the leased-and-operated hotels that do not possess the relevant licenses, permits, title certificate or fire safety inspection certificate, or is located on properties where the actual use and the designated land or property use are inconsistent, there could be substantial negative publicity, thereby triggering large-scale government actions that impact our entire hotel network, which in turn will have a material adverse impact on our business, results of operations and financial condition.
We are subject to risks related to litigation filed by or against us, and adverse litigation results may harm our business and financial condition.
We have been, and may in the future be, a party to litigation and other proceedings filed by or against us, including actions relating to among others property lease, franchise agreements with our franchisees, infringement of our brands, employment-related disputes, personal injury, property damage or other harm resulting from acts or omissions by individuals or entities outside of our control, including franchisees and third-party property owners. Various disputes in connection with the properties we lease or with the franchise agreements may occur from time to time, which may cause our hotel operationsactual results, performance or achievements to be affectedmaterially different from those expressed or inimplied by the worst-case scenario, toforward-looking statements. In some cases, these forward-looking statements can be ceased. For example,identified by words or phrases such as of December 31, 2018 we had three pending legal proceedings in connection with the leased hotel properties, two pending legal proceedings in connection with copyrights, one pending legal proceeding in connection with a negligence claim made by a hotel guest, and 25 pending legal proceedings in connection with franchised-and-managed hotels. In addition, the research and
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examinations that we conduct on both the hotel properties and the potential franchisees before entering into franchise agreements, may not be sufficient for us to identify all relevant information. As a result, we may be in dispute with our franchisees, which may result in litigation filed by or against us. See “Item 4. Information on the Company—B. Business Overview—Legal Proceedings.“may,”
The outcome of legal proceedings is uncertain, we cannot predict with certainty the cost of defense, the cost of prosecution or the ultimate outcome of thereof, including remedies or damage awards, and adverse results in such litigation and other proceedings may disrupt our business, materially and adversely affect our reputation, results of operations, financial condition and prospects. Moreover, if any claims against us were to prevail, we would be subject to monetary “will,” “expect,” “anticipate,” “aim,” “estimate,�� “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other liabilities,similar expressions. The forward-looking statements included in this annual report relate to, among others:
● | our goals and growth strategies; |
● | our future business development, financial condition and results of operations; |
● | trends in the hospitality industry in China and globally; |
● | competition in our industry; |
● | fluctuations in general economic and business conditions in China and other regions where we operate; |
● | the regulatory environment in which we and our franchisees operate; and |
● | assumptions underlying or related to any of the foregoing. |
This annual report also contains market data relating to the hospitality industry in China, including market position, market size, and growth rates of the markets in which could strain our financial resources, consume the timewe participate, that are based on industry publications and attention of our managementreports. Statistical data in these publications and otherwise have an adverse effectreports also include projections based on our business, financial condition and results of operations.
Our lessors’ failure to comply with lease registration and other compliance requirements under PRC law may subject these lessors or us to fines or other penalties that may negatively affect our ability to operate our hotels.
As an operator and manager of our leased hotel properties, we are subject to a number of land- and property-related legal requirements. For instance, under PRC law, all lease agreements are required to be registered withassumptions. The hospitality industry in China may not grow at the local land and real estate administration bureau. Our standard lease agreement generally requires the lessor to make such registrations. However, as of December 31, 2018, because our lessors failedrates projected by market data, or reluctant to provide necessary documents for us to register the leases, 26 lessors of our leased-and-operated hotels had not obtained registrations of their leases from the relevant authorities as required despite our repeated requests to these lessors to obtain registrations, as required under our lease agreements with them. In addition, based on the specific land use right certificates and property ownership certificates held by some of our lessors of the leased-and-operated hotels, approximately half of 29 of hotel properties we own or lease and operate are restricted to industrial and other uses, rather than qualified for hotel operation use.at all. The failure of these 26 lessorsmarkets to register lease agreements as required by law or to ensure thatgrow at the hotel properties are operated in compliance with their designated useprojected rates may subject these lessors or us to fines or other penalties in the amount of up to RMB10,000 for each hotel property or approximately RMB260,000 in aggregate, which may negatively affect our ability to operate the hotels covered under those leases. Moreover, the failure to use the property in compliance with the intended usage designated by the land use right certificates or the property ownership certificates may subject the lessors or us to fines in the amount of up to RMB30,000 for each property, invalidate the lease agreements, confiscation of relevant gains or subject them or us to temporary suspension or termination of operations.
We are subject to various claims and disputes in the ordinary course of business, and increases in the amount or severity of these claims and disputes could adversely affect us.
We are exposed to various claims and disputes related to commercial operations, personal injury, property damage, labor disputes and other matters in the ordinary course of our business. Developments in regulatory, legislative or judicial standards, material changes to dispute resolution trends, or a catastrophic accident or series of accidents, including accidents that affect our franchisees or vendors, involving any or all of commercial operations, property damage, personal injury, and labor disputes could have a material adverse effect on our operating results, financial condition and reputation.
For example, approximately 4% of our room nights are booked through OTAs, to whom we pay agency fees for such services. If we were to have a dispute with an OTA, the volume of our room inventory booked through such OTA may decline, or the OTA may block reservations of our rooms or remove our hotels from their website entirely, pending resolution of the dispute. As a result, our business and results of operations may be adversely affected.
In addition, our franchisees may suspend or terminate their cooperation with us voluntarily or involuntarily due to various reasons, including disagreement or dispute with us, failure to maintain requisite approvals, licenses or permits or to comply with other governmental regulations, and events beyond our or their control, such as inclement weather, natural disasters, transportation interruptions or labor unrest or shortage. For example, although the trademark for our current Shell brand has been and is used in public, this trademark is still in the process of being registered. Franchisees of our Shell brand may object to or decline to pay franchise fees charged by us, and third parties may use or exploit this trademark due to its non-registration. Due to intense competition in China’s hospitality industry, our existing franchisees may also discontinue their cooperation with us and work with our competitors instead. We may not be able to promptly replace our franchisees on a timely and cost-effective basis, or at all. As a result of any disruptions associated with our franchisees, our guest satisfaction, brands, reputation, operations and financial performance may be materially and adversely affected.
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We may encounter disputes from time to time relating to our use of intellectual property of third parties.
We may encounter disputes from time to time over rights and obligations concerning intellectual property, and we may not prevail in those disputes. We cannot assure you that personnel in our leased-and-operated hotels will not use intellectual property of third parties without proper authorization. We may incur liability for such unauthorized or infringing use, and be subject to additional claims in the future. Any such claim of infringement or unauthorized use of intellectual property could result in costly litigations and divert the attention and resources of our management.
The growth of online and other hotel reservation intermediaries and travel consolidators may adversely affect our margins and profitability.
In 2016, 2017 and 2018, approximately 4% of our room nights were booked through OTAs to whom we pay commissions for such services. If these intermediaries and consolidators become the primary channel through which our guests make their bookings, they may be able to negotiate higher commissions, reduced room rates, or other significant concessions from us. The operations of these travel intermediaries and consolidators may adversely affect our ability to control the supply andmarket price of our room inventory, which would in turn adversely affect our margins and profitability.
We are a “controlled company” within the meaningADSs. If any one or more of the NYSE Listed Company Manual.
GTI beneficially owns 84.7%assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. In addition, projections, assumptions and estimates of our Class A ordinary shares
and 100% of our Class B ordinary shares and 94.0%the future performance of the aggregate voting power of our total issued and outstanding share capital. The voting power of our company owned by GTIindustry in which we operate is indirectly owned by Mr. Alex S. Xu, our founder, chairman and chief executive officer, as he owns 83.9% of voting power of GTI, which entitles Mr. Xu to nominate or replace all directors of GTI, and determine how GTI exercises the voting power in our company. As long as GTI or Mr. Alex S. Xu owns at least 50% of the voting power of our company, we will be a “controlled company” as defined under the NYSE Listed Company Manual. For so long as we remain a controlled company under that definition, we are permitted to elect to rely on certain exemptions from corporate governance rules, including an exemption from the rule that a majority of our board of directors must be independent directors, although we have no current intention to rely on the controlled company exemption. As a result, you may not have the same protection afforded to shareholders of companies that arenecessarily subject to these corporate governance requirements.
Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes.
Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes, particularly in locations where we operate a large numberhigh degree of hotels. China has in the past experienced significant natural disasters, including earthquakes in Western and Southwestern China, extreme weather conditions, as well as health scares related to epidemic diseases, and any similar event could materially impact our business in the future. If a disaster or other disruption were to occur in the future that affects the regions where we have or are developing franchised-and-managed or leased-and-operated hotels, our operations could be materially and adversely affected due to loss of personnel and damages to property. Even if we are not directly affected, such a disaster or disruption could affect our guests, which could harm our results of operations.
In addition, our business could be affected by public health epidemics, such as the outbreak of avian influenza, severe acute respiratory syndrome, or SARS, Zika virus, Ebola virus, or other disease. If any of our employees is suspected of having contracted a contagious disease, we may be required to apply quarantines or suspend our operations. Furthermore, any future outbreak may restrict economic activities in affected regions, resulting in reduced business volume, temporary closure or quarantine of hotels in operation or otherwise disrupt our operations and adversely affect our results of operations.
Losses caused by epidemics, natural disasters and other catastrophes, including SARS, H1N1 and H7N9 influenza, earthquakes or floods, are either uninsurable or too expensive to justify insuring against in China. In the event an uninsured loss or a loss in excess of insured limits occurs, we could lose all or a portion of the capital we have invested in a hotel, as well as the anticipated future revenue from the hotel. In that event, we might nevertheless remain obligated for any financial obligations related to the hotel. Similarly, war (including the potential of war), terrorist activities (including the threat of terrorist activities), social unrest and heightened travel security measures, as well as geopolitical uncertainty and international conflict may affect travel and may in turn affect our business, financial conditions, and results of operations. If our franchised-and-managed hotels are affected by these incidents, we might lose our revenue stream from those hotels. In addition, we may not be adequately prepared in contingency planning or recovery capability in relation to a major incident or crisis, and as a result, our operational continuity may be adversely affected and our reputation may be harmed.
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We have limited insurance coverage.
We carry property insurance that covers the assets that we own at our leased-and-operated hotels, but such property insurance does not cover the buildings or any other assets owned by our lessors or the assets of the franchised-and-managed hotels. Although we generally require our lessors and our franchisees to purchase customary insurance policies, we cannot guarantee that they will adhere to such requirements. In addition, we do not have any business disruption insurance coverage for our operations to cover losses that may be caused by natural disasters or catastrophic events, such as SARS or avian flu. Any business disruption or natural disaster may result in our incurring substantial costs and diversion of our resources. In addition, there are inherent risks of accidents or injuries in hotels. One or more accidents or injuries at any of our hotels could adversely affect our safety reputation among customers and potential customers, decrease our overall occupancy rates and increase our costs by requiring us to take additional measures to make our safety precautions even more visible and effective. In the future, we may be unable to renew our insurance policies or obtain new insurance policies without increases in cost or decreases in coverage levels. We may also encounter disputes with insurance providers regarding payments of claims that we believe are covered under our policies. If we were held liable for amounts and claims exceeding the limits of our insurance coverage or outside the scope of our insurance coverage, our reputation, our business, results of operations and financial condition may be materially and adversely affected.
We may require additional financing for our business, which may not be available on terms acceptable to us, or at all, or would increase our financial leverage and may be difficult to service.
We may require additional financial resources to support our growth, future development and any investments, including mergers or acquisitions, that we may pursue. The amount and timing of such additional financing needs will vary depending on the timing of our new hotel openings, investments in converting new leased-and-operated hotels and searching and developing relationships with potential franchisees and the amount of cash flow from our operations. If our internal resources are insufficient to satisfy our financing requirements, we may seek additional financing by selling additional equity or debt securities or obtaining a credit facility. The sale of additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that may, among other things, potentially restrict our operations or our ability to pay dividends. Servicing such debt obligations could also be burdensome to our operations. If we fail to service our debt obligations or are unable to comply with the relevant debt covenants, we could be in default under the relevant debt obligations and our liquidity and financial conditions may be materially and adversely affected.
Our ability to obtain additional capital on acceptable terms is subjectrisk due to a variety of uncertainties, including:
investors’ perception of,factors, including those described in “Risk Factors” and demand for, securities of businesseselsewhere in the PRC hospitality industry;
conditions of the U.S. and other capital markets in which we may seek to raise funds;
our future results of operations, financial condition and cash flows;
PRC governmental regulation of foreign investment in the hospitality industry in China;
economic, political and other conditions in China; and
PRC governmental policies relating to foreign currency borrowings.
We cannot assure you that future financing will be available in amounts orthis annual report. You should not place undue reliance on terms acceptable to us, if at all. If we fail to raise additional funds, we may need to sell debt or additional equity securities, reduce our growth to a level that can be supported by our cash flow or defer planned expenditures.
We will continue to recognize a substantial amount of share-based compensation expenses, which will have a significant impact on our financial condition and liquidity position.
We adopted our 2018 share incentive plan in January 2018, pursuant to which we may grant options to purchase up to 9,000,000 of our Class A ordinary shares. Options granted to our employees generally vest either ratably over the following four years starting after the first/second/third anniversary of date of our initial public offering, or 50% on the date of our initial public offering and another 50% on December 31, 2018, as applicable; options granted to our directors vested 100% on the first anniversary of the date of our initial public offering. As of December 31, 2018, we had outstanding options with respect to 1,591,500 Class A ordinary shares that have been granted to our employees, directors and consultants under the 2018 share incentive plan. As a result of our grants of awards under the 2018 Plan, we incurred share-based compensation expenses of RMB16.1 million (USD$2.3 million) in 2018. We are required to account for share options granted to our employees, directors and consultants in accordance with Codification of Accounting Standards, or ASC 718, “Compensation — Stock Compensation” and ASC 505-50, “Equity, Equity-Based Payments to Non-Employees.” We will continue to incur and recognize additional share-based compensation expenses in the future as we continue to grant share-based incentives. We believe such incentives are necessary for us to be able attract and retain key personnel and employees, and we will continue to grant share-based compensation to employees in the future. As a result, our expense associated with share-based compensation may increase, which may have an adverse effect on our financial condition and liquidity position.
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A material weakness in our internal control over financial reporting has been identified, and if we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results, meet our reporting obligations or prevent fraud.
Prior to our initial public offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our management has not completed an assessment of the effectiveness of our internal control over financial reporting and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. In connection with the audit of our consolidated financial statements for the years ended December 31, 2015, 2016 and 2017, we and our independent registered public accounting firm identified one material weakness as of December 31, 2015, 2016 and 2017, in accordance with the standards established by the Public Company Accounting Oversight Board of the United States, or PCAOB.these forward-looking statements.
The material weakness that has been identified related to insufficient accounting expertise necessary to comply with U.S. GAAP and SEC reporting and compliance requirements.
We have implemented and are continuing to implement a number of measures to address the material weakness identified. For details, see “Item 15. Controls and Procedures —Internal Control over Financial Reporting.” However, the implementation of these measures may not fully address the material weaknessforward-looking statements made in our internal control over financial reporting, and our management concluded that the material weakness still existed as of December 31, 2018. We are still working to remediate these findings, we cannot assure you that we will not identify additional material weaknesses or significant deficiencies in the future.
Furthermore, had our independent registered public accounting firm conducted an audit of our internal control over financial reporting, such firm might have identified additional material weaknesses and deficiencies. Upon the completion of initial public offering, we have become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, required that we include a report of management on our internal control over financial reporting in ourthis annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2019. In addition, once we ceaserelate only to be an “emerging growth company”events or information as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation. In addition, we may not be able to timely file our periodic reports as a public company under U.S. securities laws, which could limit the amount of information that investors receive about our company in the future and adversely affect the price of our ADSs, our business and our reputation.
In documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs.
Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.
We are an “emerging growth company” and may not be subject to requirements that other public companies are subject to, which could harm investor confidence in us and our ADSs.
The Jumpstart Our Business Startups Act, or the JOBS Act, contains provisions that, among other things, relax certain requirements for qualifying public companies. We are an “emerging growth company” as defined under the JOBS Act and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies, including an exemption from the requirement to comply with the auditor attestation requirements of Section 404 and an exemption from the requirement to adopt and comply with new or revised accounting standards at the same time as other public companies. We will remain an emerging growth company until the earliest of (i) the last day of our fiscal year during which
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we have total annual gross revenues of at least US$1.07 billion; (ii) the last day of our fiscal year following the fifth anniversary of the completion of our initial public offering; (iii) the date on which the statements are made in this annual report. Except as required by law, we have, during the previous three year period, issued more than US$1.0 billion in non-convertible debt;undertake no obligation to update any forward-looking statements to reflect events or (d)circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this annual report and the documents that we are deemedhave referred to bein this annual report and have filed as exhibits to the registration statement, of which this annual report is a “large accelerated filer” under the Securities Exchange Act
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The JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We will take advantage of the extended transition period. As a result of this election, our financial statements may not be comparable to other public companies that complypart, completely and with the public company effective dates for these new or revised accounting standards.
We also expectunderstanding that these new rules and regulations could make it more expensive for us to renew director and officer liability insurance, and weour actual future results may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficultmaterially different from what we expect.
PART I
ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not required.
ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE
Not required.
ITEM 3.KEY INFORMATION
A.Reserved
B.Capitalization and Indebtedness
Not required.
C.Reasons for us to attractthe Offer and retain qualified membersUse of our board of directors, particularly to serve on our audit committee.Proceeds
We cannot predict if investors will find our ADSs less attractive because we may rely on these exemptions. If some investors find our ADSs less attractive as a result, there may be a less active trading market for our ADSs and our ADS price may be more volatile.Not required.
D.Risk Factors
Risks Related to Doing Business in China
Adverse changes in the Chinese economy could have a material adverse effect on the hospitality industry in China which could adversely affect our business.
We conduct all of our operations in China and all of our revenues are derived from our operations there. As the travel and hospitality industry is highly sensitive to business and personal discretionary spending levels, it tends to decline during general economic downturns. Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many aspects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the China’s economy has experienced significant growth in the past 30 years, growth has been uneven across different regions and among various economic sectors of China. The growth rate of China’s GDP decreased in the past few years. We cannot assure you that China’s economy will continue to grow, or that if there is growth, such growth will be steady and uniform. If there is a slowdown, such a slowdown could have a negative effect on our business. There is also a possibility that China’s economic growth rate may materially decline in the near future, which may have adverse effects on our financial condition and results of operations. Risk of a material slowdown in China’s economic growth rate may be based on several current or emerging factors, including: (i) occurrence of unusual circumstances, for instance, the outbreak of COVID-19; (ii) overinvestment by the government and businesses and excessive credit offered by banks; (iii) a rudimentary monetary policy; (iv) excessive privileges to state-owned enterprises at the expense of private enterprises; (v) the dwindling supply of surplus labor; (vi) a decrease in exports due to weaker overseas demand; (vii) failure to boost domestic consumption; and (viii) challenges resulted from international situations.
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We face various legal and operational risks and uncertainties as a company based in and primarily operating in China.
We face various legal and operational risks and uncertainties as a company based in and primarily operating in China. The PRC government has significant authority to exert influence on the ability of a China-based company, like us, to conduct its business, accept foreign investments or offer or continue to offer securities on a U.S. stock exchange. For example, we face risks associated with regulatory approvals of offshore offerings, anti-monopoly regulatory actions, cybersecurity and data privacy, as well as the lack of inspection from the U.S. Public Company Accounting Oversight Board, or PCAOB, on our auditors. The PRC government may also intervene with or influence our operations as the government deems appropriate to further regulatory, political and societal goals. The PRC government has published new policies that significantly affected certain industries such as the education and internet industries, and we cannot rule out the possibility that it will in the future release regulations or policies regarding our industry that could adversely affect our business, financial condition and results of operations. See “— Uncertainties with respect to the Chinese legal system could adversely affect us.” Any such action, once taken by the PRC government, could cause the value of our securities, including our ADSs, to significantly decline or become worthless.
Changes in the political and economic policies of the PRC government may materially and adversely affect our business, financial condition and results of operations and may result in our inability to sustain our growth strategy.
The PRC economy differs from the economies of most developed countries in many respects, including the extent of government involvement, level of development, growth rate, and control of foreign exchange and allocation of resources. Although the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the PRC government plays a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, regulating financial services and institutions and providing preferential treatment to particular industries or companies.
While the PRC economy has experienced significant growth in the past, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall PRC economy, but may also have a negative effect on us. Our financial condition and results of operations could be materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. The PRC government also has significant authority to exert influence on the ability of an issuer with substantial operations in China, such as our company, to conduct securities offerings overseas and/or allow any foreign investments in issuers with substantial operations in China, which could result in a material change in our operations and/or the value of our ADSs. In particular, there have been recent statements by the PRC government indicating an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based issuers with substantial operations in China. Any such regulatory oversight or control could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of our securities, including our ADSs, to significantly decline or become worthless. See “— Uncertainties with respect to the Chinese legal system could adversely affect us.” In addition, the PRC government has implemented in the past certain measures to control the pace of economic growth. These measures may cause decreased economic activity, which in turn could lead to a reduction in demand for our services and consequently have a material adverse effect on our businesses, financial condition and results of operations.
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Uncertainties with respect to the Chinese legal system could adversely affect us.
We conduct our business primarily through our subsidiaries in China. Our operations in China are governed by PRC laws and regulations. Our subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is based on written statutes and their interpretation by the Supreme People’s Court of the PRC. Unlike common law systems, prior court decisions may be cited for reference but have limited precedential value. Since the 1970s, the PRC government began to
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promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently-enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published court decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties and may not be as consistent and predictable as in other jurisdictions. In addition, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after the violation occurs. For example, historically we have used a portion of our excess cash to purchase shares that are listed on the PRC stock exchanges. We may be subject to investigations by relevant government authorities, severe penalties or other administrative measures for our purchases of those shares due to restrictions or prohibitions on our operational activities in the PRC. In addition, we may be subject to fines of up to RMB30,000 in connection with the purchase of publicly traded shares in certain Chinese companies engaged in industries in which foreign investments are restricted or prohibited. As we are not aware of any precedent in implementing these current legal restrictions or prohibitions, we cannot predict whether these restrictions will be implemented and if so, the quantum of the fines that may be assessed.
Furthermore, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our business and results of operations.
The PRC government has significant oversight and discretion over the conduct of our business and may intervene with or influence our operations as the government deems appropriate to further regulatory, political and societal goals. The PRC government has published new policies that significantly affected certain industries such as the education and internet industries, and we cannot rule out the possibility that it will in the future release regulations or policies regarding our industry that could adversely affect our business, financial condition and results of operations. See “— We face various legal and operational risks and uncertainties as a company based in and primarily operating in China.” Furthermore, the PRC government has also indicated an intent to exert more oversight and control over securities offerings and other capital markets activities that are conducted overseas and foreign investment in China-based companies like us. Any such action, once taken by the PRC government, could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of our securities, including our ADSs, to significantly decline or become worthless.
We could be adversely affected by political tensions between the United States and China.
Political tensions between the United States and China have escalated in recent years due to, among other things, the trade war between the two countries since 2018, the COVID-19 outbreak, the PRC National People’s Congress’ passage of Hong Kong national security legislation, the imposition of U.S. sanctions on certain Chinese officials from China’s central government and the Hong Kong Special Administrative Region by the U.S. government, the imposition of sanctions on certain individuals from the U.S. by the Chinese government and various executive orders issued by former U.S. President Donald J. Trump. Rising political tensions between China and the U.S. could reduce levels of trades, investments, technological exchanges and other economic activities between the two major economies, which would have a material adverse effect on global economic conditions and the stability of global financial markets. The measures taken by the U.S. and Chinese governments may cause investors to lose confidence in Chinese companies and counterparties, including us.
Furthermore, there have been media reports on deliberations within the U.S. government regarding potentially limiting or restricting China-based companies from accessing U.S. capital markets, and in January 2021 the New York Stock Exchange, or the NYSE, resolved to delist certain China-based companies in compliance with an executive order issued in November 2020. These delistings have introduced greater confusion and uncertainty about the status and prospects of Chinese companies listed on the U.S. stock exchanges. Any further such deliberations or delistings may have a material and adverse impact on the stock performance of China-based issuers listed in the United States such as us, and we cannot assure you that we will always be able to maintain the listing of our ADSs on a national stock exchange in the U.S., such as the NYSE or the Nasdaq Stock Market, or that you will always be allowed to trade our ADSs.
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Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.
The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive all of our revenues in RMB. Under our current structure, our income will be primarily derived from dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency dominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE, by complying with certain procedural requirements. However, foreign exchange transactions under our capital account items are subject to significant foreign exchange controls and require approval from the SAFE or its local branches. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions if foreign currencies reserve falls below a certain level. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.
Fluctuations in exchange rates could result in foreign currency exchange losses and could materially reduce the value of your investment.
The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC and other governments. On July 21, 2005, the PRC government changed its policy of pegging the value of the RMB to the U.S. dollar. More recently, from December 31, 2016 to December 31, 2017,in 2020 and 2021, the RMB appreciated approximately 6.3% against the U.S. dollar. In 2018, however, the RMB depreciated approximately 5.7%and 2.3%, respectively, against the U.S. dollar. It remains unclear what further fluctuations may occur.
Substantially all of our revenues, costs and expenses are denominated in RMB. We are a holding company and we rely on dividends paid by our operating subsidiaries in China for our cash needs. Any significant revaluation of the RMB may materially reduce any dividends payable on, our ADSs in U.S. dollars. To the extent that we need to convert U.S. dollars we received from our initial public offeringreceive into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive. Conversely, if we decide to convert our RMB into U.S. dollars for business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount.
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Limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.
Rapid urbanization and changes in zoning and urban planning in China may cause our hotel properties to be demolished, expropriated or otherwise affected.
China is undergoing a rapid urbanization process, and zoning requirements and other governmental mandates with respect to urban planning of a particular area may change. When zoning requirements or other governmental mandates change with respect to the areas where our hotels are located, the affected hotels may need to be demolished or removed. As a result, we may have to relocate our hotels to other locations. We have experienced such demolition and relocation in the past and we may encounter additional demolition and relocation cases in the future. Our hotels could suffer from demolitions or interruptions due to zoning or other local regulations in the future. Any such demolition and relocation could cause us to lose primary locations for our hotels and cause the licenses and permits held by the hotels facing demolition to not be renewed or even be revoked, and we may not be able to achieve comparable operational results following the relocations. While we may be reimbursed for such demolition and relocation, we cannot assure you that
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the reimbursement, as determined by the relevant government authorities, will be sufficient to cover our direct and indirect losses. Accordingly, our business, results of operations and financial condition may be adversely affected.
Furthermore, the PRC government has the statutory power to acquire or demolish any land in the PRC for reason of changes in urban planning or zoning or otherwise. In such events, we may be forced to relocate or close our hotels. Although we might be paid compensation for such forced acquisition, demolishment or closure, the amount of compensation to be awarded to us may not cover our losses and adversely affecting our operations.
Failure to comply with PRC regulations regarding the registration requirements for employee stock ownership plans or share option plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.
In December 2006, the People’s Bank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, which set forth the respective requirements for foreign exchange transactions by individuals (both PRC or non-PRC citizens) under either the current account or the capital account. In January 2007, the State Administration of Foreign Exchange issued implementing rules for the Administrative Measures of Foreign Exchange Matters for Individuals which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen’s participation in the employee stock ownership plans or stock option plans of an overseas publicly listed company. Pursuant to the Notice of the State Administration of Foreign Exchange on Issues concerning Foreign Exchange Administration of the Overseas Investment and Financing and the Round-trip Investment Made by Domestic Resident through Special-Purpose Companies, or Circular 37, issued on July 4, 2014, PRC residents who participate in share incentive plans in overseas non-publicly listed SPVs due to their position as director, senior management or employees of the PRC subsidiaries of the overseas SPVs may submit applications to SAFE or its local branches for the foreign exchange registration with respect to such overseas SPVs.
On February 25, 2012, the State Administration of Foreign Exchange promulgated the Circulars on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Equity Incentive Plans of Overseas-Listed Company, or the Stock Option Rules. Under these rules, PRC citizens or foreigners who have lived within the PRC for at least one year or, collectively, the PRC optionees, who participate in an equity incentive plan of an overseas publicly listed company are required to register to handle issues such as foreign exchange registration, account establishment, funds transfer and remittance, and entrust an overseas institution, or the “Overseas Trustee” to handle issues like exercise of options, purchase and sale of corresponding stocks or equity and transfer of corresponding funds. A “Domestic Agency” shall be a domestic company participating in the equity incentive plan or a domestic institution which is qualified for asset custody business as chosen by us according to PRC law.
We adopted our 2018 share incentive plan in January 2018. Our board of directors has authorized the issuance of up to 9,000,000 Class A ordinary shares upon exercise of awards granted under our 2018 share incentive plan. See “Item 6. Directors, Senior Management and Employees—B. Compensation—Employees — Share Incentive Plan.” We and the PRC optionees who participate in the 2018 share incentive plan will be subject to these regulations, and may not be able to complete the foreign exchange registration until our company becomes a publicly listed company in the United States. Asas such, the 2018 share incentive plan provides that the PRC optionees shall not exercise their options nor shall they purchase or subscribe for our shares before our company becomes a publicly listed company in the United States. After our initial public offering in the U.S. we plan to advisehave advised our employees and directors participating in the 2018 share incentive plan to handle foreign exchange matters in accordance with the Stock Option Rules. We cannot provide any assurance that we or the PRC optionees of our share incentive plans have complied or will comply with the requirements imposed by the Stock Option Rules. If we or our PRC optionees fail to comply with these regulations, we or our PRC optionees may be subject to fines and other legal or administrative sanctions, and our ability to further grant shares or share options under our share incentive plans to, and to adopt additional share incentive plans for, our directors and employees may be restricted. Such events could adversely affect our operations. See “Item 4. Information on the Company—B. Business Overview—Regulatory Matters—Regulations on Employee Stock Incentive Plans of Overseas Publicly-Listed Company.”
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Further, a notice concerning the individual income tax on earnings from employee share options jointly issued by Ministry of Finance, or the MOF, and the State Taxation Administration, or the STA (previously known as State Administration of Taxation, or the SAT), on March 28, 2005, and its implementing rules, provide that domestic companies that implement employee share option programs shall (i) file the employee share option plans and other relevant documents to the local tax authorities having jurisdiction over them before implementing such employee share
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option plans; (ii) file share option exercise notices and other relevant documents with the local tax authorities having jurisdiction over them before exercise by the employees of the share options, and clarify whether the shares issuable under the employee share options mentioned in the notice are the shares of publicly listed companies; and (iii) withhold taxes from the PRC employees in connection with the PRC individual income tax. To comply with the requirement, we will file the 2018 share incentive plan with the relevant local tax bureau.
It may be difficult for overseas regulators to conduct investigation or collect evidence within China.
There are significant legal and other obstacles in China to providing information needed for regulatory investigations or litigation initiated by regulators outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the Unities States involves uncertainty. Furthermore, according to Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation, evidence collection and other activities within the territory of the PRC. While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase difficulties faced by you in protecting your interests.
Our employment practices may be adversely impacted by the labor contract law of the PRC.
The PRC National People’s Congress promulgated the Labor Contract Law which became effective on January 1, 2008 and was amended on December 28, 2012, and the State Council promulgated implementing rules for the labor contract law on September 18, 2008. The labor contract law and the implementing rules impose requirements concerning, among others, the execution of written contracts between employers and employees, the time limits for probationary periods, and the length of employment contracts. The interpretation and implementation of these regulations are still evolving, our employment practices may violate the labor contract law and related regulations and we could be subject to penalties, fines or legal fees as a result. If we are subject to severe penalties or incur significant legal fees in connection with labor law disputes or investigations, our business, financial condition and results of operations may be adversely affected.
The Labor Contract Law prohibits an employer to establish staff dispatching companies to place workers with themselves or their subsidiaries. We have established a subsidiary which is the employer of most our employees of other subsidiaries. This subsidiary has entered into a service outsourcing arrangement with other relevant subsidiaries of us.ours. Since the current labor dispatch regulation does not clearly define the distinction of labor dispatch and service outsourcing business, our service outsourcing arrangement could be considered as labor dispatch by the relevant PRC government authorities and our abovementioned subsidiary might be regarded as dispatching entity and therefore subject us to fines, or termination of such outsourcing arrangement.
In accordance with the PRC Social Insurance Law and the Regulations on the Administration of Housing Fund and other relevant laws and regulations, China establishes a social insurance system and other employee benefits including basic pension insurance, basic medical insurance, work-related injury insurance, unemployment insurance, maternity insurance, housing fund, and a handicapped employment security fund, or collectively the Employee Benefits. An employer shall pay the Employee Benefits for its employees in accordance with the rates provided under relevant regulations and shall withhold the social insurance and other Employee Benefits that should be assumed by the employees. For example, an employer that has not made social insurance contributions at a rate and based on an amount prescribed by the law, or at all, may be ordered to rectify the non-compliance and pay the required contributions within a stipulated deadline and be subject to a late fee of up to 0.05% or 0.2% per day, as the case may be.day. If the employer still fails to rectify the failure to make social insurance contributions within the stipulated deadline, it may be subject to a fine ranging from one to three times the amount overdue.
Under the Regulations on the Administration of Housing Fund, PRC companies must register with applicable housing fund management centers and establish a special housing fund account in an entrusted bank. Both PRC companies and their employees are required to contribute to the housing funds.
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We have not made adequate contributions to employee benefit plans, as required by applicable PRC laws and regulations. We have recorded accruals for the estimated underpaid amounts for the current employees in our financial statements. However, we have not made any accruals for the interest on underpayment and penalties that may be imposed by the relevant PRC government authorities. If we are subject to investigations related to non-compliance with labor laws and are imposed severe penalties or incur significant legal fees in connection with labor law disputes or investigations, our business, financial condition and results of operations may be adversely affected.
We rely principally on dividends and other distributions on equity paid by our subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our ability to borrow money or pay dividends to holders of our ADSs.
As a holding company, we rely principally on dividends and other payments from our wholly owned operating subsidiaries in China for our cash requirements, including funds necessary to service any debt we may incur, to pay dividends and other cash distributions to our shareholders and to pay our operating expenses. If our subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our subsidiaries are permitted to pay dividends to us only out of their accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. Pursuant to laws applicable to entities incorporated in the PRC, each of our subsidiaries in the PRC
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must make appropriations from after tax profit to a statutory surplus reserve fund. The reserve fund requires annual appropriation of 10% of after tax profit (as determined under accounting principles generally accepted in the PRC at each year-end) after offsetting accumulated losses from prior years, until such reserve reaches 50% of the subsidiary’s registered capital. The reserve fund can only be used to increase the registered capital and eliminate further losses of the respective companies under PRC regulations. As of December 31, 2016, 20172019, 2020 and 2018,2021, total statutory reserves of our PRC subsidiaries were RMB55.3RMB63.0 million, RMB57.7RMB70.0 million and RMB57.7RMB77.5 million (US$8.412.2 million). These reserves are not distributable as cash dividends, loans or advances. In addition, due to restrictions under PRC laws and regulations, our PRC subsidiaries are restricted in their ability to transfer their net assets to the company in the form of dividend payments, loans or advances. Amounts of net assets restricted include paid up capital and statutory reserve funds of our PRC subsidiaries amounted to RMB398.4RMB509.4 million, RMB391.0RMB777.7 million and RMB394.4RMB936.8 million (US$57.4(US147.0 million) as of December 31, 2016, 20172019, 2020 and 2018,2021, respectively. As a result, our Chinese subsidiaries are restricted in their ability to transfer a portion of their net assets to us or any of our other subsidiaries in the form of dividends, loans or advances. Limitation on the ability of our Chinese subsidiaries to pay dividends to us or any of our other subsidiaries could materially and adversely limit our ability to borrow money outside of China or pay dividends to holders of our ADSs. Also, see “— Risks Related to Doing Business in China — It is unclear whether we will be considered as a PRC “resident enterprise” under the Enterprise Income Tax Law of the PRC, and depending on the determination of our PRC “resident enterprise” status, dividends paid to us by our PRC subsidiaries may be subject to PRC withholding tax, we may be subject to 25% PRC income tax on our worldwide income, and holders of our ADSs may be subject to PRC withholding tax on dividends on, and gains realized on their transfer of, our ADSs.”
PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of our initial public offering to make loans or additional capital contributions to our PRC subsidiaries which would materially and adversely affect our liquidity and our ability to fund and expand our business.
In utilizing the proceeds of our initial public offering in the manner described in “Use of Proceeds,”ADSs as an offshore holding company of our PRC subsidiaries, we may make loans to our PRC subsidiaries, or we may make additional capital contributions to our PRC subsidiaries. Any loans or additional capital contributions to our PRC subsidiaries are subject to PRC regulations and approvals. For example, loans by us to our subsidiaries in China, which are foreign-invested enterprises, to finance their activities cannot exceed statutory limits and must be registered with the SAFE or its local counterpart.
We may also decide to finance our subsidiaries by means of capital contributions. According to the relevant PRC regulations on foreign-invested enterprises in China, depending on the total amount of investment, capital contributions to our PRC subsidiaries are no longer subject to the approval of the PRC Ministry of Commerce or its local branches. Instead, we are required to file and submit required information and documents online within 3020 working days of such event. However, we cannot assure you that the regulations will always remain favorable to us. If the regulations are revised in the future or we fail to complete such registration or obtain such approvals on time, our ability to use the
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proceeds from theour initial public offering of the ADSs and to capitalize on our operations in the PRC may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.
Except for the filing required by PRC Ministry of Commerce or its local branches, when using the capital contributions to exchange for RMB funds, the domestic institutions including foreign-invested enterprises, must comply with certain foreign exchange requirements. For example, SAFE promulgated the Circular of the State Administration of Foreign Exchange on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or Circular 16, on June 9, 2016. Under Circular 16, the foreign exchange receipts under capital accounts of a domestic institution and the RMB funds obtained thereby from foreign exchange settlements may be used for expenditure under current accounts within its business scope or expenditure under capital accounts permitted by laws and regulations. However, they may not be used (i) directly or indirectly, for expenditure beyond the enterprise’s business scope or expenditure prohibited by laws and regulations of the state; (ii) unless otherwise specified, directly or indirectly, for investments in securities or other investments than banks’ principal-secured products; (iii) for the granting of loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and (iv) for the construction or purchase of real estate for purposes other than self-use (except for real estate enterprises). In addition, the RMB funds obtained thereby from foreign exchange settlements may not be used to repay RMB loans if the proceeds of such loans have not been fully used by the domestic institution, including a foreign-invested company like us.
We cannot assure you that we will be able to obtain these government approvals on a timely basis, if at all, with respect to future capital contributions by us to our subsidiaries. If we fail to receive such approvals, our ability to use the proceeds of our initial public offering and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.
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It is unclear whether we will be considered as a PRC “resident enterprise” under the Enterprise Income Tax Law of the PRC, and depending on the determination of our PRC “resident enterprise” status, dividends paid to us by our PRC subsidiaries may be subject to PRC withholding tax, we may be subject to 25% PRC income tax on our worldwide income, and holders of our ADSs or ordinary shares who are not PRC residents may be subject to PRC withholding tax on dividends on, and gains realized on their transfer of, our ADSs.
Under the PRC Enterprise Income Tax Law and its Implementation Regulations, or the EIT Law, dividends, interest, rent, royalties and gains on transfers of property payable by a foreign-invested enterprise in China to its foreign investor who is a non-resident enterprise without any establishment or place of business within China or if the received dividends, interest, rent, royalties and gains have no connection with the establishment or place of business of such foreign investor will be subject to a 10% withholding tax, unless such non-resident enterprise’s jurisdiction of incorporation has a tax treaty with China that provides for a reduced rate of withholding tax. Under the EIT Law, an enterprise established outside China with its “de facto management body” within China is considered a “resident enterprise” in China and is subject to the Chinese enterprise income tax at the rate of 25% on its worldwide income. The “de facto management body” is defined as the organizational body that effectively exercises overall management and control over production and business operations, personnel, finance and accounting, and properties of the enterprise. There are no detailed rules or precedents governing the procedures and specific criteria for determining “de facto management body.”
The Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. According to Circular 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a “de facto management body” in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are met: (i) the primary location of the day-to-day operational management is in China; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in China; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholders meeting minutes are located or maintained in China; and (iv) 50% or more of voting board members or senior executives habitually reside in China.
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Although substantially all of our operational management is based in the PRC, it is unclear whether PRC tax authorities would require (or permit) us to be treated as a PRC resident enterprise. It is also unclear whether the dividends we receive from our PRC subsidiaries will constitute dividends between “qualified resident enterprises” and therefore qualify for exemption from withholding tax if we are deemed to be a “resident enterprise” for PRC enterprise income tax purposes. We are not controlled by a Chinese enterprise or PRC enterprise group and as such we do not believe that our company meets all of the conditions to be deemed a PRC resident enterprise. For the same reasons, we believe our other subsidiaries located outside China are not PRC resident enterprises. In addition, we are not aware of any offshore holding companies with a corporate structure similar to ours ever having been deemed a PRC “resident enterprise” by PRC tax authorities. However, the tax resident status of an enterprise is subject to determination by PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” While we do not currently consider our company or any of our overseas subsidiaries to be a PRC resident enterprise, there is a risk that the PRC tax authorities may deem our company as a PRC resident enterprise since a substantial majority of the members of our management team are located in China, in which case we would be subject to the PRC enterprise income tax at the rate of 25% on our worldwide income.
If the ChinesePRC tax authorities determine that we are a resident enterprise for PRC enterprise income tax purposes, among other things, we would be subject to the PRC enterprise income tax at the rate of 25% on our worldwide taxable income, substantially higher than the 10% withholding tax rate to which we are subject as a non-PRC resident enterprise. Furthermore, if we are treated as a PRC resident enterprise, payments of dividends by us may be regarded as derived from sources within the PRC and therefore we may be obligated to withhold PRC income tax at 10% on payments of dividends on the ADSs or shares to non-PRC resident enterprise investors. In the case of non-PRC resident individual investors, the tax may be withheld at a rate of 20%. In addition, if we are treated as a PRC resident enterprise, any gain realized on the transfer of the ADSs and/or shares by non-PRC resident investors may be regarded as derived from sources within the PRC and accordingly may be subject to a 10% PRC income tax in the case of non-PRC resident enterprises or 20% in the case of non-PRC resident individuals. The PRC tax on dividends and/or gains may be reduced or exempted under applicable tax treaties between the PRC and the holder’s home country.
In addition, under the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Resident Enterprises, or STA Public Notice 7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. Gains derived from such indirect transfer may be subject to PRC enterprise income tax. According to STA Public Notice 7, “PRC taxable assets” include assets attributed to an establishment in China, immovable properties in China, and equity investments in PRC resident enterprises. See “Item 4. Information on the Company—Company — B. Business Overview—Overview — Regulatory Matters—Matters — Regulations Relating to Tax.” As part of our restructuring, GreenTree Hospitality Group Ltd., or GreenTree Hospitality, the listing entity for the purpose of our initial public offering, acquired through a share exchange the entire share capital of GreenTree Samoa, including the
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equity interests in most of our PRC operating subsidiaries then held by it. See “Item 4. Information on the Company—Company — C. Organizational Structure.” This acquisition of equity interests in our PRC operating subsidiaries by GreenTree Hospitality may be deemed to be an indirect transfer of PRC taxable assets, and the gains from the acquisition may be subject to PRC enterprise income tax at a rate of up to 25%. However, there is uncertainty as to the implementation details of STA Public Notice 7. If STA Public Notice 7 was determined by the tax authorities to be applicable to the abovementioned and other of our transactions involving PRC taxable assets, we might be required to spend valuable resources to comply with STA Public Notice 7 or to establish that the relevant transactions should not be taxed under STA Public Notice 7. If such transactions involving PRC taxable assets were subject to PRC enterprise income tax, our results of operations and financial condition could be adversely affected.
If additional remedial measures are imposed on the “big four” PRC-based accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging such firms’ failure to meet specific criteria set by the SEC with respect to requests for the production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.
Starting in 2011, the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S. listed
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companies operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese accounting firms access to their audit work papers and related documents. The firms were, however, advised and directed that under Chinese law they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC.
In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. In January 2014, the administrative law judge reached an initial decision to impose penalties on the firms including a temporary suspension of their right to practice before the SEC. The accounting firms filed a petition for review of the initial decision. On February 6, 2015, before a review by the commissioners of the SEC had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms. The audit committee is aware of the policy restriction and communicated with our independent auditor to ensure compliance.
In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our ADSs may be adversely affected.
If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our consolidated financial statements, our consolidated financial statements could be determined not to be in compliance with the requirements of the Exchange Act.
The audit report included in this annual report is prepared by an auditor who ishas not been inspected by the Public Company Accounting Oversight Board and, as such, youour investors are deprived of the benefits of such inspection. In addition, the adoption of any rules, legislations or other efforts to increase U.S. regulatory access to audit information could cause uncertainty, and we could be delisted if we were unable to meet any PCAOB inspection requirement in time.
Our independent registered public accounting firm that issues the audit reportsreport included in this annual report, as an auditorauditors of companies that are traded publicly in the United StatesU.S. and a firm registered with the PCAOB, is required by the laws of the United StatesU.S. to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United StatesU.S. and professional standards. Because our auditors are located in China,the PRC, a jurisdiction where the PCAOB is currently unable to fully conduct inspections without the approval of the Chinese authorities, our auditors arehave not currentlybeen inspected by the PCAOB. Furthermore, the PRC Securities Law, which became effective in March 2020, has in principle prohibited organizations or individuals from providing documents and materials relating to securities business activities to overseas parties, such as the PCAOB, without the consent of the competent PRC securities regulators and relevant authorities. According to Article 177 of the PRC Securities Law, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our consolidated financial statements.
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On May 24, 2013, PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the CSRC and the Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in the United States and China. PCAOB continues to be in discussions with the CSRC and the Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. The joint statement reflects athe U.S. regulators’ heightened interest in an issue that has vexed U.S. regulators in recent years. However, it remains unclear what further actionsthis issue. In a statement issued on December 9, 2019, the SEC and PCAOB will take to addressreiterated concerns over the problem.
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Inspections of other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections in China prevents the PCAOB from regularly evaluating our auditors’ audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
The inability of the PCAOB to conduct inspections of auditorsthe audit firm work papers with respect to U.S.-listed companies that have operations in China, makesand emphasized the importance of audit quality in emerging markets, such as China. On April 21, 2020, the SEC and the PCAOB issued a new joint statement, reminding the investors that in investing in companies that are based in or have substantial operations in many emerging markets, including China, there is substantially greater risk that disclosures will be incomplete or misleading, and there is also a greater risk of fraud. In the event of investor harm, there is substantially less ability to bring and enforce SEC, DOJ and other U.S. regulatory actions, in comparison to U.S. domestic companies, and the joint statement reinforced past SEC and PCAOB statements on matters including the difficulty to inspect audit work papers in China and its potential harm to investors. On June 4, 2020, the U.S. President issued a memorandum ordering the President’s Working Group on Financial Markets, or the PWG, to submit a report to the President within 60 days of the memorandum that includes recommendations for actions that can be taken by the executive branch and by the SEC or PCAOB on Chinese companies listed on the U.S. stock exchanges and their audit firms, in an effort to protect investors in the U.S. On August 6, 2020, the PWG released a report recommending that the SEC take steps to implement the five recommendations outlined in the report. In particular, to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfill its statutory mandate, or NCJs, the PWG recommends enhanced listing standards on U.S. stock exchanges. This would require, as a condition to initial and continued exchange listing, PCAOB access to work papers of the principal audit firm for the audit of the listed company. Companies unable to satisfy this standard as a result of governmental restrictions on access to audit work papers and practices in NCJs may satisfy this standard by providing a co-audit from an audit firm with comparable resources and experience where the PCAOB determines it has sufficient access to audit work papers and practices to conduct an appropriate inspection of the co-audit firm. There is currently no legal process under which such a co-audit may be performed in China. The report permits the new listing standards to provide for a transition period until January 1, 2022 for listed companies, but would apply immediately to new listings once the necessary rulemakings and/or standard-setting are effective. The measures in the report are expected to be subject to the standard SEC rulemaking process before becoming effective. On August 10, 2020, the SEC announced that SEC Chairman had directed the SEC staff to prepare proposals in response to the report, and that the SEC was soliciting public comments and information with respect to these proposals. If we fail to meet the new listing standards before the deadline specified thereunder due to factors beyond our control, we could face possible delisting from the NYSE, deregistration from the SEC and/or other risks, which may materially and adversely affect, or effectively terminate, our ADS trading in the United States.
In recent years, U.S. regulators have continued to express their concerns about challenges in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. More recently, as part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China’s, in December 2021, the United States enacted the Holding Foreign Companies Accountable Act, or the HFCA Act, which includes requirements for the SEC to identify issuers whose audit reports are prepared by auditors that the PCAOB is unable to inspect or investigate because of restrictions imposed by non-U.S. authorities in the auditor’s local jurisdiction. The HFCA Act also requires public companies on this SEC list to certify that they are not owned or controlled by a foreign government and make certain additional disclosures on foreign ownership and control of such issuers in their SEC filings. On March 24, 2021, the SEC announced that it had adopted interim final amendments to implement the foregoing certification and disclosure requirements under the HFCA Act. On December 2, 2021, the SEC announced that it had adopted final amendments to its rules implementing the HFCA Act, thereby finalizing the interim final rules that it had adopted in March 2021, with two modifications to clarify application of the requirements to variable interest entities, and to require tagging of information such as auditor name and location. On May 13, 2021, the PCAOB issued proposed PCAOB Rule 6100, Board Determinations Under the Holding Foreign Companies Accountable Act, for public comment. The proposed rule provides a framework for making determinations as to whether PCAOB is unable to inspect an audit firm in a foreign jurisdiction, including the timing, factors, bases,
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publication and revocation or modification of such determinations, and such determinations will be made on a jurisdiction-wide basis in a consistent manner applicable to all firms headquartered in the jurisdiction. On September 22, 2021, the PCAOB adopted PCAOB Rule 6100 as final, and on November 5, 2021, the SEC announced that it had approved PCAOB Rule 6100, giving it immediate effect. Accordingly, our securities may be prohibited from trading on the NYSE or other U.S. stock exchanges if our auditor is not inspected by the PCAOB for three consecutive years, and this ultimately could result in our ADSs being delisted. On December 16, 2021, pursuant to the HFCA Act the PCAOB issued its report notifying the SEC of its determination that it is unable to inspect or investigate completely accounting firms headquartered in China or Hong Kong, including our independent registered public accounting firm, Ernst & Young Hua Ming LLP. On March 10, 2022, the SEC identified five “commission-identified issuers” that are not in compliance with the accounting-related procedures of the HFCA Act and could be subject to potential delisting from U.S. exchanges over time. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which if enacted into law would amend the HFCA Act and require the SEC to prohibit an issuer’s securities from trading on U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive “non-inspection” years instead of three, and thus, would reduce the time before our ADSs may be prohibited from trading or delisted from the Nasdaq Global Market. As of the date of this annual report, our company has not been identified by the SEC as having a “non-inspection” year. However, there can be no assurance that we will not be identified as such by the SEC in the future. There also can be no assurance that, once we have a “non-inspection” year, we or our auditor will be able to take remedial measures in a timely manner, and as a result, there can be no assurance that we will always be able to maintain the listing of our ADSs on a national stock exchange in the U.S., such as the NYSE or the Nasdaq Stock Market, or that you will always be allowed to trade our shares or ADSs. While we understand that there has been dialogue among the CSRC, the SEC and the PCAOB regarding the inspection of PCAOB-registered accounting firms in China, there can be no assurance that our auditor or us will be able to comply with requirements imposed by U.S. regulators. The market prices of our ADSs and/or other securities could be adversely affected as a result of anticipated negative impacts of the HFCA Act upon, as well as negative investor sentiment towards, China-based companies listed in the United States, regardless of our actual operating performance.
Risks Related to Our Business
Our results of operations are subject to conditions typically affecting the hospitality industry.
Our results of operations are subject to conditions typically affecting the hospitality industry, including the following:
● | changes in national, regional or local economic conditions; |
● | natural disasters or travelers’ fears of exposure to serious contagious diseases; |
● | changes in travel patterns; |
● | changes in governmental regulations that influence or determine wages, prices or construction costs; |
● | local market conditions such as an oversupply of, or a reduction in demand for, hotel rooms; |
● | our ability to secure desirable locations for our hotels; |
● | the attractiveness of our hotels to potential guests and competition from other hotels; |
● | changes in occupancy and room rates; |
● | increases in operating costs and expenses due to inflation and other factors; |
● | our ability to develop and maintain positive relations with current and potential franchisees; and |
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● | the performance of managerial and other employees of our hotels. |
Changes in any of these conditions could adversely affect our occupancy rates, average daily rates and RevPAR or otherwise adversely affect our business, results of operations and financial condition.
We are subject to various operational risks inherent in the franchised-and-managed business model.
Our success could be adversely affected by the performance of our franchised-and-managed hotels. As of December 31, 2021, we franchised-and-managed approximately 98.6% of our hotels, and we derived 76.1%, 72.9% and 64.2% of our revenues from those hotels in 2019, 2020 and 2021, respectively, which include revenues from membership fees of franchised-and-managed hotels. We plan to increase the number of franchised-and-managed hotels in operation to increase our national presence in China. Our franchisees may not be able to develop or construct hotel properties on a timely basis, which could adversely affect our growth strategy and may impact our ability to collect fees from them on a timely basis. If COVID-19 continues to have a long-lasting impact on China’s economy, our franchisees may lose confidence in the hospitality industry, they may invest in, develop or construct fewer hotel properties than we expect, and they may decide not to invest in, develop or construct any additional hotel properties. See “— Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes.” If our franchisees reduce their investments in the hospitality industry, develop or construct fewer hotel properties, or abandon such development or construction altogether, our business, results of operations and financial condition may be materially and adversely affected.
We oversee and manage the operations of our franchised-and-managed hotels pursuant to various franchise agreements. However, we are not able to control the actions of our franchisees. Under those franchise agreements, our franchisees are typically responsible for developing hotel properties on a timely basis, bearing the costs and expenses of developing and operating the hotels, including costs of constructing, decorating or renovating the hotels to our standards and recruiting and employing hotel staff. However, if our franchisees have difficulties in accessing capital or are reluctant to make investments for the construction, decoration, management or renovation of the hotels, we may not be able to force them to secure the required capital and the quality of our franchised-and-managed hotels’ operations may be thereby diminished.
We normally require our franchisees to secure relevant governmental approvals and permits for operating the hotels in our standard franchise agreements and require that our franchisees provide us with some basic approvals and permits, including business licenses, special industry licenses and fire prevention safety inspection certificates. However, some of our franchisees may not be able to obtain such approvals or permits in a timely manner, or at all. See “— Failure to comply with government regulations relating to the franchise, hospitality industry, construction, fire prevention, food hygiene, safety and environmental protection could materially and adversely affect our business and results of operations.”
As many factors affecting the operations of those hotels are beyond our control, we cannot assure you that the quality of the services in our franchised-and-managed hotels are consistent with our standards and requirements. Although we send for routine inspection purposes regional managers and members of our quality control team to franchised-and-managed hotels on a regular basis, we may not be able to identify problems in their operations and make responses on a timely basis. As a result, our image and reputation may suffer, which may have a material adverse effect on our business and results of operations.
In addition to quality standards, safety incidents such as fire accidents may occur at our franchised-and-managed hotels despite our supervision or entrusted management. Any such occurrence may result in substantial reputational harm to us and our brands. In addition, if such safety incidents occur at any of the franchised-and-managed hotels that do not possess the relevant licenses, permits or inspection certificates, there could be substantial negative publicity, thereby triggering large-scale government actions that could impact our entire hotel network, which in turn will have a material adverse impact on our business, results of operations and financial condition.
Although our proprietary information system can collect operational and financial data of each hotel, we may not be able to avoid fraud or manipulation of such data by some franchisees, which may adversely affect the ability to
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effectively respond to potential issues. In addition, many of our franchisees do not own the hotel land or the property but typically lease the property from landlords who are either a property owner or a sub-lessor. We cannot assure you that all landlords who lease the hotel property to our franchisees have good and marketable title, or have unencumbered rights to lease or sub-lease the property to our franchisees. If any third party such as the ultimate property owners or relevant governmental authorities successfully challenge the lease of our franchisees, or if our franchisees fail to renew the leases when they expire, or if the landlords early terminate the lease, or if the properties or lands owned or leased by our franchisees are demolished, acquired or otherwise reclaimed by the government, our franchisees may have to close their hotels and thus terminate the franchise agreements and as a result, our business and results of operations may be adversely affected. Moreover, the term of the leases for some of the property of our franchisees is shorter than the typical term of our franchise agreements. We cannot assure you that upon expiration, these franchisees will be able to renew their leases in order to perform their franchise agreements with us.
We may not be able to renew our existing franchise agreements or renegotiate new franchise agreements when they expire.
We franchise hotels to third parties pursuant to franchise agreements. These franchise agreements may be renegotiated or may expire. We completed acquisitions of Argyle Hotel Management (Beijing) Co., Ltd. (“Argyle” or “Argyle Hotel Group”), and Shandong Xinghui Urban Hotel Management Group Co., Ltd. (“Urban” or “Urban Hotel Group”), respectively in April 2019 and November 2019. The versions of franchise agreements we have used during recent years, including those for Argyle, typically have an initial term of 10 to 20 years except for the franchise agreements with our Shell franchisees and Urban franchisees. We plan to renew our existing franchise agreements upon expiration or renegotiate with our franchisees for new franchise agreements. However, we may be unable to retain our franchisees on satisfactory terms, or at all. If a significant number of our existing franchise agreements expire and new franchisees do not cover those expired franchises, our revenue and profit may decrease in the future, and our results of operations could be materially and adversely affected.
As the hospitality industry in China is highly competitive, the terms of our franchise agreements are influenced by contract terms offered by our competitors. We cannot assure you that the terms of franchise agreements for new franchised-and-managed hotels entered into or renewed in the future will be as favorable as the terms under our existing franchise agreements. If such agreements cannot be renewed on satisfactory terms upon expiration, our results of operations could be materially and adversely affected.
Failure to comply with government regulations relating to the leased-and-operated and franchised-and-managed business models, hospitality industry, construction, fire prevention, food hygiene, safety and environmental protection could materially and adversely affect our business and results of operations.
Our business is subject to various compliance and operational requirements under PRC laws and regulations, which include public safety, construction, fire prevention, public area hygiene, health and sanitation and environmental protection, as well as requirements related to construction or decoration of hotel premises. The failure of any of our hotels to comply with applicable laws and regulations may incur substantial fines and penalties from the relevant PRC government authorities. Each hotel in our network must hold a basic business license and a special industry license issued by local government authorities and must conduct its hotel operations within the business scope of its business license. These hotels must also obtain various other licenses and permits. For example, if our hotels provide catering service, they are required to obtain a food operation permit. In addition, any project construction undertaken by our hotels may be subject to governmental approvals or filings requirements, and our failure to comply with the aforementioned requirements may subject us to fines or the suspension or even the cessation of operations, which could materially and adversely affect our business, financial condition and results of operations. In any event, we may not be able to obtain all permits, licenses, certificates and other approvals required by government regulations, which could negatively impact our business and significantly harm our reputation.
As of December 31, 2021, we operate 66 leased-and-operated hotels, among which, two hotels are from Argyle and nine from Urban Hotel Group, including three hotels situated on properties owned by us. Out of our 66 leased-and-operated hotels, 15 have not obtained fire prevention safety inspection certificates, one is in the process of applying for fire prevention safety inspection certificates, 11 have not obtained public area hygiene permits, 14 have not obtained
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special industry permits, eight which engage in catering business have not obtained the food operation permits, and two are in the process of applying for food operation permits. Five of our leased and operated hotels share and operate on the same premises as our other leased and operated hotels; these five leased and operated hotels have not obtained, and are unlikely to be able obtain, their own licenses. Given the significant discretion local government authorities have in the examination of our application as well as other factors beyond our control in certain areas, we may be unable to obtain our food operation permits at all.
In addition, we have only been provided with and reviewed the relevant governmental approvals and permits for the operation of 3,862 out of our 4,593 franchised-and-managed hotels in total, including Argyle and Urban, in operation as of December 31, 2021, and have found that:
● | approximately 0.36% of these hotels did not provide us with the business license; |
● | approximately 7.17% of these hotels did not provide us with the special industry license; |
● | approximately 7.85% of these hotels did not provide us with the fire prevention safety inspection certificate; and |
● | approximately 12.53% of these hotels did not provide us with the public hygiene license. |
For our leased-and-operated hotels that have not obtained the necessary licenses, and to the extent that the franchisees who did not provide us with the licenses had not obtained the licenses prior to the commencement of their operations, the legal consequences will be as follows:
● | Business license: (i) orders by the registration authority to take corrective action, with the illegal income confiscated; (ii) if market entity refuses to take corrective action, it shall be fined not less than RMB10,000 nor more than RMB100,000, or (iii) if the circumstances are serious, be ordered to suspend or cease continuing operations, and be fined not less than RMB100,000 nor more than RMB 500,000.; |
● | Special industry license: warnings or fines of up to RMB1,000 and even up to a 15-days detention. In addition, pursuant to various local regulations, hotels failing to obtain the special industry license may be subject to warnings, orders to suspend or cease continuing business operations, confiscations of illegal gains or fines (for instance, the fines could reach RMB200,000 in Jiangsu if the circumstances are serious); |
● | Fire prevention safety inspection certificate: (i) suspension of construction of projects, and/or use or operation of the business; and (ii) fines between RMB30,000 and RMB300,000; |
● | Public hygiene license: a range of administrative penalties depending on the seriousness of a hotel’s activities: (i) warnings; (ii) fines between RMB500 and RMB30,000; or (iii) suspension of operations for rectification, or revocation of public hygiene license; and |
● | Food operation permit: (i) confiscation of illegal gains, food illegally produced for sale and tools, facilities and raw materials used for illegal production; or (ii) fines between RMB50,000 and RMB100,000 if the value of food illegally produced is less than RMB10,000 or fines of 10 to 20 times of the value of food if such value is equal to or greater than RMB10,000. |
If any franchisee is subject to the foregoing legal consequences, whether fines or orders to suspend or even cease operations, due to its failure to obtain necessary licenses and permits or to comply with other requirements, our image and reputation may suffer, and such franchisee may defer making or refuse to make payments in breach of its franchise agreement with us. As we hold equity interests in certain of our franchisees, any regulatory non-compliance by such franchisees may also decrease the value of our investments. In either case, our business and results of operations may be adversely affected. Furthermore, as to certain hotels that are being converted from the leased-and-operated model to the franchised-and-managed model, if any franchisee refuses to return and uses any of our hotels’ permits in breach of their
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supplementary agreements with us, our company as the registered permit holder could be held liable for any regulatory non-compliance by our franchisees. See “— Our hotels being converted into franchised-and-managed hotels may not be able to obtain their own operational licenses or fail to pay us the rent materially and adversely affect our business and results of operations.”
In respect of our franchising business, we are subject to a comprehensive disclosure requirement when recruiting and managing our franchisees. In the past, we have not received penalties in relation to such requirements. However, our communication with our franchisees could be found in violation of these requirements in the future. In the past, we have not received penalties in relation to such requirements.
We may terminate franchise agreements earlier under certain circumstances, and we may have disputes with our franchisees which may materially and adversely affect our business and result of operations.
Our franchisees may terminate our franchise agreements in the event that, among others, the franchised-and-managed hotels’ performance is worse than they expect. Although they are not permitted to do so by our franchise agreements, the franchisees may still attempt to unilaterally terminate their franchise agreements. In such instances, we may have disputes with them, and it will be difficult for us to force them to continue the performance of our franchise agreements until they expire. If the franchise agreements are eventually terminated either based on a settlement between us and the franchisees or with a judgment or arbitral award which requires the franchisees to compensate us for our losses and costs, such compensation may not cover our losses which we have suffered as a result of the early termination, and we may no longer receive the franchise fees and related management fees from the termination. Furthermore, if our franchisees breach or terminate their franchise agreements with us before the hotel commences operation, we might not be able to grow our hotel network as planned.
Due to our rapid expansion in recent years, we have added a large number of new franchised-and-managed hotels into our hotel network, some of which may not be able to provide consistent and high-quality service to meet our standards. To avoid potential damage to our brand name and to ensure the quality of services provided to our guests, we may terminate our franchise agreements with such franchisees. In addition, if any of our franchisees defaults or commits wrongdoing and fails to cure defaults or wrongdoings, we may also need to terminate our franchise agreements. Although our franchise agreements typically allow us to terminate the agreements under many circumstances, our franchisees may dispute our termination or our claim and in such cases we have to submit such disputes for the settlement by courts or arbitration. For example, as of December 31, 2021 we had 43 pending legal proceedings with the franchised-and-managed hotels. Also, we have in the past closed and may close in the future certain franchised-and-managed hotels as a result of disputes with the franchisees for their failure to comply with our requirements on, among other things, the punctual payment of our franchise fees or management fees, the decoration or operation standard, use of our brand, maintenance of the hotel condition and appearance, the avoidance of competition between the franchisees, including keeping appropriate distances between the franchised-and-managed hotels. For example, for the year ended December 31, 2021, we terminated 400 franchised-and-managed hotels that did not comply with our brand and operating standards, respectively. If a significant number of our existing franchise agreements are terminated early, our revenue and profit may decrease in the future.
In case of a dispute with our franchisees, even if such disputes can be resolved in favor of us, the disputes could divert our management attention, affect our brand image, and incur cost for us. There could also be situations where the franchisee is not in a position to sufficiently compensate us for losses which we have suffered as a result of their defaults or wrongdoings. If we eventually terminate any franchisees, we will lose such franchisees and can no longer collect franchise fees and management fees from them. If new franchisees do not cover those terminated franchises, our results of operations and financial conditions could be materially and adversely affected.
Our hotels being converted into franchised-and-managed hotels may not be able to obtain their own operational licenses or fail to pay us the rent materially and adversely affect our business and results of operations.
During the past few years, we have sought to convert some hotels from the leased-and-operated model over to the franchised-and-managed model through selling relevant business assets and handed over the management of such hotels, in most of the cases pursuant to an asset, business and personnel transfer agreement, or Transfer Agreements, to certain
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individuals or entities that have subsequently entered into franchise agreements with us and have therefore become our new franchisees. According to the Transfer Agreements, such new franchisees shall take over and operate such hotels on their own account and shall take the risks and enjoy the benefit of operating such hotels from the completion of the transfer contemplated by such agreements. However, the Transfer Agreements typically allow our franchisees under such arrangements to continue to use the hotel’s permits that were previously obtained by us and remain in the name of our company for a transitional period. As of December 31, 2021, 11 of the abovementioned new franchisees were still using our relevant hotels’ permits. All of these franchisees have executed a supplementary agreement which requires them to stop using and return to us our hotels’ permits upon execution of the supplementary agreements. Such supplementary agreements also require the franchisees to indemnify us against all losses, costs or liabilities incurred by us for their defaults under such agreements. However, if any franchisees refuse to return and continue to use any of our hotels’ permits, our company could be held liable as the registered permit holder for any regulatory non-compliance on the part of our franchisees. As a result, any breach by our franchisees of relevant regulations could cause us to incur relevant legal liability under PRC law, which may materially affect our brand image and our results of operations. In addition, in such instances, because the relevant leases have not been transferred to our new franchisees, we continue to be the tenants of the relevant hotel premises and we remain liable to pay the rent to our landlords, and may not thereafter be fully compensated by the new franchisees. As a result, our result of operations and financial conditions may be materially and adversely affected by the default of such franchisees. Furthermore, such arrangement between us and the new franchisees could be deemed as a sublease, and our landlords may claim that our subleasing arrangement without our landlords’ consent constitutes a default. In such cases, we may be required by our landlords to terminate sublease arrangements and compensate their losses, if any, which may further increase our costs and risks. Moreover, we may not be able to enforce our rights against the franchisees under the supplementary agreements, which would hinder our ability to prevent the franchisees from using our hotel permits and negatively impact our business and our reputation.
Our leased-and-operated hotels are subject to a number of operational risks.
For hotels under the leased-and-operated model, a significant portion of operating costs, including rent, is fixed. Accordingly, a decrease in revenues could result in a disproportionately larger decrease in earnings because the operating costs and expenses are unlikely to decrease proportionately. For example, the period during both the New Year and Chinese Spring Festival holidays generally accounts for a smaller portion of our annual revenues than the other periods, but the expenses do not vary in proportion to changes in occupancy rates and revenues. Major construction work near our hotel may also have a negative impact on the occupancy rate. We need to continue to pay rent and salaries, make regular repairs, perform maintenance and renovations and invest in other capital improvements for our leased-and-operated hotels throughout the year to maintain their attractiveness. Therefore, our leased-and-operated hotels’ costs and expenses may remain constant or increase even if their revenues decline. The operation of each leased-and-operated hotel goes through the stages of development, ramp-up and mature operation. Our involvement in the development of such properties presents a number of risks, including construction delays or cost overruns, which may result in increased project costs or forgone revenue. During the development stage, significant pre-opening expenses will be incurred, and at the ramp-up stage, which is usually six months, when the occupancy rate increases gradually, revenues generated by these hotels may be insufficient to cover their operating costs, which are relatively fixed in nature. As a result, most newly opened leased-and-operated hotels may not achieve profitability until they reach mature operations. We also may be unable to recover development costs we incur for projects that are not completed. Any expansion of our leased-and-operated hotel portfolio would incur significant pre-opening expenses during the development stage and relatively low revenues during the ramp-up stage of such newly opened leased-and-operated hotels, of which expenses may have a significant negative impact on our results of operations. Properties that we develop could become less attractive due to market saturation, oversupply or changes in market demand, with the result that we may not be able to recover development costs as we expect, or at all.
We also may acquire or develop owned-and-operated hotels on a limited, case-by-case basis to seize unusually attractive business opportunities. Any such owned-and-operated hotels will be subject to risks similar to those of our leased-and-operated hotels. Such owned-and-operated hotels will also be subject to depreciation in the value paid by us for the underlying hotel property, which usually is influenced by macroeconomic and local political and economic factors.
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In certain circumstances, we have needed to liquidate certain of our PRC subsidiaries and branches which previously operated leased-and-operated hotels, upon the completion of conversion or closure of hotels. In liquidating such subsidiaries and branches, we need to complete various deregistration procedures, which may be time-consuming and therefore we cannot assure you that such subsidiaries and branches can be deregistered in a timely manner. In the future, we may need to liquidate more subsidiaries and branches which have ceased to operate leased-and-operated hotels.
The legal rights of our franchisees and us to use certain leased properties could be challenged by property owners or other third parties, which could prevent our franchisees or us from operating the affected hotels or increase the costs associated with operating these hotels.
For most of our franchised-and-managed hotels and all but three of our leased-and-operated hotels, we and our franchisees do not hold property ownership with respect to the premises under which those hotels are operated. Instead, we and our franchisees rely on leases or contracted management arrangements with third parties who either own the properties or lease the properties from the ultimate property owner. As of December 31, 2020, 22 of the ultimate owners of the properties of our leased-and-operated hotels failed to provide us with the relevant title certificates. As to these 22 ultimate owners, if they have not obtained and provided such title certificates because the relevant properties were constructed by such ultimate owners without having obtained or in violation of a construction project planning permit, our of such properties may be challenged or even invalidated by a government authority or relevant dispute resolution institution. Meanwhile, the property title certificates for the premises on which approximately half of our leased-and-managed hotels are located have a different designated use from the actual usage of those properties, and our lease of such properties may be challenged by relevant government authorities and subject us to cessation of operations or fines in an amount of up to RMB30,000 for each property or approximately RMB480,000 in aggregate. If the property owners’ title and the legal rights of our franchisees and us to the leases of such properties are successfully challenged by a government authority or dispute resolution institution as mentioned above, the development or operations of our hotels on such properties could be adversely affected.
In addition, we and our franchisees are subject to the risks of potential disputes with property owners or our immediate lessors and to forced closure of hotels by the government. Such disputes and forced closures, whether resolved in the favor of our franchisees and us, may divert management attention of our franchisees and us, harm our reputation or otherwise disrupt and adversely affect our business.
Where immediate lessors are not the ultimate owners of hotel properties operated by our franchisees and us, in some instances, no consent was obtained from the owners to sublease the hotel properties to our franchisees or us. A property owner’s failure to duly obtain the title to the property or a sub-lessor’s failure to receive any necessary approvals from the ultimate owner or the primary leaseholder, as applicable, could potentially invalidate the underlying lease or result in the renegotiation of such lease which may lead to less favorable terms. Some of the properties we or our franchisees lease from third parties were subject to mortgages at the time the leases were signed. In such circumstances and where consent to the lease was not obtained from the mortgage holder, the lease may not be binding on the transferee of the property if the mortgage holders foreclose on the mortgage and transfer the property, which could in turn materially and adversely affect the ability of our franchisees and us to operate the hotel facility located on such property. In the past, although our operations have not been disrupted simply due to the lack of title certificates or consent from the owners, such events could occur in the future.
We also sublease the property parts we do not use to third parties and in some instances where we have closed or converted our leased-and-operated hotels, we may also need to sublease the whole properties we leased for such hotels to third parties to save costs if our landlords do not agree to early terminate our lease. In some instances, no written consent was obtained from our landlords to sublease such property parts or the whole property to third parties. Our failure to receive any necessary approvals from our landlords could potentially invalidate the underlying lease or result in our default under such subleases, which may in turn affect our business. In addition, if our sub-lessees are not able to pay us rent in a timely manner or at all, we are obligated to pay the rent to our landlords on our own account. If we fail to pay such rent, we may be required by our landlords to terminate the sublease arrangements and compensate their losses, if any, which may adversely affect our result of operations and our financial condition.
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If we are unable to compete successfully, our business, financial condition and results of operations may be harmed.
The hospitality industry in China is highly competitive. Competition in the industry is primarily based on convenience of location, geographic coverage, service quality, room rates, quality of accommodation, brand name recognition, range of services and guest amenities. We compete primarily with branded and standalone hotels as well as regional and local mid-scale hotels. We also compete with four- and five- star hotels, as we offer rooms with standards comparable to many of those hotels while maintaining competitive pricing. Furthermore, we compete with other hotels for guests in each market segment in which we operate, as our typical business and leisure traveler guests may change their travel, spending and consumption patterns and choose to stay in hotels in different markets. New and existing competitors may offer competitive rates, greater convenience, services or amenities or superior facilities, which could attract guests away from our hotels, resulting in a decrease in occupancy and average daily rates for our hotels. In addition, competition among franchised hotels is intense in attracting potential franchisees and retaining existing franchisees. We believe that hotel operators choose hospitality franchisors based on primarily the value and quality of a franchisor’s brand, reputation and service and the extent to which affiliation with that franchisor may increase the franchisee’s hotel occupancy rates and profitability. Any of these factors may have an adverse effect on our competitive position, results of operations and financial condition.
We may not be able to successfully attract new franchisees and compete for franchise agreements and, as a result, we may not be able to achieve our planned growth.
Our growth strategy includes expanding through franchised-and-managed hotels by entering into franchise agreements with our franchisees. We believe that our ability to attract new franchisees and compete for franchise agreements with them depends primarily on our brand recognition and reputation, the results of our overall operations in general and the success of our current franchised-and-managed hotels. Other competitive factors for franchise agreements include marketing support, membership program, efficiency of our central reservation system, our ability to provide systems and support to assist franchisees to operate their hotels cost-effectively. The terms of any new franchise agreements that we obtain also depend on the terms that our competitors offer for those agreements. In addition, if the availability of suitable locations for new properties decreases, or governmental planning or other local regulations change, the supply of suitable properties for additional franchised-and-managed hotels could diminish. If the performance of our franchised-and-managed hotels is less successful than that of our competitors’ hotels or if we are unable to offer terms as favorable as those offered by our competitors, we may not be able to compete effectively for new franchise agreements and we may not be able to attract as many new franchisees as we expect. As a result, we may not be able to achieve our planned growth and our business and results of operations may be materially and adversely affected.
The leases of our franchisees and us could be terminated early, we and our franchisees may not be able to renew the existing leases on commercially reasonable terms and the rents paid by us or our franchisees could increase substantially, which could materially and adversely affect our operations.
The terms of leases for our franchised-and-managed hotels and leased-and-operated hotels typically provide, among other things, that the lease could be terminated under certain legal or factual conditions. If any such lease were terminated early, operations of the related hotel property may be interrupted or discontinued and costs may be incurred by us or our franchisees to relocate to another location. Furthermore, we may be liable to our lessors, guests, franchisees and other vendors and may be required to pay losses and damages due to our default under relevant contracts. As a result, our business, results of operations and financial condition could be materially and adversely affected.
Although we intend to coordinate with our franchisees to renew existing leases of our franchised-and-managed hotels, and to renew existing leases of certain of our leased-and-operated hotels, there can be no assurance that we and our franchisees will be able to renew such leases and maintain current hotel operations on satisfactory terms, or at all. In particular, we and our franchisees may experience increased rent payments and increased operating cost in connection with renegotiating leases. If we and our franchisees fail to maintain current hotel operations on satisfactory terms upon expiration of the leases, the respective operating costs of our company and our franchisees may increase, the ability of our franchisees to pay their franchise fees may decline, and overall profits generated from hotel operations may decrease. If we and our franchisees are unable to pass on increased costs to our guests through room rate increases, the operating
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margins and earnings of our company and our franchisees could decrease and our results of operations could be materially and adversely affected.
We may terminate our leases early for certain reasons and any failure by us to terminate a lease for cause may subject us to payment of liquidated damages.
Our leases typically allow us to terminate the lease early under limited circumstances, and in some instances, our leases contain a term which requires us to pay the contingent rent for our wrongful early termination of such agreements. In the past, we have early terminated some leases of hotel properties and closed our leased-and-operated hotels underlying such leased properties, and disputes arose between us and our landlords whereby we were demanded to pay the contingent rents and liquidated damages. If such disputes occur in the future, and are resolved in favor of our landlords, we may need to pay losses and damages to the landlords and as a result, our business, results of operations and financial condition could be materially and adversely affected.
Our growth depends on our ability to increase revenues generated by our existing hotels.
While sales growth will depend in part on our plans for new hotel openings, deeper penetration into existing and new geographic markets and increased sales at our existing hotels will also affect our sales growth and will continue to be critical factors affecting our revenue and profit. Our ability to increase the revenues generated by our hotels depends in part on our ability to successfully implement our growth strategy and related initiatives. Our ability to penetrate further into the existing geographic markets where we already have a presence depends in part on our ability to successfully market ourselves and to maintain and increase sales to our existing members, including individual members and corporate members and attract more members to our membership program. We may not be able to achieve our targeted sales growth at our existing hotels, and sales at existing hotels could decrease. In addition, we may not be able to achieve our targeted level of expansion within existing and new geographic markets. The occurrence of any of such events may have a material adverse effect on our business, financial condition and results of operations.
Our growth depends on our ability to grow the number of hotels in operation.
Our growth depends on our ability to open and profitably operate new hotels under both franchised-and-managed model and leased-and-operated model. In 2019, 2020 and 2021, we opened 605, 528 and 693 new franchised-and-managed hotels. In each of 2019, 2020 and 2021, we opened two, ten and 29 new leased-and-operated hotels, respectively. We plan to increase the number of our hotels in the future. We may not be successful in identifying and leasing or franchising additional hotel properties at desirable locations and on commercially reasonable terms or at all. In more developed cities, it may be difficult to increase the number of hotels because we or our competitors may already have operations in such cities. In less developed cities, demand for our hotels may not increase as rapidly as we expect. We also may incur substantial costs in connection with evaluating hotel properties and negotiating with property owners, including ones that we are subsequently unable to lease or franchise.
The growth in the number of hotels is subject to numerous risks, many of which are beyond our control. Among other risks, the following factors affect our ability to open and operate additional hotels profitably and achieve growth in the number of our hotels:
● | the availability and cost of suitable hotel locations; |
● | the availability and cost of capital to fund construction or conversion; |
● | cost-effective and timely construction of hotels (which construction can be delayed due to, among other reasons, labor and materials availability, labor disputes, local zoning and licensing matters, and weather conditions); |
● | the ability of our company and our franchisees to secure required governmental permits; |
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● | the availability of qualified hotel management staff and other personnel; |
● | our ability to enhance our reservation, operational and service delivery systems to support additional franchisees in a timely and cost-effective manner; |
● | our ability to effectively and efficiently implement our development plan; |
● | our ability to introduce our brands into new markets, any failure of which may adversely impact potential property owners’ or franchisees’ acceptance of and confidence in us; and |
● | our ability to attract new qualified franchisees and to retain existing franchisees. |
We may not be able to manage our expected growth, which could adversely affect our results of operations.
We have experienced substantial growth since our inception. We have increased the number of our total hotels in operation in China from eight as of December 31, 2005 to 4,593 as of December 31, 2021, and we intend to focus on developing additional franchised-and-managed hotels in different geographic locations in China and internationally, as well as growing through mergers, acquisitions and strategic alliances. This expansion has placed, and will continue to place, substantial demands on our managerial, operational, technological, financial and other resources. There can be no assurance that we will be able to effectively manage our growth. If our growth initiatives fail, and if we fail to integrate new alliances, merged entities or acquired targets into our network, our businesses and prospects may be materially and adversely affected.
Our planned expansion will also require us to maintain the consistency of our brands and the quality of our services to ensure that our brands do not suffer as a result of any deviations, whether actual or perceived. In order to manage and support our growth, we must improve our existing operational, administrative and technological systems and our financial and management controls, and recruit, train and retain qualified hotel managerial personnel as well as other administrative and sales and marketing personnel, particularly as we expand into new markets.
We cannot assure you that we will be able to effectively and efficiently manage the growth of our operations, recruit and retain qualified personnel and integrate new franchised-and-managed hotels into our operations, whether they are organically developed or strategically acquired. Any failure to effectively and efficiently manage our expansion may materially and adversely affect our ability to capitalize on new business opportunities, which in turn may have a material adverse effect on our business, financial condition and results of operations.
Acquisitions, financial investment or strategic investment may have an adverse effect on our ability to manage our business and harm our results of operations and financial condition.
If we are presented with appropriate opportunities, we may acquire or invest in businesses or assets. For example, in 2018, we acquired: (i) an additional 1% of the equity interest in Yancheng Zexin Hotel Management Co., Ltd., or Zexin, and our equity interest in Zexin increased to 51%; (ii) a 70% of the equity interests in Foshan Baiqinghui Hotel Co., Ltd.; (iii) all of the business assets and a 70% interest in Donghe Zhenxing Hotel, in the Xuzhou Economic and Technological Development Zone; and (iv) all of the business assets and equity interests in Deep Sleep Hotel, in the Xuzhou Economic and Technological Development Zone. In 2019, we acquired: (i) a 60% equity interest in Argyle, (ii) a 70% equity interest in Urban, and (iii) several properties for strategic development purpose. In 2020, we acquired all the hotel assets from a hotel management company located in Guangxi, and thereafter opened one leased-and-operated hotel under “GreenTree Eastern” brand. In 2021, we have acquires some hotels in some cities where we had limited numer of leased and operated hotels or we did not have any leased and operated hotels.
The existing and future acquisitions or investments may expose us to potential risks, including risks associated with unforeseen or hidden liabilities, risks that acquired or invested companies will not achieve anticipated performance levels, diversion of management attention and resources from our existing business, difficulty in integrating the acquired businesses with our existing operational infrastructure, and inability to generate sufficient revenues to offset the costs
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and expenses of acquisitions or investments. For example, the sellers of the 70% equity interest in Urban (“Urban Sellers”) had undertaken to us under the equity purchase agreement entered into between us and the Urban Sellers in April 2019 (“Urban Purchase Agreement”) that Urban will achieve a steady growth with respect to its revenue and profit during the agreed period. If Urban fails to achieve the agreed growing rate, we may have an option to claim certain amount of compensation against the Urban Sellers. If we are entitled to and also decide to exercise such option, once the compensation paid to us by the Urban Sellers reaches 50% of the purchase price we paid to the Urban Sellers, they will have the right to redeem the whole 70% equity interest in Urban from us, in which case, we would no longer be able to consolidate the financial results of Urban in our consolidated financial statements and the results of our operations may also be adversely affected. In addition, following completion of an acquisition or investment, our management and resources may be diverted from their core business activities due to the integration process, which diversion may harm the effective management of our business. Furthermore, it may not be possible to achieve the expected level of benefits after integration and the actual cost of delivering such benefits may exceed the anticipated cost. Any difficulties encountered in the acquisition or investment and integration process may have an adverse effect on our ability to manage our business and harm our results of operations and financial condition. If a financial or strategic investment is unsuccessful, then in addition to the diversion of management attention and resources from our existing business, we may lose the value of our investment, which could have a material adverse effect on our financial condition and results of operations.
Furthermore, we have made loans to third parties including our franchisees, and other entities with which we have a business relationship or strategic cooperation. Although our loans to such third parties are generally secured by collateral or a guarantee, some of these third parties may not repay us, we may not be able to recover the loaned amounts of principal and any interest due, and we may thereby incur losses which could have a material adverse effect on our financial condition and results of operations.
Our expansion into new markets may present increased risks.
We plan to open new hotels in markets in China as well as internationally where we have little or no operating experience. Those markets may have different regulatory requirements, competitive conditions, consumer preferences and discretionary spending patterns as compared to our existing markets. As a result, any new hotels we open in those markets may be less successful than hotels in our existing markets. Guests and franchisees in any new market may not be familiar with our brands and we may need more time to build brand awareness in that market through greater investments in advertising and promotional activities than we anticipated. We may find it more difficult in new markets to hire, motivate and keep qualified employees who share our vision, passion and culture. Hotels operated in new markets also may have lower average sales or higher operating costs than hotels in existing markets. Sales at hotels operated in new markets may take longer than expected to ramp up and reach expected sales and profit levels, and may never do so, thereby affecting our overall profitability.
Our financial condition and results of operations may be materially affected if our strategy to diversify our brand portfolio and mix of hospitality offerings is not successfully implemented.
We intend to diversify our brand portfolio and mix of hospitality offerings with existing brands, including GreenTree Eastern, Gem, Gya, Vx, Deep Sleep, Greentree Inns, GT Alliance, GreenTree Apartment, Vatica and Shell, as well as brands from Argyle and Urban, to cover market segments from economy to luxury markets. In April 2019, we acquired Argyle which focuses on mid-to-up-scale to luxury segments of the markets, most of which are four- and five- star hotels. In December 2019, we consolidated Urban which focuses on economy to mid-scale market segments. We may not possess sufficient knowledge or experience in expanding into the luxury market segment, hence we may face more competition in this new market segment or newly geographic markets where we operate.
In addition, the strategy to diversify our mix of hospitality offerings may increase the cash needs of our operations and may distract our management’s attention and energy. If such strategies are not successful, our business, financial condition and results of operations may be materially and adversely affected.
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If we fail to maintain our relationships with our members and corporate members, our business and growth prospects could be materially and adversely affected.
Historically, we have derived a portion of our revenues from our members and from our cooperation arrangements with certain corporate members such as banks, airlines and other large companies. In 2019, 2020 and 2021, we sold approximately 93% of our room nights through our direct sales channels. We expect that these members and corporate members will contribute to the growth of our business in the near future.
We cannot assure you that our members will remain loyal patrons of our hotels and that our corporate members will agree to renew the relevant cooperation agreements upon their expiration, or enter into new agreements with us on substantially similar terms. Our negotiating position with corporate members also is limited, given the competition in China’s hospitality industry. If we fail to enhance or maintain our relationships with our members, and the frequency of member stays at our hotels declines as a result, or if our corporate members decline to renew their cooperation agreements or propose new agreements with commercial terms less favorable to us, our business and growth prospects could be materially and adversely affected.
If our franchisees are unable to maintain our hotels’ condition and appearance, our hotel occupancy rates may decline.
In order to maintain the condition and appearance of hotels in our network, our hotels require ongoing renovations and other leasehold improvements, including periodic replacement of broken or used furniture, fixtures and equipment. Such investments and expenditures require ongoing funding and, to the extent our franchisees cannot fund these expenditures from existing cash or cash flow generated from operations, our franchisees must borrow or raise capital through financing. Our franchisees may not be able to access capital and our franchisees may be unwilling to spend available capital when necessary, even if required by the terms of our franchise agreements. If our franchisees continue to operate hotels while they are under refurbishment or improvement, there may be instances where refurbishment or improvements would seriously disrupt hotel operations and adversely affect the revenues of the relevant hotels. If our franchisees do not make needed leasehold investments and improvements, our hotels could become less attractive to our potential guests, we could lose market share to our competitors and our hotel occupancy rates may decline. Moreover, disruptions and other risks associated with renovation and improvements could have an adverse effect on our business, financial condition and results of operations.
If the value of our brand portfolio or image diminishes, it could have a material and adverse effect on our business and results of operations.
Our continued success in maintaining and enhancing our brand portfolio and image depends, to a large extent, on the ability of our franchisees and us to satisfy customer needs by maintaining consistently high-quality services across our hotel network, as well as their and our ability to respond to competitive pressures. If we and our franchisees are unable to do so, our occupancy rates may decline, which could in turn adversely affect our results of operations. Our business may also be adversely affected if our brands, public image or reputation were to be diminished by the operations of any of our hotels, whether due to our franchisees failing to operate hotels according to our requirements, unsatisfactory service, accidents or otherwise. Our brand portfolio is integral to our sales and marketing efforts. In addition, the trademark “GreenTree Inn” in the U.S. was registered by a company owned by Mr. Alex S. Xu, our chairman and chief executive officer and currently used by a chain of 18 hotels in the U.S. owned by a company majority owned by Mr. Alex S. Xu. We cannot exert control over any of these hotels in the United States. If these hotels experience any quality issues or are involved in any incidents, despite the fact that our current operations are primarily in China, our reputation can be negatively affected, and the value and image of our brands can diminish. If the value of our brand image is diminished or if our brands do not continue to be attractive to guests and franchisees, our business and results of operations may be materially and adversely affected.
Our results of operations may fluctuate significantly due to seasonality and other factors.
The hospitality industry is subject to fluctuations in revenues due to seasonality. The seasonality of our business may cause fluctuations in our quarterly operating results. Generally, the first quarter, in which both the New Year and
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Spring Festival holidays fall, accounts for a lower percentage of our annual revenues than other quarters of the year. Furthermore, our overall results of operations may fluctuate significantly from period to period because of several factors, including the timing of new hotel openings, revenue loss associated with the temporary closure of existing hotels for refurbishment, and any losses incurred by our franchisees or us due to hotel closures. As a result, our results of operations may fluctuate significantly from period to period and comparison of different periods, or even the same periods during different years, may not be meaningful. Our results for a given fiscal period are not necessarily indicative of results to be expected for any other fiscal period.
Substantial defaults or delays in payment by our franchisees and corporate customers or the deterioration of the financial condition of our franchisees or corporate members may have an adverse effect on our cash flows, working capital, financial condition and results of operations.
Our accounts receivable mainly consist of amounts due from our franchisees and corporate members whose employees are guests in our leased-and-operated hotels. Our corporate members may choose to settle with us directly, and we typically require our franchisees to pay various fees pursuant to their franchise agreements with us on a monthly or annual basis. Our franchisees and corporate members may delay their payments beyond the time periods set forth in our agreed credit arrangements. Furthermore, in order to accelerate our expansion, we used our surplus cash to finance the opening of new franchised-and-managed hotels by franchisees who have a proven track record with us. There can be no assurance that our franchisees will always repay us timely once we begin the financing plan. Our liquidity and cash flows from operations may be adversely affected if our accounts receivable cycles or collection periods lengthen or if we encounter a material increase in defaults of payment of our accounts receivable or repayment of the amounts we have lent to our franchisees.
Our operating results are affected by the ability of our franchisees to pay our franchise management fees. An extended period of hotel room vacancy or decrease in room rates, which may be the result of a variety of factors such as unfavorable economic conditions in China and globally, may adversely affect the operating results and financial condition of our franchisees. These negative operating conditions could result in the financial failure of our franchisees and result in the delayed payment of franchise management fees or other revenues derived from our franchised-and-managed hotels or the termination of their franchise agreements. As a result, our business, prospects and results of operations may be adversely affected.
Failure to retain our senior management could harm our business.
We place substantial reliance on the hospitality and other consumer-service industry experience and the institutional knowledge of members of our senior management team. Mr. Alex S. Xu, our founder, chairman and chief executive officer, is particularly important to our future success due to his substantial experience in the property development, hospitality and other consumer service industries. We do not carry key person insurance on any members of our senior management team. The loss of the services of one or more of these members of our senior management team due to their departure or otherwise could hinder our ability to effectively manage our business and implement our growth strategies. Finding suitable replacements for Mr. Xu or other members of our senior management team could be difficult, and competition for such personnel of similar experience is intense. If we lose their services, our business may be adversely affected.
If we or our franchisees are not able to hire, train and retain qualified managerial and other employees, our brand and our business may be materially and adversely affected.
Our managerial and other employees manage our hotels and interact with our guests on a daily basis. They are critical to maintaining the quality and consistency of our services as well as our established brand and reputation. It is important for our franchisees and us to attract qualified managerial and other employees who have experience in hospitality or other consumer-service industries and are committed to high levels of service. There may be a limited supply of such qualified individuals in the cities in China where we and our franchisees have operations or where we intend to expand. In addition, it is difficult to ascertain and evaluate intangible criteria of candidates, and whether they will share our vision, dedication, passion and culture, during the recruitment process. We and our franchisees must hire and train qualified managerial and other employees on a timely basis to keep pace with our rapid growth while
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maintaining consistently high-quality services across our hotels in various geographic locations. Regular training needs to be provided to our managerial and other employees so that they are equipped with up-to-date knowledge of various aspects of our hotel operations and can meet our demand for quality services. We and our franchisees also need to offer opportunities for development and career advancement in order to retain qualified managerial and other hotel staff. If we or our franchisees fail to do so, the quality of our services may decrease in one or more of the markets where the hotels in our network are located, which in turn, may have a material and adverse effect on our brand and our business.
Interruption or failure of our information and operational systems could impair our ability to effectively provide our services, which could damage our reputation.
Our ability to provide consistent quality services throughout our hotel network depends on the operation of our proprietary information and operational systems, including our central reservation, hotel management, data analysis and inter-department support systems. Any damage to or failure of our systems could interrupt our service. Our systems are vulnerable to damage or interruption as a result of power loss, telecommunications failures, computer viruses, fires, floods, earthquakes, interruptions in access to our toll-free numbers, hacking or other attempts to harm our systems, and similar events. Our servers, which are maintained in Shanghai, may also be vulnerable to break-ins, sabotage and vandalism. Some of our systems are not fully backed up, and our disaster recovery planning does not account for all possible scenarios. In addition, our systems and technologies may become outdated and we may not be able to replace or introduce upgraded systems as quickly as our competitors or within budgeted costs for such upgrades. If we experience frequent or persistent system failures, our quality of services and our reputation could be harmed. The steps we need to take to increase the reliability and safety of our systems may be costly, which could reduce our operating margins, and may not be successful in reducing the frequency or duration of system failures and service interruptions.
Failure to maintain the integrity of internal or customer data could result in harm to our reputation or subject us to costs, liabilities, fines or lawsuits.
Our business involves collecting and retaining a large volume of internal and customer data, including credit card numbers and other personal information as our various information technology systems enter, process, summarize and report such data. We also maintain information about various aspects of our operations as well as our employees. The integrity and protection of our customer, employee and company data are critical to our business. Our customers and employees expect that we will adequately protect their personal information. We are required by applicable laws to keep strictly confidential the personal information that we collect, and to take adequate security measures to safeguard such information. Our security measures and those of our third-party service providers may not be adequate for the protection of our customers, employees or company data.
In addition, computer hackers, foreign governments or cyber terrorists may attempt to penetrate our network security and our website. Unauthorized access to our proprietary internal and customer data may be obtained through break-ins, sabotage, breach of our secure network by an unauthorized party, computer viruses, computer denial-of-service attacks, employee theft or misuse, breach of the security of the networks of our third-party service providers, or other misconduct. Because the techniques used by computer programmers who may attempt to penetrate and sabotage our proprietary internal and customer data change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques. Unauthorized access to our proprietary internal and customer data may also be obtained through inadequate use of security controls. The laws and regulations applicable to security and privacy are becoming increasingly important in China. The theft, loss, fraudulent or unlawful use of customer, employee or company data could harm our reputation or result in remedial and other costs, liabilities, fines or lawsuits.
The Regulation (EU) 2016/679 of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC, known as the general data protection regulation, or GDPR, has imposed certain requirements on the processing of personal data relating to natural persons. GDPR requirements will apply both to companies established in the EU and to companies, such as us, that are not established in the EU but process personal data of individuals who are in the EU (and in the European Economic Area subject to the enactment of implementation procedures), where the processing activities relate to: (a) the offering of goods or services, irrespective of whether a payment of the data subject is required, to such data subjects in the EU; or (b) the monitoring of their behavior as far as their behavior takes place within the EU. Compliance with the GDPR will
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be a rigorous and time-intensive process that may increase our cost of doing business, and the failure to comply with the GDPR could expose us to sanctions from both a financial and business operations perspective. In addition, in case of control, noncompliance with the GDPR may expose us to damage to our reputation.
On February 1, 2013, China’s initial personal data protection guidelines, the Guidelines for Personal Information Protection in Information Security Technology Public and Commercial Service Systems, became effective, which guidelines set forth detailed requirements as to the protection of personal information and data collection, data processing, data transfer and data creation. Although these guidelines are voluntary and non-binding, we are advised by our PRC counsel that, going forward, further regulatory oversight of data privacy in China is expected. In addition, Amendment 7 to the PRC Criminal Law prohibits institutions, companies and their employees in the telecommunications and other industries from selling or otherwise illegally disclosing a PRC citizen’s personal information obtained during the course of performing their duties or providing services, or obtaining such information through theft or other illegal means. On November 7, 2016, the Standing Committee of the PRC National People’s Congress issued the Cybersecurity Law of the PRC, which became effective on June 1, 2017. Pursuant to the Cybersecurity Law of the PRC, providers of network products and services shall maintain the security of their products and services and shall comply with provisions regarding the protection of personal information as stipulated under relevant laws and regulations. Moreover, the Provisions on Protection of Personal Information of Telecommunication and Internet Users specifically regulates the collection, use, disclosure and security of personal information. Complying with these PRC laws and regulations may cause us to incur substantial costs or require us to change our business practices. To include cross references to Regulations
While we take various measures to comply with all applicable data privacy and protection laws and regulations of the PRC, our current security measures and those of our third-party service providers may not be adequate for the protection of our customers, employees or company data. In addition, hackers, foreign governments or cyber terrorists may attempt to penetrate our network security and our website. Unauthorized access to our proprietary internal and customer data may be obtained through break-ins, sabotage, breach of our secure network by an unauthorized party, computer viruses, computer denial-of-service attacks, employee theft or misuse, breach of the secure networks of our third-party service providers, or other misconduct. Because the techniques used in any attempt to penetrate and sabotage our proprietary internal and customer data change frequently and may not be recognized until launched against us, we may be unable to anticipate or protect against these techniques. Unauthorized access to our proprietary internal and customer data may also be obtained through inadequate security measures. Laws and regulations in China relating to security and privacy are becoming increasingly important. Any theft, loss, fraudulent, unlawful use or disclosure of customer, employee or company data could harm our reputation and result in remedial and other costs, liabilities, fines or lawsuits.
Any failure to protect our trademarks and other intellectual property rights could negatively impact our business.
Our brand, trade name, trademarks and other intellectual property are critical to our success. The success of our business depends in part upon our continued ability to use our brands, trade names and trademarks to increase brand awareness and to further develop our brands. As of December 31, 2021, we had a total of 552 trademarks, 74 software registration certificates, and one copyright registered in China. The expiration dates of our trademarks fall between 2022 and 2032. Once the ten-year term of our registered trademarks has expired, we will be able to renew our trademark registrations for another ten years upon paying a renewal fee. If we are unable to renew one or more trademark registrations, our ability to use such trademarks could be impaired, and our business and results of operations could be materially and adversely affected.
Furthermore, the unauthorized reproduction or infringement of our trade name or trademarks or other intellectual property could diminish the value of our brand and its market acceptance, competitive advantage or goodwill. For example, our proprietary operational IT system, which has not been patented, copyrighted or otherwise registered as our intellectual property, is a key component of our competitive advantage and our growth strategy. As of December 31, 2021, we have received 74 software registration certificates for certain of our proprietary information and operational systems including our Central Reservation System (CRS), Property Management System (PMS) and certain other quality control systems. Although we have been granted software registration certificates in respect of some of our proprietary information and operational systems, these systems could be infringed upon by third parties, which may adversely affect
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our business, financial condition and results of operations. Because the protection of a company’s intellectual property provided under PRC laws and regulations is less than that afforded under United States laws and regulations, the measures we take to protect our brands, trade names, trademarks and other intellectual property rights may not be adequate to prevent their unauthorized use by third parties. Furthermore, the application of laws governing intellectual property rights in China and abroad is uncertain and evolving, and could involve substantial risks to us. If we are unable to adequately protect our brands, trade names, trademarks and other intellectual property rights, we may lose these rights and our business may suffer materially. For example, in order to protect our brands, in the past we have filed lawsuits against certain hotel operators which had alleged to be our franchised-and-managed hotels but have not entered into any agreements with us.
We could also be subject to claims for infringement, invalidity, or indemnification relating to third parties’ intellectual property rights. Such third-party claims may be time-consuming and costly to defend, divert management attention and resources, or require us to enter into licensing agreements, which may not be available on commercially reasonable terms, or at all.
The restaurants operated by our hotels face risks related to instances of food-borne illnesses and other food safety accidents.
Some of our hotels directly operate the restaurant located in the hotels. The restaurant business is susceptible to food-borne illnesses and other food safety accidents. We cannot assure you that our internal controls and training will be fully effective in preventing all food-borne illnesses. Furthermore, our reliance on third-party food suppliers and distributors increases the risk that food-borne illness incidents could be caused by third-party food suppliers and distributors outside of our control and the risk of multiple locations being affected rather than a single restaurant. New illnesses resistant to any precautions may develop in the future, or diseases with long incubation periods could arise that could give rise to claims or allegations on a retroactive basis. Reports in the media of instances of food-borne illnesses could, if highly publicized, negatively impact restaurant sales, forcing the closure of some restaurants and affect our customers’ confidence in our hotel business. Furthermore, other illnesses, such as hand, foot and mouth disease or avian influenza, could adversely affect the supply of some of the restaurants’ food products and significantly increase such restaurants’ costs, which may also adversely affect the results of operations of the relevant hotels.
Accidents or injuries in our hotels may adversely affect our reputation and subject us to liability.
There are inherent risks of accidents or injuries in hotels. One or more accidents or injuries such as fire accident, slip and fall and accident during property renovation at any of our hotels could adversely affect our safety reputation among guests and potential guests, decrease our overall occupancy rates and increase our costs by requiring us to take additional measures to make our safety precautions even more visible and effective. If accidents or injuries occur at any of our hotels, we may be held liable for costs related to the injuries. Our property and liability insurance policies may not provide adequate coverage and we may be unable to renew our insurance policies or obtain new insurance policies without increases in cost or decreases in coverage levels.
In addition, if any incidents, particularly fire accidents, occur in any of the leased-and-operated hotels that do not possess the relevant licenses, permits, title certificate or fire safety inspection certificate, or is located on properties where the actual use and the designated land or property use are inconsistent, there could be substantial negative publicity, thereby triggering large-scale government actions that impact our entire hotel network, which in turn will have a material adverse impact on our business, results of operations and financial condition.
We are subject to risks related to litigation filed by or against us, and adverse litigation results may harm our business and financial condition.
We have been, and may in the future be, a party to litigation and other proceedings filed by or against us, including actions relating to among others property lease, franchise agreements with our franchisees, infringement of our brands, employment-related disputes, personal injury, property damage or other harm resulting from acts or omissions by individuals or entities outside of our control, including franchisees and third-party property owners. Various disputes in connection with the properties we lease or with the franchise agreements may occur from time to time, which may cause
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our hotel operations to be affected or in the worst-case scenario, to be ceased. For example, as of December 31, 2021 we had four pending legal proceedings in connection with the leased hotel properties, six pending legal proceedings in connection with trademarks, and 43 pending legal proceedings in connection with franchised-and-managed hotels. In addition, the research and examinations that we conduct on both the hotel properties and the potential franchisees before entering into franchise agreements, may not be sufficient for us to identify all relevant information. As a result, we may be in dispute with our franchisees, which may result in litigation filed by or against us. See “Our Business — Legal Proceedings.”
The outcome of legal proceedings is uncertain, we cannot predict with certainty the cost of defense, the cost of prosecution or the ultimate outcome of thereof, including remedies or damage awards, and adverse results in such litigation and other proceedings may disrupt our business, materially and adversely affect our reputation, results of operations, financial condition and prospects. Moreover, if any claims against us were to prevail, we would be subject to monetary or other liabilities, which could strain our financial resources, consume the time and attention of our management and otherwise have an adverse effect on our business, financial condition and results of operations.
Our lessors’ failure to comply with lease registration and other compliance requirements under PRC law may subject these lessors or us to fines or other penalties that may negatively affect our ability to operate our hotels.
As an operator and manager of our leased hotel properties, we are subject to a number of land- and property-related legal requirements. For instance, under PRC law, all lease agreements are required to be registered with the local land and real estate administration bureau. Our standard lease agreement generally requires the lessor to make such registrations. However, as of December 31, 2021, because our lessors failed or were reluctant to provide necessary documents for us to register the leases, 63 lessors of our leased-and-operated hotels had not obtained registrations of their leases from the relevant authorities as required despite our repeated requests to these lessors to obtain registrations, as required under our lease agreements with them. In addition, based on the specific land use right certificates and property ownership certificates held by some of our lessors of the leased-and-operated hotels, approximately half of the 66 hotel properties we own or lease and operate are restricted to industrial and other uses, rather than qualified for hotel operation use. The failure of these 63 lessors to register lease agreements as required by law or to ensure that the hotel properties are operated in compliance with their designated use may subject these lessors or us to fines or other penalties in the amount of up to RMB10,000 for each hotel property or approximately RMB310,000 in aggregate, which may negatively affect our ability to operate the hotels covered under those leases. Moreover, the failure to use the property in compliance with the intended usage designated by the land use right certificates or the property ownership certificates may subject the lessors or us to fines in the amount of up to RMB30,000 for each property, invalidate the lease agreements, confiscation of relevant gains or subject them or us to temporary suspension or termination of operations.
We are subject to various claims and disputes in the ordinary course of business, and increases in the amount or severity of these claims and disputes could adversely affect us.
We are exposed to various claims and disputes related to commercial operations, personal injury, property damage, labor disputes and other matters in the ordinary course of our business. Developments in regulatory, legislative or judicial standards, material changes to dispute resolution trends, or a catastrophic accident or series of accidents, including accidents that affect our franchisees or vendors, involving any or all of commercial operations, property damage, personal injury, and labor disputes could have a material adverse effect on our operating results, financial condition and reputation.
For example, as of December 31, 2021, approximately 8.6% of our room nights are booked through OTAs, to whom we pay agency fees for such services. If we were to have a dispute with an OTA, the volume of our room inventory booked through such OTA may decline, or the OTA may block reservations of our rooms or remove our hotels from their website entirely, pending resolution of the dispute. As a result, our business and results of operations may be adversely affected.
In addition, our franchisees may suspend or terminate their cooperation with us voluntarily or involuntarily due to various reasons, including disagreement or dispute with us, failure to maintain requisite approvals, licenses or permits or to comply with other governmental regulations, and events beyond our or their control, such as inclement weather,
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natural disasters, transportation interruptions or labor unrest or shortage. For example, franchisees of our brand may object to or decline to pay franchise fees charged by us. Due to intense competition in China’s hospitality industry, our existing franchisees may also discontinue their cooperation with us and work with our competitors instead. We may not be able to promptly replace our franchisees on a timely and cost-effective basis, or at all. As a result of any disruptions associated with our franchisees, our guest satisfaction, brands, reputation, operations and financial performance may be materially and adversely affected.
We may encounter disputes from time to time relating to our use of intellectual property of third parties.
We may encounter disputes from time to time over rights and obligations concerning intellectual property, and we may not prevail in those disputes. We cannot assure you that personnel in our leased-and-operated hotels will not use intellectual property of third parties without proper authorization. We may incur liability for such unauthorized or infringing use, and be subject to additional claims in the future. Any such claim of infringement or unauthorized use of intellectual property could result in costly litigations and divert the attention and resources of our management.
The growth of online and other hotel reservation intermediaries and travel consolidators may adversely affect our margins and profitability.
In 2019, 2020 and 2021, approximately 7.4% of our room nights were booked through OTAs to whom we pay commissions for such services. If these intermediaries and consolidators become the primary channel through which our guests make their bookings, they may be able to negotiate higher commissions, reduced room rates, or other significant concessions from us. The operations of these travel intermediaries and consolidators may adversely affect our ability to control the supply and price of our room inventory, which would in turn adversely affect our margins and profitability.
We are a “controlled company” within the meaning of the NYSE Listed Company Manual.
GTI beneficially owns 82.9% of our Class A ordinary shares and 100% of our Class B ordinary shares and 93.2% of the aggregate voting power of our total issued and outstanding share capital. The voting power of our company owned by GTI is indirectly owned by Mr. Alex S. Xu, our founder, chairman and chief executive officer, as he owns 83.9% of voting power of GTI, which entitles Mr. Xu to nominate or replace all directors of GTI, and determine how GTI exercises the voting power in our company. As long as GTI or Mr. Alex S. Xu owns at least 50% of the voting power of our company, we will be a “controlled company” as defined under the NYSE Listed Company Manual. For so long as we remain a controlled company under that definition, we are permitted to elect to rely on certain exemptions from corporate governance rules, including an exemption from the rule that a majority of our board of directors must be independent directors, although we have no current intention to rely on the controlled company exemption. As a result, you may not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.
Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes.
Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes, particularly in locations where we operate a large number of hotels. China has in the past experienced significant natural disasters, including earthquakes in Western and Southwestern China, extreme weather conditions, as well as health scares related to epidemic diseases, and any similar event that could materially impact our business in the future. If a disaster or other disruption were to occur in the future that affects the regions where we have or are developing franchised-and-managed or leased-and-operated hotels, our operations could be materially and adversely affected due to loss of personnel and damages to property. Even if we are not directly affected, such a disaster or disruption could affect our guests, which could harm our results of operations.
In addition, our business could be affected by public health epidemics, such as the outbreak of avian influenza, severe acute respiratory syndrome, or SARS, Zika virus, Ebola virus, COVID-19 or other diseases. If any of our employees is suspected of having contracted a contagious disease, we may be required to apply quarantines or suspend our operations. Furthermore, any future outbreak may restrict economic activities in affected regions, resulting in
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reduced business volume, temporary closure or quarantine of hotels in operation or otherwise disrupt our operations and adversely affect our results of operations.
Losses caused by epidemics, natural disasters and other catastrophes, including SARS, H1N1, H7N9 influenza, COVID-19, earthquakes or floods, are either uninsurable or too expensive to justify insuring against in China. In the event an uninsured loss or a loss in excess of insured limits occurs, we could lose all or a portion of the capital we have invested in a hotel, as well as the anticipated future revenue from the hotel. In that event, we might nevertheless remain obligated for any financial obligations related to the hotel. Similarly, war (including the potential of war), terrorist activities (including the threat of terrorist activities), social unrest and heightened travel security measures, as well as geopolitical uncertainty and international conflict may affect travel and may in turn affect our business, financial conditions, and results of operations. If our franchised-and-managed hotels are affected by these incidents, we might lose our revenue stream from those hotels. In addition, we may not be adequately prepared in contingency planning or recovery capability in relation to a major incident or crisis, and as a result, our operational continuity may be adversely affected and our reputation may be harmed.
COVID-19 caused us to incur economic losses in 2021, and may continue to do so. Our Franchised-and-managed revenues in 2021 full year declined by 6.9% comparing to 2019 level. Consumer demand was reduced and the operation of our hotels was disrupted as a result of measures that were taken to control the COVID-19 outbreak. Our leased-and-operated hotels generally have fixed operating costs and low profit margins, so any disruption their operation or significant reduction in consumer demand may adversely affect our business and results of operations. Since the beginning of the COVID-19 outbreak, we have provided certain financing support to our franchisees, and have reduced or waived the fees that we collect from them. This financing support, and reductions or waivers of franchisee fees, also have had an adverse effect on our results of operations and financial condition. Furthermore, the resurgence of COVID-19 in several provinces such as Hebei, and cities such as Shanghai and Beijing caused our occupancy rate to decline in January 2021. Our occupancy rate was also low during the New Year and Spring Festival holiday due to the policy encouraging residents to stay local and not return home. Although China’s economic outlook has recovered and improved since the beginning of the COVID-19 outbreak, COVID-19 as well as policies and measures adopted in response to it may still have a material and adverse impact on our financial and operating performance in the future. Over the longer term, any further resurgence of COVID-19 may undermine our existing franchisees’ confidence in us, our business and the hospitality industry generally, they may decide not to expand and develop new hotels, and our business and results of operations may be materially and adversely affected as a result.
We have limited insurance coverage.
We carry property insurance that covers the assets that we own at our leased-and-operated hotels, but such property insurance does not cover the buildings or any other assets owned by our lessors or the assets of the franchised-and-managed hotels. Although we generally require our lessors and our franchisees to purchase customary insurance policies, we cannot guarantee that they will adhere to such requirements. We do not have business disruption insurance coverage for our operations to cover losses that may be caused by natural disasters or catastrophic events, such as SARS or avian flu. Any business disruption or natural disaster may result in our incurring substantial costs and diversion of our resources. In addition, there are inherent risks of accidents or injuries in hotels. One or more accidents or injuries at any of our hotels could adversely affect our safety reputation among customers and potential customers, decrease our overall occupancy rates and increase our costs by requiring us to take additional measures to make our safety precautions even more visible and effective. In the future, we may be unable to renew our insurance policies or obtain new insurance policies without increases in cost or decreases in coverage levels. We may also encounter disputes with insurance providers regarding payments of claims that we believe are covered under our policies. If we were held liable for amounts and claims exceeding the limits of our insurance coverage or outside the scope of our insurance coverage, our reputation, our business, results of operations and financial condition may be materially and adversely affected.
We may require additional financing for our business, which may not be available on terms acceptable to us, or at all, or would increase our financial leverage and may be difficult to service.
We may require additional financial resources to support our growth, future development and any investments, including mergers or acquisitions that we may pursue. The amount and timing of such additional financing needs will
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vary depending on the timing of our new hotel openings, investments in converting new leased-and-operated hotels and searching and developing relationships with potential franchisees and the amount of cash flow from our operations. If our internal resources are insufficient to satisfy our financing requirements, we may seek additional financing by selling additional equity or debt securities or obtaining a credit facility. The sale of additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that may, among other things, potentially restrict our operations or our ability to pay dividends. Servicing such debt obligations could also be burdensome to our operations. If we fail to service our debt obligations or are unable to comply with the relevant debt covenants, we could be in default under the relevant debt obligations and our liquidity and financial conditions may be materially and adversely affected.
Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:
● | investors’ perception of, and demand for, securities of businesses in the PRC hospitality industry; |
● | conditions of the U.S. and other capital markets in which we may seek to raise funds; |
● | our future results of operations, financial condition and cash flows; |
● | PRC governmental regulation of foreign investment in the hospitality industry in China; |
● | economic, political and other conditions in China; and |
● | PRC governmental policies relating to foreign currency borrowings. |
We cannot assure you that future financing will be available in amounts or on terms acceptable to us, if at all. If we fail to raise additional funds, we may need to sell debt or additional equity securities, reduce our growth to a level that can be supported by our cash flow or defer planned expenditures.
We will continue to recognize a substantial amount of share-based compensation expenses, which will have a significant impact on our financial condition and liquidity position.
We adopted our 2018 share incentive plan in January 2018, pursuant to which we may grant options to purchase up to 9,000,000 of our Class A ordinary shares. Options granted to our employees generally vest either ratably over the following four years starting after the first/second/third anniversary of date of our initial public offering in the U.S., or 50% on the date of our initial public offering in U.S. and another 50% on December 31, 2019, as applicable; options granted to our directors vested 100% on the first anniversary of the date of our initial public offering in the U.S. As of December 31, 2021, we had outstanding options with respect to 992,500 Class A ordinary shares that have been granted to our employees, directors and consultants under the 2018 share incentive plan. As a result of our grants of awards under the 2018 Plan, we incurred share-based compensation expenses of RMB0.23 million and RMB2.46 million (USD$0.39 million) in 2020 and 2021. We are required to account for share options granted to our employees, directors and consultants in accordance with Codification of Accounting Standards, or ASC 718, “Compensation — Stock Compensation” and ASC 505-50, “Equity, Equity-Based Payments to Non-Employees.” We will continue to incur and recognize additional share-based compensation expenses in the future as we continue to grant share-based incentives. We believe such incentives are necessary for us to be able to attract and retain key personnel and employees, and we will continue to grant share-based compensation to employees in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our financial condition and liquidity position.
A material weakness in our internal control over financial reporting has been identified. If we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results, meet our reporting obligations or prevent fraud.
We are required to assess the effectiveness of our auditors’disclosure controls and procedures and internal control over financial reporting. Our independent registered public accounting firm has not conducted an audit proceduresof our internal control
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over financial reporting. As defined in standards established by the United States Public Company Accounting Oversight Board, or qualitythe PCAOB, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. In connection with the audit of our consolidated financial statements for the year ended December 31, 2021, we and our independent registered public accounting firm identified a material weakness in accordance with the standards established by the PCAOB, which relates to our material weakness in controls over the completeness of the bad debt provision for our franchisee loans receivable. To remedy our identified material weakness, we intend to implement certain measures to improve our internal control over financial reporting to address the material weakness identified. See “Item 15. Controls and Procedures — Internal Control over Financial Reporting”. However, the implementation of these measures may not fully remediate the material weakness in our internal control over financial reporting.
We are a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, required that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F. In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our independent registered public accounting firm did not undertake a comprehensive assessment of our internal control for purposes of identifying and reporting material weaknesses in our internal control over financial reporting as they will be required to do after we cease to be an emerging growth company. In the future our management may again conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we became a public company, our reporting obligations have placed and continue to place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation. In addition, we may not be able to timely file our periodic reports as a public company under U.S. securities laws, which could limit the amount of information that investors receive about our company in the future and adversely affect the price of our ADSs, our business and our reputation.
In the future in documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify new material weaknesses in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as comparedthese standards are modified, supplemented or amended from time to auditors outside of China that are subjecttime, we may identify new material weaknesses in our internal control over financial reporting. If we fail to PCAOB inspections. Investors mayachieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial informationinformation. This could in turn limit our access to capital markets, harm our results of operations, and procedures andlead to a decline in the qualitytrading price of our ADSs.
Additionally, ineffective internal control over financial statements.reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.
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Going forward we expect to generate a significant portion of our revenues from the restaurant business, which involves risks and uncertainties.
In May 2022, we entered into a definitive agreement to acquire Da Niang Dumplings and Bellagio, two leading restaurant chain businesses in China, or collectively, the Target Businesses, from GTI, our controlling shareholder. The closing of this proposed acquisition is subject to the satisfaction or waiver of customary closing conditions, and is currently expected to occur in the second half of 2022. See “Item 4. Information on the Company—A. History and Development of the Company—Proposed Acquisition of Da Niang Dumplings and Bellagio.” After completion of our proposed acquisition of Da Niang Dumplings and Bellagio, we expect to generate a significant portion of our revenues from the restaurant business, which involves risks and uncertainties that differ from our hotel business. Risks and uncertainties related to the restaurant business operated by Da Niang Dumplings and Bellagio include, but are not limited to, the following:
● | if the quality of our dining experience declines, our restaurants may not continue to be successful; |
● | we may fail to maintain or enhance recognition and reputation of our brands; |
● | we may not be able to maintain and increase the sales and profitability of our existing restaurants; |
● | if we cannot obtain desirable restaurant locations or secure renewal of existing leases on commercially reasonable terms, our business, results of operations and financial condition will be adversely affected; |
● | food safety and foodborne illness concerns may have an adverse effect on our reputation and business; |
● | any significant failure to maintain effective quality assurance systems for our restaurants could have a material adverse effect on our business, reputation, results of operations and financial conditions; |
● | any significant liability claims, food contamination complaints from our customers or reports of incidents of food tampering could adversely affect our business, reputation, results of operations and financial condition; |
● | increases in the cost of ingredients used in our restaurants may lead to declines in our margins and operating results; |
● | outbreaks and resurgences of COVID-19, its variants and restrictions due to confirmed cases have had, and may continue to have, an adverse impact on our restaurants’ operations that could adversely affect our business, reputation, results of operations and financial condition; and |
● | we rely on third parties for supplies and services and any shortage or interruption in supply could slow our growth and reduce our profitability. |
We are an “emerging growth company” and may not be subject to requirements that other public companies are subject to, which could harm investor confidence in us and our ADSs.
The Jumpstart Our Business Startups Act, or the JOBS Act, contains provisions that, among other things, relax certain requirements for qualifying public companies. We are an “emerging growth company” as defined under the JOBS Act and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies, including an exemption from the requirement to comply with the auditor attestation requirements of Section 404 and an exemption from the requirement to adopt and comply with new or revised accounting standards at the same time as other public companies. We will remain an emerging growth company until the earliest of (i) the last day of our fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (ii) the last day of our fiscal year following the fifth anniversary of the completion of our initial public offering; (iii) the date on which we have, during the previous three year period, issued
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more than US$1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter.
The JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We will take advantage of the extended transition period. As a result of this election, our financial statements may not be comparable to other public companies that comply with the public company effective dates for these new or revised accounting standards.
We also expect that these new rules and regulations could make it more expensive for us to renew director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee.
We cannot predict if investors will find our ADSs less attractive because we may rely on these exemptions. If some investors find our ADSs less attractive as a result, there may be a less active trading market for our ADSs and our ADS price may be more volatile.
Risks Related to Our ADSs
The market price for our ADSs may be volatile.
The market price for our ADSs may be highly volatile and subject to wide fluctuations in response to factors including the following:
● | negative media reports and coverage regarding us or other companies in the hospitality industry; |
● | regulatory developments in our target markets affecting us, our customers or our competitors; |
● | announcements of studies and reports relating to the quality of our solutions or those of our competitors; |
● | actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results; |
● | changes in financial estimates by securities research analysts; |
● | conditions in the travel and hospitality industries; |
● | changes in the economic performance or market valuations of other hospitality companies; |
● | announcements by us or our competitors of new brands, acquisitions, strategic relationships, joint ventures or capital commitments; |
● | addition or departure of our senior management; |
● | fluctuations of exchange rates between the RMB and U.S. dollar; |
● | potential litigation or administrative investigations; |
● | release or expiry of lock-up or other transfer restrictions on our outstanding ADSs or ordinary shares; |
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regulatory developments in our target markets affecting us, our customers or our competitors;
● | sales or perceived potential sales of additional ordinary shares or ADSs; and |
● | general economic or political conditions in China. |
actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;
changes in financial estimates by securities research analysts;
conditions in the travel and hospitality industries;
changes in the economic performance or market valuations of other hospitality companies;
announcements by us or our competitors of new brands, acquisitions, strategic relationships, joint ventures or capital commitments;
addition or departure of our senior management;
fluctuations of exchange rates between the RMB and U.S. dollar;
potential litigation or administrative investigations;
release or expiry of lock-up or other transfer restrictions on our outstanding ADSs or ordinary;
sales or perceived potential sales of additional ordinary shares or ADSs; and
general economic or political conditions in China.
In addition, the securities market from time to time experiencedexperiences significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our ADSs.
We may not pay further dividends to our public shareholders, so you should rely on price appreciation of our ADSs for return on your investment.
In January 2019, our board of directors declared a cash dividend of US$0.30 per ordinary share, or US$0.30 per ADS, and we paid such dividend in full in February 2019. In January 2019, we also announced plans to pay a cash dividend of US$0.20 per ordinary share per year in the near future if there is no immediate cash need for our growth or merger and acquisition opportunities. However, our board of directors has discretion as to whether to distribute any future dividends, subject to certain requirements of Cayman Islands law. In December 2019, we declared a cash dividend of US$0.25 per ordinary share, or US$0.25 per ADS. Holders of our ordinary shares and ADSs as of the close of trading on December 24, 2019 were entitled to such cash dividend, and we paid such dividend in full in January 2020. In December 2021, we declared a cash dividend of US$0.55 per ordinary share, or US$0.55 per ADS. Holders of our ordinary shares and ADSs as of the close of trading on December 31, 2021 were entitled to such cash dividend, and we paid such dividend in full in January 2022. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, may depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.
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Substantial future sales of our ADSs, or other equity or equity-linked securities in the public market, or the perception that these sales could occur, could cause the price of our ADSs to decline.
Additional sales of our ADSs, or other equity or equity-linked securities in the public market after our initial public offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. As of December 31, 2018,2021, we had 101,552,209103,049,863 ordinary shares outstanding including 34,762,909 Class B ordinary shares and 66,789,30068,286,954 Class A ordinary shares, 10,200,00011,697,654 Class A ordinary shares of which are represented by ADSs. All Class A ordinary shares represented by ADSs sold in our initial public offering are freely transferable without restriction or additional registration under the Securities Act. The 34,762,909 Class B ordinary shares and 56,589,300 Class A ordinary shares held by our existing shareholders are available for sale, subject to volume and other restrictions as applicable under Rule 144 and 701 under the Securities Act.
GTI has pledged approximately 26% of our ordinary shares to Pudong Development Bank, and may be required to pledge additional ordinary shares. If Pudong Development Bank forecloses on these shares, the market price of our ADSs could decline.
GTI has pledged approximately 26% of our ordinary shares to Pudong Development Bank as security under a Euro-denominated loan of approximately RMB900 million obtained in March 2017. Approximately RMB522.6RMB163.5 million of the loan remains outstanding.outstanding as of December 31, 2021. After the completion of our initial public offering, GTI iswas required to pledge ordinary shares in an amount that results in Pudong Development Bank having a pledge of no fewer than 20% of our ordinary shares, and may be required to pledge additional ordinary shares if the market price of our ADSs declines. Due to the decline in the market price of our ADSs since our initial public offering, GTI was required to pledge an aggregate of 26% of our ordinary shares as of the date of this annual report.in 2018. If GTI breaches certain covenants and obligations under the loan
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agreement, an event of default could result and Pudong Development Bank could exercise its right to accelerate all the debt under the loan agreement and foreclose on the pledged shares. The pledged shares are not subject to a lock-up agreement, and any future sale of the ordinary shares upon foreclosure could cause the market price of our ADSs to decline. As of the date of this annual report, GTI has repaid the loan and all pledge ordinary shares has been released.
Our corporate actions are substantially controlled by our officers, directors and principal shareholders.
After our initial public offering, ourOur executive officers and directors will beneficially own approximately 90.0%88.7% of our outstanding shares. These shareholders could exert substantial influence over matters requiring approval by our shareholders, including electing directors and approving mergers or other business combination transactions. The concentration of our share ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders, including those who purchase ADSs inholders of our initial public offering.ADSs.
As a foreign private issuer, we are permitted to adopt certain practices of our home country, the Cayman Islands, in relation to corporate governance matters that differ significantly from the New York Stock Exchange corporate governance listing standards; these practices afford less protection to shareholders than they would enjoy if we complied fully with the New York Stock Exchange corporate governance listing standards.
Our ADSs are listed on the New York Stock Exchange. The New York Stock Exchange Listed Company Rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the New York Stock Exchange corporate governance listing standards.
For instance, we are not required to: (i) have a majority of the board be independent; (ii) have a compensation committee or a nomination or corporate governance committee consisting entirely of independent directors; or (iii) have regularly scheduled executive sessions with only independent directors each year.year; or (iv) have a minimum of three members on our audit committee. We intend to rely on some or all of these exemptions. As a result, you may not be provided with the benefits of certain corporate governance requirements of the New York Stock Exchange.
As a foreign private issuer in the U.S., we are exempt from certain disclosure requirements under the Exchange Act, which may afford less protection to holders of our ADSs than they would enjoy if we were a domestic U.S. company.
As a foreign private issuer in the U.S., we are exempt from, among other things, the rules prescribing the furnishing and content of proxy statements under the Exchange Act and the rules relating to selective disclosure of material nonpublic information under Regulation FD under the Exchange Act. In addition, our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit and recovery provisions contained in Section 16 of the Exchange Act. In addition to annual reports with audited financial statements, such domestic U.S. companies are required to file quarterly reports with the SEC that include interim financial statements reviewed by an independent registered public accounting firm and certified by the company’s principal executive and financial officers. By contrast, as a foreign private issuer, we are not required under the Exchange Act to file such reports with the SEC or to provide quarterly certifications by our principal executive and financial officers. As a result, holders of our ADSs may be afforded less protection than they would under the Exchange Act rules applicable to domestic U.S. companies.
You may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise your right to direct how the ordinary shares underlying your ADSs are voted.
Except as described in this annual report and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares evidenced by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to direct how the ordinary shares underlying your ADSs are voted.
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If we ask for your instructions and upon timely notice from us, the depositary will notify you of the upcoming vote and arrange to deliver our voting materials to you, which contain, among other things, a statement as to the manner in which your voting instructions may be given, including an express indication that such instructions may be given or deemed given to the depositary to give a discretionary proxy to a person designated by us if no instructions are received by the depositary from you on or before the response date established by the depositary. However, no voting instruction shall be deemed given and no such discretionary proxy shall be given with respect to any matter if we inform the depositary we do not wish such proxy given, substantial opposition exits or the matter materially and adversely affects the rights of holders of the ordinary shares.
Voting at any meeting of our shareholders will be by poll.by-poll.
You may not be able to participate in any future rights offerings which may cause dilution to your holdings and you may not receive cash dividends if it is impractical to make them available to you.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register both the rights and securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Under the deposit agreement for the ADSs, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act, or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.
After the completion of our initial public offering, GTI intends to register and distribute to each of its shareholders not more than 60% of the number of our shares that representrepresented the percentage of such shareholder’s ownership in GTI as of March 29, 2018, the closing date of our initial public offering. As a condition to receive our shares, GTI’s shareholders will bewere required to enter into lock-up agreements on all of our shares which they own, prior toand the expiry of a six-month period following the date of this annual report. The number of our shares subject to such lock-up agreements will bewas reduced by 25% at the end of theeach six month period following March 26, 2018, the date of this annual report and each six month period thereafter through the two-year anniversary of the date of this annual report.our initial public offering prospectus.
The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you.
You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
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You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited, because we are incorporated under Cayman Islands law, conduct substantially all of our operations in China and the majoritymost of our directors and substantially all of our executive officers reside outside the United States.
We are incorporated in the Cayman Islands, and conduct substantially all of our operations in China through our wholly owned subsidiaries in China.wholly-owned entities and variable interest entities. Most of our directors and substantially all of our executive officers reside outside the United States and some or alla substantial portion of thetheir assets of those persons are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the Cayman Islands or in China in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind in a U.S. court, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and executive officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.
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Our corporate affairs are governed by our memorandum and articles of association, as amended and restated from time to time, and by the Cayman Companies Law (2018 Revision)Act (As Revised) and as well as common law of the Cayman Islands. The rights of shareholders to take legal action against us and our directors, and us, actions by minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which hasprovides persuasive, but not binding, authority onin a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws as compared tothan the United States and provides significantly less protection to investors. In addition, shareholders in Cayman Islands companies may not have standing to initiate a shareholder derivative action in U.S. federal courts.
As a result of all of the above,foregoing, our public shareholders may have more difficulty in protecting their interests through actions against us, our management, our directors or our major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.
The ability of the SEC, the U.S. Department of Justice, or the DOJ, and other U.S. authorities to bring enforcement actions against us for any violation of U.S. federal securities laws, SEC rules or regulations may be limited in the foreign jurisdictions where we operate.
The ability of U.S. authorities, such as the SEC and the DOJ, to bring enforcement actions against companies such as ours which operate overseas for any violation of U.S. federal securities laws, SEC rules or regulations may be limited in China, where we operate. Due to jurisdictional limitations, matters of comity and various other factors, the SEC, the DOJ and other U.S. authorities may be limited in their ability to pursue bad actors, including in instances of fraud, in emerging markets such as China. There are significant legal and other obstacles for U.S. authorities to obtain information needed for investigations or litigation against us or our directors, executive officers or other gatekeepers in case we or any of these individuals engage in fraud or other wrongdoing. In addition, local authorities in China may be constrained in their ability to assist U.S. authorities and overseas investors more generally. For example, certain provisions of PRC law prohibit entities and individuals in China from providing documents or information relating to securities business activities to overseas regulators without the approval of the CSRC and various other PRC government authorities. See “Item 3. Key Information — D. Risk Factors— Risks Related to Doing Business in China — Uncertainties with respect to the Chinese legal system could adversely affect us.” As a result, if we have any material disclosure violation or if our directors, executive officers or other gatekeepers commit any fraud or other financial misconduct, the U.S. authorities may not be able to conduct effective investigations or bring and enforce actions against us, our directors, executive officers or other gatekeepers. Therefore, you may not be able to enjoy the same protection provided by various U.S. authorities as it is provided to investors in U.S. domestic companies.
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Our management has considerable discretion as to the use of the net proceeds from our initial public offering.
Our management has considerable discretion in the application of the net proceeds received by us from our initial public offering. You do not have the opportunity to assess whether proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of our initial public offering. The net proceeds may be used for corporate purposes that do not improve our efforts to maintain profitability or increase our ADS price. The net proceeds from our initial public offering may be placed in investments, such as short-term investments, that do not produce income or that lose value.
Our articles of association will contain anti-takeover provisions that could have an adverse effect on the rights of holders of our ordinary shares and ADSs.
Our amended and restated memorandum and articles of association contain provisions which could limit the ability of others to acquire control of our company, including a provision that grants authority to our board directors to establish from time to time one or more series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series. The provisions could deprive our shareholders of the opportunity to sell their shares at a premium over the prevailing market price by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transactions.
Our management will have considerable discretion as to the use of the net proceeds from our initial public offering.
Our management has considerable discretion in the application of the net proceeds received by us from our initial public offering. You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of our initial public offering. The net proceeds may be used for corporate purposes that do not improve our efforts to maintain profitability or increase our ADS price. The net proceeds from our initial public offering may be placed in investments, such as short-term investments, that do not produce income or that lose value.
We may be or become a passive foreign investment company, or PFIC, which could result in adverse U.S. tax consequences to U.S. investors.
The determination of whether or not we are a PFIC is made on an annual basis and will depend on the nature and composition of our income and assets from time to time. Specifically, for any taxable year, we will be classified as a PFIC for U.S. federal income tax purposes if either (i) 75% or more of our gross income in that taxable year is passive income or (ii) the average percentage of our assets (which includes cash) in that taxable year which produce, or are held for the production of, passive income is at least 50%.
Based on the pastnature and projected composition of our income and assets, and the valuation of our assets, including goodwill, we do not expect to be a PFIC for 2019 or the foreseeable future, although there can be no assurance in this regard. It is unclear, however, whetherbelieve we were a PFIC for 2018. If a “controlled foreign corporation” (as defined for U.S. federal income tax purposes), or CFC,our 2021 taxable year. There is a “publicly traded corporation” forrisk, however, that we may become a PFIC in the current or any future taxable year the PFICdue to changes in our asset test is applied based onor income composition or in the value of the CFC’sour assets. Otherwise, the asset test is applied based on the adjusted tax bases of the CFC’s assets as determined for the purposes of computing earnings and profits under U.S. federal income tax principles. We were a CFC in 2018, and while we became a publicly traded corporation sometime close to the end of our first quarter in 2018, it is unclear how the asset test should apply to us in respect of 2018, as it is not clear how the asset test should be applied to a CFC in respect of its taxable year in which it becomes a publicly traded corporation (specifically, it is not clear whether the CFC can be treated as a “publicly traded corporation” for the taxable year). If we are not treated as a publicly traded corporation for 2018, there is a significant risk that we will be treated as a PFIC for 2018. You should consult your tax advisors about how to apply the asset test with respect to us for the 2018 taxable year. For taxable years in which we are treated as a publicly traded corporation, or for which we are no longer a CFC,In particular, the calculation of the value of our assets will be based, in part, on the quarterly market value of our ADSs, which is subject to change. See “Item 10. Additional Information—E. Taxation—Material U.S. Federal Income Tax Considerations—Passive Foreign Investment Company.”change and has been volatile. Any decrease in the market value of our ADSs may result in our becoming a PFIC.
If we are a PFIC for any taxable year during which you hold our ADSs or Class A ordinary shares, our PFIC status could result in adverse U.S. federal income tax consequences to you if you are a U.S. Holder, as defined under “Item 10. Additional Information—Information — E. Taxation—Taxation — Material U.S. Federal Income Tax Considerations.” For example, if we are or become a PFIC, you may become subject to increased tax liabilities under U.S. federal income tax laws and regulations, and will become subject to burdensome reporting requirements. See “Item 10. Additional Information—Information — E. Taxation—Taxation — Material U.S. Federal Income Tax Considerations—Considerations — Passive Foreign Investment Company.” There can be no assurance that we were not a PFIC for 2018, or that we will not be a PFIC for our current or any future taxable year.
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We will continue to incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”
Since the completion of our initial public offering, we have been a public company and expect to incur significant accounting, legal and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the New York Stock Exchange, have detailed requirements concerning corporate governance practices of public companies, including Section 404 of the Sarbanes-Oxley Act relating to internal controls over financial reporting. As a company with less than US$1.07 billion in total annual gross revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under
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Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies. We will take advantage of the extended transition period. As a result of this election, our financial statements may not be comparable to other public companies that comply with the public company effective dates for these new or revised accounting standards.
We expect these and other rules and regulations applicable to public companies to increase our accounting, legal and financial compliance costs and to make certain corporate activities more time-consuming and costly. We are evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of incurring such costs. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. For example, as a result of being a public company, we need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company makes it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we incurred additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.
In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.
Our dual-class ordinary share structure with different voting rights could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.
Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to three (3) votes per share if such Class B ordinary share is owned by GTI, Mr. Alex S. Xu, our founder, chairman and chief executive officer, Mr. Alex S. Xu’s family trusts or his oron all matters subject to vote at general meetings of the family trust’s designated transferees.Company. Our existing shareholder GTI holds 56,589,300 Class A ordinary shares and all 34,762,909 Class B ordinary shares. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, and Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Due to the disparate voting rights attached to shares in these two classes, GTI owns approximately 94.0%93.2% of the total voting power of our issued and outstanding ordinary shares. Mr. Alex S. Xu, our founder, chairman and chief executive officer, by virtue of this 83.9% voting power of GTI, which entitles Mr. Xu to nominate or replace all directors of GTI, and determine how GTI exercises the voting power in our company, is considered to beneficially ownedown the shares held by GTI. As a result, Mr. Xu has significant voting rights over matters requiring shareholdershareholders’ approval, including the election and removal of directors and certain corporate transactions, such as mergers, consolidations and other business combinations. This concentrated control could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.
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Holders of ADSs have fewer rights than shareholders and must act through the depositary to exercise their rights.
Holders of our ADSs do not have the same rights as our registered shareholders. As a holder of our ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights which attach to the underlying Class A ordinary shares represented by your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement. Upon receipt of your voting instructions in a timely manner, the depositary will vote or attempt to vote the
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underlying Class A ordinary shares represented by your ADSs in accordance with these instructions. You will not be able to directly exercise your right to vote with respect to the underlying Class A ordinary shares represented by your ADSs unless you withdraw thesuch shares and become the registered holder of such shares prior to the record date for the general meeting. Under our amended and restated memorandum and articles of association, the minimum notice period required to be given by our company to our registered shareholders to convene a general meeting will be ten calendar days. When a general meeting is convened, you may not receive sufficient notice of the meeting to enable you to withdraw the underlying Class A ordinary shares represented by your ADSs and become the registered holder of such shares to allow you to attend the general meeting or to cast your vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. In addition, under our amended and restated memorandum and articles of association, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the underlying Class A ordinary shares represented by your ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote directly.
Under the deposit agreement, if we request the depositary to act at a general meeting, we will give the depositary notice of the meeting at least 30 business days in advance of the meeting in order to give you a reasonable opportunity to instruct the depositary as to the exercise of voting rights relating to underlying Class A ordinary shares underlyingrepresented by your ADSs. However, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. Where any matter is to be put to a vote at a general meeting, we will make all reasonable efforts to cause the depositary to notify you of the upcoming vote and to deliver our voting materials to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the underlying Class A ordinary shares underlyingrepresented by your ADSs. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to direct how the underlying Class A ordinary shares represented by your ADSs are voted and you may lack recourse if the underlying Class A ordinary shares represented by your ADSs are not voted as you request. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting.
A. | History and Development of the Company |
We are a Cayman Islands holding company and conduct our operations in China through our PRC subsidiaries. GreenTree Inns Hotel Management Group, Inc., a company incorporated in Samoa, or GreenTree Samoa, was formed to be thea holding company and currently holds most of all but two of ourthe PRC subsidiariesSubsidiaries that operate our hotels in the PRC. GreenTree Samoa also owns 100% of the equity interest in Pacific Hotel Investment, Inc. and GreenTree Suites Management Corp., each of which owns 100% of the equity interest in the other two of our PRC subsidiaries.
We began our hotel business in the PRC in September 2004 through GreenTree Inns Hotel (Weihai) Management Group Inc., or GreenTree Weihai, which was incorporated on November 14, 2003 and 100% owned by American Pacific Homes Inc., a company wholly owned by Mr. Alex S. Xu, our founder, chairman and chief executive officer. In September 2010, GreenTree Weihai was merged into GreenTree Samoa as a wholly ownedwholly-owned subsidiary of GreenTree Samoa. In October 2010, upon completion of a share exchange, GreenTree Samoa became a wholly-owned subsidiary of GreenTree Inns Hotel Management Group, Inc., or GTI, a company incorporated in the Cayman Islands.
GreenTree Hospitality Group Ltd., or GreenTree Hospitality, the listing entity for the purpose of this offering, was incorporated in October 2017 as a wholly-owned subsidiary of GTI. In November 2017, GreenTree Hospitality issued 48,635,251 Class A ordinary shares and 42,716,957 Class B ordinary shares to GTI in exchange for the entire share capital of GreenTree Samoa then held by GTI. On March 11, 2018, we redesignated 7,954,048 of our Class B ordinary shares as Class A ordinary shares. Immediately after the completionAs of this offering, 84.7%December 31, 2021, 82.9% of our Class A ordinary shares and 100% of our Class B ordinary shares are owned by GTI, our parent company. Subsequently,
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GTI intends to register and distribute to each of its shareholders not more than 60% of the number of our shares that representrepresented the percentage of such shareholder’s ownership in GTI as of March 29, 2018, the closing date of thisour initial public offering. As a condition to receiving our shares, GTI’s shareholders will bewere required to enter into certain lock-up agreements with us in respecton all of our shares which they own, prior toand the expiry of a six-month period following the date of this annual report. The number of our shares subject to such lock-up agreements will bewas reduced by 25% at the end of theeach six month period following March 26, 2018, the date of this annual report and each six month period thereafter through the two-year anniversary of the date of this annual report.our initial public offering prospectus. Following the completion of thisour initial public offering and as long as GTI or Mr. Alex S. Xu owns at least 50% of the voting power of our company, we are a “controlled company” as defined under the NYSE Listed Company Manual. We have no current intention to rely on the controlled company exemption.
36In January 2019, we entered into a share purchase agreement to become a major shareholder of Argyle. Argyle is an owner and operator of hotels, with a network of mid-scale and up-scale brands in China and Southeast Asia. This transaction was completed in April of 2019.
In April 2019, we entered into an agreement to acquire a 70% equity stake in Urban. Urban is a leading franchised hotel operator in China, and has built a strong suite of brands with broad geographic coverage to deliver a variety of superior business and leisure services to guests at fair prices. This transaction was completed in November of 2019.
Recent Developments
We are not only further expanding in Tier 3 and lower cities but also further penetrating the Mid-to-Up-Scale segment. Over the past 5 years, most of our new hotels have been in China’s thriving Tier 3 and lower cities where they have recovered faster in other cities in most quarters. Hotels in some lower-tier cities are performing well. In executing this strategic plan, 68.4% of new hotels in our current pipeline are in such cities and we will further capitalize on the substantial opportunities in such locations. The combination of our existing footprint and our strong performance in these cities have given us a real competitive advantage to capture future opportunities in China’s booming hospitality industry.
Furthermore, we have accelerated our expansion into China’s central, southeast and southwest markets. In 2021, we opened 29 L&O hotels, all well situated around transportation hubs, central business districts, or government centers. We are adding both L&O and F&M hotels in strategic locations including Chongqing, Sichuan, Hubei, Jiangxi, Shanghai and other cities and provinces. In the Hubei and Hunan area, our total numbers of hotels increased by over 80%, over 30% and 20% year over year in the Hubei and Hunan area, in the Chongqing and Sichuan area, and in the Jiangxi and Fujian area, respectively.
In addition, in response to a growing market trend, in 2021 we have established a strategic cooperation partnership with Tencent Games to diversify our E-sports business. We are introducing new Mid-to-upscale brands such as E-sports hotels to address the needs of local gamers. We now have 25 E-sports hotels in operation and target to add 100 more over the next 12 months. We are also introducing an innovative brand “Geli” which is positioned in our mid-to upscale segment and currently has 7 hotels in operation. We have been continuously growing our mid-to-upscale and luxury segment and by the end of the fourth quarter 2021, hotels in these segments had increased to 552, 11.9% of our total portfolio, compared with only 50 in 2017. We are planning to open more hotels in these segments in 2022. In 2021, we continuously strived to optimize our management and operating systems including design, technology features, sales, and marketing programs, to improve hotel quality and operating performance. Our ongoing efforts in researching and testing various decoration materials allow us to deploy cost effective materials that also ensure quality and excellent customer experience. In 2021, as for the IT process, we are investing in information technology innovations and creating smarter hotels. We are an early mover in our industry in upgrading our hotels to an integrated cloud-based management and AI-driven platform. We strongly believe that this is a solid foundation that we need to advance to help ensure that personal data is securely managed in a manner compliant with applicable privacy laws and regulations. We are fully focused on developing smart and digital hotels to improve operational efficiency for our hotel general managers and staff, ensure the reliability of our booking systems, and deliver excellent customer service.
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Proposed Acquisition of Da Niang Dumplings and Bellagio
In May 2022, we entered into a definitive agreement to acquire Da Niang Dumplings and Bellagio, two leading restaurant chain businesses in China, or collectively, the Target Businesses, from GTI, our controlling shareholder. The closing of this proposed acquisition is subject to the satisfaction or waiver of customary closing conditions, and is currently expected to occur in the second half of 2022.
We have been exploring new growth opportunities to expand our business and create value for our shareholders. In addition to expanding our hotel network and diversifying our brand portfolio, we seek to launch new service offerings that are complementary to our existing hotel business. Our proposed acquisition of Da Niang Dumplings and Bellagio is expected to drive growth in our business and improve our financial performance.
Da Niang Dumplings and Bellagio focus on offering healthy and affordable fast food and casual dining services to mass consumers and generated a combined unaudited revenue of about RMB740 million in 2021. Since demand for such food services is more stable and less dependent on discretionary spending as compared with our existing hotel services, we expect the Target Businesses to provide a more stable revenue stream that may offset cyclical aspects of our hotel business. The restaurant and hotel businesses are also complementary in nature as we witness increasing demand for hotel-related services in the local communities we serve, and we expect cross-selling opportunities to arise from the two businesses. After completion of our proposed acquisition of Da Niang Dumplings and Bellagio, we expect the Target Businesses and our existing business to share common resources, achieve economies of scale and improve our overall operating performance. The proposed acquisition will also enable all of our shareholders to share in the synergistic growth of the hotel and restaurant businesses.
Da Niang Dumplings
Da Niang Dumplings is a leading quick service restaurant chain in China, with restaurants covering 297 locations in 40 cities as of December 31, 2021. As of December 31, 2021, the chain comprises of 160 self-operated restaurants and 137 franchised restaurants.
Bellagio
Bellagio is a leading casual dining restaurant chain focusing on the Chinese market, with restaurants covering 39 locations in more than 14 cities as of December 31, 2021, including in mainland China, Macao and Southeast Asia. As of December 31, 2021, the chain comprises of 31 self-operated restaurants and 8 franchised restaurants.
Both Da Niang Dumplings and Bellagio are committed to food quality and safety. They have implemented quality control measures that standardize food quality and safety in their supply chain and restaurants.
Principal Offices
Our principal executive offices are located at 2451 Hongqiao Road, Changning District, Shanghai 200335, People’s Republic of China. Our telephone number at this address is +86-21-3617-4886. Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman KY1-1104, Cayman Islands. Our agent for service of process in the United States is Law Debenture Corporate Services Inc., located at 801 2nd Avenue, Suite 403, New York, New York 10017.
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We arehave the leading pure play franchised hotel operator in China asstrong direct sales channels coupled with an established membership program. We achieved more than 95.0% of franchised-and-managed hotels represent almost all of the hotels in our hotel network as early as 2013, and currently operate with 98.6% of franchised-and-managed hotels in our network. In 2018, we were the fourth largest economyOur pure play franchised model allows us to mid-scale hotel groupexpand rapidly in Chinaan asset-light manner and have brought us substantial financial performance in terms of numberprofitability, return on investments and success to its franchisees.
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As of December 31, 2018, we had2021, our nationwide hotel network consisted of 4,659 hotels with 337,153 rooms in China, covering all four centrally-administrated municipalities and 367 cities throughout all 31 provinces and autonomous regions in China, as well as an additional 1,225 hotels that were contracted for or under development. We operate one of the highest proportion of franchised-and-managed hotels among the top four economy to mid-scalefastest growing hotel networks in China with 98.9% of– from 2012 to 2021, we grew from 792 to 4,659 hotels in our network as of those dates being franchised-and-managed hotels.
We sell a predominant proportion of our room nights through our strong direct sales channels comprising our website and mobile app. In 2016, 2017 and 2018, we sold approximately 96% of our room nights through our direct sales channels, while OTAs only contributed approximately 4% of our room nights. Our strong direct sales channels, combined with a loyal customer base, have contributed to our financial success. Over the years, we have grown a strong base of loyal members at a CAGR of approximately 41.5% from approximately 1.8 million members21.8%. Rooted in China’s hospitality market with the largest addressable market, we are well positioned as of December 31, 2010. As of December 31, 2018, we had over 1,270,000 corporate clients who can settle directly witha market leader to capture the robust momentum in China’s economic growth and growing consumer demand for value-for-money options. Our strong presence in China’s thriving Tier 3 and lower cities also presents substantial expansion opportunities for a market leader like us orto capture the growth opportunities in China’s booming hospitality industry and further enhance our franchisees and enjoy a preferential room rate and approximately 29 million members who registered with us and enjoy a range of different benefits, including discounts on room rates, priority in making hotel reservations. In 2016, 2017 and 2018,profitability.
Brands have paved the way for our corporate clients and loyal members booked 72.9%, 73.0% and 72.5%, respectively, of room nights in our hotel network.
continuous success. We have built a strong “GreenTree Inns” brand as a resultsuite of our long-standing dedication in the hospitality industry in Chinawell-recognized and consistent quality of our services, signature hotel designs, broad geographic coveragediversified brands, each with unique attributes and convenient locations. We have positioned our brandsstrengths to appeal to value-different consumer segments and quality-conscious business travelers and leisure travelers. Starting from our GreenTree Inns hotels in 2004, we have successfully rolled out a number of brands to establish a full product suite, which we believe enablesfranchisee needs, enabling us to capture a wide spectrum of market opportunities. Our currentWe started as an operator of mid-scale market brands – our first and flagship brand, GreenTree Inns, caters to the needs of value-conscious business travelers and leisure travelers. Over the past 16 years, GreenTree Inns has grown into a beloved Chinese household name that is synonymous with comfort, high quality and affordability. Through organic development and acquisitions, we have since successfully rolled out a number of brands in the luxury, mid-to-up-scale and economy to mid-scale market segments to capture the growth opportunities along the industry value chain. Today, our brand portfolio compriseshas grown to comprise more than 20 brands, including (i) mid- to up-scaleluxury brand Argyle, which was acquired in 2019; (ii) mid-to-up-scale brands including GreenTree Eastern founded in 2012, as well as Gme,Gem, Gya and VXVx brands founded in 2017; (ii) mid-scale2017, Deep Sleep Hotel, which was adopted from one of our franchisees in 2018, Ausotel brand, also consolidated from Argyle in 2019, Urban Garden and others, which were acquired in 2019; and (iii) mid brands including GreenTree Inns founded in 2004, GT Alliance founded in 2008, as well as the Wumian brand, which we adopted from one of our franchisees in 2018; and (iii) economy brands including Vatica founded in 2013, GreenTree Apartment founded in 2018, City 118 Selected and others consolidated from Urban Hotel Group in 2019; and (iv) economy brands including Shell founded in 2016.2016, City 118 and others which were consolidated from Urban Hotel Group in 2019.
WeOver the years, we have establishedsuccessfully forged an all-win ecosystem for our franchisees, guests and employees through a highly effective and scalable franchise management system, that enables us to win franchisees and grow rapidly. This platform not only ensures quality service be consistently delivered to our guests, but also helps our franchisees integrate into our hotel network smoothly and quickly. Oura set of strong and supportive franchise platform, and disciplined return-driven model, enable our franchisees to generate highly attractive investment returns, which we believe is both a strong attraction for potential franchiseesdirect sales channels coupled with an established membership program and a strong incentive for existing franchisees to open multiple hotels.suite of state-of-the-art technologies and tools optimizing hotel operations and enhancing guest experiences.
● | A highly effective and scalable franchise management system, which empowers our franchisees and enables us to grow rapidly. This system effectively manages the full life cycle of a franchised hotel with a high degree of standardization, and ensures quality service to be consistently delivered to our guests. Through our franchise management system, we guide and hand-hold our franchisees every step of the process, starting from new project initiation and planning, site selection, decoration, procurement, hotel opening preparation, daily operation, quality inspection to hotel closure. Our strong and supportive franchise system enables our franchisees to generate highly attractive investment returns, which we believe is both a strong attraction for potential franchisees and a strong incentive for existing franchisees to open multiple hotels. |
● | Strong direct sales channels coupled with an established membership program. We have successfully built up a set of strong direct sales channels, and are able to sell a predominant proportion of our room night through our strong direct sales channels comprising our website, mobile apps, WeChat mini-program and reservation functions embedded in a number of popular apps. In 2021, we sold approximately 91.4% of our room nights through our direct sales channels, while OTAs contributed approximately 8.6% of our room nights. We have also accumulated a vast base of loyal individual members and corporate members. Our loyal individual members increased with a CAGR of approximately 39.3% from approximately 1.8 million members as of December 31, 2010. As of December 31, 2021, we had approximately 1,850,000 corporate members and 69 million individual members, who have registered with us and enjoy a range of different benefits, including discounts on room rates and priority in making hotel reservations. In 2019, 2020 and 2021, our corporate members and loyal members booked 73.9%, 75.1% and 72.9%, respectively, of room nights in our hotel network. Our strong direct sales channels, coupled with an established membership program, effectively deliver large volumes of guests with reduced sales and marketing expenses and enhance customer loyalty. |
48
● | A suite of state-of-the-art technologies and tools. We have developed an industry-leading, proprietary technology infrastructure that optimizes franchisee operations, enhances customer experience, increases our management efficiency, and supports our fast growth. We have developed a series of tools/technologies to improve the efficiency of our internal operations, to support franchisee/hotel level operations, and to improve guest satisfaction from booking until check-out. |
Our Hotel Network
We provide guests at each of our five different brands of hotels with conveniently-located, clean, comfortable and quality accommodations at competitive prices. We cater primarily to the needs of value- and quality-conscious business travelers and leisure travelers.
As of December 31, 2018,2021, our overall hotel network consisted of 2,7574,659 hotels with 221,529337,153 rooms in operation covering 290367 cities in China, and an additional 4301,225 hotels with 31,68391,887 rooms that were contracted for or under development. Out of those 4301,225 hotels, 242565 hotels were contracted for, and the remaining 188660 hotels were under development and are expected to commence operation by June 2019. As of December 31, 2018, our GreenTree Inns brand hotels consisted of 1,881 hotels with 162,844 rooms in operation covering 248 cities in China, and an additional 159 hotels with 12,428 rooms under development.
37
The following map depicts the geographic coverage of our hotel network as of December 31, 2018.2021.
We expand into a new city if it meets our selection criteria, especially potential for economic growth, geographic location and affordability of long-term rent. AsFirst, as a result of one of our strategic focus on buildingstrategies to build a dense network of hotels in the most affluent regions in China with high growth potential, 48.7%40.1% of our hotels were located in the Greater Yangtze River Delta region, while 12.3%10.5% of our hotels were located in Beijing/Tianjin/Hebei province as of December 31, 2018.2021. Within these regions, we select locations to achieve a balanced rental rate and RevPAR, and many of them located in Tier 2 or smaller cities, thereby ensuring attractive
49
returns for our franchisees. Secondly, we continuously penetrated into Tier 3 and lower cities to capture the robust growth and growing consumer demand. As of December 31, 2018, 3612021, 410 of our 2,7574,659 hotels were located in Tier 1 cities (13.1%(8.8%), 6181,096 in Tier 2 cities (22.4%(23.5%) and 1,7783,153 in other cities (64.5%(67.7%). Taking into account of the hotels under development as of the same date, by December 31, 2018,2021, the number of our hotels located in Tier 23 cities and otherlower cities will further increase to 2,7983,991 representing 87.8%67.8% of our total hotels in operation and under development. Furthermore, we will accelerate our expansion into the mid-scale to luxury markets in central China, southeast China and southwest China. We will put additional effort and build up flagship hotels for Tier 1 and Tier 2 cities with strategic positions around transportation hubs, central business districts, or government centers in Tier 1 and Tier 2 cities.
The following table sets forth a breakdown by geographic locations of our hotels as of December 31, 2018.2021.
| | | | | | | | | | |
|
| |
| |
| Contracted |
| |
| |
| | | | | | for or under | | | | |
| | | | | | Development | | Contracted | | |
| | Franchised- | | Leased-and- | | Franchised- | | Leased-and- | | |
| | and-managed | | operated | | and- managed | | Operated | | |
City | | Hotels | | Hotels | | Hotels | | Hotels | | Total |
Shanghai Municipality and 61 cities in |
| 486 | | 4 | | 106 | | 0 | | 596 |
Jiangsu, Zhejiang and Anhui Provinces |
| 1,837 | | 29 | | 329 | | 6 | | 2,201 |
Beijing, Tianjin Municipalities and Hebei Province |
| 2,270 | | 33 | | 774 | | 10 | | 3,087 |
Other cities |
| 4,593 | | 66 | | 1,209 | | 16 | | 5,884 |
City |
| Franchised- and- managed Hotels |
|
| Leased-and- operated Hotels |
|
| Contracted for or under Development Franchised-and- managed Hotels(1) |
|
| Contracted Leased-and- operated Hotels |
|
| Total |
| |||||
Shanghai Municipality and 53 cities in Jiangsu, Zhejiang and Anhui Provinces |
|
| 1,326 |
|
|
| 17 |
|
|
| 182 |
|
|
| — |
|
|
| 1,525 |
|
Beijing, Tianjin Municipalities and Hebei Province |
|
| 332 |
|
|
| 6 |
|
|
| 45 |
|
|
| — |
|
|
| 383 |
|
Other cities |
|
| 1,070 |
|
|
| 6 |
|
|
| 203 |
|
|
| — |
|
|
| 1,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
| 2,728 |
|
|
| 29 |
|
|
| 430 |
|
|
| — |
|
|
| 3,187 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
The following table sets forth a breakdown of locations of our hotels by Tier 1, Tier 2, Tier 3 and otherlower cities as of December 31, 2018.2021.
| | | | | | | | | | |
|
| |
| |
| Contracted |
| |
| |
| | | | | | for or under | | | | |
| | | | | | Development | | Contracted | | |
| | Franchised- | | Leased-and- | | Franchised- | | Leased-and- | | |
| | and-managed | | operated | | and- managed | | Operated | | |
City | | Hotels | | Hotels | | Hotels | | Hotels | | Total |
Tier 1 cities |
| 392 | | 18 | | 46 | | 4 | | 460 |
Tier 2 cities |
| 1,061 | | 35 | | 327 | | 10 | | 1,433 |
Tier 3 and lower cities |
| 3,140 | | 13 | | 836 | | 2 | | 3,991 |
Total |
| 4,593 | | 66 | | 1,209 | | 16 | | 5,884 |
|
|
|
|
|
|
|
| Contracted for Hotels |
|
|
|
| ||||||||
City |
|
| Franchised- and-managed Hotels |
|
|
| Leased-and- operated Hotels |
|
|
| Franchised-and- managed Hotels |
|
|
| Leased-and- operated Hotels |
|
|
| Total |
|
Tier 1 cities |
|
| 349 |
|
|
| 12 |
|
|
| 28 |
|
|
| — |
|
|
| 389 |
|
Tier 2 cities |
|
| 611 |
|
|
| 7 |
|
|
| 113 |
|
|
| — |
|
|
| 731 |
|
Other cities |
|
| 1,768 |
|
|
| 10 |
|
|
| 289 |
|
|
| — |
|
|
| 2,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
| 2,728 |
|
|
| 29 |
|
|
| 430 |
|
|
| — |
|
|
| 3,187 |
|
50
The following table sets forth a breakdown of the number of our hotels in operation by operational model as of December 31, 2018.2021.
| | | | | | | | | | |
|
| |
| Number of |
| Number of |
| Average |
| |
| | Total | | Hotels Opened | | Hotels Opened | | Number of | | Typical |
| | Number of | | for Over Six | | for Less than | | Rooms per | | Lease/Franchise |
| | Hotels | | Months | | Six Months | | Hotel | | Term |
Franchised-and-managed hotels |
|
| |
| |
| |
| |
|
Argyle |
| 33 | | 28 | | 5 | | 190 | | 10 – 20 years |
GreenTree Eastern |
| 196 | | 155 | | 41 | | 107 | | 10 – 20 years |
Gem |
| 43 | | 36 | | 7 | | 89 | | 10 – 20 years |
Gya |
| 59 | | 44 | | 15 | | 84 | | 10 – 20 years |
Vx |
| 74 | | 46 | | 28 | | 88 | | 10 – 20 years |
Deep Sleep Hotel (无眠酒店) |
| 4 | | 3 | | 1 | | 71 | | 10 – 20 years |
Ausotel |
| 16 | | 12 | | 4 | | 122 | | 10 – 20 years |
Urban Garden and others* |
| 99 | | 79 | | 20 | | 58 | | 10 – 20 years |
GreenTree Inn |
| 2,145 | | 2,033 | | 112 | | 83 | | 10 – 20 years |
GT Alliance |
| 506 | | 467 | | 39 | | 71 | | 10 – 20 years |
GreenTree Apartment |
| 15 | | 14 | | 1 | | 66 | | 10 – 20 years |
Vatica |
| 112 | | 107 | | 5 | | 72 | | 10 – 20 years |
City 118 Selected and others* |
| 120 | | 114 | | 6 | | 49 | | 10 – 20 years |
Shell |
| 650 | | 582 | | 68 | | 43 | | 5 years |
City 118 and others* |
| 521 | | 502 | | 19 | | 46 | | 5 – 20 years |
Leased-and-operated hotels |
|
|
|
|
|
|
|
|
| |
GreenTree Eastern |
| 8 | | 7 | | 1 | | 152 |
| 10 – 20 years |
Gem |
| 3 | | 3 | | - | | 112 |
| 10 – 20 years |
Gya |
| 3 | | 3 | | - | | 106 |
| 10 – 20 years |
Deep Sleep Hotel (无眠酒店) |
| 5 | | 5 | | - | | 107 |
| 10 – 20 years |
Ausotel |
| 2 | | 2 | | - | | 66 |
| 10 – 20 years |
GreenTree Inn |
| 2 | | 2 | | - | | 140 |
| 10 – 20 years |
GreenTree Apartment |
| 24 | | 20 | | 4 | | 131 |
| 10 – 20 years |
Urban Garden and others* |
| 9 | | 6 | | 3 | | 79 |
| 10 – 20 years |
City 118 and others* |
| 1 | | 1 | | - | | 107 |
| 5 – 20 years |
* Others include other brands in each segment of Urban.
|
| Total Number of Hotels |
|
| Number of Hotels Opened for Over Six Months |
|
| Number of Hotels Opened for Less than Six Months |
|
| Average Number of Rooms per Hotel |
|
| Typical Lease/Franchise Term | ||||
Franchised-and-managed hotels |
|
| 2,728 |
|
|
| 2,360 |
|
|
| 368 |
|
|
| 81 |
|
| 15 -20 years |
GreenTree Inns |
|
| 1,856 |
|
|
| 1,732 |
|
|
| 124 |
|
|
| 85 |
|
| 15 -20 years |
GreenTree Eastern |
|
| 84 |
|
|
| 55 |
|
|
| 29 |
|
|
| 105 |
|
| 15 -20 years |
Gme |
|
| 9 |
|
|
| — |
|
|
| 9 |
|
|
| 92 |
|
| 15 -20 years |
Gya |
|
| 1 |
|
|
| — |
|
|
| 1 |
|
|
| 63 |
|
| 15 -20 years |
VX |
|
| 11 |
|
|
| 2 |
|
|
| 9 |
|
|
| 85 |
|
| 15 -20 years |
GT Alliance |
|
| 302 |
|
|
| 268 |
|
|
| 34 |
|
|
| 75 |
|
| 10 -20 years |
Vatica |
|
| 117 |
|
|
| 109 |
|
|
| 8 |
|
|
| 71 |
|
| 10 -20 years |
Shell |
|
| 348 |
|
|
| 194 |
|
|
| 154 |
|
|
| 40 |
|
| 5 years |
Leased-and-operated hotels |
|
| 29 |
|
|
| 29 |
|
|
| — |
|
|
| 123 |
|
| 15 -20 years |
GreenTree Inns |
|
| 25 |
|
|
| 25 |
|
|
| — |
|
|
| 121 |
|
| 15 -20 years |
GreenTree Eastern |
|
| 3 |
|
|
| 3 |
|
|
| — |
|
|
| 145 |
|
| 15 -20 years |
Gme |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| 15 -20 years |
Gya |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| 15 -20 years |
VX |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| 15 -20 years |
Wumian |
|
| 1 |
|
|
| 1 |
|
|
| — |
|
|
| 61 |
|
| 15 -20 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
| 2,757 |
|
|
| 2,389 |
|
|
| 368 |
|
|
| 81 |
|
|
|
Franchised-and-managed hotels. As of December 31, 2018,2021, we had 2,7284,593 franchised-and-managed hotels, accounting for 98.9%98.6% of all of our hotels in operation. For our franchised-and-managed hotels, we license our relevant brand to property owners, lessors or existing hotel operators who become our franchisees, and we give the franchisees the right to use our brand name, logo, operating manuals and procedures. We generate revenue from collecting an initial franchise fee and a percentage of revenue in each period without franchisees’ loss. Hotels under the franchised-and-managed business model will be converted in accordance with our brand standard, including conforming the hotel property to the standard design and layout of the corresponding brand offering under our supervision, becoming integrated into our central reservation system and hotel management IT system, being staffed with well-trained general managers and other managerial personnel and being included in our consumable goods procurement system. This conversion progress ensures our ability to provide services of consistent quality to our hotel guests.
Our franchisees are responsible for the costs of developing and operating their hotels, including the costs of renovating the hotels to meet our standards. We believe that the franchised-and-managed model has enabled us to expand our geographical coverage and market share quickly and effectively with less capital and lower upfront investment. We leverage the local knowledge and relationships of our franchisees in order to achieve success, while dedicating resources to help them achieve good investment returns.
We aim to strengthen our leadership position and gain greater market share by attracting new franchisees while encouraging our existing franchisees to expand their hotel business under our brand and management.
3951
Franchise Agreements and Cost Structure. Our franchise agreements typically carry terms of 1510 to 20 years. Under our typical franchise agreements, the franchisee is required to pay an initial one-time franchise fee of RMB150,000 to RMB250,000, depending on the size of the property. Aproperty, a one-time system installation fee and a one-time project consultancy fee, and recurring monthly franchise management fees of 3% to 5% of total revenue, which primarily consist of on-goingongoing management and service fees based on a certain percentage of room revenues, as well as system maintenance, reservation fees to use our central reservation system and other support fees, including marketing fees to cover expenses associated with marketing and media advertising. The initial fee and on-goingongoing franchise management fee are intended to cover our operating expenses, such as expenses incurred for purposes of business development, quality assurance, administrative support and other franchise services and to provide us with operating profits. Pursuant to the typical franchise agreement, we are entitled to terminate the franchise under a number of circumstances, including: franchisee insolvency or bankruptcy; falsification of revenue by the franchisee; and unapproved transfer of the property by the franchisee. We may also terminate a franchise agreement where the franchisee fails to cure any of the following conditions within 30 days: failure to make necessary repairs; failure to maintain required insurance; operation of the hotel in violation of applicable laws and regulations; and failure to pass periodic inspections made by us. Franchisees generally have the right to terminate the franchise agreement in the event of our default in performing our obligations under the franchise agreement.
The fee and cost structure of our franchised-and-managed business model afford us opportunities to improve operating results by increasing the number of franchised-and-managed hotel rooms, improving RevPAR performance and increasing the effective franchise management fee rates of our franchise agreements. As a hotel franchisor, we derive our revenue primarily from the various franchise fees described above.
Our revenue stream depends on the number of rooms in our franchise, revenues generated by our franchisees and effective franchise management fee rates under our franchise agreements. We enjoy significant operating leverage by using smart IT systems and effective organizational management structures, since the variable operating costs associated with our franchise growth have historically been less than incremental franchise management fees generated from new franchisees.
Leased-and-operated Hotels. As of December 31, 2018,2021, we had 2966 leased-and-operated hotels, accounting for 1.1%1.4% of all of our hotels then in operation. For all but twothree of our leased-and-operated hotels, we lease properties from property owners or lessors and we are responsible for all costs of construction, ongoing maintenance and repairs in connection with converting the property to conform to the standards of our brands and all hotel operating expenses. Rent is generally paid on a quarterly or semiannual basis. Our typical lease term ranges from 1510 to 20 years with an initial three- to six-month rent-free period. Upon a lease’s expiry, we generally have the right to remove and dispose of any removable facilities, equipment and appliances, while leasehold improvements and fixtures will be kept by the real estate owner or lessor. Our leases typically contain a penalty for early termination that is equal to double the daily rent times the number of days remaining on the lease. In addition, our lessors are typically required to notify us in advance if they intend to sell or dispose of the subject property, in which case we have a preemptive right to purchase the property on conditions and terms equivalent to those being offered by the lessor.
Pricing. We set the room rates52
40
The following table presents certain selected operating data as of and for the dates and periods indicated. Our revenues have been and will continue to be significantly affected by these operating measures which are widely used in the hospitality industry.
| | | | | | |
|
| As of December 31, | ||||
|
| 2019 |
| 2020 |
| 2021 |
Total hotels in operation: | |
|
|
|
|
|
Franchised-and-managed hotels | | 3,923 |
| 4,300 |
| 4,593 |
Argyle | | 20 |
| 23 |
| 33 |
GreenTree Eastern | | 102 |
| 146 |
| 196 |
Gem | | 26 |
| 33 |
| 43 |
Gya | | 25 |
| 40 |
| 59 |
Vx | | 22 |
| 33 |
| 74 |
Deep Sleep Hotel | | 1 |
| 2 |
| 4 |
Ausotel | | 10 |
| 11 |
| 16 |
Urban Garden and others* | | 71 |
| 79 |
| 99 |
GreenTree Inns | | 1,991 |
| 2,143 |
| 2,145 |
GT Alliance | | 314 |
| 374 |
| 506 |
GreenTree Apartment | | 6 |
| 12 |
| 15 |
Vatica | | 121 |
| 121 |
| 112 |
City 118 Selected and others* | | 108 |
| 115 |
| 120 |
Shell | | 541 |
| 620 |
| 650 |
City 118 and others* | | 565 |
| 548 |
| 521 |
Leased-and-operated hotels | | 34 |
| 40 |
| 66 |
GreenTree Eastern | | 3 |
| 5 |
| 8 |
Gem | | 1 |
| 2 |
| 3 |
Gya | | 1 |
| 2 |
| 3 |
Vx | | | | | | 5 |
Deep Sleep Hotel | | 1 |
| 1 |
| 2 |
Ausotel | | 0 |
| 2 |
| 2 |
Urban Garden and others* | | 1 |
| 4 |
| 5 |
GreenTree Inns | | 22 |
| 20 |
| 24 |
GT Alliance | | | | | | 9 |
GreenTree Apartment | | 1 |
| 1 |
| 1 |
City 118 and others* | | 4 |
| 3 |
| 4 |
Total | | 3,957 |
| 4,340 |
| 4,659 |
Total rooms: | |
|
|
|
| |
Franchised-and-managed hotels | | 285,736 |
| 310,447 |
| 330,089 |
Argyle | | 4,556 |
| 4,749 |
| 6,265.00 |
GreenTree Eastern | | 10,831 |
| 14,888 |
| 21,030.00 |
Gem | | 2,259 |
| 2,944 |
| 3,837.00 |
Gya | | 2,029 |
| 3,334 |
| 4,984.00 |
Vx | | 1,816 |
| 2,681 |
| 6,484.00 |
Deep Sleep Hotel | | 99 |
| 159 |
| 285 |
Ausotel | | 1,183 |
| 1,386 |
| 1,957.00 |
Urban Garden and others* | | 4,706 |
| 4,915 |
| 5,760.00 |
GreenTree Inns | | 168,626 |
| 178,922 |
| 176,340.00 |
GT Alliance | | 24,141 |
| 28,560 |
| 36,095.00 |
GreenTree Apartment | | 264 |
| 755 |
| 991 |
Vatica | | 8,907 |
| 8,749 |
| 8,115.00 |
City 118 Selected and others* | | 5,171 |
| 5,603 |
| 5,886.00 |
Shell | | 23,617 |
| 26,784 |
| 28,196.00 |
City 118 and others* | | 27,531 |
| 25,984 |
| 23,864.00 |
Leased-and-operated hotels | | 4,290 |
| 4,888 |
| 7,064 |
GreenTree Eastern | | 432 |
| 731 |
| 1,216.00 |
Gem | | 138 |
| 258 |
| 132 |
Gya | | 138 |
| 238 |
| 336 |
VX | | | | | | 318 |
Deep Sleep Hotel | | 62 |
| 62 |
| 537 |
Ausotel | | — |
| 280 |
| 537 |
Urban Garden and others* | | 123 |
| 427 |
| 280 |
GreenTree Inns | | 2,788 |
| 2,373 |
| 510 |
GT Alliance | | | | | | 707 |
GreenTree Apartment | | 69 |
| 107 |
| 107 |
City 118 and others* | | 540 |
| 412 |
| 412 |
Total | | 290,026 |
| 315,335 |
| 337,153 |
|
| As of December 31, |
| |||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||
Total hotels in operation: |
|
|
|
|
|
|
|
|
|
|
|
|
Franchised-and-managed hotels |
|
| 1,932 |
|
|
| 2,263 |
|
|
| 2,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GreenTree Inns |
|
| 1,532 |
|
|
| 1,708 |
|
|
| 1,856 |
|
GreenTree Eastern |
|
| 30 |
|
|
| 49 |
|
|
| 84 |
|
Gme |
| — |
|
| — |
|
|
| 9 |
| ||
Gya |
| — |
|
| — |
|
|
| 1 |
| ||
VX |
| — |
|
| — |
|
|
| 11 |
| ||
GT Alliance |
|
| 212 |
|
|
| 249 |
|
|
| 302 |
|
Vatica |
|
| 78 |
|
|
| 104 |
|
|
| 117 |
|
Shell |
|
| 80 |
|
|
| 153 |
|
|
| 348 |
|
Leased-and-operated hotels |
|
| 32 |
|
|
| 26 |
|
|
| 29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GreenTree Inns |
|
| 32 |
|
|
| 25 |
|
|
| 25 |
|
GreenTree Eastern |
|
| — |
|
|
| 1 |
|
|
| 3 |
|
Gme |
| — |
|
| — |
|
|
| — |
| ||
Gya |
| — |
|
| — |
|
|
| — |
| ||
VX |
| — |
|
| — |
|
|
| — |
| ||
Wumian |
| — |
|
| — |
|
|
| 1 |
| ||
Total |
|
| 1,964 |
|
|
| 2,289 |
|
|
| 2,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total rooms: |
|
|
|
|
|
|
|
|
|
|
|
|
Franchised-and-managed hotels |
|
| 164,207 |
|
|
| 187,505 |
|
|
| 217,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GreenTree Inns |
|
| 134,055 |
|
|
| 148,015 |
|
|
| 159,604 |
|
GreenTree Eastern |
|
| 3,480 |
|
|
| 5,543 |
|
|
| 9,055 |
|
Gme |
| — |
|
| — |
|
|
| 841 |
| ||
Gya |
| — |
|
| — |
|
|
| 63 |
| ||
VX |
| — |
|
| — |
|
|
| 969 |
| ||
GT Alliance |
|
| 17,276 |
|
|
| 19,887 |
|
|
| 23,607 |
|
Vatica |
|
| 5,967 |
|
|
| 7,704 |
|
|
| 8,674 |
|
Shell |
|
| 3,429 |
|
|
| 6,356 |
|
|
| 14,982 |
|
Leased-and-operated hotels |
|
| 4,031 |
|
|
| 3,302 |
|
|
| 3,734 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GreenTree Inns |
|
| 4,031 |
|
|
| 3,139 |
|
|
| 3,240 |
|
GreenTree Eastern |
|
| — |
|
|
| 163 |
|
|
| 432 |
|
Gme |
| — |
|
| — |
|
|
| — |
| ||
Gya |
| — |
|
| — |
|
|
| — |
| ||
VX |
| — |
|
| — |
|
|
| — |
| ||
Wumian |
| — |
|
| — |
|
|
| 62 |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
Total |
|
| 168,238 |
|
|
| 190,807 |
|
|
| 221,529 |
|
41* Others include other brands in each segment of Urban.
53
|
| For the Year Ended December 31, |
| |||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||
Occupancy rate (as a percentage)(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Franchised-and-managed hotels |
|
| 80.9% |
|
|
| 82.9% |
|
|
| 82.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GreenTree Inns |
|
| 82.1% |
|
|
| 84.5% |
|
|
| 84.0% |
|
GreenTree Eastern |
|
| 69.6% |
|
|
| 71.2% |
|
|
| 71.3% |
|
Gme |
| — |
|
| — |
|
|
| 49.6% |
| ||
Gya |
| — |
|
| — |
|
|
| 70.8% |
| ||
VX |
| — |
|
| — |
|
|
| 52.4% |
| ||
GT Alliance |
|
| 74.0% |
|
|
| 74.8% |
|
|
| 75.0% |
|
Vatica |
|
| 71.1% |
|
|
| 77.1% |
|
|
| 80.1% |
|
Shell |
|
| 68.1% |
|
|
| 73.1% |
|
|
| 76.1% |
|
Leased-and-operated hotels |
|
| 66.4% |
|
|
| 70.3% |
|
|
| 68.0% |
|
GreenTree Inns |
|
| 66.4% |
|
|
| 71.3% |
|
|
| 69.6% |
|
GreenTree Eastern |
| — |
|
|
| 43.7% |
|
|
| 56.5% |
| |
Gme |
| — |
|
| — |
|
|
| — |
| ||
Gya |
| — |
|
| — |
|
|
| — |
| ||
VX |
| — |
|
| — |
|
|
| — |
| ||
Wumian |
| — |
|
| — |
|
|
| 79.0% |
| ||
Total hotels in operation |
|
| 80.4% |
|
|
| 82.6% |
|
|
| 82.1% |
|
Average daily rate (in RMB) |
|
|
|
|
|
|
|
|
|
|
|
|
Franchised-and-managed hotels |
|
| 152 |
|
|
| 156 |
|
|
| 163 |
|
GreenTree Inns |
|
| 152 |
|
|
| 156 |
|
|
| 163 |
|
GreenTree Eastern |
|
| 202 |
|
|
| 210 |
|
|
| 220 |
|
Gme |
| — |
|
| — |
|
|
| 172 |
| ||
Gya |
| — |
|
| — |
|
|
| 368 |
| ||
VX |
| — |
|
| — |
|
|
| 177 |
| ||
GT Alliance |
|
| 156 |
|
|
| 159 |
|
|
| 167 |
|
Vatica |
|
| 142 |
|
|
| 150 |
|
|
| 155 |
|
Shell |
|
| 138 |
|
|
| 129 |
|
|
| 138 |
|
Leased-and-operated hotels |
|
| 164 |
|
|
| 186 |
|
|
| 205 |
|
GreenTree Inns |
|
| 164 |
|
|
| 181 |
|
|
| 196 |
|
GreenTree Eastern |
| — |
|
|
| 396 |
|
|
| 277 |
| |
Gme |
| — |
|
| — |
|
| — |
| |||
Gya |
| — |
|
| — |
|
| — |
| |||
VX |
| — |
|
| — |
|
| — |
| |||
Wumian |
| — |
|
| — |
|
|
| 245 |
| ||
Total hotels in operation |
|
| 153 |
|
|
| 157 |
|
|
| 164 |
|
RevPAR (in RMB) |
|
|
|
|
|
|
|
|
|
|
|
|
Franchised-and-managed hotels |
|
| 123 |
|
|
| 129 |
|
|
| 134 |
|
GreenTree Inns |
|
| 125 |
|
|
| 132 |
|
|
| 137 |
|
GreenTree Eastern |
|
| 140 |
|
|
| 150 |
|
|
| 157 |
|
Gme |
| — |
|
| — |
|
|
| 85 |
| ||
Gya |
| — |
|
| — |
|
|
| 261 |
| ||
VX |
| — |
|
| — |
|
|
| 93 |
| ||
GT Alliance |
|
| 115 |
|
|
| 119 |
|
|
| 125 |
|
Vatica |
|
| 101 |
|
|
| 116 |
|
|
| 124 |
|
Shell |
|
| 94 |
|
|
| 94 |
|
|
| 105 |
|
Leased-and-operated hotels |
|
| 109 |
|
|
| 131 |
|
|
| 139 |
|
GreenTree Inns |
|
| 109 |
|
|
| 129 |
|
|
| 136 |
|
GreenTree Eastern |
| — |
|
|
| 173 |
|
|
| 157 |
| |
Gme |
| — |
|
| — |
|
| — |
| |||
Gya |
| — |
|
| — |
|
| — |
| |||
VX |
| — |
|
| — |
|
| — |
| |||
Wumian |
| — |
|
| — |
|
|
| 194 |
| ||
Total hotels in operation |
|
| 123 |
|
|
| 130 |
|
|
| 135 |
|
| | | | | | | |
|
| For the Year Ended December 31, | | ||||
|
| 2019 |
| 2020 |
| 2021 |
|
Occupancy rate (as a percentage)(1) |
|
|
|
|
|
| |
Franchised-and-managed hotels |
| 81.1 | % | 68.9 | % | 71.3 | % |
Argyle |
| 54.8 | % | 38.3 | % | 37.7 | % |
GreenTree Eastern |
| 74.4 | % | 68.5 | % | 69.2 | % |
Gem |
| 67.2 | % | 64.9 | % | 64.0 | % |
Gya |
| 56.8 | % | 66.6 | % | 71.0 | % |
Vx |
| 67.6 | % | 68.4 | % | 67.9 | % |
Deep Sleep Hotel |
| 51.5 | % | 44.7 | % | 55.1 | % |
Ausotel |
| 59.6 | % | 44.7 | % | 48.6 | % |
Urban Garden and others* |
| 54.3 | % | 50.6 | % | 54.8 | % |
GreenTree Inns |
| 83.8 | % | 73.7 | % | 76.4 | % |
GT Alliance |
| 76.6 | % | 66.1 | % | 70.0 | % |
GreenTree Apartment |
| 48.9 | % | 50.8 | % | 48.4 | % |
Vatica |
| 82.7 | % | 70.8 | % | 73.5 | % |
City 118 Selected and others* |
| 57.6 | % | 54.5 | % | 58.2 | % |
Shell |
| 77.7 | % | 71.6 | % | 74.8 | % |
City 118 and others* |
| 50.8 | % | 46.3 | % | 48.8 | % |
Leased-and-operated hotels |
| 66.1 | % | 57.8 | % | 63.4 | % |
GreenTree Eastern |
| 52.8 | % | 48.1 | % | 53.3 | % |
Gem |
| 58.1 | % | 57.8 | % | 66.9 | % |
Gya |
| 82.3 | % | 55.8 | % | 66.3 | % |
Vx | | | | | | 62.1 | % |
Deep Sleep Hotel |
| 78.7 | % | 65.8 | % | 61.7 | % |
Ausotel |
|
| | 72.1 | % | 58.6 | % |
Urban Garden and others* |
| 56.1 | % | 51.9 | % | 52.0 | % |
GreenTree Inns |
| 68.1 | % | 60.6 | % | 70.9 | % |
GT Alliance | | | | | | 66.1 | % |
GreenTree Apartment |
| 57.4 | % | 71.8 | % | 89.5 | % |
City 118 and others* |
| 71.8 | % | 55.8 | % | 51.2 | % |
Total hotels in operation |
| 80.9 | % | 68.7 | % | 71.1 | % |
| | | | | | | |
Average daily rate (in RMB) |
|
|
|
|
| | |
Franchised-and-managed hotels |
| 169 |
| 152 |
| 163 | |
Argyle |
| 310 |
| 239 |
| 278 | |
GreenTree Eastern |
| 223 |
| 195 |
| 209 | |
Gem |
| 186 |
| 180 |
| 192 | |
Gya |
| 204 |
| 195 |
| 203 | |
Vx |
| 178 |
| 175 |
| 190 | |
Deep Sleep Hotel |
| 179 |
| 168 |
| 225 | |
Ausotel |
| 338 |
| 287 |
| 322 | |
Urban Garden and others* |
| 159 |
| 161 |
| 165 | |
GreenTree Inns |
| 167 |
| 152 |
| 163 | |
GT Alliance |
| 172 |
| 148 |
| 146 | |
GreenTree Apartment |
| 149 |
| 149 |
| 127 | |
Vatica |
| 157 |
| 144 |
| 153 | |
City 118 Selected and others* |
| 134 |
| 133 |
| 139 | |
Shell |
| 141 |
| 129 |
| 137 | |
City 118 and others* |
| 123 |
| 123 |
| 128 | |
Leased-and-operated hotels |
| 211 |
| 179 |
| 213 | |
GreenTree Eastern |
| 259 |
| 216 |
| 247 | |
Gem |
| 240 |
| 197 |
| 245 | |
Gya |
| 247 |
| 220 |
| 262 | |
Vx | | | | | | 272 | |
Deep Sleep Hotel |
| 242 |
| 237 |
| 272 | |
Ausotel |
|
|
| 259 |
| 225 | |
Urban Garden and others* |
| 205 |
| 214 |
| 264 | |
GreenTree Inns |
| 202 |
| 171 |
| 223 | |
GT Alliance | | | | | | 189 | |
GreenTree Apartment |
| 175 |
| 71 |
| 113 | |
City 118 and others* |
| 133 |
| 121 |
| 141 | |
Total hotels in operation |
| 170 |
| 152 |
| 164 | |
| | | | | | | |
RevPAR (in RMB) |
|
|
|
|
|
| |
Franchised-and-managed hotels |
| 137 |
| 105 |
| 116 | |
Argyle |
| 170 |
| 91 |
| 105 | |
GreenTree Eastern |
| 166 |
| 134 |
| 145 | |
Gem |
| 125 |
| 117 |
| 123 | |
Gya |
| 116 |
| 130 |
| 144 | |
Vx |
| 120 |
| 119 |
| 129 | |
Deep Sleep Hotel |
| 92 |
| 75 |
| 124 | |
Ausotel |
| 201 |
| 128 |
| 157 | |
Urban Garden and others* |
| 87 |
| 82 |
| 91 | |
GreenTree Inns |
| 140 |
| 112 |
| 125 | |
GT Alliance |
| 132 |
| 97 |
| 102 | |
54
GreenTree Apartment |
| 73 |
| 76 |
| 62 | |
Vatica |
| 130 |
| 102 |
| 112 | |
City 118 Selected and others* |
| 63 |
| 73 |
| 81 | |
Shell |
| 109 |
| 93 |
| 103 | |
City 118 and others* |
| 63 |
| 57 |
| 63 | |
Leased-and-operated hotels |
| 140 |
| 104 |
| 135 | |
GreenTree Eastern |
| 137 |
| 104 |
| 131 | |
Gem |
| 139 |
| 114 |
| 164 | |
Gya |
| 203 |
| 123 |
| 173 | |
Vx | | | | | | 169 | |
Deep Sleep Hotel |
| 190 |
| 156 |
| 139 | |
Ausotel |
|
|
| 187 |
| 155 | |
Urban Garden and others* |
| 115 |
| 111 |
| 116 | |
GreenTree Inns |
| 138 |
| 104 |
| 137 | |
GT Alliance | | | | | | 125 | |
GreenTree Apartment |
| 101 |
| 51 |
| 101 | |
City 118 and others* |
| 96 |
| 68 |
| 72 | |
Total hotels in operation |
| 137 |
| 105 |
| 116 | |
(1) | Based on number of available rooms. |
42* Others include other brands in each segment of Urban.
| | | | | | |
|
| |
| |
| Number of hotels |
| | | | | | contracted for |
| | | | Number of hotels | | or under |
| | | | in operation | | development |
| | | | as of | | as of |
| | | | December 31, | | December 31, |
|
| Brands |
| 2021 |
| 2021 |
Luxury | | Argyle | | 33 | | 57 |
Business to Mid-to-up-scale | | GreenTree Eastern | | 204 | | 116 |
| | Gem, Gya and Vx | | 187 | | 122 |
| | Deep Sleep Hotel | | 6 | | 4 |
| | Ausotel | | 18 | | 17 |
| | Urban Garden and others | | 104 | | 88 |
Mid-scale |
| GreenTree Inns |
| 2169 |
| 287 |
|
| GT Alliance |
| 515 |
| 98 |
|
| GreenTree Apartment |
| 16 |
| 32 |
|
| Vatica |
| 112 |
| 15 |
|
| City 118 Selected and others |
| 120 |
| 46 |
Economy |
| Shell |
| 650 |
| 179 |
|
| City 118 and others |
| 525 |
| 164 |
Total |
| |
| 4,659 |
| 1,225 |
|
| Brands |
| Number of hotels in operation as of December 31, 2018 |
|
| Number of hotels contracted for or under development as of December 31, 2018 |
| ||
Mid-to-up-scale |
| GreenTree Eastern |
|
| 87 |
|
|
| 36 |
|
|
| Gme, Gya and VX |
|
| 21 |
|
|
| 80 |
|
|
|
|
|
|
|
|
|
|
|
|
Mid-scale |
| GreenTree Inns |
|
| 1,881 |
|
|
| 159 |
|
|
| GT Alliance |
|
| 302 |
|
|
| 57 |
|
|
| Wumian |
|
| 1 |
|
|
| 1 |
|
|
|
|
|
|
|
|
|
|
|
|
Economy |
| Vatica |
|
| 117 |
|
|
| 15 |
|
|
| Shell |
|
| 348 |
|
|
| 82 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
| 2,757 |
|
|
| 430 |
|
We beganlaunched the transition to our current business of operating and managing a multi-brand hotel group in 2004. Our main brand, GreenTree Inns, caters to the needs of value-conscious business travelers and leisure travelers. We also offer GT Alliance hotels that feature distinctive designs and furnishings from our GreenTree Inns brand. We launched our GreenTree Eastern brand as our first hotel offering designed to provide a level of service commensurate with four-star hotels for quality-conscious business travelers at mid- to up-scalemid-to-up-scale price points. Our mid-scale brand Vatica and economy brands,brand Shell and Vatica, offer vibrant accommodations suited to young professionals and travelers. Beyond our mid-scale offerings under the GreenTree Inns and GT Alliance brands, weWe have expanded our brand portfolio in the mid-to-up-scale segment, with new Gme,Gem, Gya and VXVx brands launched in 2017;2017 and in the mid-scale segment with the WumianDeep Sleep brand launched in 2018, which complement the diversity and style of our hospitality offerings. During the second half year of 2018, we started our GreenTree apartment business. Hotel network ranging from stylish economy to luxury hotel brands were also consolidated into our portfolio with the acquisition completion of Argyle and Urban in 2019.
GreenTree Eastern. Founded in 2012, our GreenTree Eastern brand of premium boutique hotels that are designed to provide a level of service commensurate with four-star hotels to quality-conscious business travelers at mid- to up-scalemid-to-up-scale price points. GreenTree Eastern hotels are generally located in busy commercial centers and urban high-tech zones, and
55
are priced between RMB300 and RMB600 per room night. These hotels feature more varied and customized room layouts, stylish working spaces and healthy dining as well as beauty and health spas.
Gme.Gem. Founded in 2017, our GmeGem brand of hotels are mid- to-up-scalemid-to-up-scale business hotels that are designed to be a calm and unique heaven for business travelers. “Go with Me”, the GmeGem brand takes business travelers to a space with rich culture and graceful taste. Our GmeGem branded hotels are priced between RMB280 and RMB350 per room night.
Gya.Founded in 2017, our Gya brand of hotels are mid- to-up-scalemid-to-up-scale smart, fashionable and trendy hotels that are designed to be a chic club that highlights individuality. A rendezvous with Gya hotels take travelers to a spiritual sanctuary in the busy world. Our Gya branded hotels are priced between RMB280 and RMB350 per room night.
VX.Vx. Founded in 2017, our VXVx brand of hotels are mid- to-up-scalemid-to-up-scale leisure hotels that combine youthful trends with artistic interiors to allow each hotel to make a mark on the local culture scene. The colorful lobbies and artistic designs create a “Very Relaxing” space for travelers at our VXVx brand of hotels. Our VXVx branded hotels are priced between RMB280 and RMB350 per room night.
Wumian. Deep Sleep. Adopted from one of our franchisees in 2018, our WumianDeep Sleep branded hotel is a mid-scalemid-to-up-scale hotel that provides comfortable, intimate, simple and stylish spaces to business travelers for “a deep sleep”.sleep.” Our WumianDeep Sleep branded hotel is priced between RMB270 and RMB400 per room night.
GreenTree Inns. Founded in 2004 with our first hotel opened in Shanghai, GreenTree Inns is designed to provide a level of service commensurate with three-star hotels and value to business and leisure travelers at mid-scale price points. These hotels are typically located in areas close to major business and commercial districts, and are priced between RMB180 and RMB400 per room night. These hotels feature spacious lobbies and our uniform GreenTree Inns decorative style, and provide free high-speed Internet access, cable television, conference rooms, business centers and exercise facilities. Most of our GreenTree Inns hotels provide food and beverage through onsite full service restaurants.
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GT Alliance. Founded in 2008, our GT Alliance brand offers unique hotels in desirable locations to deliver individualized experiences with distinctive decor and furnishings for our guests. GT Alliance hotels are typically designed to provide a level of service commensurate with three-star hotels, and are priced between RMB150 and RMB400 per room night. We provide GT Alliance branded hotels with our standard operating procedures and proprietary Property Management System to help ensure a uniform quality of services for our guests. Most of the GT Alliance hotels provide food and beverage through onsite fullrestaurants.
GreenTree Apartment. Founded in 2018, our GreenTree Apartment is committed to providing medium and long term apartment rental service restaurants.for new urbanites, and expanding into the market with midscale economic products. GreenTree Apartments are priced at more than RMB150 per room night.
Vatica. Founded in 2013, our Vatica brand of hotels offer oases of natural, environmentally conscious design elements in urban settings to provide vibrant experiences for white-collar professionals and allow them to retreat to nature while in the heart of the city. Vatica hotels are priced between RMB150 and RMB300 per room night. Vatica hotels promote green, environmentally-friendly and low-carbon lifestyles with neat accommodations. These hotels feature modern, well-appointed rooms and amenities with free 24-hour Internet access.
Shell. Founded in 2016, our Shell brand of hotels mixes fashionable designs and creative elements to host young professionals, travelers and college students while in major urban centers along their journey. Shell branded hotels are gaining popularity among youths in urban areas, and are priced between RMB99 and RMB260 per room night.
Argyle. In April 2019, Argyle was consolidated into our portfolio, with mid-to-up-scale and luxury brands, including Argyle Grand Hotel, Argyle Boutique Hotel, Argyle Resort, Argyle Hotel, Ausotel and Ausotel Smart, Argyle Suit, ranging from stylish business hotels to five-star luxury hotels, all showcasing the unique Australian lifestyle and flavors. The majority of these properties are located in Southwest China. Strategically, Argyle’s highly distinguished brand portfolio and geographic coverage are highly complementary to GreenTree’s business and expansion plans.
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Urban. In December 2019, Urban was consolidated into our portfolio, with nine distinct brands, including Han Hotel, Urban Garden Hotel, City 118 Selected, and City 118, covering the economy segment to mid-to-up-scale segment, to deliver a variety of superior business and leisure services to guests at fair prices.
Membership Program
Our GreenTree Reward Membership Program is a key element of our marketing efforts. We invite our guests to participate in this customer loyalty program.
We have four tiers of membership — E-membership,e-membership, regular membership, gold membership and platinum membership. Other than basic-tier E-membership,e-membership, a one-time membership fee is charged to join one of our three premium tiers of regular, gold or platinum membership, for which we charge a fee of RMB30, RMB198 and RMB398, respectively. Each membership must be used at least once during the period of two years following its last use, or the membership will expire. We believe that this membership program helps us build loyalty to our brand among repeat guests and allows us to promote our brand in a cost-effective and targeted way.
Different tiers of membership offer different benefits. MembersIndividual members and corporate members enjoy a range of different benefits, including discounts on room rates, priority in making hotel reservations, and they accumulate membership points for their paid stays. Membership points can be redeemed for membership upgrades, room night awards and other gifts and products. The estimated incremental costs to provide gifts, membership upgrades and room night awards are accrued and recorded as selling and marketing expenses in our consolidated statements of comprehensive income.
. As individual members and corporate members redeem awards or their entitlements expire, the provision is reduced correspondingly. We record estimated liabilities for points that are expected to be redeemed in the future, by estimating points that will be forfeited based on historical data.
We have accumulated a strong base of loyal hotel guests, including over 1,270,0001,850,000 corporate clientsmembers and approximately 2969 million individual members as of December 31, 2018. Of these members, approximately 21 million had paid a one-time membership fee to join the program.2021. In 2016, 20172019, 2020 and 2018,2021, our corporate clientsmembers and loyalindividual members tookbook approximately 72.9%73.9%, 73.0%75.1% and 72.5%72.9%, respectively, of room nights in our hotel network. In addition, approximately 66%68% of our individual members are between the ages of 20 and 40, which represents the youthful core of our loyal guest community that whose spending power is expected to grow in years to come. The following table shows the breakdown of our membership by age:
| | | |
Age Group |
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|
|
Age 21 to 30 |
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| % |
Age 31 to 40 |
|
| % |
Age 41 to 50 |
| 22 | % |
Others |
|
| % |
Our paidloyal membership program increases membership retention rate, enhances members’ loyalty and commitment to our services and encourages individual members and corporate members to repeatedly use our central reservation system as well as other membership services, substantially keeping our low dependence on third party reservation channels. In 2021, we sold approximately 91.4% of our room nights through our direct sales channels, while OTAs contributed approximately 8.6% of our room nights. The extensive network of corporate accountsmembers and individual members provides us with a stable base of repeat guests, which is in turn an attractive marketing message to potential franchisees.
In March 2019, we launched a joint customer loyalty program together with Yibon, a hotel operator focusing on the economy hotel segment in China and one of our equity investees. By connecting our CRS and PMS systems with those of Yibon, Yibon’s customers are able to join our paid membership program and realize the same benefits as are enjoyed by our members.
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We have adopted a systematic process with respect to the planning and execution of new development projects for our franchised-and-managed and leased-and-operated hotels. When assessing potential franchising opportunities, we consider and evaluate additional factors such as the quality of the prospective franchisee and consistency with our standards. The franchise agreement must be based on our standard form and is processed through the same internal review procedure as our lease agreements.
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Market and Hotel Selection Criteria. Criteria
We seek franchised-and-managed or leased-and-operated properties that meet the following general market and specific hotel criteria:
General Market Criteria. We follow a return-driven approach in selecting hotel locations. We focus on cities that are approaching, or have already entered into, periods of significant economic growth. Such cities generally show growth in certain business segments as measured by employment opportunities, population growth rates, tourism and convention activities, air traffic volume, local commercial real estate occupancy, and retail sales volume. Cities that exhibit growth in these areas typically have strong demand for hotel facilities and services. Cities which we target include provincial capitals, national economic centers, special economic zones, urban tourist destinations and regional transportation hubs. As a result of one of our strategic focus on buildingstrategies to build a dense network of hotels in the most affluent region in China with high growth potential, 48.7%40.1% of our hotels were located in the Greater Yangtze River Delta region, while 12.3%10.5% of our hotels were located in Beijing/Tianjin/Hebei region as of December 31, 2018.2021. Meanwhile, as China continues to develop its high-speed rail networks and more enterprises move from coastal cities to inland cities, we are placing greater emphasis on expanding our operations in Tier 23 and otherlower cities. We select locations that will help us achieve a balanced rental rate and RevPAR, many of which are located in Tier 23 and otherlower cities, thereby ensuring more attractive returns for our franchisees. WeFurthermore, we will accelerate our expansion into the mid-scale to luxury markets in Tier 1 and Tier 2 cities, where we also follow this return-driven approach for select locations in Tier 1 cities.approach.
Specific Hotel Criteria. We seek to invest in hotels that are conveniently located near entertainment, shopping, commercial, conference or tourist centers, universities, and mid-to-high-end residential areas. We also consider a hotel’s proximity to local businesses, such as restaurants, banks, convenience stores, supermarkets and malls. Transportation is another factor we consider, and we actively seek properties situated near major public transit, major thoroughfares or intersections and airports. We believe that having our hotels located near both business and leisure centers enables us to attract both weekday business travelers and weekend leisure travelers. We prefer certain building features including stand-alone structures having a gross floor area of between 3,000 and 8,000 square meters, elevators, standard water, electricity and telecommunications connections, and sufficient surrounding space to provide one parking space for every three to five hotel rooms. We seek to develop and operate economy to mid-scalea full range of hotels, withmost of which have 80 to 120 guest rooms, which include amenities such as a cafe, self-service laundry facilities, business center and conference rooms that are attractive to key demand segments such as individual business and leisure travelers. We balance location, demand, property pricing and rent to ensure low operating leverage ratio that enables attractive and sustainable returns to be achieved by the hotels.
For our leased-and-operated hotels, we require our development team and operations team to assess the potential financial return of every proposed new hotel. We typically only develop hotels that exhibit a potential for achieving our internal financial return objectives both in the near term and over the term of the lease agreement.
Hotel Development Team. Our hotel development team consisted of 197161 members as of December 31, 2018,2021, many of whom have over two years of experience in real estate development and construction. As of the same date, our hotel development team was led by 67 managers covering 61 regions, with each regional manager supervising ten to fifteen business development employees.38 managers. Each regional manager has in-depth knowledge of the target markets in the specific region, and draws on local knowledge to supervise the identification, evaluation and selection of suitable hotel properties by our business development employees.
Franchised-and-Managed Hotel Development. For our franchised-and-managed hotels, we conduct research and evaluation both on the hotel properties and on the qualifications of the potential franchisees. The hotel property research criteria and procedures are the same for our franchised-and-managed model and our leased-and-operated model. When evaluating a prospective franchisee, we review the franchisee’s financial records, credit history, indebtedness and capitalization in order to ensure that the franchisee has sufficient resources to complete the property conversion and develop the hotel to a fully operational status. We provide franchisees with our detailed design and construction manual, wemanual. We generally supervise the construction process and offer cost-savings suggestions. These measures assist franchisees in refurbishing, renovating or constructing their properties after they join our brands and helpshelp them meet our brand specifications. Before construction is completed, we carry out a series of pre-opening activities, such as inspecting the quality of the converted property, identifying and appointing the general manager and other members of the hotel
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management team, and training hotel staff in anticipation of the hotel’s opening. After a franchise agreement is executed, it typically takes between five and twelve12 months to open the subject hotel for business. Our business development team actively participates in local hotel associationassociations and industry conferences to expand our network, to become more familiar with local markets and explore cooperation opportunities with potential franchisees. We also attract potential franchisees through word-of-mouth referrals made by our existing franchisees, our marketing efforts, and the experience of guests satisfied with our quality service.
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Leased-and-Operated Hotel Development. While we focus on operating hotels under our franchised-and-managed model, when we identify appropriate opportunities, we also directly operate selected hotels under our leased-and-operated model. Our development team follows a structured and systematic process to evaluate, select and renovate properties for our branded hotels. This process begins with a study of the suitability of a prospective new market, as applicable, in terms of economic conditions, demographics, transportation infrastructure, city planning and development, and the availability of existing hotel accommodations. After deciding to pursue opportunities in a particular city, our regional development team commences a search of attractive properties within that market, taking into consideration a variety of factors, including convenience of location and proximity to major business and leisure centers. In evaluating a potential site, our business development team conducts an interview with the property owner, gathers information about the property, conducts a site visit, takes pictures and prepares a preliminary report for the regional manager to assess the suitability of the location. If a site passes this initial review process, our engineering department then carefully reviews blueprints, the layout and design of the property, and prepares a conversion plan. Our legal department reviews any permits, authorizations, certificates, title documents, lease agreements, mortgages or other legal documentation, as applicable, and assesses any legal risk. Our operations department conducts further site visits to further assess the commercial viability of the location. Our business development team then presents a final report to the regional manager which includes a financial forecast and construction budget. If the final report is approved by the regional manager, our chief executive officer will review the report and make a final decision. If our chief executive officer decides to proceed, then we enter into a memorandum of understanding with the prospective property owner and proceed to negotiate the details of the final lease agreement, which also is subject to comments and approval by our engineering, legal and operations departments.
For example, during the first half of 2018, we purchased two properties in Xuzhou, China. These properties are strategically located near Xuzhou’s high-speed railway station, which is one of seven main hubs on the Beijing-Shanghai high-speed rail route.
Hotel Management
Our management team has accumulated significant experience with respect to the operation of economy andhotels, mid-scale hotels as well as mid-to-up-scale hotels. Building on this experience, our management team has developed a robust operational platform for our domestic operations in China, implemented a rigorous budgeting process, and utilized our information systems to monitor the performance of our hotels. Our hotels are managed by general managers trained by us. General managers report to regional managers and are responsible primarily for the day-to-day operation of our hotels. The regional managers oversee the operation of each hotel in the relevant regions and they also regularly visit the hotels and supervise the marketing and promotion programs implemented by the general manager of the hotel. General managers are involved early on in the process of constructing or converting a new property through the opening of the new hotel. General managers, along with our quality inspection team, construction team and regional managers, are responsible for implementing GreenTree Innsour standards for brand quality, handling personnel matters of hotel staff, maintaining proper financial reports and records, overseeing procurement of hotel supplies to be purchased locally, and implementing marketing and promotional programs. Each general manager serves as the primary contact point between our headquarters and every hotel, and works closely with our corporate level departments in managing the performance of the hotels for which the General Managergeneral manager is responsible.
Key features of our hotel management include the following:
Pricing. We set the room rates of our hotels based on a number of factors, including local market conditions with reference to room rates set by our competitors, historical levels, recent occupancy levels and seasonal occupancy fluctuations. As we primarily target individual business travelers and leisure travelers, the month in which the Chinese New Year falls generally accounts for a lower portion of our annual revenues than other months, due to generally lower occupancy rates. Our headquarters in Shanghai reviews and establishes standard room rates. Thanks to our updated revenue management system, room rate changes can be approved automatically when the system is able to identify a rationale for a room rate adjustment by studying big data in the market. Otherwise, an individual hotel will conduct a
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market study, and then send its proposed price change to our operation department and marketing department for approval, generally within 24 hours. We regularly review room rates at each of our hotels under both franchised-and-managed and leased-and-operated models and adjust rates based on occupancy levels, neighborhood market performance, historical levels, seasonality, and reports from our general managers. We also negotiate contract rates with corporate members whose employees regularly stay at our hotels.
Budgeting and Monitoring. Our finance and accounting personnel work with each hotel’s general manager to prepare a detailed annual budget. Based on financial and operating data gathered by the Central Reservation System, or CRS, and Property Management System, or PMS, for each given hotel, we make projections as to expected revenue, hotel operating costs, expenditures on marketing, renovations or other property improvements. Our centralized monitoring function also tracks trends in operating or financial performance, in particular with respect to occupancy rates, average daily rates and RevPAR, and shares this information and analyses with the hotel’s general manager so that appropriate strategies may be formulated in response to the data.
Quality Assurance. The quality and consistency of our hotels and accommodations are the keys to maintaining the integrity and attractiveness of our brands. Our management plays a central role in assuring that the quality standards of our brands are implemented uniformly across our hotel network. Regional managers and the general managers are responsible for supervising various aspects of the operation of our hotels, including hotel maintenance and renovation, restaurant service, housekeeping and customer service, to help ensure that our rigorous quality standards are maintained. Our quality inspection department dispatches teams to conduct both scheduled and unannounced evaluations of each of our hotels, and notifies the hotel’s general manager of any repairs, maintenance work or upgrades that need to be conducted. Our quality inspection department also regularly reviews and updates our quality standards and oversees their implementation in each of our hotels.
Flexible and Cost-effective Procurement. We have a flexible procurement system that enables us to obtain the best pricing available for the quality of goods sourced for our hotels and to minimize operating expenses. We maintain a list of approved suppliers for goods used in our hotels which display any of our logos or brands. As a leading hotel network in China, we have significant leverage in price negotiations with our suppliers and enjoy cost savings by purchasing in bulk, which cost savings we pass on to franchisees directly. Franchisees are encouraged to negotiate favorable delivery prices directly with these suppliers. Franchisees are also encouraged to recommend quality suppliers to us that meet our stringent standards, including as to quality, price, delivery and maintenance services, and that can be approved by our central purchasing department. For other goods that do not display our logos or brands, franchisees can opt to use either one of our approved suppliers or other suppliers as long as they can meet our standards. Franchisees can procure the high-quality amenities and hotel consumables at favorable prices and terms and settle directly with the vendors via 168 Mall, which partially serves as a procurement facilitation platform, where a group of qualified vendors we have screened and selected over the years are able to list their products and market to franchisees directly. We believe this approach helps distinguish our brands, defines the style of our hotels and ensures quality and consistent experience for our guests.
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Franchisee Services. We provide dedicated support to our franchisees to assist them in addressing any issues that may require the expertise of our various departments. We coordinate with our construction, engineering, procurement, information technology and other departments to help answer questions or troubleshoot problems which a franchisee brings to us. Our franchisee services department provides an alternative channel, in addition to the hotel general manager, for our franchisees to seek assistance. We believe that this service underscores our commitment to our service-oriented culture and strengthens the relationships we have with our franchisees.
KOSMOS University and e-Learning Program. KOSMOS University, formerly known as GreenTree Academy and E-Learning Program. Formedformed in 2006, GreenTree Academy is our internal hotel management school. Each of our general manager candidates is required to complete a three-monthtwo-month training program through the GreenTree Academy.KOSMOS University. The first stage of this training program is two months’one-month classroom study, and the second stage is one-monthone month of on-site training conducted at one of our hotels. The two months’one-month classroom study features live lectures covering hotel operation and management skills. The one monthone-month on-site training provides our general manager candidates with an opportunity to apply all of the skills they have learned and to gain a better understanding of our GreenTree Inns standards our guest-focused and our service-oriented philosophy. Trainers and professors for our GreenTree AcademyKOSMOS University are invited from our own senior management team and outside professionals in the hospitality industry. In addition to cultivating our general manager candidates, our GreenTree AcademyKOSMOS
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University also is responsible for delivering training to our new hotel employees which training comprises 40 days of combined class study and field practice.regional general managers, each course program with different focuses. Our GreenTree AcademyKOSMOS University supervises and assists the general manager of each hotel to conduct weekly training for hotel employees at various levels. The GreenTree AcademyKOSMOS University coordinates to compile and disseminate training materials, monitors progress and assesses training results. We currently have 2932 dedicated staff to organize and coordinate the training activities delivered by the GreenTree Academy.KOSMOS University. In addition, we also have an E-Learninge-Learning Program in place through which all training materials are organized and uploaded to our internal website. Through our E-Learninge-Learning Program, all valuable knowledge and experience isare preserved and accumulated and can be broadly shared and conveniently referred to by our employees. In order to be granted a promotion, hotel employees either on our payroll or the payrolls of our franchisees need to complete certain GreenTree AcademyKOSMOS University and/or E-Learninge-Learning Program modules and pass exams relevant to their desired job role.
Hotel Information and Operational Systems
Our proprietary information and operational systems, which compiles information from all of our hotels with our operational systems, is a key tool that allows us to track occupancy levels, average daily rate, RevPAR, net operating income and other important operational data and performance indicators for each of our hotels and operating divisions. These systems facilitate the storage, processing and analysis of large amounts of data, which we use to improve our cost-efficiency, to allocate managerial and marketing resources more effectively, to analyze the impact of our marketing and promotional campaigns and set prices levels to maximize RevPAR. By centralizing and organizing our operations and financial data, our information and operational systems enable us to respond promptly and effectively to business trends in specific hotels or localities. We believe that centralizing our information and operational systems and providing our franchisees with ongoing access to these systems and information also helps our franchisees to operate more profitably, enhancing our ability to retain existing franchisees and attract new franchisees.franchisees with operation efficiency and cost-efficiency.
Our principal hotel information and operational systems comprise the following:
Central Reservation System (CRS). Our central reservation system,Technologies for internal operations. We consistently look into how our employees interact with technologies and have adapted to the needs of the modern workforce. As early as 2014, we developed and launched a suite of innovative tools that digitize every key aspect of our frontline employees’ daily routines. This set of tools modernizes the traditional handwritten logs for frontline employees, and thereby increases the speed and efficiency of our entire business process, from the moment when a new hotel project is signed, to our construction or CRS,conversion, daily operations and quality assurance.
“GreenTree Aide”
“GreenTree Aide” is our primary information collectiona dedicated app that assists with and distribution platform which is operated by our team of IT specialists based in Shanghai. Our hotel rooms may be reserved through multiple channels including our reservation mobile applications and website, our 24-hour toll-free call center, WeChat, eachdigitizes a hotel’s front desk,daily operations as well as third-party hotel reservation agentslinks hotels’ operation data to our franchisees. We are a pioneer in the hospitality industry in China to realize the real-time interaction between operating activities and OTAs such as Meituan, eLong, Qunar, Alitrip, Booking, Expediaour franchisees. The app is self-developed by us to ensure the efficiency, safety and Agoda. A predominant proportionstability of our room nightdaily operation, and has a number of functions, including monitoring the regional managers’ work, managing the hotel managers’ work and providing real-time information to our franchisees. GreenTree Aide creates, assigns, prioritizes and monitors individual and group tasks and keeps track of all aspects of a hotel’s daily operations in the following respects.
For the hotel’s daily operations and sales was generated from our strong direct sales channels comprising our websitetasks, hotel regional manager teams use this app to record their patrol plans, highlight the hotel’s problems inspected by them in each hotel and mobile app. In 2016, 2017 and 2018, approximately 96% oftrack the room nights in our hotel network was sold through our direct sales channels, while OTAs only contributed approximately 4% of our room nights.
Information about reservation at our hotels is gathered and processed by the CRS and connected and distributed back to each of the multiple reservation channels in real time. Through our CRS, we can monitor the availabilitysolving process of each problem. A hotel room. Detailedmanager uses this app in its daily management operations, including reporting assigned work, conducting hotel procurement, proposing digital contracts, adjusting room reservation information enables us to maximizerates and other revenue management measures. In 2017, we further upgraded the efficient use of our rooms. For example, even whenfunction as a specific hotel’s rooms are fully booked, we can still allocate hotel rooms to guests based on their expected arrival and departure times in order to preparedashboard for the arrival of our next guests in advance. We seekhousekeeping team to mark clean and dirty rooms. The housekeeping team uses this app to identify and manage daily room maintenance needs and increase and maximize utilization by renting our hotelhousekeeping efficiency with instant updates on housekeeping mobile devices when customers check out, freeing up rooms on a partial-day basis.for cleaning. In addition, our CRS is responsible for managingfranchisees are able to use this app to monitor the informationkey hotel operating data, compare the performance of our membership program.adjacent peers and ensure guest satisfaction. The CRS recordsfranchisees also use this app to receive notifications and analyzesalerts from us, including hotel promotions and advertisements.
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DPMS
DPMS, or development process management system, streamlines and digitizes the franchise sales process, including prospecting, e-proposals, digital contracts, workflows and reporting. Linked directly to the management information system (which is further elaborated below), the DPMS is designed to increase conversion rates and improve sales performance.
PPMS
PPMS, or project process management system, is designed to assist our members’ personal information, reward points, visit historymaintenance and feedback. This information alsoengineering department to maintain a clear overview of the construction/conversion progress of hotels and all routine inspections and repairs.
QPMS
QPMS, or quality process management system, is provideddedicated to each hotel and our management to improve service quality.
To maximize convenience and further enhance our customers’ satisfaction, we are committed to improving the functionality of our mobile app on an ongoing basis so that customers can make advance bookings for rooms based on their desired room style, conferences, check-in and check-out, as well as place orders for food and beverages. As of December 31, 2018, our mobile app was ranked second in terms of monthly user activity in the hotels category of “Intelligent Mobile Observatory,” a famous mobile big data query platform launched by TalkingData.
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Property Management System (PMS). Each hotel is equipped with a PMS server that operates independently to gather and summarize operational and financial data for each hotel.quality inspection activities. The PMS is synchronized with the CRS to facilitatequality control personnel through QPMS have access to our members’ informationquality standards and obtain room reservations froma set of check forms when conducting inspections. After inspections are completed, QPMS automatically generates an inspection report and notifies the CRS. The PMS enables ushotel managers of any repairs, maintenance work or upgrades that need to monitor the operations of each hotel in our network and to regularly obtain fundamental business data for analysis by our management.be conducted.
Management Information System (MIS). Our proprietary, internally-developed MIS collects and analyzes data regarding hotel room reservations, members’ information and feedback, and certain operational and financial data of our hotels, such as room rates and occupancy rates based on input from the CRS and PMS. Our MIS compiles information from our CRS and PMS to establish a database and extracts data based on the needs of our management. Our MIS enables us to generate useful insights and to conduct in-depth analyses of hotel operations on a daily basis for each general manager in our hotel network. These operational reports, in turn, enable our regional managers to monitor the performance of hotels in a given region, and nation-wide hotel data compilations, statistical reports and comparison analyses facilitate strategic and tactical decision-making by our management. In addition, our MIS helps our hotel management ascertain certain factors contributing to our operational statistics, helps provide advance warning of potential problems and aids with their correction. Hotel general managers and regional managers use data provided by the MIS to refine and improve hotel performance and respond to market changes at the local level in a timely manner. Our MIS also helps us evaluate the performance of each of our hotel general managers and regional managers.
Financial and Accounting System. Our financial and accounting system is used both by employees in our financial and accounting department at our headquarters and at the local hotel level. Our financial and accounting system manages our accounts receivable, accounts payable, expenses tracking, bookkeeping, taxation and other services both for our franchisees and us.
We vigilantly protect our information and operational systems. We use redundant power systems and Internet access to ensure that our guests can continually access our website, even in the event of a power outage at our main data center or a disruption in the connection between our PMS and our hotels. All of our servers are equipped with uninterrupted power supplies, and are supported by backup power generators as well as redundant file systems to help ensure the continuous availability of our data. We also regularly back up our data to minimize any potential impact of data loss due to system failure.
We have upgraded the infrastructure of our information and operational systems. These upgrades enable us to rapidly develop our business by increasing the number of hotels in our network. Our data center can support a large number of guests simultaneously accessing our mobile applications and website hotel reservations systems.
We also are improving the security of our IT systems, which includes developing the security of our office networks, our internal virtual private network and our guests’ access to our networks.
In addition, we have enabled greater accessibility to our internal systems by our employees through the addition of e-meetingse-Meetings as well as e-Human Resources, or e-HR, and e-Learning systems.
e-HR system. Our e-HR system enables comprehensive tracking of the organizational and personnel information of our company. Through this system our HR department is able to dynamically manage information about our employees and more efficiently administer standard programs as to wages, welfare benefits, work attendance, vacations and performance. Such data are securely stored on the system and allow our HR department to supervise the training and development of our personnel.
e-Learning system. Our e-Learning system offers modular, video-based programs to all employees of our company. This system enables personnel to acquire professional knowledge and complete courses in which they are interested at their own pace in order to develop skills and advance their careers. The content and materials for each course module are developed and produced by our GreenTree Academyinternal hotel management school, KOSMOS University team. Each course module is only 5-10 minutes in length for condensed, convenient learning. Additionally, the GreenTree AcademyKOSMOS University formulates learning plans for different job positions on a regular basis to help clarify and assist staff with planning their vocational development so they can enhance their existing skills. Recognizing that hospitality is a career choice for professionals,
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we train most of our key hotel employees, including hotel managers and the “GreenTree Quintet”- front office managers, sales managers, financial managers, guest services managers and hotel manager assistants.
e-Meeting system. Our e-meetinge-Meeting system supports routine management and training activities of our company by increasing efficiency of inter-departmental meetings and by facilitating remote working arrangements outside normal business hours. This system also enables the operations department to provide remote online management training to hotel managers, staff and franchisees on a weekly basis, helping to make our operations and management practices more efficient and consistent.
48Technologies for franchisee support
We have developed our proprietary and scalable technology infrastructure with modules covering every key aspect of hotel operation to assist and empower our franchisees, improve their efficiency and maximize their value.
Central Reservation System (CRS)
Our central reservation system, or CRS, is our primary information collection and distribution platform, which is operated by our team of IT specialists based in Shanghai. Our hotel rooms may be reserved through multiple channels, including our reservation mobile applications and website, our 24-hour toll-free call center, our WeChat mini-program, each hotel’s front desk, as well as third-party hotel reservation agents and OTAs such as Meituan, eLong, Qunar, Alitrip, Booking, Expedia and Agoda. A predominant proportion of our room night sales was generated from our strong direct sales channels comprising our website and mobile app. In 2019, 2020 and 2021, approximately 93% of the room nights in our hotel network were sold through our direct sales channels, while OTAs contributed approximately 7% of our room nights.
Information about reservation at our hotels is gathered and processed by the CRS and connected and distributed back to each of the multiple reservation channels in real-time. Through our CRS, we can monitor, on a real-time basis, the availability of each hotel room. Real-time and detailed hotel room reservation information enables us to maximize the efficient use of our rooms. In addition, the CRS is responsible for managing the information of our strong membership program, where it records and analyzes members’ personal information, membership points, visit history and feedback, based on which we and our franchisees are able to effectively gather, analyze and make use of such proprietary customer behavior and transaction data to generate actionable insights to perform precision marketing, improve service quality and enhance overall customer lifecycle management.
To maximize convenience and further enhance our customers’ satisfaction, we are committed to improving the functionality of our mobile app on an ongoing basis so that customers can make advance bookings for rooms based on their desired room style, conferences, check-in and check-out, as well as place orders for food and beverages.
Property Management System (PMS)
We have launched a cloud-based property management system, or PMS. Unlike onsite-PMSs, which require significant upfront hardware investment and are costly and time-consuming to upgrade, our cloud-based PMS is highly scalable and enables the simultaneous launch of new services across all hotels, which helps us further expand and grow our franchisee network rapidly.
Our PMS houses all administrative tools a franchisee’s hotel managers and front desk staff need to manage every hotel’s daily business operations, including hotel room management, budget management and membership management. Each franchisee hotel is equipped with the PMS server and, based on financial and operating data collected by the PMS, our franchisees can make projections for each given hotel as to expected revenue, hotel operating costs, expenditures on marketing, renovations or other property improvements. The PMS is further synchronized with the CRS to facilitate access to our members’ information. The PMS enables us to monitor the operations of each hotel in our network and to regularly obtain fundamental business data for analysis by our management.
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Management information system (MIS)
We have launched a proprietary management information system, or MIS system, which serves as the backbone of our technology and IT infrastructure and is applied in all aspects of our business operations. MIS effectively manages the full cycle of our franchisee hotels, starting from new project initiation and planning, construction or conversion of a new property, hotel opening, procurement, daily operations, quality control to hotel closure. Throughout the process, the MIS collects, monitors and analyzes various key operational and financial data and provides a series of data-driven optimization strategies and recommendations. The MIS compiles information from the CRS and PMS to establish a database and extracts data based on the needs of our management. The MIS system enables us and our franchisees to generate useful insights from and conduct in-depth analyses of the vast amount of data gleaned from our daily operations, and assists the management in formulating and optimizing hotel operations with agility and confidence in the face of increasing business and time pressure, as well as increasing complexity of guest services. These operational reports, in turn, enable our regional managers to monitor the performance of hotels in a given region, and nationwide hotel data compilations, statistical reports and comparison analyses facilitate strategic and tactical decision-making by its management.
In addition, the MIS helps our hotel management ascertain certain factors contributing to our operational statistics, helps provide advance warning of potential problems and aids with their correction. Hotel general managers and regional managers use data provided by the MIS to refine and improve hotel performance and respond to market changes at the local level in a timely manner. The MIS also helps evaluate the performance of each of our hotel general managers and regional managers.
Technologies for guest services
We have developed a full suite of hotel-level digital transformation initiatives to improve guest satisfaction in every step of customer interactions, from check-in to check-out.
Self-serve initiatives
We have launched our user-friendly, self-check-in/out services in our app to shorten both customers and front-desk staff’s time. We also launched a self-serve room selection function on our apps, where guests are able to access a hotel’s floor plan and room layout and choose a room with their preferred floor level, view, proximity to elevators, and potential nearby noise sources. In September 2018, we launched a self-serve stay extension function on our apps and website, which effectively reduces our staff-to-room ratio.
Robot assistants
The use of robot assistants in our hotels is intended to attract guests, especially young professionals and travelers. These AI-powered smart robots can move around the entire hotel to make deliveries of snacks, toiletries and other hotel amenities, greet guests and lead them to their rooms, improving both the hotel’s operating efficiency and guest experience.
One-click Wi-Fi access
One-click Wi-Fi access has been rolled out to our customers for convenience purposes, where guests can authenticate their identity and easily access a hotel’s Wi-Fi network without the need of inputting passwords.
IoT enabled guest rooms
IoT technologies to our hotel rooms can enhance quality of guests’ stays. Our IoT enabled guest rooms to allow guests to control the room temperature, lights, window shades and provide room cleaning service, wake-up call service and hotel check-out appointment as well as requesting electronic invoices through their mobile phones or other room facilities.
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Internet Service System
Our Internet Service System consists of our website (www.998.com), our mobile apps for smartphones running iOS, Android or other operating systems, and our WeChat mini-program for the purpose of reserving rooms. The system provides our members and the general public with convenient, friendly and updated services, including information and search services for our hotels, such as location, amenities and pricing, reservation services, online payment and online room selection functions, membership registration and management and corporate member services.
Sales and Marketing
Franchisees
We intend to continue expanding our hotel network primarily through our franchised-and-managed model. Our business development team utilizes our brand names and our national presence to engage with potential franchisees and to compete with other economy and mid-scale hotel networks. We aim to share our business philosophy with potential franchisees and emphasize the consistency of our services. We emphasize the benefits of affiliating with our brands, our commitment to improving hotel profitability, our proprietary operations system, our training and support program and our extensive network of corporate accountsmembers and individual members. Our objective is to grow our franchise base by continuing to promote our brands. We also encourage franchisees to operate multiple hotels under our brand by offering volume discounts on franchise management fees to franchisees who open multiple hotels under our brand within a certain period of time. We do not, however, encourage franchisees to open too many hotels simultaneously to ensure that their existing hotel operations receive due attention and that our guests enjoy the consistent quality services they deserve. As of December 31, 2018,2021, we had 307353 franchisees who hadrepeatedly opened two or morehotels with a total number of 846 hotels under our brands. When we spot new hotel development opportunities, we offer these prime opportunities to existing franchisees, developers of hotels, owners of independent hotels and motels, and owners of hotels affiliated with other economy and mid-scale hotel chains on a priority basis. We believe that this practice will enhance trust between us and existing and potential franchisees and may effectively increase our ability to convert such development opportunities into hotels under our franchised-and-managed model.
Guests
Our guest sales and marketing efforts target individual business and leisure travelers. Despite our growing number of international guests, our guests are primarily PRC citizens. As of December 31, 2018,citizens, approximately 82.9%96.4% of our guests were intra-Asia travelers. Our marketing and advertising efforts also include outdoor advertisements such as billboards and signs, advertisements and materials at our hotels, promotional materials sent to our members, television, Internet and radio advertising, advertising on high-speed rail networks, print advertising in consumer media and at promotional events, special holiday promotions, co-marketing activities, and participation incooperation with popular Internet social networking activities.platforms. The focus of our marketing and advertising programs is to promote the core characteristics of our brands — comfort, quality, value and convenience. Our advertising campaigns encourage consumers to “just experience” our hotels and to contact us directly. Furthermore, by integrating with food and beverage’s joint customer loyalty programs, we benefited from the attraction of these chain restaurants, and providing our individual members with more options to redeem their membership points for food. We continued to roll out our food and beverage concept by branding food and beverage services into our hotels to turn them into profit centers and attract additional guests to our hotels. Regarding marketing, we are formulating joint marketing programs with several banks to attract local corporate clients and high-value business travelers.
Our Investments
Yibon
In April 2017, we purchased 30% of the equity interest in Yibon Hotel Group Co., Ltd., or Yibon, together with a group of investors that are not related to us. Yibon is a hotel operator focusing on the economy hotel segment in China. As of December 31, 2018,2021, Yibon had 519650 hotels with 27,48435,112 rooms and 61223 hotels in the pipeline with 3,52312,904 rooms planned. In 2018,2021, Yibon recorded a net loss, partially due to more leased-and-operated hotels under constructionthe impact of COVID-19. Furthermore, holders of 70% of
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equity interest in the last year. Furthermore, subject to certain conditions, the co-investors in the Yibon investment willHotel Group Co., Ltd., or Yibon, have athe right to exchange their equity interest in Yibon into our shares within a certain period after Yibon delivered a consolidated financial report for the year of 2019 audited by “big four” accounting firm in 2020. See “Share Capital — Historyaccordance with a formula using Yibon’s net profit achieved in the year of Securities Issuances — Outstanding Right Exchangeable with2019 as calculation basis. Yibon recorded a net loss in 2019, and such holders were unable to exchange for our Shares.”shares based on Yibon’s financial results of 2019. Besides, we have an option to require the original shareholder to redeem the 30% investment.
Gingko
In January 2019, we invested approximately US$5.2 million to acquire 27,776,000 ordinary shares in the initial public offering of China Gingko Education Group Company Limited, or Gingko, on The Stock Exchange of Hong Kong Limited. In January 2019, we further invested US$2.5 million to acquire 13,560,000 additional ordinary shares in Gingko. Gingko is a pioneer in developing and providing higher education services for the hospitality industry in China. With nearly 10,000 students on campus, Gingko is currently ranked as China’s number one hospitality university by the “Gaosan Web Association,” an authoritative website with introductions to and rankings of universities in China. We believe this transaction will help cultivate, develop and enhance professional talents for our company, as well as for China’s hospitality industry generally.
Argyle
In January 2019, we entered into a share purchase agreement to become a major shareholder of Argyle Hotel Management Group (Australia) Pty Ltd., or Argyle. Argyle is an owner and operator of hotels, with a network of eight mid-scale and up-scale brands in China and Southeast Asia. This transaction is expected to be completed in the first half of 2019. We believe that Argyle’s brand portfolio and geographic coverage are highly complementary to our business and strategic expansion plans.
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In March 2019, we entered into a subscription agreement as a cornerstone investor in the initial public offering of Zhejiang New Century Hotel Management Co., Ltd., or New Century, on The Stock Exchange of Hong Kong Limited. We invested approximately US$29.2 million to subscribe for shares representing 4.95% of New Century’s outstanding shares after completion the offering. New Century operates and manages mid-scale to up-scale hotel chains, with 150 hotels with over 34,000 hotel rooms in 22 provinces, municipalities and autonomous regions in China as of December 31, 2018.
Urban Hotel Group
In April 2019, we entered into an agreement to acquireconsolidated Argyle. As a 70% equity stake in Urban Hotel Group. Urban Hotel Group is a leading franchised hotel operator focusing on stylish business hotels to five-star luxury hotels, Argyle’s series of brands all showcase unique Australian life style and flavors. The majority of these properties are located in Southwestern China. AsIts increase in selling and marketing expenses resulted from expansion of business development team, on-line advertising, participation in exhibitions, for the purpose of fast expanding its hotel network. During 2021, Argyle recorded a net loss, primarily due to the impact of COVID-19.
Urban
In December 31, 2018,2019, we consolidated Urban Hotel Group was the sixth-largest economywith nine distinct brands covering economic segment to mid-scale hotel group in China, in terms of number of hotels according to a report from Shanghai Inntie Enterprise Management Consulting Co., Ltd. Urban Hotel Groupmid-to-up-scale segment. It has built a strong suite of brands with broad geographic coverage in China to deliver a variety of superior business and leisure services to guests at fair prices.price. Strategically, Urban’s strong brand portfolio and geographic coverage in China are highly complementary to GreenTree’s business and expansion plans.
Employees
We had 2,020, 2,2592,657, 2,565 and 2,3942,892 employees as of December 31, 2016, 20172019, 2020 and 2018,2021, respectively. None of our employees is represented by a labor union. As of December 31, 2018,2021, out of our 2,394 employees, 6252,892employees, 917 were leased-and-operated hotel-based staff, 9831,178 were franchised-and-managed hotel-based staff, 197161 were investment and development staff, 104157 were regional manager/operations staff, 9022 were quality control staff, 38 were20were central reservation center staff, 2932 were GreenTree AcademyKOSMOS University training staff and 328405 were working at our headquarters offices. We believe that our employees are our company’s greatest resource and that developing and retaining a team of capable and motivated staff is critical to our success. We aim to hire managerial employees who possess backgrounds and experience in the hospitality industry and other services industries having an emphasis on addressing customers’ needs. We also recruit top graduates from highly-ranked universities that offer courses of study in hotel management. We require our employees to have at least a two-year associate’s degree. We aim to recruit, train and retain the best talent through a disciplined recruiting and training process while offering competitive performance-linked and KPI-driven career advancement and development opportunities.
General Managers
To help ensure that our franchised-and-managed hotels provide high-quality service on a consistent basis, our general managers and certain other managerial employees of our franchised-and-managed hotels are trained and dispatched by us. Pursuant to the franchise-and-management agreements, the Group charges the franchisees fixed hotel manager fees to compensate the Group for the franchised-and-managed hotel managers’ salaries, social welfare benefits
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and certain other out-of-pocket expenses as incurred. The hotel manager fee is recognized as revenue on a monthly basis. In addition to the standard compensation, our franchisees also are permitted to offer performance-based compensation to managers of their locations. Several factors are considered in evaluating our general managers such as financial performance of the hotel for which the general manager is responsible, guest satisfaction, employee satisfaction, results of the hotel’s periodic quality inspections and results of the general manager’s training programs and annual examinations.
Employees of Franchised-and-Managed Hotels
At our franchised-and-managed hotels, aside from our general managers, we do not employ hotel employees and we therefore are not responsible for compensating local employees, which functions are undertaken by the franchisee. However, to help ensure that our franchised-and-managed hotels provide high-quality service on a consistent basis, we have in place both mandatory and optional training programs designed for employees of our franchised-and-managed hotels. These training programs provide quality monitoring assistance and comprehensive training on various aspects of hotel operations. With our franchisees’ permission, we also offer promotions to hotel employees, opportunities to join our company and transition to other roles within our network, based on demonstrated job performance as well as satisfactory completion of mandatory training programs and passing examinations. We also encourage our franchisees to follow our employment practices since we believe that these practices will help employees of our franchised-and-managed hotels improve productivity, increase job satisfaction, and feel a similar sense of ownership loyalty to us and our brands.
Employees of Leased-and-Operated Hotels
As of December 31, 2018,2021, we had 625917 employees working for our leased-and-operated hotels. Two to three months in advance of a hotel’s opening, all of the hotel’s employees are required to complete formal training under the supervision of the hotel’s general manager and our human resources department. GreenTree AcademyKOSMOS University staff and our regional managers will conduct an inspection of the hotel’s quality after the conclusion of the training. For general managers, we have an additional three-monthtwo-month program to give them experience in each of our departments on a rotating basis to get further training. Some of these new hires will be selected and promoted to the position of duty manager, and outstanding trainees will quickly be promoted to the position of general manager. We have found this training program to be effective in initiating and motivating our new hires.
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China’s hospitality industry is fragmented, highly competitive and ripe for consolidation, especially among branded hotel chains. We compete with other branded and stand-alone hotels for guests in each of the markets where we operate. Different brands in the hospitality industry compete primarily on the basis of room rates, quality of accommodations, brand name recognition, convenience of location, geographic coverage, quality and range of services provided, guest amenities and membership benefits. We compete mainly with other economy and mid-scale Chinesehotel groups as well as international branded hotel networksvarious stand-alone lodging facilities in China,each of the markets in which we operate, including brands such as Jinjiang, Ji Hotel, Home Inns, 7 Days Inn, Hanting, Super 8 and Ibis, as well as various regional and localinternational hotel chains. As we develop new branded offerings, we expect to compete directly with other hotel operators in many of the mid- to up-scale, mid-scale and economy segments.brands. We also face competition from serviced apartments.
Intellectual Property
Our brand, trade names, trademarks, trade secrets and other intellectual property rights distinguish our technology platforms, services and products from those of our competitors. Our intellectual property contributes to our competitive advantage in the economy and mid-scale hotel segments of China’s hospitality industry. To protect our brand and other of our intellectual property rights, we rely on a combination of trademark, trade secret and copyright laws. We also impose confidentiality obligations on our employees, contractors and other persons who provide services to our company. As of December 31, 2018,2021, we had a total of 218552 trademarks, 2774 software registration certificates and one copyright and 11 patents registered in China. The expiration dates of theseour trademarks fall between the years of 20192022 and 2028,2032, including “GreenTree Inn.” Once the ten-year term of our registered trademarks has expired, we will be able to renew our trademark registrations for another ten years upon paying a renewal fee. We have registered our domain names, including 998.com,, greentree.cn,, greentree.com.cn and others, with the Internet Corporation for Assigned Names and Numbers, or ICANN.
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Our efforts to protect our intellectual property rights may not be adequate, and third parties may infringe on or misappropriate our rights. If others are able to copy and use our proprietary information and operational systems and other proprietary technology platforms of ours without spending time and resources to develop their own, we may not be able to maintain or improve our competitive position. Furthermore, the application and interpretation of laws governing intellectual property rights in China is uncertain and evolving and could involve substantial risks to us. If litigation is necessary to enforce our intellectual property rights, or to determine the scope of the proprietary rights of others, we may have to incur substantial costs or divert other resources which could harm our business and prospects. See “Risk“Item 3. Key Information — D. Risk Factors — Risks Related to Our Business — Any failure to protect our trademarks and other intellectual property rights could negatively impact our business.”
Insurance
We believe that our hotels are covered by adequate property, equipment liability and money insurance policies with coverage features and insured limits that we believe are customary for similar companies in China. We also require our franchisees to carry adequate property, equipment liability and money insurance policies. We carry property insurance that covers the assets that we own at our hotels. Although we require our franchisees to carry customary insurance policies, we cannot guarantee that they will adhere to this requirement and actually purchase such policies. If we were held liable for amounts and claims exceeding the limits of our insurance coverage, or outside the scope of such coverage, our business, financial condition and results of operations may be materially and adversely affected. See “Risk“Item 3. Key Information — D. Risk Factors — Risks Related to Our Business — We have limited insurance coverage.”
Properties and Facilities
Our headquarters are located in Shanghai, China, where we lease approximately 9,396 square meters of office space.
Owned Properties
As of December 31, 2018,2021, we owned foureleven hotel properties having an aggregate GFAgross floor area of 10,389 square meters, and we leased the properties of our leased-and-operated hotels having an aggregate size of 181,08492,360 square meters. For more detailed information about the locations of our hotels, see “— Our Hotel Network.”
Leased Properties
As of December 31, 2021, we had leased a total of 66 properties, with 63 properties for hotel operations and three properties for other uses, such as headquarters and office premises. The gross floor area of our leased properties ranges from approximately 120 square meters to 46,176square meters.
Legal Proceedings
We have been subject to legal proceedings, investigations and claims incidental to the conduct of our business from time to time, including actions relating to among others property lease, franchise agreements with our franchisees, infringement of our brand, employment-related disputes, personal injury, property damage or other harm resulting from acts or omissions by individuals or entities outside of our control, including franchisees and third-party property owners. Various disputes in connection with the properties we lease or with the franchise agreements may occur from time to time, which may cause our hotel operations to be affected or terminated in the worst-case scenario. As of December 31, 2018,2021, we had 2543 pending legal proceedings in connection with the franchised-and-managed hotels. We are the plaintiff in most of these cases. See “Risk“Item 3. Key Information — D. Risk Factors — Risks Related to Our Business — We are subject to risks related to litigation filed by or against us, and adverse litigation results may harm our business and financial condition.”
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Except as otherwise disclosed in this annual report, we are not currently a party to, nor are we aware of, any legal proceeding, investigation or claim which, in the opinion of our management, is, individually or in the aggregate, likely to have a material adverse effect on our business, financial condition or results of operations.
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We have not set aside a reserve fund for litigation its which we are the defendant, because we believe that we are not likely to lose such litigation, or that if we were to lose such litigation, such loss would not have a material effect on our financial condition and results of operations.
Corporate Social Responsibility: Environmental Impact
We are committed to saving more energy and cost by recommending more energy-saving household electrical appliances produced by several leading manufacturers with higher energy standards to our hotels. Getting more energy saved even through reasonable layout and location of these appliances with the help of our Engineering Department staff. What’s more, in order to reduce environmental impact and reduce unnecessary waste of environmental resources, we have been upgrading the disposable items used in our hotels, such as slippers, toothbrushes, and combs, to environmentally friendly ones.
To pay back to society, we prefer to purchase and recommend social welfare products, including washing-up products from certain chemical factories with most of their workers being hearing impaired, to contribute to the social integration of the disabled. During the period of college entrance examination each year, we call for our hotels to join the “preferential leisure room for college entrance examination” to provide cheer for college entrance examination students.
Regulatory Matters
This section sets forthfollowing is a summary of the most significant rulesmaterial laws and regulations or requirements that affect our business activities in China or the rights of our shareholders’ rightsshareholders to receive dividends and other distributions from us.
The hotel industry in China is subject to a number of laws and regulations, including laws and regulations relating specifically to hotel operation and management and commercial franchising, as well as those relating to environmental and consumer protection. As with other industries in China, regulations governing the hotel industry in China are still developing and evolving and might be amended, upgraded or re-enacted from time to time. As a result, when any prevailing regulations are amended or upgraded, the hotel industry may be required to meet new or stricter standards, criteria or requirements. This section summarizes the principal PRC regulations currently relevant to our business and operations.
Regulations on Foreign Ownership
The principalForeign Investment Law of the PRC enacted by the National People’s Congress, or the NPC, on March 15, 2019, and most current regulation governingthe Regulations for Implementation of the Foreign Investment Law of the People’s Republic of China, or the Implementation Regulations, promulgated by the State Council, both of which became effective on January 1, 2020 replaced the trio of existing laws regulating foreign ownershipinvestment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations. The organization form, organization and activities of hotel businessesforeign-invested enterprises shall be governed, among others, by the Company Law of PRC and the Partnership Enterprise Law of PRC. Foreign-invested enterprises established before the implementation of the Foreign Investment Law may retain the original business organization and so on within five years after the implementation of this Law.
According to the Foreign Investment Law, foreign investments are entitled to pre-entry national treatment and are subject to negative list management system. The pre-entry national treatment means that the treatment given to foreign investors and their investments at the stage of investment access is not lower than that of domestic investors and their investments. The negative list management system means that the state implements special administrative measures for access of foreign investment in specific fields. Foreign investors shall not invest in any forbidden fields stipulated in the negative list and shall meet the conditions stipulated in the negative list before investing in any restricted fields. Foreign investors’ investment, earnings and other legitimate rights and interests within the territory of China shall be protected in accordance with the law, and all national policies on supporting the development of enterprises shall equally apply to foreign-invested enterprises.
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Investment activities in the PRC isby foreign investors are principally governed by the Catalog of Industries for Encouraging Foreign Investment, or the Encouraging Catalogue, and the Special Management Measures (Negative List) for the Access of Foreign Investment, or the Negative List which were promulgated and are amended from time to time by the PRC Ministry of Commerce, or MOC, and the National Development and Reform Commission, or NDRC, and together with the Foreign Investment Law and their respective implementation rules and ancillary regulations. MOC and the NDRC promulgated the Catalogue of Industries for Encouraging Foreign Investment (2020 Version), on December 27, 2020, and the Special Management Measures (Negative List) for the Access of Foreign Investment (2018) issued(2021), or the 2021 Negative List, on December 27, 2021, to replace the previous encouraging catalogue and negative list thereunder.
Under the Measures on Reporting of Foreign Investment Information approved by MOC and the State Administration for Market Regulation, or SAMR, which came to effect on January 1, 2020, Foreign investors or foreign investment enterprises shall submit investment information through submission of initial reports, change reports, deregistration reports and annual reports to the commerce administrative authorities through the Enterprise Registration System and the National Enterprise Credit Information Publicity System. Where a foreign investor or foreign-funded enterprise, in violation of the provisions of the present Law, fails to report the investment information as required to the foreign investment information report system, the competent department for commerce concerned shall order it to make corrections within a time limit; if it fails to do so within the prescribed time limit, a fine of not less than 100,000 yuan but not more than 500,000 yuan shall be imposed.
According to the Measures for the Security Review of Foreign Investment promulgated by the National DevelopmentNDRC and Reform Commission and the PRC Ministry of Commerce, or the MOC on June 28, 2018December 19, 2020 and became effective ason January 18, 2021, the NDRC and the MOC will establish a working mechanism office in charge of July 28, 2018. Pursuant to this regulation, there are no restrictions onthe security review of foreign investment. Such measures define foreign investment as direct or indirect investment by foreign investors in hotel businessesthe PRC, which includes (i) investment in new onshore projects or establishment of wholly foreign owned onshore companies or joint ventures with foreign investors; (ii) acquiring equity or asset of onshore companies by merger and acquisition; and (iii) onshore investment by and through any other means. Investment in certain key areas with bearing on national security, such as important cultural products and services, important information technology and internet services and products, key technologies and other important areas with bearing on national security, and in the acquisition of de facto control of investee companies, shall be filed with the specifically established office before such investment is carried out. What may constitute “onshore investment by and through any other means” or “de facto control” could be broadly interpreted under such measures. It is likely that control through contractual arrangement be regarded as de facto control based on provisions applied to security review of foreign investment. Failure to make such filing may subject such foreign investor to rectification within prescribed period, and will be recorded as negative credit information of such foreign investor in the relevant national credit information system, which would then subject such investors to joint punishment as provided by relevant rules. If such investor fails to or refuses to undertake such rectification, it would be ordered to dispose of the equity or asset and to take any other necessary measures so as to return to the status quo and to erase the impact to national security.
Regulations on Mergers and Acquisitions
Under the Measures on Reporting of Foreign Investment Information, foreign investors undertaking a merger and acquisition of a non- foreign investment enterprise in China aside from business licensesshall submit an initial report through the Enterprise Registration System at the time of completion of change registration for the target enterprise.
A foreign investor acquiring shares, equities, property shares or any other similar rights and other permits that every hotel must obtain.
In addition, under the Interim Provisions on the Investmentinterests of Foreign-invested Companies in China promulgated on July 25, 2000 and amended on October 28, 2015, any foreign investedan enterprise that intends to invest within the territory of China shall abide bybe subject to the state laws and regulations, andForeign Investment Law, which means if the investment by the foreign invested enterprises shallinvestors do not follow the Foreign Investment Industrial Guidance Catalog as updated from time to time by reference, according to which, foreign invested enterprises are not permitted to invest in fields where foreign investment is prohibited, such as Internet news information services, online publication servicespresent law during the transaction of mergers and etc.
Furthermore, underacquisition, the Interim Administrative Measures for the Record-filing of the Incorporation and Change of Foreign-invested Enterprises (Revised in 2018) which were promulgated and became effective on July 30, 2017, if foreign-invested enterprises and their investors conduct investment and operation activities in restricted investment sectors listed in the special access administrative measures prescribed by the state without approval, the competent commerce departments shall order them to make corrections within a prescribed time limit, and impose a fine of less than RMB30,000. In the case of violation of other laws and regulations, the relevant departments shall investigate the corresponding legal liability. In addition, if foreign-invested enterprises and their investors conduct investment and operation activities in forbidden investment sectors listed in the special access administrative measures prescribed by the state, the competent commerce departments shall order them to make corrections within a prescribed time limit, and impose a fine of less than RMB30,000. In the case of violation of other laws and regulations, the relevant departments shall investigate the corresponding legal liability. For example, if any investment violates the Securities Law of the People’s Republic of China (Revised in 2014), the person undertaking such investmentparty may be subject to investigations initiated by the China Securities Regulatory Commission or its local branches,penalties and severe penalties or other administrative measures may also be imposed.
Regulations on Mergers and Acquisitions
The Interim Administrative Measures for Record-filing of the Incorporation and Change of Foreign-invested Enterprises (Revised in 2018) governs generally foreign investors’ mergers with and acquisitions of domestic Chinese non-foreign-invested enterprises, as well as foreign investors’ strategic investments in publicly-listed companies in China, subject to certain exceptions. More specifically,fines under the record-filing administration system, where a new foreign-invested enterprise is incorporated or a non-foreign invested enterprise changes its status and becomes a foreign-invested enterprise through an acquisition, merger or other means, such incorporation or change no longer requires pre-approval of MOC but should, prior to registration with the SAIC or within 30 days after the updated business license has been issued by the SAIC, be filed online on a foreign investment comprehensive administration information system operated by MOC. The abovementioned filing must be completed online together with the registration with SAIC and the relevant department of the State Administration for Market Regulation through the same system.newly promulgated Foreign Investment Law.
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Regulations on Hotel Operation
In November 1987, the Ministry of Public Security issued the Measures for the Control of Security in the Hotel Industry, and in June 2004, the State Council promulgated the Decision of the State Council on Establishing Administrative License for the Administrative Examination and Approval Items Really Necessary To Be Retained,
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which was amended on August 25, 2016. Under these two regulations, anyone who applies to operate a hotel is subject to examination and approval by the local public security authority and must obtain a special industry license. The Measures for the Control of Security in the Hotel Industry impose certain security control obligations on the operators. For example, the hotel must examine the identification card of any guest to whom accommodation is provided and make an accurate registration. The hotel must also report to the local public security authority if it discovers anyone violating the law or behaving suspiciously or an offender wanted by the public security authority. The Law of the PRC on Penalties for the Violation of Public Security Administration was promulgated on October 26, 2012 and entered into force on January 1, 2013. Pursuant to the Measures for the Control of Security in the Hotel Industry, the Law of the PRC on Penalties for the Violation of Public Security Administration and relevant local regulations, operating a hotel business without having obtained a special industry license may subject the operator to warnings, detention of between 10 and 15 days as well as fines of RMB500 to RMB1,000. Operators of hotel businesses who failed to obtain the special industry license, or who obtained the special industry license but have violated applicable administrative regulations, may also be subject to orders to suspend or cease their operations, forfeitoperations. of According to the regulations of certain cities/provinces, such as Jiangsu, operating a hotel business without having obtained a special industry license may be banned by relevant public security departments, confiscated illegal gains, illegally operated items, and intools and equipment directly used for illegal operations, and a fine ranging from RMB5,000 to RMB20,000 shall be imposed; if the circumstances are serious, circumstances, additional fines.they shall also be fined between RMB20,000 to RMB200,000. See “Risk“Item 3. Key Information — D. Risk Factors — Risks Related to Our Business — Failure to comply with government regulations relating to the franchiseleased-and-operated and franchised-and-managed business model,models, hospitality industry, construction, fire prevention, food hygiene, safety and environmental protection could materially and adversely affect our business and results of operations.”
In April 1987, the State Council promulgated the Public Area Hygiene Administration Regulation and subsequently amended the same on February 6, 2016 and April 23, 2019, and on March 10, 2011, the Ministry of Health promulgated the Implementing Measures for the Public Area Hygiene Administration Regulation and the National Health and Family Planning Commission amended this regulation on January 19, 2016 and on December 26, 2017. According to these regulations, a hotel must obtain a public area hygiene license before opening for business. Pursuant to these regulations, hotels failing to obtain a public area hygiene license or comply with other requirements set forth in such regulations may be subject to the following administrative penalties depending on the seriousness of their respective activities: (i) warnings; (ii) fines between RMB500 and RMB30,000; or (iii) orders to suspend operations for rectification, or to revoke the public hygiene license. See “Risk“Item 3. Key Information — D. Risk Factors — Risks Related to Our Business — Failure to comply with government regulations relating to the franchise business model, hospitality industry, construction, fire prevention, food hygiene, safety and environmental protection could materially and adversely affect our business and results of operations.”
Since 2018, management for waste sorting and recycling has been implemented across the country, and corresponding management regulations and administrative penalties have been formulated for companies/persons who violate the waste sorting and recycling management regulations, such as the fifty-seventh of " Regulations on the Management of Domestic Waste in Shanghai". On January 31, 2019, the Standing Committee of the Shanghai Municipal People's Congress issued the "Regulations on the Management of Domestic Waste in Shanghai", which were officially implemented on July 1, 2019. Article 57 of the regulations stipulates that if a company violates the provisions of paragraph 1 of Article 24 of these regulations and fails to put household garbage into corresponding collection containers, the urban management law enforcement department shall order it to make corrections immediately; if it refuses to make corrections, it shall be fined not less than RMB5,000 but not more than RMB50,000.
On June 10, 2021, the Standing Committee of the National People's Congress promulgated the "Production Safety Law of the People's Republic of China", which will be officially implemented on September 1, 2021. The law stipulates that production and business entities shall educate and train employees on work safety to ensure that employees have the necessary knowledge of work safety, are familiar with relevant work safety rules and regulations and safety operation procedures, master the safety operation skills of their posts, and understand accidents emergency measures, and know their rights and obligations in safety production. In addition, employees who are not qualified for work safety education and training should not allowed to work.
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For production and operation companies that fail to provide safety production education and training to employees, dispatched workers and interns in accordance with regulations, or fail to truthfully inform relevant production safety issues as required, they shall be ordered to make corrections within a time limit and may be fined RMB50,000; If the correction is not made within the time limit, it shall be ordered to suspend production and business for rectification, and a fine of not less than RMB50,000 but not more than RMB100,000 shall be imposed; the person in charge directly responsible and other directly responsible personnel shall be fined not less than RMB10,000 but not more than RMB20,000.
In order to protect and improve the environment and prevent and control air pollution, the Standing Committee of the National Congress formulated the Law of the People's Republic of China on the Prevention and Control of Air Pollution, which was promulgated and took effect on October 26, 2018. The operator shall install oil fume purification facilities and keep them in normal use, or take other oil fume purification measures to discharge oil fume up to the standard and prevent pollution to the normal living environment of nearby residents. It is also prohibited to build, rebuild or expand catering service projects that generate oily smoke, odor and exhaust gas in residential buildings, commercial and residential complex buildings without special flues, and commercial floors adjacent to residential floors in commercial and residential complex buildings.
Article 118 stipulates food and beverage business operators which emit fume and violate the provisions of this Law in failing to install and use fume purification facilities properly or failing to adopt other fume purification measures and emit fume beyond the emission standards shall be ordered by the supervision and administration authorities determined by the local People's Governments of county level and above to make correction, and be subject to a fine ranging from RMB5,000 to RMB50,000; offenders who refuse to make correction shall be ordered to suspend production and rectify; Offenders who violate the provisions of this Law in undertaking new establishment, alteration and expansion of food and beverage business operations which emit fume, odor and waste gases within residential buildings, commercial cum residential buildings which have not installed complementary dedicated flue, and commercial floors of commercial cum residential buildings adjacent to residential floors, shall be ordered by the supervision and administration authorities determined by the local People's Governments of county level and above to make correction; offenders who refuse to make correction shall be ordered to close down, and be subject to a fine ranging from RMB10,000 to RMB100,000.
With the purpose of guaranteeing food safety and the safeguarding the health and life safety of the public, the Standing Committee of the National People’s Congress, or the SCNPC enacted the PRC Law on Food Safety in February 2009 and amended the same on April 24, 2015, and on December 29, 2018.2018 and on April 29, 2021. Also, the SCNPC adopted the Implementation Rules of the Food Safety Law which became effective on July 20, 2009 and amended on February 6, 2016.2016 and on October 11, 2019. On March 4, 2010, the Ministry of Health promulgated the Administrative Measures on Food and Beverage Service Licensing and Administrative Measures on Food Safety Supervision in Food and Beverage Services. Both measures came into force on May 1, 2010. Pursuant to the above measures, providers of consumer food services are required to obtain a food catering service license, and are responsible for safety in food and beverage services. On July 30, 2009, the SAIC promulgated the Administrative Measures for the Food Circulation License which was subsequently repealed in 2015 to comply with the newly amended PRC Law on Food Safety. Under this measure, providers for food circulation service shall obtain a food circulation license. In August 2015, the China Food and Drug Administration, or the CFDA promulgated the Administrative Measures for Food Operation Licensing and subsequently amended the same on November 17, 2017. Also, the CFDA adopted the Announcement on Launching the Use of Food Business License which became effective on September 30, 2015. Under the above measures, a food operation permit shall be obtained in accordance with the law to engage in food selling and catering services within the territory of the People’s Republic of China. The former food catering service or circulation license will be de-registeredderegistered by the authority that has issued the license upon its expiration. However, a former food catering service or circulation license that does not expire will continue to be valid; if, during the validity period thereof, the food business operator applies for replacing it with food business license, the licensing authority shall make the replacement according to relevant provisions. Each of the restaurants run in our hotels is required to obtain a food business or catering service or circulation license in order to offer food services. Pursuant to the PRC Law on Food Safety, hotels failing to obtain a food service license (or formerly food hygiene license) may be subject to: (i) confiscation of illegal gains, food illegally produced for sale and tools, facilities and raw materials used for illegal production; or (ii) fines between RMB50,000 and RMB100,000 if the value of food illegally produced is less than RMB10,000 or fines equal to 10 to 20 times of the value of food if such value is equal to or more than RMB10,000. See “Risk“Item 3. Key Information — D. Risk Factors — Risks Related to Our Business — Failure to comply with government
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regulations relating to the franchise,leased-and-operated and franchised-and-managed business models, hospitality industry, construction, fire prevention, food hygiene, safety and environmental protection could materially and adversely affect our business and results of operations.”
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The PRC legal framework governing fire prevention is set forth in the Fire Prevention Law which was adopted on April 29, 1998 and amended on October 28, 2008.April 29, 2021. According to the Fire Prevention Law and other relevant laws and regulations of the PRC, the Ministry of Public SecurityEmergency Management and its local counterparts at or above county level shall monitor and administer the fire prevention affairs. The Fire Prevention Law provides that the fire prevention design or construction of a construction project must conform to the national fire prevention technical standards. Before construction and decoration of a hotel, the construction entity shall submit the fire prevention design documents to the local fire prevention department of the public securityhousing and urban-rural development authority for examination and approval. Upon completion, the construction entity must go through the fire prevention acceptance check with the relevant fire prevention departmenthousing and urban-rural development authority and no construction may be put into use before it is accepted by the relevant authorities. For each public assembly venue such as a hotel, the construction entity or entity using such venue shall, prior to use and operation of any business thereof, apply for a safety check on fire prevention with the relevant fire prevention department under the public security authority at or above the county level where the venue is located, and such place could not be put into use and operation if it fails to pass the safety check on fire prevention or fails to conform to the safety requirements for fire prevention after such check. Pursuant to these regulations, hotels failing to obtain approval of fire prevention design plans or failing fire prevention safety inspections (including acceptance check and safety check on fire prevention) may be subject to: (i) orders to suspend the construction of projects, use or operation of business; and (ii) fines between RMB30,000 and RMB300,000. PursuantOn May 30, 2019, the General Office of the CPC Central Committee and the General Office of the State Council promulgated the Notice of the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council on Promulgation of the Opinions on Deepening the Reform of Fire Control Law Enforcement, or the Opinions. Under the Opinions, public gathering premises (including hotels) may be put into use or commence business after obtaining a business license or satisfying the conditions for putting into use pursuant to the Administrative Regulations Concerning Supervision onapplicable law, and upon submission of an application through the Fire Safety of Construction Projects and Regulations Concerning Supervision and Inspection on Fire Safety, both as amended on July 17, 2012 and effective on November 11, 2012, for each hotel with a construction area of no less than 10 thousand square meters, the construction entityonline government services platform or entity operating such hotel shall, prior to putting it in use and operating it for business, submit the fire prevention design documentsonsite to the fire prevention department ofcontrol departments and undertaking that the public security authority for approval, go through acceptance check on fire prevention thereby and thereafter go throughpremises comply with fire safety inspection on public assembly venues; for each hotel with a construction area of less than 10 thousand square meters, the construction entity or entity operating such hotel shall, prior to putting it in use and operating it for business, submit the documents in relation to the fire prevention design and acceptance check on fire prevention to the fire prevention department of the public security authority for filing purpose, and go through fire safety inspection on public assembly venues.standards. Each hotel passing the fire safety inspection on public assembly venues will obtain a certificate for fire safety inspection on public assembly venues. See “Risk“Item 3. Key Information — D. Risk Factors — Risks Related to Our Business — Failure to comply with government regulations relating to the franchise,leased-and-operated and franchised-and-managed business models, hospitality industry, construction, fire prevention, food hygiene, safety and environmental protection could materially and adversely affect our business and results of operations.”
In January 2006, the State Council promulgated the Regulations for Administration of Entertainment Places and amended them on February 6, 2016.2016 and on November 29, 2020. Under these regulations, hotels that provide entertainment facilities, such as discos or ballrooms, are required to obtain a license for entertainment business operations.
On October 18, 2010, the General Administration of Quality Supervision, Inspection and Quarantine and Standardization Administration approved and issued the Classification and Accreditation for Star-rated Tourist Hotels (GB/T14308-2010), which became effective on January 1, 2011. On November 19, 2010, the National Tourist Administration promulgated the Implementation Measures of Classification and Accreditation for Star-rated Tourist Hotels, which also became effective on January 1, 2011. Under these regulations, all hotels which have been in operation for over one year are eligible to apply for a star rating assessment. There are five ratings for tourist hotels from one star to five stars, which ratings are assessed based on facilities, management standards and quality of service. A star rating, once granted, is valid for three years.
On April 25, 2013, the Standing Committee of the National People’s CongressSCNPC issued the Tourism Law of the People’s Republic of China, which became effective on October 1, 2013 and was most recently amended on October 26, 2018. According to this law, accommodation providers must fulfill the obligations under their agreements with customers. If the accommodation providers subcontract part of their services to any third party, or involve any third party in the provision of services to customers, the accommodation providers must assume joint and several liability with such third parties for any damage caused to their customers.
All of the foregoing regulations on hotel operation apply to our company both as the operator of our leased-and-operated hotels, and as the franchisor of our franchised-and-managed hotels.
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Regulations on Leasing
Under the Law on Urban Real Estate Administration promulgated by the SCNPC, which took effect as of January 1995 with the latest amendment in August 2009,2019, lessors and lessees are required to enter into a written lease contract, containing such provisions as the term of the lease, the use of the premises, liability for rent and repair, and other rights and obligations of both parties. Both lessor and lessee are also required to register the lease with the real estate administration department. Pursuant to implementing rules stipulated by certain provinces or cities, such as Tianjin, if the lessor and lessee fail to go through the registration procedures, both lessor and lessee may be subject to warnings, rectifications and/or other penalties. See “Risk“Item 3. Key Information — D. Risk Factors — Risks Related to Our Business — Our lessors’ failure to comply with lease registration and other compliance requirements under PRC law may subject these lessors or us to fines or other penalties that may negatively affect our ability to operate our hotels.”
In March 1999,According to the National People’s Congress,PRC Civil Code (which took effect on January 1, 2021 and replaced, among others, the China legislature, passed the PRC Contract Law, of which Chapter 13 governs lease agreements. According to and the PRC ContractProperty Law), subject to consent of the lessor, the lessee may sublease the leased item to a third party. Where the lessee subleases the lease item, the leasing contract between the lessee and the lessor remains valid. The lessor is entitled to terminate the contract if the lessee subleases the lease item without the consent of the lessor. See “Risk“Item 3. Key Information — D. Risk Factors — Risks Related to Our Business — The legal rights of our franchisees and us to use certain leased properties could be challenged by property owners or other third parties, which could prevent our franchisees or us from operating the affected hotels or increase the costs associated with operating these hotels.”
On December 1, 2010, the Ministry of Housing and Urban-Rural Development promulgated the Administrative Measures for Commodity Housing Tenancy, which took effect on February 1, 2011. Under this regulation, a property may not be leased in some circumstances, including if the designated use of the property is changed in violation of applicable regulations. This regulation further provides that the competent real estate departments of the people’s governments of the municipalities directly under the central government, cities and counties shall urge those who violate above provisions to make corrections within a specified time limit, and impose a fine below RMB5,000 on those who have not obtained illegal income. A fine between three and five times the amount of illegal income up to RMB30,000 may be imposed on those who have obtained illegal gains.
In March 16, 2007,Pursuant to the National People’s Congress passed the PRC Property Law, pursuant to which where a mortgagor leasesCivil Code, if the mortgaged property beforehas been leased and transferred for occupation prior to the establishment of the mortgage contract is concluded,right, the previously established leasing relationoriginal tenancy shall not be affected;affected by such mortgage right. According to the Interpretation of the Supreme People’s Court on Several Issues concerning the Application of Law in the Trial of Cases about Disputes Over Lease Contracts on Urban Buildings (2020 version), which took effect on January 1, 2021, if the ownership of the leased premises changes during lessee’s possession in accordance with the terms of the lease contract, and where a mortgagor leases the mortgaged property afterlessee requests the creationassignee to continue to perform the original lease contract, the PRC court shall support it, except that the mortgage right has been established before the lease of the leased premises and the ownership changes due to the mortgagee’s realization of the mortgage interest, the leasing interest will be subordinated to the registered mortgage interest.right. See “Risk“Item 3. Key Information — D. Risk Factors — Risks Related to Our Business — The legal rights of our franchisees and us to use certain leased properties could be challenged by property owners or other third parties, which could prevent our franchisees or us from operating the affected hotels or increase the costs associated with operating these hotels.”
Regulations on Usage of Land or Property
The regulations governing the land or property usage mainly include the Land Administration Law of the People’s Republic of Chinaadopted by the Standing Committee of the National People’s Congress on June 25, 1986, and most recently amended on August 28, 2004,26, 2019, and the Regulations on the Implementation of the Land Administration Law of the People’s Republic of China promulgated according to the Order of the State Council No. 256 on December 27, 1998 and further revised in accordance with the Decision of the State Council on Revising Certain Administrative Regulations on July 29, 2014.2014 and September 1, 2021.
According to the above regulations, as to state-owned land and land collectively-owned by farmers, construction entities shall use such land, construction according to the stipulations of the land use right lease contract or according to the provisions of the approval documents relevant to the allocation of land use rights. The As for state-owned land, the
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conversion of the land to land used for construction purposes shall receive the consent of the competent landnatural resources administrative departments of relevant people’s governments and be submitted to the people’s governments that originally granted land use approval. When changing the purpose of land within urban planning areas, consent shall be obtained from the relevant urban planning administration departments before submission; without such approvals, the use of land specified in the relevant overall land utilization plan shall not be changed. Under these regulations, failure to comply with the approved usage may subject the owners of such properties and/or the tenants to fines or other penalties, including potentially being required to cease such non-compliant operations and being requested by the relevant land administrative authority to return the land. If the land is not used in accordance with the approved land use purpose, the rural collective economic organization may take back the land use rights upon approval by the People’s Government which has approved the land use previously.
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Regulations on Consumer Protection
In October 1993, the SCNPC promulgated the Law on the Protection of the Rights and Interests of Consumers which has been amended on October 25, 2013, or the Consumer Protection Law. Under the Consumer Protection Law, a business operator providing a commodity or service to a consumer is subject to a number of requirements, including the following:
● | to ensure that commodities and services meet certain safety requirements; |
● | to disclose serious defects of a commodity or a service and to adopt preventive measures against damage occurrence; |
● | to provide consumers with accurate information and to refrain from conducting false advertising; |
● | not to set unreasonable or unfair terms for consumers or alleviate or release itself from civil liability for harming the legal rights and interests of consumers by means of standard contracts, circulars, announcements, shop notices or other means; and |
● | not to insult or slander consumers or to search the person of, or articles carried by, a consumer or to infringe upon the personal freedom of a consumer. |
to ensure that commodities and services meet with certain safety requirements;
to disclose serious defects of a commodity or a service and to adopt preventive measures against damage occurrence;
to provide consumers with accurate information and to refrain from conducting false advertising;
not to set unreasonable or unfair terms for consumers or alleviate or release itself from civil liability for harming the legal rights and interests of consumers by means of standard contracts, circulars, announcements, shop notices or other means; and
not to insult or slander consumers or to search the person of, or articles carried by, a consumer or to infringe upon the personal freedom of a consumer.
Business operators may be subject to civil liabilities for failing to fulfill the obligations discussed above. These liabilities include restoring the consumer’s reputation, eliminating the adverse effects suffered by the consumer, and offering an apology and compensation for any losses incurred. The following penalties may also be imposed upon business operators for the infraction of these obligations: issuance of a warning, confiscation of any illegal income, imposition of a fine, an order to cease business operation, revocation of its business license or imposition of criminal liabilities under circumstances that are specified in laws and statutory regulations.
On December 26, 2003, the PRC Supreme People’s Court published the Interpretation of Some Issues Concerning the Application of Law for the Trial of Cases on Compensation for Personal Injury which took effect on May 1, 2004.2004 and be amended on December 29, 2020. On December 26, 2009, the PRC Standing Committee ofMay 8, 2020, the National People’s Congress promulgated the Tort Law of the People’s RepublicPRC enacted The Civil Code of Chinathe PRC, which took effectbecame effective on July 1, 2010.2021. The above interpretation and law further increase the liabilities of business operators engaged in the operation of hotels, restaurants, or entertainment facilities and subject such operators to compensatory liabilities for failing to fulfill their statutory obligations to a reasonable extent or to guarantee the personal safety of others.
Regulations on Protection of Information on Networks
On December 28, 2012, the SCNPC issued Decision of the Standing Committee of the National People’s Congress on Strengthening Information Protection of Information on Networks,, pursuant to which network service providers and other enterprises and institutions shall, when gathering and using electronic personal information of citizens as part of theirin business activities, must make such gatheringpublish their collection and use publicly known, implement rules and adhere to the principles of legality, rationality and necessity,necessarily, explicitly state the
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purposes, mannermanners and scope for gatheringscopes of collecting and using information, and obtain the consentsconsent of those aboutfrom whom information is gathered, mustcollected, and shall not gathercollect and use information in violation of relevant laws and regulations and must adhere to any agreements they have with such persons. Networkthe agreement between both sides; and the network service providers and other enterprises and institutions and their personnel must strictly keep such information strictly confidential and may not divulge, alter, damage, or sell, such information, or illegally provide others with such information.
On July 16, 2013, the Ministry of Industry and Information Technology, or the MIIT, issued the Order for the Protection of Telecommunication and Internet User Personal Information. The requirements under this order are stricter and wider compared to the above decision issued by the National People’s Congress. According to this order, if a network service provider wishes to collect or use personal information, it may do so only if such collection is necessary for the services it provides. Furthermore, it must disclose to its users the purpose, method and scope of any such collection or usage, and must obtain consent from the users whose information is being collected or used. Network service providers are also required to establish and publish their protocols relating to personal information collection or usage, keep any collected information strictly confidential and take technological and other measures to maintain the security of such information. Network service providers are required to cease any collection or usage of the relevant personal information, and deregister the relevant user account, when a user stops using the relevant Internet service. Network service providers are further prohibited from divulging, distorting or destroying any such personal information, or selling or providing such personal information unlawfully to other parties. In addition, if a network service provider appoints an agent to undertake any marketing or technical services that involve the collection or usage of personal information, the network service provider is required to supervise and manage the protection of the information. The order states, in broad terms, that violators may face warnings, fines, public exposure and, in the most severe cases, criminal liability.
On June 1, 2017, the Cybersecurity Law of the People’s Republic of China promulgated in November, 2016 by SCNPC became effective. This law also absorbed and restated the principles and requirements mentioned in the aforesaid decision and order, and further provides that, where an individual finds any network operator collects or uses his or her personal information in violation of the provisions of any law, regulation or the agreement of both parties, the individual shall be entitled to request the network operator to delete his or her personal information; if the individual finds that his or her personal information collected or stored by the network operator has any error, he or she shall be entitled to request the network operator to make corrections, and the network operator shall take measures to do so. Pursuant to this law, the violators may be subject to: (i) warning; (ii) confiscation of illegal gains and fines equal to 100% to 1,000% of the illegal gains; or if without illegal gains, fines up to RMB1,000,000; or (iii) an order to shut down the website, suspend the business operation for rectification, or revoke business license. Besides, responsible persons may be subject to fines between RMB10,000 and RMB100,000.
On November 28, 2019, the Secretary Bureau of the Cyberspace Administration of China, or CAC the General Office of the Ministry of Industry and Information Technology, the General Office of the Ministry of Public Security and the General Office of the SAMR promulgated the Identification Method of Illegal Collection and Use of Personal Information Through App, which provides guidance for the regulatory authorities to identify the illegal collection and use of personal information through mobile apps, and for the app operators to conduct self-examination and self-correction and for other participants to voluntarily monitor compliance. We have required our users to consent to our collecting and using their personal information, and established information security systems to protect user’s privacy. Furthermore, pursuant to the PRC Civil Code, any organization or individual shall legally obtain personal information of others when necessary and ensure the safety of such information, and shall not illegally collect, use, process or transmit personal information of others, or illegally purchase or sell, provide or make public personal information of others.
Regulations Relating to Internet Content and Information Security
The Administrative Measures on Internet Information Services specifies that internet information services regarding news, publications, education, medical and health care, pharmacy and medical devices, among other things, are to be examined, approved and regulated by the relevant authorities. Internet information providers are prohibited from providing services beyond those included in the scope of their ICP licenses or filings. Furthermore, these measures clearly specify a list of prohibited content. Internet information providers are prohibited from producing, copying, publishing or distributing information that is humiliating or defamatory to others or that infringes the lawful rights and
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interests of others. Internet information providers that violate the prohibition may face criminal charges or administrative sanctions by the PRC authorities. Internet information providers must monitor and control the information posted on their websites. If any prohibited content is found, they must remove the offending content immediately, keep a record of it and report to the relevant authorities. Furthermore, in 2019, the CAC issued the Provisions on the Management of Network Information Content Ecology, or the CAC Order No. 5, which became effective on March 1, 2020, to further strengthen the regulation and management of network information content. Pursuant to the CAC Order No. 5, each network information content service platform is required, among others, (i) not to disseminate any information prohibited by laws and regulations, such as information jeopardizing national security; (ii) to strengthen the examination of advertisements published on such network information content service platform; (iii) to promulgate management rules and platform convention and improve user agreement, such that such network information content service platform could clarify users’ rights and obligations and perform management responsibilities required by laws, regulations, rules and convention; (iv) to establish convenient means for complaints and reports; and (v) to prepare annual work report regarding its management of network information content ecology. In addition, a network information content service platform must not, among others, (i) utilize new technologies such as deep learning and virtual reality to engage in activities prohibited by laws and regulations; (ii) engage in online traffic fraud, malicious traffic rerouting and other activities related to fraudulent account, illegal transaction account or maneuver of users’ account; or (iii) infringe a third party’s legitimate rights or seek illegal interests by way of interfering with information display. Internet information in China is also regulated and restricted from a national security standpoint. The SCNPC enacted the Decisions on Maintaining Internet Security, which may subject violators to criminal punishment in China for any effort to: (1) gain improper entry into a computer or system of strategic importance; (2) disseminate politically disruptive information; (3) leak state secrets; (4) spread false commercial information; or (5) infringe intellectual property rights. The Ministry of Public Security has promulgated measures that prohibit use of the internet in ways which, among other things, result in a leakage of state secrets or a spread of socially destabilizing content. In addition, the Standing Committee of the National People’s Congress promulgated the Cyber Security Law of the People’s Republic of China, or the Cyber Security Law, effective on June 1, 2017, to protect cyberspace security and order. Pursuant to the Cyber Security Law, any individual or organization using the network must comply with the constitution and the applicable laws, follow the public order and respect social moralities, and must not endanger cyber security, or engage in activities by making use of the network that endanger the national security, honor and interests, or infringe on the fame, privacy, intellectual property and other legitimate rights and interests of others. The Cyber Security Law sets forth various security protection obligations for network operators, which are defined as “owners and administrators of networks and network service providers”, including, among others, complying with a series of requirements of tiered cyber protection systems; verifying users’ real identity; localizing the personal information and important data gathered and produced by key information infrastructure operators during operations within the PRC (where such information and data have to be provided abroad for business purpose, subject to applicable laws and regulations, security assessment shall be conducted); and providing assistance and support to government authorities where necessary for protecting national security and investigating crimes.
Regulations on Environmental Protection
On February 29, 2012, the SCNPC issued the amended Law on Promoting Clean Production, which regulates service enterprises such as restaurants, entertainment establishments and hotels and requires them to use technologies and equipment that conserve energy and water, serve other environmental protection purposes, and reduce or stop the use of consumer goods that waste resources or pollute the environment.
According to the Environmental Protection Law of the People’s Republic of China promulgated by the SCNPC on December 26, 1989 and amended on April 24, 2014 and the Environmental Impact Assessment Law of the People’s Republic of China promulgated by the SCNPC on October 28, 2002 and most recently amended on December 29, 2018, respectively, the Regulations Governing Environmental Protection in Construction Projects promulgated by the State Council on November 29, 1998 and amended on July 16, 2017, and the Regulations Governing Completion Acceptance of Environmental Protection in Construction Projects promulgated by the Ministry of Environmental Protection on December 27, 2001, hotels shall submit a Report on Environmental Impact Assessment and an Application Letter for Acceptance of Environmental Protection Facilities in Construction Projects to competent environmental protection authorities for approvals before commencing the operation. Pursuant to the Environmental Impact Assessment Law of the People’s Republic of China, any hotel failing to obtain the approval of an Environmental Impact Assessment may be ordered to cease construction, pay a fine of not less than 1% but not more
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than 5% of the total investment of the construction project on it, and apply forbe ordered restore to the approval within a specified time limit. If the hotel still fails to obtain approval within the specified time limit, it may be subject to fines between RMB50,000 and RMB200,000,original state, and the person directly responsible for the project may be subject to certain administrative penalties. Pursuant to
The Law of the Regulations Governing Completion AcceptancePeople's Republic of Environmental Protection in Construction Projects, any hotel failing to obtain an AcceptanceChina on the Prevention and Control of Environmental Protection Facilities in Construction Projects may be subject to fines and an order to obtain approval within a specified time limit.
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The Water Pollution Prevention Lawfirst became effective on November 1, 1984 and was most recently amended on June 27, 2017. The law applies to the prevention and control of pollution of rivers, lakes, canals, irrigation channels, reservoirs and other surface water bodies and groundwater within the PRC. According to the provisions of the Water Pollution Preventionthis Law and other relevant laws and regulations of the PRC, the Ministry of Environmental Protection and its local counterparts at or above county level shall take charge of the administration and supervision on the matters of prevention and control of water pollution.
The Law of the People's Republic of China on the Prevention and Control of Water Pollution Prevention Lawprovides that environmental impact assessment should be conducted in accordance with the relevant laws and regulations for new construction projects and expansion or reconstruction projects and other facilities on water that directly or indirectly discharge pollutants to water bodies. Facilities for the prevention and control of water pollution at a construction project shall be designed, built and put into use along with the main structure of the construction project. The construction project shall only be used after facilities for the prevention and control of water pollution pass the inspection and acceptance by the Ministry of Environmental Protection and its competent local counterparts. Dismantling or putting off operation of such installations shall be subject to prior approval of the local counterpart of the Ministry of Environmental Protection at or above the county level.
The Administrative Rules regarding the Payment of the Pollutant Discharge Fee, which was promulgated by the State Council and took effect on July 1, 2003 provides that the enterprises should pay the charges for disposing pollutant according to the laws regarding atmospheric pollution, water pollution, solid waste pollution and radioactive contamination and according to enterprises’ actual situation of disposing pollutants. If enterprises fail to pay the charges for disposing pollutants according to the relevant regulations, the environmental protection department is entitled to order the enterprise to pay the charges within limited period of time, otherwise the enterprise will be fined from 200% to 300% of the charges or be ordered to suspend business for rectification. See “Risk Factors — Risks Related to Our Business — Failure to comply with government regulations relating to the franchise, hospitality industry, construction, fire prevention, food hygiene, safety and environmental protection could materially and adversely affect our business and results of operations.”
Regulations on Commercial Franchising
Franchise operations are subject to the supervision and administration of the MOC, and its regional counterparts. Such activities are currently regulated by the Regulations for on the Administration of Commercial Franchising promulgated by the State Council on February 6, 2007, effective as of May 1, 2007. The Regulations for on the Administration of Commercial Franchising were supplemented by the new Administrative Measures for Archival Filing of Commercial Franchises which were issued by the MOC on December 12, 2011 and took effect on February 1, 2012 and the new Administrative Measures for Information Disclosure of Commercial Franchises which were issued by the MOC on February 23, 2012 and took effect on April 1, 2012.
Under the above applicable regulations, a franchisor must have certain prerequisites including a mature business model, trademark, the capability to provide long-term business guidance, technical support and training services to franchisees and ownership of at least two directly-managed storefronts that have been in operation for at least one year within China. Franchisors engaged in franchising activities without satisfying the above requirements may be subject to penalties such as forfeit of illegal income and imposition of fines between RMB100,000 and RMB500,000 and may be bulletined by the MOC or its local counterparts. Franchise contracts shall include certain required provisions, such as terms, termination rights and payments.
A franchisor is required to file its business license, sample franchise agreement and other documents to the provincial commerce authority where it is registered for record within fifteen days following the execution of its first franchise agreement with a franchisee inside the PRC. If the franchisor conducts franchise business in two or more municipalities, provinces or autonomous regions, it is required to file with the Ministry of Commerce. Franchisors who comply with the provisions of the above applicable regulations shall, in accordance with the law, make filing through commercial franchise information management system established by the Ministry of Commerce. Moreover, the franchisor shall file information regarding the execution, withdrawal, renewal of and amendment to franchise agreements to the commerce authority for record before March 31 of each year.
AnyCertain changes in the recorded information of the franchisor should also be filed with the relevant commerce authority within thirty days following the occurrence of these changes. For a franchisor failing to file in accordance with these regulations, the relevant commerce authority may order it to comply within a designated time frame and impose a fine ranging from RMB10,000 to RMB50,000. If the franchisor fails to comply as ordered, the relevant commerce authority may impose another fine ranging from RMB50,000 to RMB100,000 and publicly announce the franchisor’s violation.
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The term of a franchise contract shall be no less than three years unless otherwise agreed by franchisees. The franchisee is entitled to terminate the franchise contract inat his sole discretion within a set period of time upon signing of the franchise contract.
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Pursuant to the Administrative Measures for Information Disclosure of Commercial Franchises, 30 days prior to the execution of franchise contracts, franchisors are required to provide franchisees with copies of the franchise contracts, as well as written true and accurate basic information on matters including:
● | the name, domiciles, legal representative, registered capital, scope of business and basic information relating to its commercial franchising; |
● | basic information relating to the registered trademark, logo, patent, know-how and business model; |
● | the type, amount and method of payment of franchise fees (including payment of deposit and the conditions and method of refund of deposit); |
● | the price and conditions for the franchisor to provide goods, service and equipment to the franchisee; |
● | the detailed plan, provision and implementation plan of consistent quality services including operational guidance, technical support and business training provided to the franchisee; |
● | detailed measures for guiding and supervising the operation of the franchisor, including certain of operational guidance, method of provision and implementation plan, including site selection, fitting out and decoration, store management, advertising promotions and product configuration; division of liabilities between the franchiser and the franchisee in respect of the handling of customer complaints and remediation thereof, etc.; |
● | investment budget for all franchised hotels of the franchisee; |
● | the current numbers, territory and operation evaluation of the franchisors within China; |
● | a summary of accounting statements audited by an accounting firm and a summary of audit reports for the previous two years; |
● | information on any lawsuit in which the franchisor has been involved in the previous five years; |
● | basic information regarding whether the franchisor and its legal representative have any record of material violation; and |
● | other information required to be disclosed by the MOC. |
the name, domiciles, legal representative, registered capital, scope of business and basic information relating to its commercial franchising;
basic information relating to the registered trademark, logo, patent, know-how and business model;
the type, amount and method of payment of franchise fees (including payment of deposit and the conditions and method of refund of deposit);
the price and conditions for the franchisor to provide goods, service and equipment to the franchisee;
the detailed plan, provision and implementation plan of consistent quality services including operational guidance, technical support and business training provided to the franchisee;
detailed measures for guiding and supervising the operation of the franchisor, including certain of operational guidance, method of provision and implementation plan, including site selection, fitting out and decoration, store management, advertising promotions and product configuration; division of liabilities between the franchiser and the franchisee in respect of the handling of customer complaints and remediation thereof, etc.;
investment budget for all franchised hotels of the franchisee;
the current numbers, territory and operation evaluation of the franchisors within China;
a summary of accounting statements audited by an accounting firm and a summary of audit reports for the previous two years;
information on any lawsuit in which the franchisor has been involved in the previous five years;
basic information regarding whether the franchisor and its legal representative have any record of material violation; and
other information required to be disclosed by the MOC.
In the event of failure to disclose or misrepresentation, the franchisee may terminate the franchise contract and the franchisor may be fined up to RMB100,000.RMB300,000. In addition, such noncompliancenon-compliance may be bulletined.
According to the 2008 Handbook of Market Access of Foreign Investment promulgated by the MOC in December 2008, if an existing foreign-invested company wishes to operate a franchise in China, it must apply to its original examination and approval authority to expand its business scope to include “engaging in commercial activities by way of franchise.”
Regulations on Intellectual Property Rights
The PRC has adopted comprehensive legislation governing intellectual property rights, including copyrights, patents, trademarks and domain names.
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Copyright. Copyright in the PRC, including copyrighted software, is principally protected under the Copyright Law and related rules and regulations. Under the Copyright Law, the term of protection for copyrighted software is 50 years.
Trademark. The PRC Trademark Law and its implementation rules protect registered trademarks. The PRC Trademark Law has adopted a “first-to-file” principle with respect to trademark registration. The National Intellectual Property Administration, or the Trademark Office, is responsible for the registration and administration of trademarks throughout the PRC, and grants a term of ten years to registered trademarks and another ten years if requested upon expiry of the initial or extended term. Trademark license agreements must be filed with the Trademark Office for record.
Patent. Pursuant to the PRC Patent Law and its implementation rules, once a patent for an invention, utility model or design has been granted, unless otherwise provided by the Patent Law, no entity or individual may use the patent, patented product or patented process for production or business purposes without the authorization of the patent owner. Once a patent has been granted for a design, no entity or individual may manufacture, sell or import any product containing the patented design without the permission of the patent owner. If a patent is found to have been infringed, the infringer must, in accordance with relevant regulations, cease such infringement, take remedial action and pay damages.
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Domain Name. Domain names are protected under the Administrative Measures on the China Internet Domain Names promulgated by the MIIT in 2004, which will be replaced by the Administrative Measures on the Internet Domain Names effective on November 1, 2017. The MIIT is the major regulatory authority responsible for the administration of the PRC Internet domain names. The registration of domain names in PRC is on a “first-apply-first-registration” basis. A domain name applicant will become the domain name holder upon the completion of the application procedure.
Regulations on Internet Information Services
The Telecommunications Regulations of the People’s Republic of China (Revised in 2016) which took effect on February 6, 2016 and the Administrative Measures for Internet Information Services (Revised in 2011) which took effect on January 8, 2011 provide that anyone wishing to engage in the provision of commercial internet information services shall apply to the telecommunications administration authority of the province, autonomous region or municipality directly under the Central Government or the State Council’s department in charge of the information industry for an operating permit for value-added telecommunications services of internet information services.
In July 2006, the Ministry of Information Industry, the predecessor of the Ministry of Industry and Information Technology, or the MIIT, issued the Circular on Strengthening the Administration of Foreign Investment in the Operation of Value-added Telecommunications Business, pursuant to which a PRC domestic company that holds an operating license for value-added telecommunications business, which we refer to as an ICP License, is prohibited from leasing, transferring or selling the ICP License to foreign investors in any form and from providing any assistance, including resources, sites or facilities, to foreign investors that conduct a value-added telecommunications business illegally in the PRC. Further, the domain names and registered trademarks used by an operating company providing value-added telecommunications services must be legally owned by that company or its shareholders. In addition, the company’s operational premises and equipment must comply with the approved coverage region on its ICP License, and the company must establish and improve its internal internet and information security policies and standards and emergency management procedures. If an ICP License holder fails to comply with the requirements and also fails to remedy such non-compliance within a specified period of time, the MIIT or its local counterparts have the discretion to take administrative measures against the license holder, including revoking its ICP license. If anyone operates telecommunications business without authorization or beyond its scope of business, the State Council’s department in charge of the information industry or the telecommunications administration authority of the province, autonomous region or municipality directly under the central government shall, ex officio, order rectification of the matter, confiscate the illegal income and impose a fine of up to five times the amount illegal income; if there is no illegal income or if the illegal income is less than RMB50,000, a fine of not less than RMB100,000 and not more than RMB1 million shall be imposed; if the case is serious, the perpetrator shall be ordered to suspend operations and undergo rectification.
On June 10, 2021, National People's Congress of the People's Republic of China adopted The Data Security Law of the PRC, is hereby promulgated, effective September 1, 2021. The Data Security Act requires data processing in a lawful
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and appropriate manner, including the collection, storage, use, processing, transmission, provision and disclosure of data. The Data Security Act sets out data security and privacy obligations for entities and individuals conducting data processing activities. Moreover, data classification and grading protection system has been introduced. Under the Act of Data Security, processors of important data need to conduct risk assessments for their data processing activities, and submit risk assessment reports to relevant authorities. National core data (that is, data related to national security, the lifeline of the national economy, important people's livelihood and major public interests) should be subject to a stricter management system. In addition, the Data Security Act provides for national security review procedures for data processing activities that affect or may affect national security and imposes export controls on certain data and information. Furthermore, the Data Security Act stipulates that without the approval of the competent authorities of the Chinese government, any organization or individual in China shall not provide any data stored in China to any foreign judicial and law enforcement agencies.
On August 20, 2021, the SCNPC of the People's Republic of China promulgated the Personal Information Protection Law, which stipulates personal information rights and privacy protection, and takes effect on November 1, 2021. The Personal Information Protection Law stipulates protection requirements for handling personal information, including but not limited to the collection, storage, use, processing, transmission, provision, disclosure, and deletion of personal information. And many of its specific requirements remain to be clarified in practice by the Cyberspace Administration of China, other regulators and Chinese courts. We may need to further adjust our business practices to comply with personal information protection laws and regulations (including the Personal Information Protection Act).
On December 28, 2021, the Cyberspace Administration of China promulgated the "Measures for Cybersecurity Review", which became effective on February 15, 2022. According to the Cybersecurity Review Measures and other Chinese cybersecurity laws and regulations and draft measures, critical information infrastructure operators planning to purchase network products and services that affect or may affect national security must undergo cybersecurity review by the Cyberspace Administration of China. In addition, the measures stipulate that data processors that carry out data processing activities that affect or may affect national security are also subject to cybersecurity review. The measure further stipulates that if an operator has the personal information of more than 1 million users and plans to list it abroad, it must undergo a cybersecurity review.
On October 29, 2021, the Cyberspace Administration of China promulgated the "Measures for Security Assessment of Data Exports (Draft for Comment)", which stipulates that important data collected and generated during operations in China to be provided overseas and security assessments should be conducted in accordance with the law. Data processors of personal information should conduct security assessments. The draft approach further specifies the procedures and requirements for safety assessment. As of December 31, 2021, the draft measures are only for public comments and have not been formally adopted. Final terms and the timeline for their adoption are subject to change and uncertainty.
On November 14, 2021, the Cyberspace Administration of China promulgated the Regulations on the Administration of Network Data Security (Draft for Comment), which further regulates Internet data processing activities, emphasizes the supervision and management of network data security, and further stipulates the obligations of Internet platform operators, such as establishing data-related platform rules, privacy policies and algorithm policy disclosure systems. Specifically, the Regulations require data processors, including, (1) to take immediate remedial measures when they discover that the network products and services they use or provide have security deficiencies and vulnerabilities, or threaten national security or endanger the public interest; and (2) to follow a series of detailed requirements in processing personal information, managing important data and intending to provide data overseas. In addition, these draft regulations require that data processors that process important data or data processors that go public overseas complete an annual data security assessment and submit a data security assessment report to the relevant regulatory authority. As required by the Regulations, such annual assessments include, but are not limited to, the processing of important data, the findings of Data security risks and disposal measures, effectiveness of data protection measures, implementation of national data security laws and regulations, data security incidents that have occurred and their disposal, and security assessments related to sharing and providing important data overseas. As of December 31, 2021 the Regulations are for public comment only and have not been formally adopted. Final terms and the timeline for their adoption are subject to change and uncertainty.
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Regulations on Foreign Currency Exchange
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations promulgated by the State Council, as amended on August 5, 2008, or the Foreign Exchange Regulations. Under the Foreign Exchange Regulations, the payments of current account items, such as profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital account items, such as direct investments, repayment of foreign currency-denominated loans, repatriation of investments and investments in securities outside of China.
On February 13, 2015, the SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment, or SAFE Notice 13. After SAFE Notice 13 became effective on June 1, 2015, instead of applying for approvals regarding foreign exchange registrations of foreign direct investment and overseas direct investment from SAFE, entities and individuals will be required to apply for such foreign exchange registrations from qualified banks. The qualified banks, under the supervision of the SAFE, will directly examine the applications and conduct the registration.
On March 30, 2015, the SAFE promulgated Notice of the State Administration of Foreign Exchange on Reforming the Mode of Management of Settlement of Foreign Exchange Capital of Foreign-Funded Enterprises, or SAFE Circular 19, to expand the reform nationwide. Circular 19 allows foreign-invested enterprises to make equity investments by using RMB fund converted from foreign exchange capital. Under Circular 19, the foreign exchange capital in the capital account of foreign-invested enterprises upon the confirmation of rights and interests of monetary contribution by the local foreign exchange bureau (or the book-entry registration of monetary contribution by the banks) can be settled at the banks based on the actual operation needs of the enterprises. The proportion of discretionary settlement of foreign exchange capital of foreign-invested enterprises is currently 100%. SAFE can adjust such proportion in due time based on the circumstances of international balance of payments. However, Circular 19 and another circular promulgated by SAFE in June 2016, Notice of the State Administration of Foreign Exchange on Reforming and Regulating the Policies for the Administration of Foreign Exchange Settlement under the Capital Account, or SAFE Circular 16, continues to, prohibit foreign-invested enterprises from, among other things, using RMB fund converted from its foreign exchange capitals for expenditure beyond its business scope, investment and financing (except for security investment or guarantee products issued by bank), providing loans to non-affiliated enterprises or constructing or purchasing real estate not for self-use. See “Risk“Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China — PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offeringour offerings to make loans or additional capital contributions to our PRC subsidiaries which would materially and adversely affect our liquidity and our ability to fund and expand our business.”
In October 2019, the SAFE promulgated the Notice for Further Advancing the Facilitation of Cross-border Trade and Investment, or the SAFE Circular 28, which, among other things, allows all foreign invested enterprises to use Renminbi converted from foreign currency denominated capital for equity investments in China, as long as the equity investment is genuine, does not violate applicable laws, and complies with the negative list on foreign investment. The Circular Regarding Further Optimizing the Cross-border RMB Policy to Support the Stabilization of Foreign Trade and Foreign Investment jointly promulgated by the People’s Bank of China, NDRC, MOFCOM, the State-owned Assets Supervision and Administration Commission of the State Council, the China Banking and Insurance Regulatory Commission and SAFE on December 31, 2020 and effective on February 4, 2021 allows the noninvestment foreign-invested enterprises to make domestic reinvestment with RMB capital in accordance with the law on the premise that they comply with prevailing regulations and the invested projects in China are authentic and compliant. In addition, if a foreign-invested enterprise uses RMB income under capital accounts to conduct domestic reinvestment, the invested enterprise is not required to open a special deposit account for RMB capital. According to the Circular of the State Administration for Foreign Exchange on Optimizing Foreign Exchange Administration to Support the Development of Foreign-related Business, or the SAFE Circular 8 promulgated and effective on April 10, 2020 by the SAFE, the reform of facilitating the payments of incomes under the capital accounts shall be promoted nationwide. Under the prerequisite of ensuring true and compliant use of funds and compliance and complying with the prevailing administrative provisions on use of income from capital projects, enterprises which satisfy the criteria are allowed to use income under the capital
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account, such as capital funds, foreign debt and overseas listing, etc., for domestic payment, without the need to provide proof materials for veracity to the bank beforehand for each transaction.
Under the Foreign Investment Law, foreign investors may freely remit into or out of China, in Renminbi or any other foreign currency, their capital contributions, profits, capital gains, income from asset disposal, intellectual property royalties, lawfully acquired compensation, indemnity or liquidation income and so on within the territory of China.
Regulations on Employee Stock Incentive Plans of Overseas Publicly-Listed Company
In December 2006, the People’s Bank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, which set forth the respective requirements for foreign exchange transactions by individuals (both PRC or non-PRC citizens) under either the current account or the capital account. In January 2007, the State Administration of Foreign Exchange issued implementing rules for the Administrative Measures of Foreign Exchange Matters for Individuals which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen’s participation in the employee stock ownership plans or stock option plans of an overseas publicly listed company.
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On February 25, 2012, the State Administration of Foreign Exchange promulgated the Circulars on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Equity Incentive Plans of Overseas-Listed Company, or the Stock Option Rules. Under this rule, PRC citizens or non-PRC citizens who reside in China for a continuous period of not less than one year, who participate in an equity incentive plan of an overseas publicly listed company are required to register, through our PRC Subsidiary, collectively entrust a domestic agency, or the “Domestic Agency”, to handle issues like foreign exchange registration, account establishment, funds transfer and remittance, and entrust an overseas institution, or the “Overseas Trustee” to handle issues like exercise of options, purchase and sale of corresponding stocks or equity and transfer of corresponding funds. A “Domestic Agency” shall be a domestic company participating in the equity incentive plan or a domestic institution which is qualified for asset custody business as chosen by us according to PRC law. We and our executive officers and other employees who are PRC citizens or non-PRC citizens who reside in China for a continuous period of not less than one year and have been granted options will behave been subject to these regulations uponsince the completion of thisour initial public offering. Failure by these individuals to complete their SAFE registrations may subject us and them to fines and other legal sanctions. See “Risk“Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China — Failure to comply with PRC regulations regarding the registration requirements for employee stock ownership plans or share option planplans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.”
The STA has issued certain circulars concerning employee share options and restricted shares. Under these circulars, our employees working in China who exercise share options will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee share options with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options. If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC governmental authorities.
Further, a notice concerning the individual income tax on earnings from employee share options jointly issued by the Ministry of Finance, or the MOF, and STA,SAT, on March 28, 2005, and its implementing rules, provide that domestic companies that implement employee share option programs shall (a) file the employee share option plans and other relevant documents to the local tax authorities having jurisdiction over them before implementing such employee share option plans; (b) file share option exercise notices and other relevant documents with the local tax authorities having jurisdiction over them before exerciseexercising by the employees of the share options, and clarify whether the shares issuable under the employee share options mentioned in the notice are the shares of publicly listed companies; and (c) withhold taxes from the PRC employees in connection with the PRC individual income tax.
Regulations on Share Capital
In October 2005,Under the SCNPC issued the amended Companynewly promulgated Foreign Investment Law, of the People’s Republic of China, which became effective on January 1, 2006 and was most recently amended on October 26, 2018. In April 2006, the SAIC, the MOC, the General Administration of Customs and the SAFE jointly issued the Implementation Opinions on Several Issues regarding the Laws Applicable to the Administration of Approval and Registration of Foreign-invested Companies. Pursuant to the above regulations, shareholders of a foreign-invested company are obligatedtreated as a domestic company and the shareholders of the foreign-invested company are no longer subject to make full and timely contribution to the
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registered capital of the foreign-invested company. The shareholders can make their capital contributions in cash or in kind, including in the forms of contributions of intellectual property rights or land use rights that can be valued and is transferable. Contribution to a foreign-invested company’s registered capital in cash must not be less than 30% of the total registered capital of the company. The shareholders may choose to make the contributions either in a lump sum or in installments. If the shareholders choose to make the contributions in installments, the first tranche of the contribution shall be no less than 15% of the total registered capital and shall be paid within three months of the establishment of the company and the remaining contribution shall be paid within two years of the establishment of the company.
Regulations on Dividend Distribution
The principal regulation governing distribution of dividends of foreign-invested enterprises is the Corporate Law, as most recently amended on October 26, 2018.
Under the Corporate Law, foreign-invested enterprises in China may pay dividends only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, foreign-invested enterprises in China are required to allocate at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds unless these reserves have reached 50% of the registered capital of the enterprises. Furthermore, foreign-owned companies may, at their discretion, allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserves are not distributable as cash dividends.
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On August 18, 2016, the MOC promulgated Administrative Measures on Single-purpose Commercial Prepaid Cards (Trial Implementation). According to these administrative measures, corporate legal entities engaged in the retail, accommodation and catering, or residential services industries issuing prepaid cards shall complete filling formalities within 30 days from the date on which they engage in the single-purpose card businesses. The administrative measures classify different types of issuers of single-purpose cards, including issuers of group cards, branded cards and issuers of cards on a large scale. Each company engaging in the single-purpose card business shall be classified as one of the foregoing types of prepaid card business in which they are engaged. In addition, these administrative measures also stipulate rules for the card purchase agreement, patterns of cards, limits of each registered and non-registerednonregistered card, use of prepaid monies, a minimum ratio of balances of prepaid monies to the company’s main business income in the preceding accounting year, the company’s depositary system and the designated proportion of deposited funds or guarantee insurance amounts to the balance of prepaid monies in the previous quarter, prepaid money management system and polices and so on. Companies may be subject to administrative punishments, orders to correct any instances of non-compliance within a stipulated period, as well as a fine ranging from RMB 10,000RMB10,000 to RMB 30,000RMB30,000 for any violation of these administrative measures.
Regulations on Offshore Financing
SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as “SAFE Circular 75” promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls. According to the Notice on Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment released on February 13, 2015 by SAFE, from June 1, 2015 local banks will examine and handle foreign exchange registration for overseas direct investment, including the initial foreign exchange registration and amendment registration, under SAFE Circular 37 from June 1, 2015.from.
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The Company has confirmed to usthat none of the holders or beneficiary owners of the Company areis PRC residents. Nevertheless, we may not be aware of the identities of all of our beneficial owners.
Regulations on Overseas Listing
On August 8, 2006, six PRC regulatory agencies, namely the MOC, the State Assets Supervision and Administration Commission, the State Administration of Taxation, the SAIC, the China Securities Regulatory Commission, or the CSRC, and the SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rule, which became effective on September 8, 2006. This New M&A Rule, as amended on June 22, 2009, purports, among other things, to require offshore special purpose vehicles, or SPVs, formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange. On September 21, 2006, the CSRC published a notice on its official website specifying documents and materials required to be submitted to it by SPVs seeking the CSRC approval of their overseas listings.
On December 14, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings by SPVs. The CSRC approval procedures require the filing of a number of documents with the CSRC and the approval process takes several months to complete.
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The PRC Securities Law, which became effective on March 1, 2020, stipulates that overseas securities regulatory authorities shall not carry out investigation and evidence collection directly in the People’s Republic of China. Without the consent of the securities regulatory authority of the State Council and the relevant State Council department(s), no organization or individual may provide the documents and materials relating to securities business activities to overseas parties arbitrarily.
Regulations Relating to Employment
The PRC National People’s Congress promulgated the Labor Contract Law which became effective on January 1, 2008 and was amended on December 28, 2012, and the State Council promulgated implementing rules for the labor contract law on September 18, 2008. The labor contract law and the implementing rules impose requirements concerning, among others, the execution of written contracts between employers and employees, the time limits for probationary periods, and the length of employment contracts. Also, under the labor contract law an employer is not permitted to establish staffing companies to place workers with themselves or their subsidiaries, and no enterprises is permitted to provide work placement business without obtaining a work placement license, for an enterprise that acts in violation of such provisions, the labor administrative department shall order it to stop the illegal act, confiscate all illegal gains, if there is no illegal gain, a fine of not more than RMB50,000 shall be imposed.
On July 5, 1994, the SCNPC promulgated the Labor Law of the People's Republic of China, or the Labor Law, which became effective on January 1, 1995, and amended them on August 27, 2009 and December 29, 2018. In accordance with the Labor Law, a labor contract shall be concluded for establishment of work relationships. On August 4, 1995, the Ministry of Labor (currently known as Ministry of Human Resources and Social Security), promulgated the Opinions on Several Issues concerning the Implementation of the Labor Law of the People's Republic of China, or the Opinions. Under the Opinions, employers shall sign labor contracts with their personnel who are borrowed by other employers for a long time, or personnel who receive education with wages or other off-the-job personnel who still maintain labor relations with them. However, during the period of borrowing or going to school, certain relevant clauses in the labor contract may be modified upon negotiation by both parties; and if the employees dispatched to equity joint ventures and shareholding entities still maintain labor relations with their original employer, they shall conclude labor contracts with their original employer. When the original employer concludes service contracts with the equity joint ventures and shareholding entities in regard to the relevant contents of labor contracts, it may clarify the wage, insurances, welfare, holidays and other relevant treatment to the employees.
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On October 28, 2010, the National People’s Congress of China promulgated the PRC Social Insurance Law, which became effective on July 1, 2011.2011 and was amended on December 29, 2018. In accordance with the PRC Social Insurance Law and other relevant laws and regulations, enterprises in China are required by PRC laws and regulations to participate in certain employee benefit plans, including social insurance funds, namely a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan, a maternity insurance plan, a housing provident fund, and a handicapped employment security fund, and contribute to the plans or funds in amounts equal to certain percentages of salaries, including bonuses and allowances, of the employees as specified by the local government from time to time at locations where they operate their businesses or where they are located. According to the Social Insurance Law, an employer that fails to make social insurance contributions may be ordered to rectify the non-compliance and pay the required contributions within a stipulated deadline and be subject to a late fee of up to 0.05% or 0.2% per day, as the case may be.day. If the employer still fails to rectify the failure to make social insurance contributions within the stipulated deadline, it may be subject to a fine ranging from one to three times the amount overdue. In addition, the PRC Individual Income Tax Law requires companies operating in China to withhold individual income tax on employees’ salaries based on the actual salary of each employee upon payment.
Under the Foreign Investment Law, foreign-funded enterprise engaging in production or operation activities shall comply with the provisions on labor protection and social insurance in laws and administrative regulations, handle the tax, accounting, foreign exchange and other matters according to the relevant laws, administrative regulations and relevant provisions of the State, and accept supervision and inspection by relevant competent departments.
Regulations Relating to Tax
Income Tax and Withholding Tax
The EIT Law applies a uniform 25% enterprise income tax rate to PRC resident enterprises, including both foreign-invested enterprises and domestic enterprises. The EIT Law imposes an enterprise income tax of 10% on dividends distributed by a foreign-invested enterprise to its immediate holding company outside of China, if such immediate holding company is considered a “nonresident“non-resident enterprise” without any establishment or place within China or if the received dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding tax rate. HoldingPursuant to the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong company which directly holds at least 25% equity interest in the PRC enterprise is reduced to 5% from a standard rate of 10%. Pursuant to the Notice of the State Taxation Administration on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or Circular 81, if the relevant PRC tax authorities determine, in their sole discretion, that a company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authorities may adjust the preferential tax treatment. As such, holding companies in Hong Kong, for example, are subject to a 5% withholding tax rate if the holding companies directly hold no less than 25% equity interest in the PRC enterprise and are the beneficial owners of the dividends. The Cayman Islands, where we are incorporated, does not have such a tax treaty with China. Thus, dividends paid to us by our subsidiaries in China may be subject to the 10% withholding tax if we are considered a “non-resident enterprise” under the EIT Law.
The EIT Law provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises.” The “de facto management body” is defined as the organizational body that effectively exercises overall management and control over production and business operations, personnel, finance and accounting, and properties of the enterprise. Currently, there are no detailed rules or precedents governing the procedures and specific criteria for determining “de facto management body”. STA issued the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. According to STA Circular 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a “de facto management body” in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are met: (a) the primary location of the day-to- dayday-to-day operational management is in China; (b) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel
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in China; (c) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholders meeting minutes are located or maintained in China; and (d) 50% or more of voting board members or senior executives habitually reside in China. In addition, the STA issued the Administrative Measures on Income Taxes of Chinese-controlled Offshore Incorporated Resident Enterprises (Trial Implementation), or Tax Trial Measures, on July 27, 2011, and effective on September 1, 2011 and amended in 2015,2017, providing more guidance on the implementation of Circular 82. Both Circular 82 and the Tax Trial Measures apply only to offshore enterprises controlled by PRC enterprises or PRC enterprise groups and are not applicable to our case. But determining criteria set forth in Circular 82 and the Tax Trial Measures may reflect the STA’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or PRC enterprise groups or by PRC or foreign individuals.
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The STA issued a Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-ResidentNonresident Enterprises, or STA Public Notice 7, on February 3, 2015, which replaced or supplemented certain previous rules under the Circular on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-ResidentNonresident Enterprises, or STA Circular 698.
Under STA Public Notice 7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax. According to STA Public Notice 7, “PRC taxable assets” include assets attributed to an establishment in China, immovable properties in China, and equity investments in PRC resident enterprises. In respect of an indirect offshore transfer of assets of a PRC establishment, the relevant gain is to be regarded as effectively connected with the PRC establishment and therefore included in its enterprise income tax filing, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to the immovable properties in China or to equity investments in a PRC resident enterprise, which is not effectively connected to a PRC establishment of a non-resident enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. There is uncertainty as to the implementation details of STA Public Notice 7. If STA Public Notice 7 was determined by the tax authorities to be applicable to some of our transactions involving PRC taxable assets, our offshore subsidiaries conducting the relevant transactions might be required to spend valuable resources to comply with STA Public Notice 7 or to establish that the relevant transactions should not be taxed under STA Public Notice 7. See “Risk“Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China — It is unclear whether we will be considered as a PRC “resident enterprise” under the Enterprise Income Tax Law of the PRC, and depending on the determination of our PRC “resident enterprise” status, dividends paid to us by our PRC subsidiaries may be subject to PRC withholding tax, we may be subject to 25% PRC income tax on our worldwide income, and holders of our ADSs may be subject to PRC withholding tax on dividends on, and gains realized on their transfer of, our ADSs.”
Under the EIT Law, enterprises qualified as “High New Technology Enterprises,” or HNTEs, enjoy a preferential income tax rate of 15%, rather than the uniform income tax rate of 25% which otherwise would apply. Shanghai Evergreen Technology Co., Ltd. has qualified as an HNTE for the period of 2017 until now under the EIT Law, and has been subject to the preferential income tax rate of 15% during such period.
On October 17, 2017, the STA issued a Public Notice of the State Administration of Taxation on Matters Concerning Withholding of Income Tax of Non-resident Enterprises at Source, or STA Public Notice 37. This STA Public Notice 37 has entered into force as of December 1, 2017, according to which, STA Circular 698 has been abolished from December 1, 2017.
Under the STA Public Notice 37 and other applicable PRC laws, the withholding agent (for example, payers of PRC-sourced income to non-PRC residents) is obligated to withhold PRC income taxes from the payment. The withholding agent shall, within seven days of the day on which the withholding obligation occurs, declare and remit the withholding tax to the competent tax authority at its locality. The withholding agent shall establish account books for all tax it has withheld and remitted on a commission basis and archive relevant contractual documents, so as to record the exact information about the enterprise income withheld and remitted for the non-resident enterprise.
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Although the withholding agents have the obligation to withhold relevant PRC taxes, in the event of a failure to withhold, the non-PRC residents are still required to pay such taxes on their own. Failure to comply with the tax payment obligations by the non-PRC residents will result in penalties, including full payment of taxes owed, fines and default interest on those taxes.
The STA issued the Announcement of State Taxation Administration on Promulgation of the Administrative Measures on Non-resident Taxpayers Enjoying Treaty Benefits (“STA Circular 35”) on October 14, 2019, which became effective on January 1, 2020. The STA Circular 35 further simplified the procedures for enjoying treaty benefits. According to the STA Circular 35, no approvals from the tax authorities are required for a non-resident taxpayer to enjoy treaty benefits, and where a non-resident taxpayer self-assesses and concludes that it satisfies the criteria for claiming treaty benefits, it may enjoy treaty benefits at the time of tax declaration or at the time of withholding through the withholding agent, but it shall gather and retain the relevant materials as required for future inspection, and accept follow-up administration by the tax authorities. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations. According to the Circular on Several Issues regarding the “Beneficial Owner” in Tax Treaties, or Circular 9, which was issued on February 3, 2018 by the STA, effective as of April 1, 2018, when determining the applicant’s status of the “beneficial owner” regarding tax treatments in connection with dividends, interest or royalties in the tax treaties, several factors, including without limitation, whether the applicant is obligated to pay more than 50% of its income in twelve months to residents in a third country or region, whether the business operated by the applicant constitutes the actual business activities, and whether the counterparty country or region to the tax treaties does not levy any tax or grants tax exemption on relevant income or levies tax at an extremely low rate, will be taken into account, and they will be analyzed according to the actual circumstances of the specific cases. This circular further provides that applicants who intend to prove his or her status of the “beneficial owner” shall submit the relevant documents to the relevant tax bureau according to the Administrative Measures for Nonresident Enterprises to Enjoy Treatments under Tax Treaties. Accordingly, GreenTree Hotel (Hong Kong), Limited may be able to enjoy the 5% withholding tax rate for the dividends they receive from our PRC subsidiaries, respectively, if they satisfy the conditions prescribed under Circular 81 and other relevant tax rules and regulations, and obtain the approvals as required. However, if the relevant tax authorities consider the transactions or arrangements we have are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future.
PRC Value-Added Tax
On March 23, 2016, the Ministry of Finance of China and the State Administration of Taxation of China jointly issued the Circular on the Nationwide Implementation of Pilot Program for the Collection of Value Added-Tax Instead of Business Tax, or Circular 36, which became effective on May 1, 2016. Subsequent to the effectiveness of Circular 36, most of our PRC subsidiaries’ business will be subject to value-added tax, or VAT, at a rate of 6% and they would be permitted to offset input VAT by providing valid VAT invoices received from vendors against their VAT liability.
According to Circular 36, the entities and individuals providing the services within the PRC shall be subject to VAT. The services are treated as being provided within the PRC where either the service provider or the service recipient is located in the PRC. The services subject to VAT include the provision of financial services such as transferring financial instruments. Based on the definition of “financial“transfer of financial instruments” under Circular 36, the ADSs and/and shares are likely to be treated as financial instruments. As such, where a holder of the ADSs and/and shares who is an entity or individual located outside of the PRC re-sells the ADSs and/and shares to an entity or individual located outside of the PRC and derives any gain, since neither the service provider nor the service recipient is located in the PRC, theoretically Circular 36 does not apply and the buyer does not have the obligation to withhold the VAT or the local levies. However, there is uncertainty as to the applicability of VAT if either the seller or buyer of ADSs and/and shares is located within the PRC.
On April 4, 2018, the MOF and STA jointly promulgated the Circular of the Ministry of Finance and the STA on Adjustment of Value-Added Tax Rates, or Circular 32. Circular 32 became effective on May 1, 2018 and shall supersede any previously existing provisions in the case of any inconsistency. Further, On March 20, 2019, the MOF, the STA and the General Administration of Customs jointly issued the Announcement on Policies for Deepening the VAT Reform, or Announcement 39, to further slash value-added tax rates. According to Announcement 39, (i) for general VAT payers’
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sales activities or imports that are subject to VAT at an existing applicable rate of 16% or 10%, the applicable VAT rate is adjusted to 13% or 9% respectively; (ii) for the agricultural products purchased by taxpayers to which an existing 10% deduction rate is applicable, the deduction rate is adjusted to 9%; (iii) for the agricultural products purchased by taxpayers for production or commissioned processing, which are subject to VAT at 13%, the input VAT will be calculated at a 10% deduction rate; (iv) for the exportation of goods or labor services that are subject to VAT at 16%, with the applicable export refund at the same rate, the export refund rate is adjusted to 13%; and (v) for the exportation of goods or cross-border taxable activities that are subject to VAT at 10%, with the export refund at the same rate, the export refund rate is adjusted to 9%. Announcement 39 came into effect on April 1, 2019 and shall prevail in case of any conflict with existing provisions.
63Regulations Relating to Lending
According to the General Lending Provisions promulgated by the PBOC in 1996, only financial institutions may legally engage in the business of extending loans, and loans between companies that are not financial institutions are prohibited. According to the General Lending Provisions, a company which is not a financial institution and offers loans may be imposed penalties in the amount equivalent to one to five times of the income generated (being interests charged) from the loan advancing activities. However, according to the Provisions of the Supreme People’s Court on Several Issues concerning the Application of Law in the Trial of Private Lending Cases (the “Private Lending Provisions”), which became effective on 1 September 2015 and was latest revised on 29 December 2020, borrowing agreements between companies which are not financial institutions shall be classified as private lending and should be valid if such lending is for business operation purposes and do not fall into certain situations stipulated in the abolished Contract Law or the newly promulgated Civil Code (as applicable) of the PRC and Private Lending Provisions. PRC courts will support a company’s claim for interest in respect of such lending as long as the annual interest rate does not exceed four times of the applicable one-year loan prime rate (“LPR”).
C. |
Corporate Structures
The following diagram illustrates our corporate structure and the place of organization and ownership interest of each of our subsidiaries as of the date of this annual report. It omits certain entities that are immaterial to our results of
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operations, business and financial condition. Unless otherwise indicated, equity interests depicted in this diagram are held as to 100%.
Note:
|
|
Subsidiaries of GreenTree Hospitality Group Ltd.
An exhibit containing a list of our significant subsidiaries has been filed with this annual report.
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Please refer to “B. Business Overview—Facilities” for a discussion of our property, plants and equipment.
None.
| ITEM 4A.UNRESOLVED STAFF COMMENTS None. 90 |
Unless otherwise stated, the discussion and analysis of our financial condition and results of operation in this section apply to our financial information as prepared according to U.S. GAAP. You should read the following discussion and analysis of our financial condition and operating results in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report. The following discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item 3. Key Information—D. Risk Factors.”
Overview
We are the leading pure play franchised hotel operator in China. We achieved more than 95.0% of franchised-and-managed hotels in our hotel network as early as 2013, and currently operated 98.6% of franchised-and-managed hotels in our network. Our pure play franchised model allows us to expand rapidly in an asset-light manner and have brought us substantial financial performance in terms of profitability, return on investments and success to its franchisees.
As of December 31, 2021, our nationwide hotel network consisted of 4,659 hotels with 337,153 rooms in China, covering all four centrally-administrated municipalities and 367 cities throughout all 31 provinces and autonomous regions in China, as well as an additional 1,225 hotels that were contracted for or under development. We were the fourth largest hotel group in China in terms of number of hotels and rooms, according to China Hotel Association. We operate a rapidly-growing hotel networks in China – from 2012 to 2021, we grew from 792 to 4,659 hotels at a CAGR of 21.8% and from 70,934 to 337,153 rooms at a CAGR of 18.9%.
We have built a strong suite of well-recognized and diversified brands, each with unique attributes and strengths to appeal to different consumer segments and franchisee needs, covering economy hotels, mid-scale hotels, mid-to-up-scale hotels, and luxury hotels. Over the years, we have successfully forged an all-win ecosystem for our franchisees, guests and employees through a highly effective and scalable franchise management system, a set of strong direct sales channels coupled with an established membership program and a suite of state-of-the-art technologies and tools optimizing hotel operations and enhancing guest experiences.
Factors Affecting Our Results of Operations
While our business is affected by factors relating to general economic conditions and the hospitality industry in China, we believe that our results of operations are also affected by company specific factors, including, among others:
● | The total number of hotels and hotel rooms in our hotel network. Our revenues are affected to a significant extent by the number of hotels and hotel rooms we have in operation. We generate substantially all of our revenues from room nights sold at our leased-and-operated hotels and the franchise management fees we charge to each of our franchised-and-managed hotels. Furthermore, we believe expanding geographic coverage of our hotel network through increasing the number of hotels will enhance our brand recognition. Our ability to expand our hotel network depends on whether we can provide consistent quality services to our guests and franchisees and whether we can enhance our brand recognition in the market and win the competition for suitable property sites and quality franchisee candidates. |
● | The proportion of mature hotels in our hotel portfolio. We define mature hotels as those that have been in operation for more than six months. It typically takes six months for our newly opened franchised-and-managed hotels to ramp up before such hotels can generate normal and stable franchise management fees and for our new leased-and-operated hotels’ income to exceed the hotel operating costs which are generally fixed in nature. |
The total number of hotels and hotel rooms in our hotel network. Our revenues are affected to a significant extent by the number of hotels and hotel rooms we have in operation. We generate substantially all of our revenues from room nights sold at our leased-and-operated hotels and the franchise management fees we charge to each of our franchised-and-managed hotels. Furthermore, we believe expanding geographic coverage of our hotel network through increasing the number of hotels will enhance our brand recognition. Our ability to expand our hotel network depends on whether we can provide consistent quality services to our guests and franchisees and whether we can enhance our brand recognition in the market and win the competition for suitable property sites and quality franchisee candidates.
The proportion of mature hotels in our hotel portfolio. We define mature hotels as those that have been in operation for more than six months. It typically takes six months for our newly opened franchised-and-managed hotels to ramp up before such hotels can generate normal and stable franchise management fees and for our new leased-and-operated hotels’ income to exceed the hotel operating costs which are generally fixed in nature.
The operation of each leased-and-operated hotel goes through three stages: development, ramp up and mature operations. During the ramp up stage, when the occupancy rate is relatively low, revenues generated by these new leased-and-operated hotels may be insufficient to cover their operating costs. The lower franchise management fees
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generated by our franchised-and-operated hotels during the ramp up stage and the pre-opening expenses incurred during the development stage and the lower profitability during the ramp-up stage for our leased-and-operated hotels may have a significant negative impact on our financial performance.
The table below illustrates the net increases of our hotels during 2016, 20172019, 2020 and 2018.2021.
|
| Year Ended December 31, |
| |||||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||||||||
| | | | | | | ||||||||||||
|
| Year Ended December 31, | ||||||||||||||||
|
| 2019 |
| 2020 |
| 2021 | ||||||||||||
Hotels opened |
|
| 401 |
|
|
| 425 |
|
|
| 554 |
|
| 607 |
| 538 |
| 722 |
Hotels closed |
|
| (88 | ) |
|
| (100 | ) |
|
| (86 | ) |
| 140 |
| 155 | �� | 403 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net increase in total hotels |
|
| 313 |
|
|
| 325 |
|
|
| 468 |
|
| 467 |
| 383 |
| 319 |
We track the performance of our hotels by comparing hotel revenue of our hotels during ramp up stage and mature hotels, calculated on a monthly rolling basis, taking into account the total number of hotels during ramp up stage and mature hotels in any particular period of time.
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The table below illustrates the comparison of performance between mature hotels and hotels during ramp up stage.
| | | | | | |
| | Year Ended December 31, | ||||
|
| 2019 |
| 2020 |
| 2021 |
Mature franchised-and-managed hotels(1) |
| 3,527 |
| 3,895 |
| 4,222 |
RevPAR (in RMB) |
| 138 |
| 105 |
| 116 |
Franchised-and-managed hotels during ramp up stage |
| 396 |
| 405 |
| 371 |
RevPAR (in RMB) |
| 86 |
| 101 |
| 84 |
|
| Year Ended December 31, |
| |||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||
Mature franchised-and-managed hotels(1) |
|
| 1,639 |
|
|
| 1,983 |
|
|
| 2,360 |
|
RevPAR (in RMB) |
|
| 123 |
|
|
| 129 |
|
|
| 134 |
|
Franchised-and-managed hotels during ramp up stage |
|
| 293 |
|
|
| 280 |
|
|
| 368 |
|
RevPAR (in RMB) |
|
| 86 |
|
|
| 87 |
|
|
| 88 |
|
(1) | As of end of the |
| | | | | | |
|
| Year Ended December 31, | ||||
|
| 2019 |
| 2020 |
| 2021 |
Mature leased-and-operated hotels(1) |
| 33 |
| 32 |
| 58 |
RevPAR (in RMB) |
| 140 |
| 102 |
| 136 |
Revenue (in RMB thousands) |
| 253,421 |
| 227,074 |
| 391,960 |
|
| Year Ended December 31, |
| |||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||
Mature leased-and-operated hotels(1) |
|
| 32 |
|
|
| 26 |
|
|
| 29 |
|
RevPAR (in RMB) |
|
| 109 |
|
|
| 131 |
|
|
| 139 |
|
Revenue (in RMB thousands) |
|
| 183,773 |
|
|
| 189,134 |
|
|
| 213,172 |
|
(1) | As of end of the |
● | The fixed nature of our hotel operating costs. For our leased-and-operated hotels, a significant portion of our operating costs and expenses, including rental and base salary, is generally fixed. As a result, an increase in our revenues achieved through higher RevPAR will generally result in higher profitability, whereas a decrease in our revenues could result in a disproportionately large decrease in our earnings. For franchised-and-managed hotels, the fixed cost components are relatively limited, and the incremental costs associated with each additional franchisee are minimal, which helps us achieve economies of scale as we attract more franchisees over time. |
● | Seasonality and special events. The hospitality industry is subject to fluctuations in revenues due to seasonality. Generally, the first quarter, in which both the New Year and Spring Festival holidays fall, accounts for a lower percentage of our annual revenues than the other quarters of the year. In addition, certain special events, such as large-scale exhibitions, concerts or sports events, may increase the demand for our hotels significantly as such special events may attract travelers into and within the regions in China where we operate hotels. |
● | The COVID-19 pandemic outbreak. The hospitality industry is largely dependent on commercial activities and travel, which have been materially and adversely affected by COVID-19 since early 2020. Although the Chinese government implemented travel restrictions starting from March 2020, such travel restrictions in China have been gradually lifted in regions where the pandemic is under control. Although China’s economic outlook has recovered and improved since the beginning of the COVID-19 outbreak, COVID-19 as well as government policies and measures adopted in response to it may still put pressure on the hospitality industry and our |
The fixed nature of our hotel operating costs. For our leased-and-operated hotels, a significant portion of our operating costs and expenses, including rental and base salary, is generally fixed. As a result, an increase in our revenues achieved through higher RevPAR will generally result in higher profitability, whereas a decrease in our revenues could result in a disproportionately large decrease in our earnings.92
Seasonality and special events. The hospitality industry is subject to fluctuations in revenues due to seasonality. Generally, the first quarter, in which both the New Year and Spring Festival holidays fall, accounts for a lower percentageTable of our annual revenues than the other quarters of the year. In addition, certain special events, such as large-scale exhibition, concerts or sports events, may increase the demand for our hotels significantly as such special events may attract travelers into and within the regions in China where we operate hotels.Contents
Critical Accounting Policies
We prepare financial statements in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect the reported amounts of our assets and liabilities and the disclosure of our contingent assets and liabilities at the end of each fiscal period and the reported amounts of revenues and expenses during each fiscal period. We evaluate these judgments and estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and assumptions that we believe to be reasonable, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.
Revenue recognition
We recognize revenues when all of the following have occurred: persuasive evidence of arrangement with the customer, services have been performed, fees are fixed or determinable and collectability of the fees is reasonably assured, as prescribed by ASC 605-10, Revenue Recognition, Overall.
Our revenues from leased-and-operated hotels are primarily derived from hotel operations, including the rental of rooms and food and beverage sales from those hotels administrated under our brand names. Revenue is recognized when rooms are occupied and food and beverages are sold. Sublease rental revenue are derived from the subleasing of partial space of leased-and-operated hotels and is recorded in leased-and-operated hotel revenue in the consolidated statements of comprehensive income on a straight-line basis over the contractual lease term.
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Our revenues from franchised-and-managed hotels are derived from franchise agreements where the franchisees are required to pay (i) an initial one-time non-refundable franchise fee, and (ii) continuing franchise fees, which mainly consist of on-going management and service fees based on a certain percentage of the room revenues of the franchised-and-managed hotels and central reservation system, or CRS, usage fee based on a fixed rate per transaction. The one-time franchise fee is recognized when we have fulfilled all our commitments and obligations, including the assistance to the franchisees in property design, leasehold improvement, construction project management, systems installation, personnel recruiting and training, which is generally when the franchised-and-managed hotel opens for business. Continuing franchise fees are recognized when the underlying service revenue is recognized by the franchisees’ operations. The CRS usage fees are recognized when the services are provided.
In addition, we designate hotel managers to certain hotels and account for hotel manager fees related to the hotels under the franchise program as revenues. Pursuant to the franchise and management agreements, we charge the franchisees fixed hotel manager fees to compensate us for the franchised-and-managed hotel managers’ salaries, social welfare benefits and certain other out-of-pocket expenses as incurred. The hotel manager fee is recognized as revenue on a monthly basis and is included in franchised-and-managed hotel revenue in our consolidated statements of comprehensive income.
We invite our customers to participate in a membership program. We have four tiers of membership — e-membership, regular membership, gold membership and platinum membership. A one-time membership fee is charged for new members except for the e-membership. The membership automatically expires after two years in the event of non-usage. The membership is automatically renewed if used at least once within a two-year period. Members enjoy discounts on room rates, priority in hotel reservation, and accumulate membership points for their paid stays, which can be redeemed for membership upgrades, room night rewards and other gifts within two years after the points are earned.
One time fees from the sale of membership cards under our paid membership program are recognized on a straight-line basis over the expected membership term, which is three to five years depending on membership level, based on our historical membership data. We will continue to monitor membership activity patterns and will re-assess estimated lives of memberships at each reporting period.
Impairment of long lived assets
We evaluate our long lived assets and finite lived intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When these events occur, we measure impairment by comparing the carrying amount of the assets to future undiscounted net cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, we will recognize an impairment loss based on the fair value of the assets. Fair value is generally determined by discounting the cash flows expected to be generated by the assets, when the market prices are not readily available for the long lived assets. We recognized impairment charges of nil, nil and RMB5.0 million (US$0.7 million) for long lived assets for the years ended December 31, 2016, 2017 and 2018 respectively.
Investments
Our investments mainly consist of cost method and equity method investments as well as held-to-maturity investments and trading securities.
Entities where we own less than 20% of the voting securities and does not have the ability to exercise significant influence over operating and financial policies are accounted as cost-method investment. Whereas entities where we have significant influence but does not own a majority equity interest or otherwise control are accounted as equity-method investments in accordance to ASC 323-10, Investments — Equity Method and Joint Ventures: Overall. Share of earnings or losses of such investees are recorded in earnings. We record impairment losses on these investments when the impairment is deemed other-than-temporary.
The securities that we have the positive intent and the ability to hold to maturity are classified as held-to-maturity securities and stated at amortized cost, whereas the securities that we buy and hold principally for the purpose of selling them in the near term are classified as trading securities with unrealized holding gains and losses for trading securities are included in earnings.
Income taxes
We account for income taxes using the liability method, where deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some or all of the deferred tax assets will not be realized.
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We recognize the benefit of a tax position if the tax position is more likely than not to prevail based on the technical merits of the tax position. Tax positions that meet the “more likely than not” threshold are measured at the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement. We re-assessed our liability for unrecognized tax benefits that may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations. Changes in recognition and measurement estimates are recognized in the period in which the changes occur. We account for interest and penalties related to an uncertain tax position as a component of income taxes.
Share-based compensation
Share based awards granted to employees are accounted for under ASC 718, “Compensation—Stock Compensation”, which requires that such share-based awards granted to employees be measured based on the grant date fair value and recognized as compensation expense a) immediately at grant date if no vesting conditions are required; or b) using accelerated method, net of estimated forfeitures, over the requisite service period, which is the vesting period.
Fair Value of Our Ordinary Shares
Prior to the completion of our initial public offering, we were a private company with no quoted market prices for our ordinary shares. We engaged an independent third party valuation firm to assist us in the determination of the estimated fair value of options granted for purposes of assessing the share-based compensation in connection with employee share options granted. The table below sets forth our estimates of the fair value of our ordinary shares:
Date |
| Fair Value per Ordinary Share (US$) |
|
| DLOM(1) |
|
| Discount Rate |
| |||
January 15, 2018 |
|
| 14.00 |
|
|
| 5 | % |
|
| 12 | % |
|
| business. Any further resurgence of COVID-19 could materially and adversely affect our business and results of operations. See “Item 3. Key Information — D. Risk Factors — Risks Related to |
The determination of the fair value of our ordinary shares requires complex and subjective judgments to be made regarding our projected financial and operating results, our unique business risks, the liquidity of our shares and our operating history and prospects at the time of valuation.
We considered three generally accepted approaches to value our ordinary shares: the market approach, cost approach and income approach. We adopted the income approach as our primary approach and used the market approach as a crosscheck. We did not rely on the cost approach because it does not directly include information about the economic benefits contributed by our assets, business or business interests.
The income approach is based on the assumption that value emanates from expectations of future income and cash flows. The income approach seeks to convert future economic benefits into a present value, and involves applying appropriate discount rates to estimated cash flows that are based on earnings forecasts. Our revenue and earnings growth rates, as well as major milestones that we have achieved, contributed to the increase in the fair value of our ordinary shares. However, the fair value analyses are inherently uncertain and highly subjective and are based on assumptions, including no material changes in the existing political, legal and economic conditions in the markets which we operate; our ability to retain competent management, key personnel and staff to support our ongoing operations; and no material deviation in market conditions from economic forecasts.
Under the income approach, we applied the discounted cash flow method. We used the concept of “free cash flow to firm,” or FCFF, being the cash flows left over after covering capital expenditure and working capital needs, to assess the overall enterprise value of our operating companies. Present value of our FCFF is a measure of enterprise value and a 100% equity interest is subsequently derived by taking the enterprise value, subtracting existing debt and adding cash and cash equivalents. Enterprise value is estimated based on the estimated present value of future net cash flows that the business is expected to generate over a forecasted period and an estimate of the present value of cash flows beyond that period, which is referred to as terminal value.
The estimated present value is calculated using a discount rate based on the weighted average cost of capital, or WACC, which accounts for the time value of money and the appropriate degree of risks inherent in the business. Our calculation of WACC was determined based on a consideration of the factors including risk-free rate, comparative industry risk, equity risk premium, company size and non-systemic risk factors. We assumed a WACC of 12% as of the grant date.
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We applied a discount for lack of marketability, or DLOM, to reflect the fact that there is no ready public market for our shares as we are a closely held private company.
The assumptions used in the above methodology are inherently uncertain. Different assumptions and judgments would affect our calculation of the fair value of the underlying ordinary shares for the options granted, and the valuation results and the amount of share-based compensation expenses would also vary accordingly.
The market approach uses the guideline company method, which considers valuation metrics based on trading multiples of a selected industry peer group of companies.
Litigation and contingencies
From time to time are, and in the future, we may be, parties to or targets of lawsuits, claims, investigations, and proceedings, including but not limited to non-compliance respect to licenses and permits, franchise agreements and lease contracts, which are handled and defended in the ordinary course of business. We may be unable to estimate the reasonably possible loss or a range of reasonably possible losses until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the court on motions or appeals, or the progress of settlement negotiations. We accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When we are not able to reasonably estimate a single amount within a range, we accrue the minimum amount. We expense legal costs, including those expected to be incurred in connection with a loss contingency, as incurred.
Business combinations
We account for all business combinations under the purchase method in accordance with ASC 805, Business Combinations. The cost of an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of (i) the total of the cost of the acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the identifiable net assets of the acquiree, the difference is recognized directly in earnings.
The determination and allocation of fair values to the identifiable net assets acquired, liabilities assumed and noncontrolling interest is based on various assumptions and valuation methodologies requiring considerable judgment. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. We determine discount rates to be used based on the risk inherent in the acquiree’s current business model and industry comparisons. Although we believe that the assumptions applied in the determination are reasonable based on information available at the date of acquisition, actual results may differ from forecasted amounts and the differences could be material.
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the identifiable assets acquired less liabilities assumed of an acquired business. Our goodwill at December 31, 2017 and 2018 was related to its acquisition of subsidiaries and business. We follow ASC subtopic 350-20, Intangibles-Goodwill and Other: Goodwill. Goodwill and business acquired in a business combination are not amortized, but instead tested for impairment at least annually, or more frequently if certain circumstances indicate a possible impairment may exist.
In accordance to ASC 350-20, we have assigned and assessed goodwill for impairment at the reporting unit level. A reporting unit is an operating segment or one level below the operating segment. We have determined that it has one reporting unit, which is also its only reportable segment.
We have the option to first assess qualitative factors to determine whether it is necessary to perform the two-step test in accordance with ASC 350-20, Testing Goodwill for Impairment. If we believe, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, the two-step quantitative impairment test described above is required. Otherwise, no further testing is required. In the qualitative assessment, we consider primary factors such as industry and market considerations, overall financial performance of the reporting unit, and other specific information related to the operations. In performing the two-step quantitative impairment test, the first step compares the carrying amount of the reporting unit to the fair value of the reporting unit based on either quoted market prices of the ordinary shares or estimated fair value using a combination
69
of the income approach and the market approach. If the fair value of the reporting unit exceeds the carrying value of the reporting unit, goodwill is not impaired and we are not required to perform further testing. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit’s goodwill. The fair value of the reporting unit is allocated to its assets and liabilities in a manner similar to a purchase price allocation in order to determine the implied fair value of the reporting unit goodwill. If the carrying amount of the goodwill is greater than its implied fair value, the excess is recognized as an impairment loss.
In 2017 and 2018, we performed a qualitative assessment for the reporting unit. Based on the requirements of ASC 350-20, we evaluated all relevant factors, weighed all factors in their entirety and concluded that it was not more-likely-than-not the fair value was less than the carrying amount of the reporting unit, and further impairment testing on goodwill was not necessary as of December 31, 2017 and 2018.
Key Performance Indicators
We utilize a set of non-financial and financial key performance indicators which our senior management reviews frequently. The review of these indicators facilitates timely evaluation of the performance of our business and effective communication of results and key decisions, allowing our business to react promptly to changing customer demands and market conditions.
Our non-financial key performance indicators consist of increase in the total number of hotels and hotel rooms in our hotel network, as well as RevPAR achieved by our leased-and-operated hotels and franchised-and-managed hotels. RevPAR is a commonly used operating measure in the hospitality industry and is defined as the product of average occupancy rates and average daily rates achieved. Occupancy rates of our hotels mainly depend on the locations of our hotels, product and service offering, the effectiveness of our sales and brand promotion efforts, our ability to effectively manage hotel reservations, the performance of managerial and other employees of our hotels, as well as our ability to respond to competitive pressure. We set the room rates of our hotels primarily based on the location of hotels, room rates charged by our competitors within the same locality, and our relative brand and product strength in the city or city cluster.
Our financial key performance indicators consist of revenues, operating costs and expenses, which are discussed in greater detail in the following paragraphs. In addition, we use Adjusted EBITDA, a non-GAAP financial measure, as a key financial performance indicator to assess our results of operations before the impact of investing and financing transactions and income taxes. We believe that Adjusted EBITDA is widely used by other companies in the hospitality industry and may be used by investors as a measure of our financial performance. See “— Results of Operations” for a reconciliation of Adjusted EBITDA to net income.
Revenues
We primarily derive our revenues from operation of our leased-and-operated hotels and various types of fees we charge our franchisees in relation to our franchised-and-managed hotels. We also generate revenue from the one-time membership fees charged to our hotel guests. Our revenues are net of a value-added tax of 6% and other related taxes. The following table sets forth our revenues generated by our franchised-and-managed hotels and leased-and-operated hotels, both in absolute amount and as a percentage of total revenues for the year indicated.
| | | | | | | | | | | | | | |
|
| 2019 | | 2020 | | 2021 | ||||||||
|
| RMB |
| % |
| RMB |
| % |
| RMB |
| US$ |
| % |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased-and-operated hotels(1) |
| 253,421 |
| 23.2 |
| 227,074 |
| 24.4 |
| 391,960 | | 61,507 |
| 32.5 |
Franchised-and-managed hotels |
| 831,340 |
| 76.1 |
| 677,481 |
| 72.9 |
| 774,359 | | 121,514 | | 64.2 |
Others |
| 7,032 |
| 0.7 |
| 25,455 |
| 2.7 |
| 39,827 |
| 6,250 |
| 3.3 |
Total revenues |
| 1,091,793 |
| 100.0 |
| 930,010 |
| 100.0 |
| 1,206,146 |
| 189,271 |
| 100.0 |
|
| Year Ended December 31, |
| |||||||||||||||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||||||||||||||||||
|
| RMB |
|
| % |
|
| RMB |
|
| % |
|
| RMB |
|
| US$ |
|
| % |
| |||||||
|
| (in thousands, except for percentages) |
| |||||||||||||||||||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased-and-operated hotels |
|
| 189,285 |
|
|
| 29.2 |
|
|
| 193,542 |
|
|
| 24.9 |
|
|
| 213,172 |
|
|
| 31,004 |
|
|
| 22.6 |
|
Franchised-and-managed hotels |
|
| 458,504 |
|
|
| 70.8 |
|
|
| 584,589 |
|
|
| 75.1 |
|
|
| 731,834 |
|
|
| 106,441 |
|
|
| 77.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
| 647,789 |
|
|
| 100.0 |
|
|
| 778,131 |
|
|
| 100.0 |
|
|
| 945,006 |
|
|
| 137,445 |
|
|
| 100.0 |
|
● | Franchised-and-managed Hotels. In 2019, 2020 and 2021, we generated revenues of RMB831.3 million, RMB677.5 million and RMB774.4 million (US$121.5 million) from our franchised-and-managed hotels, which accounted for 76.1%, 72.9 and 64.2% of our revenues for the respective years, which revenues include revenues from membership fees of franchised-and-managed hotels. |
Franchised-and-managed Hotels. In 2016, 2017 and 2018, we generated revenues of RMB458.5 million, RMB584.6 million and RMB731.8 million (US$106.4 million) from our franchised-and-managed hotels, which accounted for 70.8%, 75.1% and 77.4% of our revenues for the respective years, which revenues include revenues from membership fees of franchised-and-managed hotels. Going forward, we expect the number of our franchised-and-managed hotels as a percentage of the total number of hotels in our network to further increase.
70
We select franchisees who are property owners, existing hotel operators or hotel investors. We train and manage general managers for our franchised-and-managed hotels and impose the same standards on all franchised-and-managed hotels to ensure product quality and consistency across our hotel network. Pursuant to the franchise-and-management agreements, we charge the franchisees fixed hotel manager fees to compensate us for the franchised-and-managed hotel managers’ salaries, social welfare benefits and certain other out-of-pocket expenses as incurred. The hotel manager fee is
93
recognized as revenue on a monthly basis. Management services we provide to our franchisees generally include appointing and training hotel managers, obtaining access to and integrating into our central reservation system and our proprietary IT system, providing sales and marketing support, conducting quality assurance inspections, and providing other operational support and information. Our franchisees are responsible for operating expenses and the costs of developing and operating the hotels, including renovating the hotels according to our standards. We believe that our franchised-and-managed model has enabled us to quickly and effectively expand our geographical coverage and increase our market share in an asset-light manner by utilizing the local knowledge and relationships of our franchisees and the properties that they may own or have access to which are suitable for future hotel business cooperation with us.
Our revenues from franchised-and-managed hotels are primarily affected by the number of hotels and the revenues generated by the franchised-and-managed hotels. Our franchise agreements typically run for an initial term of 1510 to 20 years. We collect franchise management feesfee
s from our franchisees and do not bear loss, if any, incurred by our franchisees. Our franchisees are generally required to pay us an initial franchise fee ranging between RMB150,000 and RMB250,000, depending on the number of rooms in the hotel. They are also responsible for all costs and expenses related to hotel construction and renovation. In addition, our franchise agreements typically provide for a monthly franchise management fee of 3% to 5% of the total revenues generated by each franchised-and-managed hotel. In general, we charge franchisees who open multiple hotels under our franchised-and-managed model a lower fee to reward their loyalty. On average, we charged our franchisees a monthly franchise management fee of 4.3%4.5%, 4.4%4.5% and 4.4% of the total revenues generated by each franchised-and-managed hotel in 2016, 20172019, 2020 and 2018.2021. Due to the impact of COVID-19, we supported our franchisees by temporarily reducing both their recurring franchisee fee and central reservation fee by 50% nationwide, and by temporarily waiving entirely both the recurring franchisee fee and the central reservation fee for all hotels under requisition or located in Hubei Province. All these policies resulted in a lower effective ratio of monthly franchisee fees. We also collect from franchisees a reservation fee on a per room night basis for using our central reservation system, an annual IT system maintenance fee and a part of the membership registration fee to service customers who join our membership program at franchised-and-managed hotels. A number of these hotel general managers are our direct employees and the franchisees will reimburse us the general managers’ salary which is recognized as part of our revenues.
The table below sets forth the revenues from initial franchise fee and recurring franchise management fee and others, both in absolute amount and as a percentage of our revenues generated from franchised-and-managed hotels for the years indicated:
| | | | | | | | | | | | | | |
|
| 2019 |
| 2020 |
| 2021 | ||||||||
|
| RMB |
| % |
| RMB |
| % |
| RMB |
| US$ |
| % |
Initial franchise fee |
| 54,930 |
| 6.6 |
| 61,051 |
| 9.0 |
| 76,263 |
| 11,968 |
| 9.8 |
Recurring franchise management fee |
| 776,410 |
| 93.4 |
| 616,430 |
| 91.0 |
| 698,096 |
| 109,546 | | 90.2 |
Revenues from franchised-and- managed hotels |
| 831,340 |
| 100.0 |
| 677,481 |
| 100.0 |
| 774,359 |
| 121,514 |
| 100.0 |
|
| Year Ended December 31, |
| |||||||||||||||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||||||||||||||||||
|
| RMB |
|
| % |
|
| RMB |
|
| % |
|
| RMB |
|
| US$ |
|
| % |
| |||||||
|
| (in thousands, except for percentage) |
| |||||||||||||||||||||||||
Initial franchise fee |
|
| 48,517 |
|
|
| 10.6 |
|
|
| 56,176 |
|
|
| 9.6 |
|
|
| 66,407 |
|
|
| 9,659 |
|
|
| 9.1 |
|
Recurring franchise management fee and others |
|
| 409,987 |
|
|
| 89.4 |
|
|
| 528,413 |
|
|
| 90.4 |
|
|
| 665,427 |
|
|
| 96,782 |
|
|
| 90.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from franchised-and-managed hotels |
|
| 458,504 |
|
|
| 100.0 |
|
|
| 584,589 |
|
|
| 100.0 |
|
|
| 731,834 |
|
|
| 106,441 |
|
|
| 100.0 |
|
Revenues from recurring franchise management fee and others as a percentage of our revenues from franchised-and-managed hotels increased from 89.4%were 93.4% in 2016 to 90.4%2019, 91.0% in 20172020 and further to 90.9%90.2% in 2018, due to a continuous increase in the number of franchised-and-managed hotels in operation from 2016 to 2018.2021.
Leased-and-operated Hotels. In 2016, 2017 and 2018, we generated revenues of RMB189.3 million, RMB193.5 million and RMB213.2 million (US$31.0 million) (including RMB27.2 million, RMB42.2 million and RMB53.9 million (US$7.8 million) sublease rental revenue for 2016, 2017 and 2018, respectively) from our leased-and-operated hotels, which accounted for 29.2%, 24.9% and 22.6% of our revenues for the respective years. As we plan to focus on our franchised-and-managed model, we do not expect revenues from our leased-and-operated hotels to increase in the future as a percentage of our revenue.
· | Leased-and-operated Hotels. In 2019, 20120 and 2021, we generated revenues of RMB253.4 million, RMB227.1 million and RMB392.0 million (US$61.5 million) (including RMB74.9 million, RMB77.7 million and RMB74.7 million (US$11.7 million) sublease rental revenue for 2019, 2020 and 2021, respectively) from our leased-and-operated hotels, which accounted for 23.2%, 24.4% and 32.5% of our revenues for the respective years. |
For our leased-and-operated hotels, we own or lease properties from property owners or lessors and we are responsible for hotel conversion and customization to conform to our standards, as well as for repairs and maintenance and operating costs and expenses of properties over the term of the lease. We are also responsible for hotel operations and management, including hiring, training and supervising the hotel managers and employees required to operate our
94
hotels and purchasing supplies. Our typical lease term ranges from 1510 to 20 years with an initial three to six month rent freesix-month rent-free period. We generally pay rent on a quarterly or semi-annual basis.
71
Our revenues generated from leased-and-operated hotels are significantly affected by the following:
● | the total number of leased-and-operated hotels in our hotel network; |
● | the total number of leased-and-operated hotel rooms in our hotel network; and |
● | RevPAR achieved by our leased-and-operated hotels, which represents the product of average daily rates and occupancy rates. |
the total number of leased-and-operated hotels in our hotel network;
the total number of leased-and-operated hotel rooms in our hotel network; and
RevPAR achieved by our leased-and-operated hotels, which represents the product of average daily rates and occupancy rates.
The growth of revenues generated from our leased-and-operated hotels dependdepends significantly upon our ability to expand our hotel network into new locations in China and maintain competitive rates.
Operating Costs and Expenses. Our operating costs and expenses consist of hotel operating costs, selling and marketing expenses and general and administrative expenses.
The following table sets forth the components of our operating costs and expenses, both in absolute amount and as a percentage of total revenues for the year indicated.
|
| Year Ended December 31, |
| |||||||||||||||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||||||||||||||||||
|
| RMB |
|
| % |
|
| RMB |
|
| % |
|
| RMB |
|
| US$ |
|
| % |
| |||||||
|
| (in thousands, except for percentages) |
| |||||||||||||||||||||||||
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
|
| 65,616 |
|
|
| 10.1 |
|
|
| 60,253 |
|
|
| 7.7 |
|
|
| 76,055 |
|
|
| 11,062 |
|
|
| 8.0 |
|
Utilities |
|
| 17,274 |
|
|
| 2.7 |
|
|
| 16,692 |
|
|
| 2.1 |
|
|
| 19,264 |
|
|
| 2,802 |
|
|
| 2.0 |
|
Personnel costs |
|
| 32,754 |
|
|
| 5.1 |
|
|
| 27,546 |
|
|
| 3.5 |
|
|
| 33,715 |
|
|
| 4,904 |
|
|
| 3.6 |
|
Depreciation and amortization |
|
| 33,751 |
|
|
| 5.2 |
|
|
| 22,979 |
|
|
| 3.0 |
|
|
| 21,313 |
|
|
| 3,100 |
|
|
| 2.3 |
|
Consumables, food and beverage |
|
| 14,162 |
|
|
| 2.2 |
|
|
| 13,470 |
|
|
| 1.7 |
|
|
| 19,276 |
|
|
| 2,804 |
|
|
| 2.0 |
|
Costs of general managers of franchised-and-managed hotels |
|
| 45,516 |
|
|
| 7.0 |
|
|
| 54,292 |
|
|
| 7.0 |
|
|
| 70,480 |
|
|
| 10,249 |
|
|
| 7.4 |
|
Other costs of franchised-and-managed hotels |
|
| 18,822 |
|
|
| 2.9 |
|
|
| 23,498 |
|
|
| 3.0 |
|
|
| 28,889 |
|
|
| 4,202 |
|
|
| 3.1 |
|
Others |
|
| 12,237 |
|
|
| 1.9 |
|
|
| 14,916 |
|
|
| 2.0 |
|
|
| 11,962 |
|
|
| 1,740 |
|
|
| 1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total hotel operating costs |
|
| 240,132 |
|
|
| 37.1 |
|
|
| 233,646 |
|
|
| 30.0 |
|
|
| 280,954 |
|
|
| 40,863 |
|
|
| 29.7 |
|
Selling and marketing expenses |
|
| 26,609 |
|
|
| 4.1 |
|
|
| 45,032 |
|
|
| 5.8 |
|
|
| 50,393 |
|
|
| 7,329 |
|
|
| 5.3 |
|
General and administrative expenses |
|
| 77,933 |
|
|
| 12.0 |
|
|
| 121,657 |
|
|
| 15.6 |
|
|
| 95,262 |
|
|
| 13,855 |
|
|
| 10.1 |
|
Other operating expenses |
|
| 3,073 |
|
|
| 0.5 |
|
|
| 5,629 |
|
|
| 0.7 |
|
|
| 5,946 |
|
|
| 865 |
|
|
| 0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
| 347,747 |
|
|
| 53.7 |
|
|
| 405,964 |
|
|
| 52.1 |
|
|
| 432,555 |
|
|
| 62,912 |
|
|
| 45.8 |
|
| | | | | | | | | | | | | | |
|
| Year Ended December 31, | ||||||||||||
|
| 2019 | | 2020 | | 2021 | ||||||||
|
| RMB |
| % |
| RMB |
| % |
| RMB |
| US$ |
| % |
|
| (in thousands, except for percentages) | ||||||||||||
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel operating costs: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental |
| 79,597 |
| 7.3 |
| 118,295 |
| 12.7 |
| 235,568 | | 36,966 | | 19.5 |
Utilities |
| 19,119 |
| 1.8 |
| 15,372 |
| 1.7 |
| 25,783 | | 4,046 | | 2.1 |
Personnel costs |
| 38,277 |
| 3.5 |
| 46,942 |
| 5.0 |
| 82,114 | | 12,885 | | 6.8 |
Depreciation and amortization |
| 34,727 |
| 3.2 |
| 53,850 |
| 5.8 |
| 80,576 | | 12,644 | | 6.7 |
Consumables, food and beverage |
| 32,338 |
| 3.0 |
| 43,258 |
| 4.7 |
| 69,496 | | 10,905 | | 5.8 |
Costs of hotel managers of franchised-and-managed hotels |
| 96,565 |
| 8.8 |
| 91,665 |
| 9.9 |
| 114,779 | | 18,011 | | 9.5 |
Other costs of franchised-and-managed hotels |
| 29,193 |
| 2.7 |
| 22,986 |
| 2.5 |
| 26,124 | | 4,099 | | 2.2 |
Others |
| 9,011 |
| 0.8 |
| 9,291 |
| 1.0 |
| 16,937 | | 2,659 | | 1.4 |
Total hotel operating costs |
| 338,827 |
| 31.1 |
| 401,659 |
| 43.2 |
| 651,377 | | 102,215 | | 54.0 |
Selling and marketing expenses |
| 84,970 |
| 7.8 |
| 75,347 |
| 8.1 |
| 66,922 | | 10,502 | | 5.5 |
General and administrative expenses |
| 184,988 |
| 16.9 |
| 163,421 |
| 17.6 |
| 356,046 | | 55,871 | | 29.5 |
Other operating expenses |
| 3,287 |
| 0.3 |
| 1,731 |
| 0.2 |
| 4,938 | | 775 | | 0.4 |
Total operating costs and expenses |
| 612,072 |
| 56.1 |
| 642,158 |
| 69.0 |
| 1,079,283 | | 169,363 | | 89.5 |
● | Hotel operating costs. Our hotel operating costs consist of costs and expenses directly attributable to the operations of our franchised-and-managed and leased-and-operated hotels. Operating costs primarily include costs related to our leased and operated hotels, including rental payments and utility costs, compensation and benefits for our hotel based employees, costs of hotel room consumable products, such as bedding accessories, towel and sanitary amenities, depreciation and amortization of leasehold improvements and others including maintenance expenses, telecommunication expenses and public service charges, as well as costs related to our franchised-and-managed hotels, including (i) compensation and benefits for franchised-and-managed hotel general managers appointed and trained by us, the regional managers of the operating department and other headquarter personnel that serve the franchise and managed hotels, and (ii) related travel and telecommunication expenses. |
● | Selling and marketing expenses. Our selling and marketing expenses consist primarily of commissions to travel intermediaries, expenses for marketing programs and materials, expenses in relation to our membership program, |
Hotel operating costs. Our hotel operating costs consist of costs and expenses directly attributable to the operations of our franchised-and-managed and leased-and-operated hotels. Operating costs primarily include costs related to our leased and operated hotels, including rental payments and utility costs, compensation and benefits for our hotel based employees, costs of hotel room consumable products, such as bedding accessories, towel and sanitary amenities, depreciation and amortization of leasehold improvements and others including maintenance expenses, telecommunication expenses and public service charges, as well as costs related to our franchised-and-managed hotels, including (i) compensation and benefits for franchised-and-managed hotel general managers appointed and trained by us, the regional managers of the operating department and other headquarter personnel that serve the franchise and managed hotels, and (ii) related travel and telecommunication expenses.95
Selling and marketing expenses. Our selling and marketing expenses consist primarily of commissions to travel intermediaries, expenses for marketing programs and materials, expenses in relation to our membership program, compensation and benefits for our sales and marketing personnel, and others including entertainment expenses and travel expenses for our sales and marketing personnel.
General and administrative expenses. Our general and administrative expenses consist primarilyTable of compensation and benefits, including share based compensation, for our corporate and regional office employees and other employees who are not sales and marketing or hotel-based employees, costs of third-party professional services, travel and accommodation expenses, bad debt provision and other expenses which include bank charges and stamp duty.Contents
72
| compensation and benefits for our sales and marketing personnel, and others including meals and travel expenses for our sales and marketing personnel. |
● | General and administrative expenses. Our general and administrative expenses consist primarily of compensation and benefits, including share-based compensation, for our corporate and regional office employees and other employees who are not sales and marketing or hotel-based employees, costs of third-party professional services, travel and accommodation expenses, bad debt provision and other expenses which include bank charges and stamp duty. |
A. | Results of Operations |
The following table sets forth a summary of our consolidated results of operations, both in absolute amount and as a percentage of total revenues for the year indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus.annual report. We believe that the year to yearyear-to-year comparison of operating results should not be relied upon as being indicative of future performance.
| | | | | | | | | | | | | | | ||||||||||||||||||||||||||||
|
| Year Ended December 31, | ||||||||||||||||||||||||||||||||||||||||
|
| 2019 | | 2020 | | 2021 | ||||||||||||||||||||||||||||||||||||
|
| RMB |
| % |
| RMB |
| % |
| RMB |
| US$ |
| % | ||||||||||||||||||||||||||||
|
| Year Ended December 31, |
| |||||||||||||||||||||||||||||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||||||||||||||||||||||||||||||||
|
| RMB |
|
| % |
|
| RMB |
|
| % |
|
| RMB |
|
| US$ |
|
| % |
| |||||||||||||||||||||
|
| (in thousands, except for percentage) |
| |||||||||||||||||||||||||||||||||||||||
|
| (in thousands, except for percentage) | ||||||||||||||||||||||||||||||||||||||||
Consolidated Statement of Comprehensive Income Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased-and-operated hotels |
|
| 189,285 |
|
|
| 29.2 |
|
|
| 193,542 |
|
|
| 24.9 |
|
|
| 213,172 |
|
|
| 31,004 |
|
|
| 22.6 |
|
| 253,421 |
| 23.2 |
| 227,074 |
| 24.4 |
| 391,960 | | 61,507 | | 32.5 |
Franchised-and-managed hotels |
|
| 458,504 |
|
|
| 70.8 |
|
|
| 584,589 |
|
|
| 75.1 |
|
|
| 731,834 |
|
|
| 106,441 |
|
|
| 77.4 |
|
| 831,340 |
| 76.1 |
| 677,481 |
| 72.9 |
| 774,359 | | 121,514 | | 64.2 |
others |
| 7,032 |
| 0.7 |
| 25,455 |
| 2.7 |
| 39,827 | | 6,250 | | 3.3 | ||||||||||||||||||||||||||||
Total revenues |
|
| 647,789 |
|
|
| 100.0 |
|
|
| 778,131 |
|
|
| 100.0 |
|
|
| 945,006 |
|
|
| 137,445 |
|
|
| 100.0 |
|
| 1,091,793 |
| 100.0 |
| 930,010 |
| 100.0 |
| 1,206,146 | | 189,271 | | 100.0 |
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
Hotel operating costs |
|
| (240,132) |
|
|
| (37.1) |
|
|
| (233,646) |
|
|
| (30.0) |
|
|
| (280,954) |
|
|
| (40,863) |
|
|
| (29.7) |
|
| (338,827) |
| (31.1) |
| (401,659) |
| (43.2) |
| (651,377) | | (102,215) | | (54.0) |
Selling and marketing expenses |
|
| (26,609) |
|
|
| (4.1) |
|
|
| (45,032) |
|
|
| (5.8) |
|
|
| (50,393) |
|
|
| (7,329) |
|
|
| (5.3) |
|
| (84,970) |
| (7.8) |
| (75,347) |
| (8.1) |
| (66,922) | | (10,502) | | (5.5) |
General and administrative expenses |
|
| (77,933) |
|
|
| (12.0) |
|
|
| (121,657) |
| (1) |
| (15.6) |
|
|
| (95,262) |
|
|
| (13,855) |
|
|
| (10.1) |
|
| (184,988) |
| (16.9) |
| (163,421) |
| (17.6) |
| (356,046) | | (55,871) | | (29.5) |
Other operating expense |
|
| (3,073) |
|
|
| (0.5) |
|
|
| (5,629) |
|
|
| (0.7) |
|
|
| (5,946) |
|
|
| (865) |
|
|
| (0.6) |
|
| (3,287) |
| (0.3) |
| (1,731) |
| (0.2) |
| (4,938) | | (775) | | (0.4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Total operating costs and expenses |
|
| (347,747) |
|
|
| (53.7) |
|
|
| (405,964) |
|
|
| (52.1) |
|
|
| (432,555) |
|
|
| (62,912) |
|
|
| (45.8) |
|
| (612,072) |
| (56.1) |
| (642,158) |
| (69.1) |
| (1,079,283) | | (169,363) | | (89.5) |
Other operating income |
|
| 12,222 |
|
|
| 1.9 |
|
|
| 15,284 |
|
|
| 2.0 |
|
|
| 22,571 |
|
|
| 3,283 |
|
|
| 2.4 |
|
| 24,832 |
| 2.3 |
| 31,399 |
| 3.4 |
| 27,060 | | 4,246 | | 2.2 |
Income from operations |
|
| 312,264 |
|
|
| 48.2 |
|
|
| 387,451 |
|
|
| 49.9 |
|
|
| 535,022 |
|
|
| 77,816 |
|
|
| 56.6 |
|
| 504,553 |
| 46.2 |
| 319,251 |
| 34.3 |
| 153,923 | | 24,154 | | 12.8 |
Interest income and other, net |
|
| 22,039 |
|
|
| 3.4 |
|
|
| 26,238 |
|
|
| 3.4 |
|
|
| 49,660 |
|
|
| 7,223 |
|
|
| 5.3 |
|
| 66,088 |
| 6.1 |
| 72,934 |
| 7.8 |
| 59,974 | | 9,411 | | 5.0 |
Interest expenses |
|
| — |
|
|
| — |
|
|
| (1,443) |
|
|
| (0.2) |
|
|
| (542) |
|
|
| (79) |
|
|
| (0.1) |
|
| (2,506) |
| (0.2) |
| (3,456) |
| (0.4) |
| (12,671) | | (1,988) | | (1.1) |
Gains (losses) from trading securities |
|
| 24,564 |
|
|
| 3.8 |
|
|
| 59,165 |
|
|
| 7.4 |
|
|
| (57,775) |
|
|
| (8,403) |
|
|
| (6.1) |
| ||||||||||||||
Other income, net |
|
| 1,322 |
|
|
| 0.2 |
|
|
| 1,191 |
|
|
| 0.2 |
|
|
| 35,735 |
|
|
| 5,197 |
|
|
| 3.8 |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Gains (losses) from investments in equity securities |
| 55,254 |
| 5.1 |
| (36,774) |
| (4.0) |
| 9,138 | | 1,434 | | 0.8 | ||||||||||||||||||||||||||||
Other income/expense, net |
| 2,691 |
| 0.2 |
| 2,297 |
| 0.2 |
| 11,819 | | 1,854 | | 1.0 | ||||||||||||||||||||||||||||
Income before income taxes |
|
| 360,189 |
|
|
| 55.6 |
|
|
| 472,602 |
|
|
| 60.7 |
|
|
| 562,100 |
|
|
| 81,754 |
|
|
| 59.5 |
|
| 626,080 |
| 57.3 |
| 354,252 |
| 38.1 |
| 222,183 | | 34,865 | | 18.4 |
Income tax expense |
|
| (83,924) |
|
|
| (13.0) |
|
|
| (186,651) |
| (2) |
| (24.0) |
|
|
| (160,186) | (3) |
|
| (23,298) |
|
|
| (17.0) |
|
| (189,568) |
| (17.4) |
| (110,459) |
| (11.9) |
| (108,889) | | (17,087) | | (9.0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Income before share of loss in equity investees |
|
| 276,265 |
|
|
| 42.6 |
|
|
| 285,951 |
|
|
| 36.7 |
|
|
| 401,914 |
|
|
| 58,456 |
|
|
| 42.5 |
| ||||||||||||||
Share of loss in equity investees, net of tax |
|
| (10,465) |
|
|
| (1.6) |
|
|
| (900) |
|
|
| (0.1) |
|
|
| (8,300) |
|
|
| (1,207) |
|
|
| (0.9) |
| ||||||||||||||
Income before share of losses in equity investees |
| 436,512 |
| 40.0 |
| 243,793 |
| 26.2 |
| 113,294 | | 17,778 | | 9.4 | ||||||||||||||||||||||||||||
Share of losses (gains) in equity investees, net of tax |
| 1,262 |
| 0.1 |
| 910 |
| 0.1 |
| 383 | | 60 | | 0.0 | ||||||||||||||||||||||||||||
Net income |
|
| 265,800 |
|
|
| 41.0 |
|
|
| 285,051 |
|
|
| 36.6 |
|
|
| 393,614 |
|
|
| 57,249 |
|
|
| 41.6 |
|
| 437,774 |
| 40.1 |
| 244,703 |
| 26.3 |
| 113,677 | | 17,838 | | 9.4 |
Net loss attributable to noncontrolling interests |
|
| 173 |
|
|
| 0.0 |
|
|
| 349 |
|
|
| 0.1 |
|
|
| 491 |
|
|
| 71 |
|
|
| 0.1 |
|
| 4,944 |
| 0.5 |
| 16,641 |
| 1.8 |
| 3,761 | | 591 | | 0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||
Net income attributable to ordinary shareholders |
|
| 265,973 |
|
|
| 41.0 |
|
|
| 285,400 |
|
|
| 36.7 |
|
|
| 394,105 |
|
|
| 57,320 |
|
|
| 41.7 |
|
| 442,718 |
| 40.5 |
| 261,344 |
| 28.1 |
| 117,438 | | 18,429 | | 9.7 |
|
|
|
|
96
|
|
73
The following tables present certain unaudited financial data and selected operating data as of and for the years ended December 31, 2016, 20172019, 2020 and 2018:2021:
| | | | | | |
|
| As of December 31, | ||||
|
| 2019 |
| 2020 |
| 2021 |
Selected Operating Data: |
|
|
|
|
|
|
Total hotels in operation |
| 3,957 |
| 4,340 |
| 4,659 |
Franchised-and-managed hotels |
| 3,923 |
| 4,300 |
| 4,593 |
Leased-and-operated hotels |
| 34 |
| 40 |
| 66 |
Total hotel rooms in operation |
| 290,026 |
| 315,335 |
| 337,153 |
Franchised-and-managed hotels |
| 285,736 |
| 310,447 |
| 330,089 |
Leased-and-operated hotels |
| 4,290 |
| 4,888 |
| 7,064 |
Number of cities |
| 339 |
| 345 |
| 367 |
| | | | | | | |
|
| Year Ended December 31, | | ||||
|
| 2019 |
| 2020 |
| 2021 | |
Occupancy rate (as a percentage) |
|
| |
| |
| |
Total hotels in operation |
| 80.9 | % | 68.7 | % | 71.1 | % |
Franchised-and-managed hotels |
| 81.1 | % | 68.9 | % | 63.4 | % |
Leased-and-operated hotels |
| 66.1 | % | 57.8 | % | 71.3 | % |
Average daily rate (in RMB) |
|
| |
| |
| |
Total hotels in operation |
| 170 | | 152 | | 164 | |
Franchised-and-managed hotels |
| 169 | | 152 | | 213 | |
Leased-and-operated hotels |
| 211 | | 179 | | 163 | |
RevPAR (in RMB) |
|
| |
| |
| |
Total hotels in operation |
| 137 | | 105 | | 116 | |
Franchised-and-managed hotels |
| 137 | | 105 | | 135 | |
Leased-and-operated hotels |
| 140 | | 104 | | 116 | |
|
| As of December 31, |
| |||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||
Selected Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Total hotels in operation |
|
| 1,964 |
|
|
| 2,289 |
|
|
| 2,757 |
|
Franchised-and-managed hotels |
|
| 1,932 |
|
|
| 2,263 |
|
|
| 2,728 |
|
Leased-and-operated hotels |
|
| 32 |
|
|
| 26 |
|
|
| 29 |
|
Total hotel rooms in operation |
|
| 168,238 |
|
|
| 190,807 |
|
|
| 221,529 |
|
Franchised-and-managed hotels |
|
| 164,207 |
|
|
| 187,505 |
|
|
| 217,795 |
|
Leased-and-operated hotels |
|
| 4,031 |
|
|
| 3,302 |
|
|
| 3,734 |
|
Number of cities |
|
| 234 |
|
|
| 263 |
|
|
| 290 |
|
|
| Year Ended December 31, |
| |||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||
Occupancy rate (as a percentage)(1) |
|
|
|
|
|
|
|
|
|
|
|
|
Total hotels in operation |
|
| 80.4 | % |
|
| 82.6 | % |
|
| 82.1 | % |
Franchised-and-managed hotels |
|
| 80.9 | % |
|
| 82.9 | % |
|
| 82.3 | % |
Leased-and-operated hotels |
|
| 66.4 | % |
|
| 70.3 | % |
|
| 68.0 | % |
Average daily rate (in RMB) |
|
|
|
|
|
|
|
|
|
|
|
|
Total hotels in operation |
|
| 153 |
|
|
| 157 |
|
|
| 164 |
|
Franchised-and-managed hotels |
|
| 152 |
|
|
| 156 |
|
|
| 163 |
|
Leased-and-operated hotels |
|
| 164 |
|
|
| 186 |
|
|
| 205 |
|
RevPAR (in RMB) |
|
|
|
|
|
|
|
|
|
|
|
|
Total hotels in operation |
|
| 123 |
|
|
| 130 |
|
|
| 135 |
|
Franchised-and-managed hotels |
|
| 123 |
|
|
| 129 |
|
|
| 134 |
|
Leased-and-operated hotels |
|
| 109 |
|
|
| 131 |
|
|
| 139 |
|
(1) | Based on the number of available rooms. |
| | | | | | | | | |
|
| Year Ended December 31, | | ||||||
| | 2019 |
| 2020 |
| 2021 | | ||
|
| RMB | | RMB | | RMB |
| US$ | |
|
| (in thousands, except for percentage) | | ||||||
Non-GAAP Financial Data |
|
| |
| |
| |
| |
Adjusted EBITDA(1) |
| 523,374 | | 355,453 | | 325,274 | | 51,042 | |
Adjusted EBITDA Margin(2) |
| 47.9 | % | 38.2 | % | 27.0 | % | 27.0 | % |
|
| Year Ended December 31, |
| |||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||||||
|
| RMB |
|
| RMB |
|
| RMB |
|
| US$ |
| ||||
|
| (in thousands, except for percentage) |
| |||||||||||||
Non-GAAP Financial Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA(1) |
|
| 360,509 |
|
|
| 467,039 |
|
|
| 609,716 |
|
|
| 88,680 |
|
Adjusted EBITDA Margin(2) |
|
| 55.7% |
|
|
| 60.0% |
|
|
| 64.5% |
|
|
|
|
|
(1) | We believe that Adjusted EBITDA, as we present it, is a useful financial metric to assess our operating and financial performance before the impact of investing and financing transactions, income taxes and certain non-core and non-recurring items in our financial statements. |
In 2020 and prior years, Adjusted EBITDA (non-GAAP) iswas previously calculated as net income plus other operating expenses, income tax expense, share of losslosses in equity investees (net of tax), interest expense, share-based compensation, depreciation and amortization, losses from tradingon investments in equity securities, one-time fees and expenses, provision for bad debt and other expense net, but excludes other operating income, interest income and other, net, gains on investments in equity securities, share of gains in equity investees (net of tax) and other income net. In 2020, we revised our presentation and method of calculating Adjusted EBITDA (non-GAAP). Adjusted EBITDA (non-GAAP) is currently calculated as net income plus other operating expenses, income tax expense, interest expense, depreciation and amortization, losses from investment in equity securities, share of loss in equity investees (net of tax), but excludes other operating income, interest income and other net, gains from tradinginvestment in equity securities, share of gain in equity investees (net of tax) and other income net. Our Adjusted EBITDA for the years ended December 31, 2019, 2020 and 2021 presented above have been retrospectively adjusted and prepared in accordance with this new calculation method.
(2) | Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by our total revenues. |
(3) | Our Occupancy rate, Average daily rate and RevPAR data for the year ended December 31, 2019 presented above reflect the impact of Argyle Hotel Management Group (Australia) Pty Ltd, or Argyle, and Urban Hotel Group, or Urban, only after we acquired them, and began consolidating them in our financial statements, starting from April 2019 and December 2019, respectively. If such Occupancy rate, Average daily rate and RevPAR data were also to reflect the full year impact of Argyle and Urban prior to the respective acquisitions, and for the full year ended December 31, 2019: our Occupancy rate would have been 77.8% for Total hotels in operation, with 78.0% for Franchised-and-managed hotels and 67.5% for Leased-and-operated hotels; our Average daily rate would have been 168 |
97
for Total hotels in operation, with 168 for Franchised-and-managed hotels and 205 for Leased-and-operated hotels; and our RevPAR would have been 131 for Total hotels in operation, with 131 for Franchised-and-managed hotels and 138 for Leased-and-operated hotels. |
The presentation of Adjusted EBITDA should not be construed as an indication that our future results will be unaffected by other charges and gains, we consider to be outside the ordinary course of our business.
The use of Adjusted EBITDA has certain limitations because it does not reflect all items of income and expenses that affect our operations. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our operating and financial performance. Depreciation and amortization expense for various long-term assets, and income tax and share-based compensation have been and will be incurred and are not reflected in the presentation of Adjusted EBITDA. Each of these items should also be considered in the overall evaluation of our results. Additionally, Adjusted EBITDA does not consider capital expenditures and other investing activities and should not be considered as a measure of our liquidity. We compensate for these limitations by providing the relevant disclosure of our other operating income/expense, depreciation and amortization, interest expense, gains/lossesgains(losses) from tradinginvestments in equity securities, income tax expenses, share-based compensation, share of gain/lossgains (losses) in equity investees (net of tax), other income/expense, net, and other relevant items both in our reconciliations to the corresponding U.S. GAAP financial measures and in our consolidated financial statements, all of which should be considered when evaluating our performance.
74
The term Adjusted EBITDA is not defined under U.S. GAAP, and Adjusted EBITDA is not a measure of net income, operating income, operating performance or liquidity presented in accordance with U.S. GAAP. When assessing our operating and financial performance, you should not consider this data in isolation or as a substitute for our net income, operating income or any other operating performance measure that is calculated in accordance with U.S. GAAP. In addition, our Adjusted EBITDA may not be comparable to Adjusted EBITDA or similarly titled measures utilized by other companies since such other companies may not calculate Adjusted EBITDA in the same manner as we do.
A reconciliation of Adjusted EBITDA to net income, which is the most directly comparable U.S. GAAP measure, is provided below:
| | | | | | | | |
|
| Year Ended December 31, | ||||||
| | 2019 |
| 2020 |
| 2021 | ||
| | RMB | | RMB | | RMB |
| US$ |
|
| (in thousands) | ||||||
Net income |
| 437,774 |
| 244,703 |
| 113,677 |
| 17,838 |
Deduct: |
|
|
|
|
|
|
|
|
Other operating income |
| 24,832 |
| 31,399 |
| 27,060 |
| 4,246 |
Interest income and other, net |
| 66,088 |
| 72,934 |
| 59,974 |
| 9,411 |
Gains from investments in equity securities |
| 77,050 |
| 45,440 |
| 9,138 |
| 1,434 |
Share of gains in equity investees, net of tax |
| 1,550 |
| 1,119 |
| 383 |
| 60 |
Other income (expense), net |
| 2,691 |
| 2,297 |
| 11,819 |
| 1,855 |
Add: |
|
|
|
|
|
|
|
|
Other operating expenses |
| 3,287 |
| 1,731 |
| 4,938 |
| 775 |
Provision for franchisee loans receivable(1) | | — | | — | | 95,362 | | 14,964 |
Income tax expense |
| 189,568 |
| 110,459 |
| 108,889 |
| 17,087 |
Share of loss in equity investees, net of tax |
| 288 |
| 209 |
| |
| |
Interest expense |
| 2,506 |
| 3,456 |
| 12,671 |
| 1,988 |
Depreciation and amortization |
| 40,366 |
| 65,870 |
| 98,111 |
| 15,396 |
Losses on investments in equity securities |
| 21,796 |
| 82,214 |
| — |
| — |
Other expense, net |
| — |
| — |
| — |
| — |
Adjusted EBITDA (Non-GAAP) |
| 523,374 |
| 355,453 |
| 325,274 |
| 51,403 |
|
| Year Ended December 31, |
| |||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||||||
|
| (RMB) |
|
| (RMB) |
|
| (RMB) |
|
| US$ |
| ||||
|
| (in thousands) |
| |||||||||||||
Net income |
|
| 265,800 |
|
|
| 285,051 |
|
|
| 393,614 |
|
|
| 57,249 |
|
Deduct: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income |
|
| 12,222 |
|
|
| 15,284 |
|
|
| 22,571 |
|
|
| 3,283 |
|
Gains from trading securities |
|
| 24,564 |
|
|
| 59,165 |
|
|
| — |
|
|
| — |
|
Other income, net |
|
| 1,322 |
|
|
| 1,191 |
|
|
| 35,735 |
|
|
| 5,197 |
|
Add: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses |
|
| 3,073 |
|
|
| 5,629 |
|
|
| 5,946 |
|
|
| 865 |
|
Income tax expense |
|
| 83,924 |
|
|
| 186,651 |
|
|
| 160,186 |
|
|
| 23,298 |
|
Share of loss in equity investees, net of tax |
|
| 10,465 |
|
|
| 900 |
|
|
| 8,300 |
|
|
| 1,207 |
|
Interest expense |
|
| — |
|
|
| 1,443 |
|
|
| 542 |
|
|
| 79 |
|
Share-based compensation |
|
| — |
|
|
| 38,048 |
|
|
| 16,109 |
|
|
| 2,343 |
|
Depreciation and amortization |
|
| 35,355 |
|
|
| 24,956 |
|
|
| 25,550 |
|
|
| 3,716 |
|
Losses from trading securities |
|
| — |
|
|
| — |
|
|
| 57,775 |
|
|
| 8,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (Non-GAAP) |
|
| 360,509 |
|
|
| 467,039 |
|
|
| 609,716 |
|
|
| 88,680 |
|
(1) Due to the impact of COVID-19, we have extended the repayment periods for certain loans to our franchisees, and out of an abundance of caution and prudence we have made provision for such loans receivable as bad debt in the total amount of RMB99.9 million for the year ended December 31, 2021. As such bad debt is non-recurring in nature, may yet be repaid in the future, we have added back such amount of provision for franchisee loans receivable in calculating our Adjusted EBITDA.
98
Year Ended December 31, 20182021 Compared to Year Ended December 31, 20172020
Revenues. Our total revenues increased by 21.4%29.7 % from RMB778.1RMB930.0 million in 20172020 to RMB945.0RMB1,206.1 million (US$137.4189.3 million) in 2018.2021. The increase was primarily due to newly opened L&O and F&M hotels. For the full year 2021, we have opened 722 new hotels and closed 403 hotels at the same time. The revenue per available room, or RevPAR, was RMB116 in the full year 2021, representing a 11.3% year-over-year increase.
Franchised-and-managed hotels.Revenues from our franchised-and-managed hotels increased by 25.2%14.3% from RMB584.6RMB677.5 million in 20172020 to RMB731.8 millionRMB774.4million (US$106.4121.5 million) in 2018. This growth was primarily due to the increased number of hotels in our franchised-and-managed hotel portfolio from 2,263 hotels and 187,505 hotel rooms as of December 31, 2017 to 2,728 hotels and 217,795 hotel rooms as of December 31, 2018.2021. The RevPAR from RMB129 in 2017 to RMB134 in 2018, driven by stronger brand recognition, also contributed to the growth of revenues from our franchised-and-managed hotels.Initialinitial franchise fees increased by 18.2%24.9% year-over-year, mainly attributable to the gross opening of【693】F&M hotels and the closure of 【400】F&M hotels. The recurring franchise management fees increased from 2017RMB616.4 million in 2020 to 2018,RMB698.1 million in 2021, primarily due to an to【10.7%】increase in RevPAR and the【6.8%】year-over-year increase in the number of newF&M hotels, opened from 424 in 2017 to 553 in 2018. The 25.9% year-over-year increase in recurring franchisee management fees and others in 2018 was primarily due to RevPAR growth of 3.9%, as well as growth in membership fees, central reservation system, or CRS, usage fees, annual IT, marketing fees and hotel manager fees, which in turn were drivenoffset by the increased number offee waiver to franchisees related to newly acquired hotels and hotel rooms in operation..
Leased-and-operated hotels.Revenues from our leased-and-operated hotels, including sublease rental revenues of RMB42.2RMB77.7 million and RMB53.9RMB74.7 million (US$7.8 million) 11.7million) for 20172020 and 2018,2021, respectively, increased by 10.1%72.6% from RMB193.5RMB227.1 million in 20172020 to RMB 213.2RMB392.0 million (US$31.061.5 million) in 2018. This growth2021. The increase was primarily due to the opening of one leased-and-operated hotel, the conversion of three franchised-and-managed hotels to leased-and-operated hotels and an30.4% year-over-year increase in RevParL&O hotels' RevPAR and revenues from RMB131 in 2017 to RMB139 in 2018 due to stronger brand recognition. Such increases werethe 29 L&O hotels opened since the beginning of 2021, and partially offset by a decrease in occupancy rate from 70.3% in 2017 to 68.0% in 2018, and the conversionclosure of one leased-and-operated hotel to franchised-and-managed hotel in3 L&O hotels over the fourth quarter of 2018.same period.
75
Hotel operating costs. costs. Our hotel operating costs increased by 20.2%62.2% from RMB233.6RMB401.7 million in 20172020 to RMB281.0RMB651.4 million (US$40.9102.2 million) in 2018,2021, The increase was mainly attributable to anhigher rents, higher utilities and consumables, higher staff headcount and compensation expenses, higher depreciation and amortization, and higher ramp up costs. In 2021, there were 29 L&O hotels opened since the beginning of 2021, and three L&O hotels closed over the same period, which accounted for the main increase in the number of general managers in our hotel network and other costs associated with the expansion of our franchised-and-managed hotels, as well as higher rental costs, utilities, consumables and personnel costs associated with the GreenTree Eastern leased-and-operated hotels and the four new leased-and-operated hotels added to our portfolio since the third quarter of 2018. Ouroperating costs. Excluding L&O hotel operating costs, as a percentage of total revenues decreased from 30.0% in 2017costs related to 29.7% in 2018, primarily due to the increasing revenue contribution from our franchised-and-managed hotels.F&M hotels and others increased 22.9%.
Selling and marketing expenses.Our selling and marketing expenses increaseddecreased by 11.9%11.2% from RMB45.0RMB 75.3 million in 20172020 to RMB50.4RMB 66.9 million (US$7.310.5 million) in 2018,2021, The decrease was mainly attributeattributable to model room construction, exhibition and otherlower advertising and promotion expenses related to our three new mid-to-up-scale brands, increased personnel, compensation and other costs of business development personnel (i.e. travel traveling), which in turn was the result of an increase in hotel openings and wider geographic coverage.expenses. Our selling and marketing expenses decreased as a percentage of our revenues from 5.8%8.1% in 20172020 to 5.3%5.5% in 2018.2021.
General and administrative expenses. expenses.Our general and administrative expenses decreasedincreased by 21.7%117.9% from RMB121.7RMB163.4 million in 20172020 to RMB95.3RMB 356.0 million (US$13.9US$55.9 million) in 2018,2021, the increase was primarily because weattributable to the opening of 29 L&O hotels since the beginning of 2021,the impact of provision for bad debts incurred during 2021, and the increased one-time share-based compensation expenses of RMB38.0 million in relation to a grant of GTI’s shares to certain of our directors in the fourth quarter of 2017. Without accountingconsulting fees for this item, our general and administrative expenses would have increased by 13.9% in 2018.capital market advice.
Other operating expense.Our other operating expense increased by 5.6%185.3% from RMB5.6RMB1.7 million in 20172020 to RMB5.9 millionRMB4.9million (US$0.90.8 million) in 2018,2021, primarily due to one-off loss from the disposal of property and equipment and compensation to lessor due to early termination.
Other operating income. Our other operating income decreased by 13.8% from RMB31.4 million in 2020 to RMB27.1 million (US$4.2 million) in 2021, primarily due to the impairment loss caused by the expected closuredecrease of one leased-and-operated hotel located in Beijing.
Other operating income. Our other operating income increased by 47.7%financial subsidies from RMB15.3RMB20.1 million in 20172020 to RMB22.6RMB17.0 million (US$3.3 million) in 2018, primarily due to the government subsidies of RMB15.2 million (US$2.2 million) we received in 2018, as compared with the government subsidies of RMB10.2 million we received in 2017.2021.
Income from operations.As a result of the foregoing, our income from operations increaseddecreased by 38.1%51.8% from RMB387.5RMB319.3 million in 20172020 to RMB535.0RMB153.9 million (US$77.824.2 million) in 2018.2021. As a percentage of our revenues, our income from operations increaseddecreased from 49.9%34.3% in 20172020 to 56.6%12.8% in 2018.2021.
Interest income and other, net.Our net interest income increaseddecreased by 89.3%17.8% from RMB26.2RMB72.9 million in 20172020 to RMB49.7RMB60.0 million (US$7.29.4 million) in 2018,2021, primarily due to an increaseprimarily due to a decrease in interest income from higher average aggregate balances of cash and cash equivalents, restricted cash, and short-term investment and time deposits in 2018.2021.
99
Gains (losses) from tradinginvestments in equity securities.Our gains(losses) from tradinginvestments in equity securities decreasedincreased from RMB59.2negative RMB36.8 million in 2017,2020, including a gain from disposalmark-to-market losses of trading securitiesRMB40.8 million, commission for stock purchase of RMB22.6 million and a mark-to-market gain of RMB36.6RMB0.7 million, to negative RMB57.8 million (negative US$8.4profit RMB9.1 (US$1.4 million) in 2018,2021, including a gain from disposalmark-to-market profit of trading securitiesRMB 6.4 million, commission for stock purchase of RMB14.4 million (US$2.1 million) and a mark-to-market loss of RMB72.2 million (US$10.5 million).RMB 0.3 million. The balance of our tradinginvestments in equity securities decreased from RMB307.8RMB242.4 million as of December 31, 20172020 to RMB307.7RMB158 million (US$44.824.8 million) as of December 31, 2018. All of2021. Aside from these A-share securities, werewe also hold 41,336,000 shares of Chinese companies listedGingko, which we acquired during its initial public offering on China’s A share market.the Hong Kong Stock Exchange in 2019, and 33,652,000 shares of Sunkwan Properties, in which we invested as a cornerstone investor in its initial public offering on the Hong Kong Stock Exchange in 2020. Any realized or unrealized gains or losses resulting from the fluctuations of the market value of these securities will be recognized in earnings in the period which they occur.
Income tax expense. Our income tax expenses decreased by 14.2%1.4% from RMB186.7RMB110.5 million in 20172020 to RMB160.2RMB108.9 million (US$23.317.1 million) in 2018,2021, primarily due to a higher withholding tax in 2017. In addition, we incurred withholding taxesthe decrease of RMB23.3 million (US$3.4 million) as our subsidiaries incorporated in the PRC are expected to distribute their 2018 earnings during 2019 in the form of dividends. As a result of the foregoing, ourincome from operations. The effective tax rate decreasedslightly increased from 39.5%31% in 20172020 to 28.5%49% in 2018.2021 due to the tax on bad debts provisions and share repurchase plans.
Share of loss(losses) gains in equity investee, net of tax. We recognized lossThe gains in 2020 mainly consist of RMB0.9 million including RMB0.8from Zhilong. We recognized gains of RMB0.4 million (US$0.06 million) in 2021, mainly attribute to to the gains from Zhilong and RMB0.1losses from Yueyuanbaili.
Net loss attributable to non-controlling interests. The loss in 2021 mainly consist of RMB3.76 million asattributable to Zexin and Tianbao, respectively, in 2017, as compared with loss of RMB8.3 million (US$1.2 million) as to Tianbao RMB7.4 million, Zexin RMB0.6 million and Steigenberger Hotels AG RMB0.3 million in 2018, as a result of the net losses of these companies in proportion to our equity interest in them.GHG’s minority shareholders.
Net income attributable to our ordinary shareholders.As a result of the foregoing, our net income attributable to our ordinary shareholders increaseddecreased by 38.1%55.1% from RMB285.4RMB261.3 million in 20172020 to RMB394.1 millionRMB117.4million (US$57.318.4 million) in 2018.2021. Our net margin, defined as our net income attributable to our ordinary shareholders as a percentage of our revenues, increaseddecreased from 36.7%28.1% in 20172020 to 41.7%9.7% in 2018.2021.
76
Year Ended December 31, 20172020 Compared to Year Ended December 31, 20162019
Revenues. Our total revenues increaseddecreased by 20.1%14.8% from RMB647.8RMB1,091.8 million in 20162019 to RMB778.1RMB930.0 million in 2017.2020. The decrease was primarily due to the impact of COVID-19. For the full year 2020, we have opened 538 new hotels and closed 155 hotels at the same time. The revenue per available room, or RevPAR, was RMB105 in the full year 2020,
Franchised-and-managed hotels.Revenues from our franchised-and-managed hotels decreased by 18.5% from RMB831.3 million in 2019 to RMB677.5 million in 2020. The initial franchise fees increased by 27.5%11.1% year-over-year, mainly attributable to the gross opening of 528 F&M hotels and contribution from RMB458.5historical amortization under ASC606, which was adopted since the first quarter of 2019. The recurring franchise management fees decreased from RMB776.4 million in 20162019 to RMB584.6RMB616.4 million in 2017. This growth was2020, primarily due to the increased numberRevPAR decrease resulted from impact of hotels in our franchised-and-managed hotel portfolio from 1,932 hotels and 164,207 hotel rooms as of December 31, 2016 to 2,263 hotels and 187,505 hotel rooms as of December 31, 2017. The increase in the occupancy rate from 80.9% in 2016 to 82.9% in 2017 and the RevPAR from RMB123 in 2016 to RMB129 in 2017, driven by stronger brand recognition, also contributed to the growth of revenues from our franchised-and-managed hotels,COVID-19, as well as growth in membership fees.the temporary reduction of franchise management fees and CRS usage fees to support our franchisees during COVID-19.
Leased-and-operated hotels.Revenues from our leased-and-operated hotels, including sublease rental revenues of RMB27.2RMB74.9 million and RMB42.2RMB77.7 million for 20162019 and 2017,2020, respectively, increaseddecreased by 2.2%10.4% from RMB189.3RMB253.4 million in 20162019 to RMB193.5RMB227.1 million in 2017. This growth was primarily due to the opening of one leased-and-operated hotel and increases in the occupancy rate from 66.4% in 2016 to 70.3% in 2017 and the RevPar from RMB109 in 2016 to RMB131 in 2017, which in turn was the result of our stronger brand recognition, as well as growth in membership fees. Such increases were partially offset by a decrease in the number of our leased-and-operated hotels as we converted six leased-and-operated hotels to franchised-and-managed hotels and we closed one leased-and-operated hotel.
Hotel operating costs. Our hotel operating costs decreased by 2.7% from RMB240.1 million in 2016 to RMB233.6 million in 2017.2020. The decrease was primarily due to aRevPAR decrease, in the numbertemporary closure of our leased-and-operated hotels as we converted six leased-and-operated hotels to franchised-and-managedcertain hotels, and we closed one leased-and-operated hotel,partial reduction and extension of sublease income recognition, and partially offset by the costs associated with one leased-and-operated hotelrevenue contribution from 6 net newly opened in 2017.L&O hotels.
Hotel operating costs. Our hotel operating costs as a percentageincreased by 18.5% from RMB338.8 million in 2019 to RMB401.7 million in 2020, The increase was mainly attributable to higher rents, higher depreciation and amortization, the consolidation of total revenuesoperation costs of Argyle and Urban, which was acquired in April and November, 2019. In 2020, there were 10 L&O hotels newly opened, which accounted for the main increase in hotel operating costs. Excluding L&O hotel operating costs, costs related to F&M hotels and others decreased from 37.1% in 2016 to 30.0% in 2017, primarily due to the increasing revenue contribution from our franchised-and-managed hotels.9.5%.
100
Selling and marketing expenses.Our selling and marketing expenses increaseddecreased by 69.2%11.3% from RMB26.6RMB 85.0 million in 20162019 to RMB45.0RMB 75.3 million in 2017, primarily2020, The decrease was mainly attributable to decreases in cost incurred during the first half of the year for travelling and meals, because of measures taken to control the spread of COVID-19, including the lock-down of certain cities, business closures, and restrictions on travel. The decrease was also due to increased membership pointsthe impact of a one-time expense for the Annual Conference for Celebrating the First Anniversary of our Listing on NYSE in exchange for awards, an increase in marketing personnel2019, and related travel expenses. Forpartially offset by the same reason, ourincreasing fees incurred during the second half of the year, along with cooperation with Internet social platforms. Our selling and marketing expenses increased as a percentage of our revenues from 4.1%7.8% in 20162019 to 5.8%8.1% in 2017.2020.
General and administrative expense. expenses. Our general and administrative expenses increaseddecreased by 56.1%11.7% from RMB77.9RMB185.0 million in 20162019 to RMB121.7RMB163.4 million in 2017,2020, the decrease was primarily asattributable to the impact of a resultone-time provision for bad debts incurred during 2019, partially offset by higher depreciation and amortization for our property and equipment, increased investment in Research and Development, higher consulting fees, and the consolidation of one-time share-based compensation expenses of RMB38.0 million for GTI’s shares granted to certain of our directors for their past services as directors. For the same reason, our generalfrom Argyle and administrative expense as a percentage of our revenues increased from 12.0% in 2016 to 15.6% in 2017.Urban.
Other operating expense.Our other operating expense increaseddecreased by 83.2%47.3% from RMB3.1RMB3.3 million in 20162019 to RMB5.6RMB1.7 million in 2017,2020, primarily due to a donation of $1 million and one-time loss incurred onof the disposal of six of ourtransformation from one leased-and-operated hotels.hotel to franchise hotel in 2019.
Other operating income.Our other operating income increased by 25.1%26.4% from RMB12.2RMB24.8 million in 20162019 to RMB15.3RMB31.4 million in 2017,2020, primarily due to the governmentincrease of financial subsidies of RMB10.2from RMB9.9 million we received in 2017, as compared with the government subsidies of RMB8.62019 to RMB20.1 million we received in 2016.2020.
Income from operations.As a result of the foregoing, our income from operations increaseddecreased by 24.1%36.7% from RMB312.3RMB504.6 million in 20162019 to RMB387.5RMB319.3 million in 2017.2020. As a percentage of our revenues, our income from operations increaseddecreased from 48.2%46.2% in 20162019 to 49.9%34.3% in 2017.2020.
Interest income and other, net.Our net interest income increased by 19.1%10.4% from RMB22.0RMB66.1 million in 20162019 to RMB26.2RMB72.9 million in 2017,2020, primarily due to an increase in interest income from higher average aggregate balances of cash and cash equivalents, restricted cash, and short-term investment and time deposits in 2017.2020.
GainGains (losses) from tradinginvestments in equity securities.Our gaingains (losses) from tradinginvestments in equity securities increased by 140.9%decreased from RMB24.6RMB55.3 million in 2016,2019, including a gaingains from disposal of tradinginvestments in equity securities of RMB24.2RMB70.4 million and a mark-to-market gainlosses of RMB0.4RMB15.1 million., to negative RMB36.8 in 2020, including mark-to-market losses of RMB40.8 million, to RMB59.2commission for stock purchase of RMB0.7 million, in 2017, including a gain from disposaland offset by dividends of tradingequity securities of RMB22.6 million and a mark-to-market gain of RMB36.6RMB4.7 million. The balance of our tradinginvestments in equity securities increased from RMB273.5RMB207.0 million as of December 31, 20162019 to RMB307.8RMB242.4 million as of December 31, 2017. All of2020. Aside from these A-share securities, werewe also hold 41,336,000 shares of Chinese companies listedGingko, which we acquired during its initial public offering on China’s A share market.the Hong Kong Stock Exchange in 2019, and 33,652,000 shares of Sunkwan Properties, in which we invested as a cornerstone investor in its initial public offering on the Hong Kong Stock Exchange in 2020. Any realized or unrealized gains or losses resulting from the fluctuations of the market value of these securities will be recognized in earnings in the period which they occur.
77
Income tax expense. Our income tax expenses increaseddecreased by 122.4%41.7% from RMB83.9RMB189.6 million in 20162019 to RMB186.7RMB110.5 million in 2017,2020, primarily due to an increasethe decrease of income from operations in our taxable income. In addition, we incurred withholding taxes2020. The effective tax rate slightly increased from 30% in 2019 to 31% in 2020 due to the combination effect of RMB67.7 million asthe tax rate of 25% applied for certain subsidiaries that was in the process of renewal of HNTE qualification and decrease in accrual of deferred tax liabilities for expected distributions from our subsidiaries incorporated in the PRC distributed a cash dividendof their 2020 earnings in 2017. As a resultthe form of the foregoing, our effective tax rate increased from 23.3% in 2016 to 39.5% in 2017.dividend.
Share of loss(losses) gains in equity investee, net of tax. The gains in 2019 mainly consist of RMB1.3 million from Steigenberger Hotels AG. We recognized loss of RMB10.5 million for our equity investments in certain investees, including RMB9.4 million, RMB0.6 million and RMB0.5 million as to CYTS Shanghai Jinyuhao International Hotel Co. Ltd., or JYH, Yancheng Zexin Hotel Management Co., Ltd., or Zexin, and GreenTree Tianbao Hotel Management Co., Ltd., or Tianbao, respectively, in 2016, as compared with lossgains of RMB0.9 million including RMB0.8in 2020, mainly attribute to the gains from Zhilong.
Net loss attributable to non-controlling interests. The loss in 2020 mainly consist of RMB16.6 million and RMB0.1 million asattributable to Zexin and Tianbao, respectively, in 2017, as a resultArgyle’s minority shareholders.
101
Net income attributable to our ordinary shareholders.As a result of the foregoing, our net income attributable to our ordinary shareholders increaseddecreased by 7.3%41.0% from RMB266.0RMB442.7 million in 20162019 to RMB285.4RMB261.3 million in 2017.2020. Our net margin, defined as our net income attributable to our ordinary shareholders as a percentage of our revenues, decreased from 41.0%40.5% in 20162019 to 36.7%28.1% in 2017.2020.
| B.Liquidity and Capital Resources |
Our principal sources of liquidity have been cash generated from operating activities. Our cash and cash equivalents and restricted cash balance as of December 31, 20182021 was RMB1,264.0RMB320.60 million (US$183.850.31 million). Our cash and cash equivalents consist of cash on hand and liquid investments which have maturities of three months or less when acquired and are unrestricted as to withdrawal or use.acquired.
We have been able to meet our working capital and capital expenditure needs, and we believe that we will be able to meet our working capital needs in at least the next twelve months with our operating cash flow and existing cash and cash equivalents. The following table sets forth a summary of our cash flows for the years indicated:
| | | | | | | | |
|
| Year Ended December 31, | ||||||
| | 2019 |
| 2020 |
| 2021 | ||
| | RMB | | RMB | | RMB |
| US$ |
|
| (in thousands) | ||||||
Net cash provided by operating activities |
| 513,940 |
| 295,257 |
| 360,975 |
| 56,645 |
Net cash used in investing activities |
| (1,219,956) |
| (111,553) |
| (928,388) |
| (145,684) |
Net cash (used in) provided by financing activities |
| (212,232) |
| 115,528 |
| 255,628 |
| 40,114 |
Effect of exchange rate changes on cash and cash equivalents |
| (6,918) |
| (7,664) |
| (1,344) |
| (211) |
Net increase (decrease) in cash and cash equivalents |
| (925,166) |
| 291,568 |
| (313,129) |
| (49,137) |
Cash and cash equivalents and restricted cash at the beginning of the year |
| 1,267,326 |
| 342,160 |
| 633,728 |
| 99,446 |
Cash and cash equivalents and restricted cash at the end of the year |
| 342,160 |
| 633,728 | | 320,599 | | 50,309 |
|
| Year Ended December 31, |
| |||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||||||
|
| RMB |
|
| RMB |
|
| RMB |
|
| US$ |
| ||||
|
| (in thousands) |
| |||||||||||||
Net cash provided by operating activities |
|
| 443,556 |
|
|
| 476,666 |
|
|
| 554,950 |
|
|
| 80,714 |
|
Net cash provided by (used in) investing activities |
|
| 73,998 |
|
|
| (744,856 | ) |
|
| (181,756 | ) |
|
| (26,435) |
|
Net cash (used in) provided by financing activities |
|
| (132,956 | ) |
|
| (465,161 | ) |
|
| 662,845 |
|
|
| 96,407 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
| 6,328 |
|
|
| (1,468 | ) |
|
| 66,023 |
|
|
| 9,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
| 390,926 |
|
|
| (734,819 | ) |
|
| 1,102,062 |
|
|
| 160,288 |
|
Cash and cash equivalents at the beginning of the year |
|
| 505,857 |
|
|
| 896,783 |
|
|
| 161,964 |
|
|
| 23,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the year |
|
| 896,783 |
|
|
| 161,964 |
|
|
| 1,264,026 |
|
|
| 183,845 |
|
* | Upon the adoption of ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, restricted cash was included within cash and cash equivalents in the consolidated statement of cash flows for the year ended December 31, 2019 and the comparative disclosure of the year ended December 31, 2017 and 2018 had been restated to conform to the current year presentation. |
Operating Activities
Net cash provided by operating activities was RMB554.9 millionRMB361million (US$80.756.6 million) in 2018,2021, compared to RMB476.7RMB295.3 million in 20172020 and RMB443.6RMB513.9 million in 2016.2019.
Net cash provided by operating activities in 20182021 was RMB554.9RMB361 million, which was primarily attributable to our net income of RMB393.6RMB113.7 million, adjusted to deduct interest income of RMB3.7 million , and to add back (i) non-cash depreciation and amortization of RMB98.1 million, (ii) losses from investments in equity securities of RMB9.1 million, and (iii) bad debt expense of RMB132.6 million. The amount was further adjusted by changes in itemized balances of operating assets and liabilities that have a negative effect on cashflow, including primarily (i) a decrease in our deferred revenue of RMB53.6 million mainly attributable to a decrease in our membership fees received and initial franchisee fees received, (ii) an increase in our accounts receivable of RMB22.3million mainly attributable to a decrease in bad debt provision due to the recovery from COVID 19 and improved operating performance, (iii) an increase in other assets of RMB49.2 million, (iv) an increase in other current assets of RMB60.3 million,(v) an increase in income tax payable of RMB16.6 million , as well as certain changes in itemized balances of operating assets and liabilities that have a positive effect on cashflow, including primarily (i) an increase in our unrecognized tax benefits of RMB38.1 million, (ii) an increase in accrued expenses and other current liabilities of RMB71.5 million, (iii) an increase in salary and welfare payable of RMB8.6 million.
Net cash provided by operating activities in 2020 was RMB295.3 million, which was primarily attributable to our net income of RMB244.7 million, adjusted to deduct interest income of RMB11.5 million, and to add back (i) non-cash depreciation and amortization of RMB65.9 million, (ii) losses from investments in equity securities of RMB44.5 million, and (iii) bad debt expense of RMB30.0 million. The amount was further adjusted by changes in itemized balances of operating assets and liabilities that have a negative effect on cashflow, including primarily (i) a decrease in our deferred
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revenue of RMB59.5 million mainly attributable to a decrease in our membership fees received and initial franchisee fees received, (ii) an increase in our accounts receivable of RMB28.8 million mainly attributable to a decrease in bad debt provision due to the recovery from COVID-19 and improved operating performance, (iii) an increase in other assets of RMB19.7 million, (iv) an increase in other current assets of RMB18.8 million, (v) an increase in deferred taxes of RMB12.6 million, as well as certain changes in itemized balances of operating assets and liabilities that have a positive effect on cashflow, including primarily (i) an increase in our unrecognized tax benefits of RMB29.0 million, (ii) an increase in accrued expenses and other current liabilities of RMB13.2 million, (iii) a decrease in amounts due from related parties of RMB10.3 million, and (iv) an increase in salary and welfare payable of RMB8.9 million.
Net cash provided by operating activities in 2019 was RMB513.9 million, which was primarily attributable to our net income of RMB437.8 million, adjusted to deduct (i) gains from disposalinvestments in equity securities of a long-term investments of RMB36.7RMB55.3 million, and (ii) interest income of RMB20.4RMB35.7 million, and to add back (i) losses on trading securitiesnon-cash depreciation and amortization of RMB57.8RMB40.4 million, (ii) bad debt expense of RMB38.4 million, (iii) share-based compensation expenses of RMB26.5 million, and (iv) income tax expenses of RMB23.3RMB19.8 million related to dividend distribution by our PRC subsidiaries, (iii) share-based compensation expenses of RMB16.1 million, and (iv) non-cash depreciation and amortization of RMB25.5 million, and (v) share of loss in equity method investments of RMB8.3 million.subsidiaries. The amount was further adjusted by changes in itemized balances of operating assets and liabilities that have a negative effect on cashflow, including primarily (i) an increase in our accounts receivable of RMB12.4RMB52.3 million mainly attributable to an increase of RMB8.2RMB40.9 million in receivables from franchisees due to expansion of our business, (ii) an increase in deferred taxes of RMB30.2 million, (iii) an increase in other current assets of RMB13.9RMB22.6 million, (iv) an increase in prepaid rent of RMB14.3 million, (v) a decrease in income tax payable of RMB12.5 million, as well as certain changes in itemized balances of operating assets and liabilities that have a positive effect on cashflow, including primarily (i) an increase in our deferred revenue of RMB45.6RMB19.0 million mainly attributable to an increase of RMB40.9 million in our membership fees received, partially offset by a reduction of RMB6.6 million in initial franchisee fees received, (ii) an increase in our unrecognized tax benefits of RMB56.3RMB92.0 million, (iii) an increase in accrued expenses and (iii)other current liabilities of RMB27.2 million, (iv) an increase in our other long-term liabilities of RMB22.6 million.
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Net cash provided by operating activities in 2017 was RMB476.7 million, which was primarily attributable to our net income of RMB285.1 million, adjusted to deduct (i) gains from trading securities of RMB59.2 million, and (ii) interest income of RMB14.7 million, and to add back (i) income tax expenses of RMB67.7 million related to dividend distribution by our PRC subsidiaries, (ii) share-based compensation expenses of RMB38.0 million, and (iii) non-cash depreciation and amortization of RMB25.0 million. The amount was further adjusted by changes in itemized balances of operating assets and liabilities that have a negative effect on cashflow, including primarily (i) an increase in our accounts receivable of RMB17.9 million mainly attributable to an increase of RMB11.7 million in receivables from franchisees due to expansion of our business, and (ii) a decrease in our deferred rent of RMB15.8 million, as well as certain changes in itemized balances of operating assets and liabilities that have a positive effect on cashflow, including primarily (i) an increase in our deferred revenue of RMB52.0 million mainly attributable to an increase of RMB60.7 million in membership fees received, partially offset by a reduction of RMB8.7 million in initial franchisee fees received, (ii) an increase in our accrued expenses and other current liabilities of RMB44.3 million mainly attributable to an increase of RMB52.0 million in payables to franchisees, partially offset by a reduction of RMB7.7 million in other payables, (iii) an increase in our income tax payable of RMB20.8 million, (iv) an increase in amounts due from related parties of RMB13.8RMB21.5 million, and (v) an increasea decrease in our other long-term liabilities of RMB10.7 million.
Net cash provided by operating activities in 2016 was RMB443.6 million, which was primarily attributable to our net income of RMB265.8 million, adjusted to deduct (i) the disposal gain on equity investee of RMB35.7 million, (ii) gains from trading securities of RMB24.6 million, and (iii) interest income of RMB15.3 million, and to add back (i) the non-cash depreciation and amortization of RMB35.4 million and (ii) the non-cash share of loss in equity investees of RMB10.5 million. The amount was further adjusted by changed in itemized balances of operating assets and liabilities that have a negative effect on cashflow, including primarily (i) an increase in our deferred taxes of RMB12.3 million, (ii) the deposit of RMB10.2 million to restricted cash account for judgments in respect of litigation, and (iii) an increase in our other current assets of RMB10.0 million including an increase of RMB8.0 million receivables from on-line payment platform and (iii) as well as certain changes in itemized balances that have a positive effect on cashflow, including primarily (i) an increase in our other payables comprise primarily accrued expenses and other current liabilities in connection with various hotel operating costs and operating expenses of RMB105.4 million, (ii) an increase in our deferred revenue of RMB50.3 million in connection with the growth of our paid-membership base, (iii) an increase in uncertain tax positions of RMB25.2 million, (iv) an increase in advance received from franchisees of RMB17.3 million comprising primarily an increase in prepaid membership cards to be sold by franchisees to customers, (v) an increase in advances from related parties of RMB16.8 million, and (vi) an increase in our other long-term liabilities of RMB15.7RMB11.0 million.
Investing Activities
Net cash used in investing activities was RMB181.8RMB928.4 million (US$26.4145.7 million) in 2018,2021, compared to RMB744.9RMB111.6 million in 20172020 and net cash provided by investing activities of RMB74.0RMB1,220.0 million in 2016.2019.
Net cash used in investing activities in 20182021 was RMB181.8RMB928.4 million, primarily attributable to (i) purchase of short-term investments of RMB772.5RMB378.2 million, (ii) loan to third partiesfranchisee net of RMB166.8RMB290.0 million, (iii) purchases of property and equipment of RMB138.5RMB341.7 million, (iv) purchasespurchase of tradinginvestments in equity securities of RMB88.3 million,RMB8.9million, including the strategic and financial investment in Sunkwan Properties, (v) increase of long-term time deposits of RMB60.0RMB130.0 million, and(vi) (vi) acquisitions, net of cash received of RMB 147.6 million, (vii) advances for purchases of property and equipment of RMB 219.3 million, (viii) advances for acquisitions of RMB 39.5 million, (x)loan to franchisees RMB54.1related parties net of RMB296.7 million, partially offset by (i) receipt of a repayment from a related party of RMB118.4 million, and (ii) proceeds from short-term investments of RMB889.3RMB536.4 million, (ii) repayment of advances for acquisitions of RMB12.2 million, (iii) repayment from advances for purchases of property and (iii) proceeds from disposalequipment of two long-term investments, CYTS Shanghai Jinyuhao International Hotel Co. Ltd. and Wiselong Enterprise Management Co., Ltd. of RMB89.2RMB22.4 million, and (iv) proceeds from disposal of investments in tradingequity securities of RMB30.5RMB 284 million. (v) proceeds from sales of long-term time deposits of RMB50 million,(vi) repayment of loan from third parties of RMB18.2 million.
Net cash used in investing activities in 20172020 was RMB744.9RMB111.6 million, primarily attributable to (i) purchase of short-term investments of RMB781.9RMB206.6 million, (ii) purchaseloan to franchisee net of long-term investmentsRMB119.6 million, loan to third parties net of RMB100.7RMB62.0 million, (iii) purchases of trading securities of RMB40.0 million, and (iv) purchases of property and equipment of RMB16.6RMB111.9 million, (iv) purchase of investments in equity securities of RMB65.8 million, including the strategic and financial investment in Sunkwan Properties, (v) increase of long-term time deposits of RMB30.0 million, (vi) payment for acquisitions of RMB25.0 million, partially offset by (i) receiptproceeds from short-term investments of a loanRMB453.4 million, (ii) repayment of advances for acquisitions of RMB36.4 million, (iii) repayment from a related party net of RMB128.1 million, and (ii) receipt of a repayment from a related party of RMB8.7RMB11.6 million.
Net cash provided byused in investing activities in 20162019 was RMB74.0RMB1,220.0 million, primarily attributable to (i) receipt of proceeds from salepurchase of short-term investments of RMB564.7RMB823.2 million, (ii) receiptincrease of long-term time deposits of RMB500.0 million, (iii) payment for acquisitions of RMB363.9 million, (iv) purchase of investments in equity securities of RMB328.2 million, including the investment of Gingko and New Century, (v) purchases of property and equipment of RMB213.3 million (vi) loan to related parties net of RMB175.9 million, loan to franchisee net of RMB135.4 million, loan to third
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parties net of RMB10.3 million, partially offset by (i) proceeds from disposalshort-term investments of trading securities of RMB129.3RMB1,107.1 million and (iii) receipt of(ii) proceeds from disposal of equity interest in CYTS Shanghai Jinyuhao International Hotel Co. Ltd., our equity investee, of RMB64.0 million, partially offset by (i) investment in trading securities of RMB164.6 million and (ii) purchase of short-term investments of RMB368.0 million as part of our treasury policy to manage our cash.RMB222.0 million.
Financing Activities
Net cash generated fromprovided by financing activities was RMB662.8RMB255.6 million (US$96.440.1 million) in 2018,2021, compared to net cash provided by financing activities of RMB115.5 million in 2020 and net cash used in financing activities of RMB465.2RMB212.2 million in 2017 and RMB133.0 million in 2016.2019.
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Net cash provided by financing activities in 20182021 was RMB662.8RMB255.6 million, primarily attributable to (i) proceeds from initial public offeringbank borrowings net of RMB837.5RMB558.0 million, (ii) proceeds from NCI of RMB17.9 million and (iii) Distribution to the shareholders of RMB320.3 millions.
Net cash provided by financing activities in 2020 was RMB115.5 million, primarily attributable to (i) proceeds from short-term borrowings of RMB90.0 million and (ii) proceeds from short-term borrowingsNCI of RMB60 million, partially offset by (i) a distribution to our shareholders of RMB200.5 million, and (ii) payment for initial public offering costs of RMB30.8 million.
Net cash used in financing activities in 2017 was RMB465.2 million, primarily attributable to (i) a distribution to our shareholders of RMB579.0 million, (ii) income tax paid of RMB64.7 million related to the foregoing distribution, and (iii) repayment of short-term borrowings of RMB61.4 million, partially offset by (i) a decrease in restricted cash of RMB180 million and (ii) proceeds from short-term borrowings of RMB60RMB27.5 million.
Net cash used in financing activities in 20162019 was RMB133.0RMB212.2 million, primarily attributable to (i)proceeds from NCI of RMB14.7 million and offset by a distribution to our shareholders of RMB18.0 million and (ii) an increase in restricted cash of RMB115.0RMB227.0 million.
Statutory Reserves
As a holding company, we rely upon dividends paid to us by our subsidiaries in the PRC to pay dividends and to finance any debt we may incur. If our subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our subsidiaries are permitted to pay dividends to us only out of their accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. Pursuant to laws applicable to entities incorporated in the PRC, each of our subsidiaries in the PRC must make appropriations from after tax profit to a statutory surplus reserve fund. The reserve fund requires annual appropriation of 10% of after tax profit (as determined under accounting principles generally accepted in the PRC at each year-end) after offsetting accumulated losses from prior years, until such reserve reaches 50% of the subsidiary’s registered capital. The reserve fund can only be used to increase the registered capital and eliminate further losses of the respective companies under PRC regulations. As of December 31, 2016, 20172019, 2020 and 2018,2021, total statutory reserves of our PRC subsidiaries was RMB55.3RMB63.0 million, RMB57.7RMB70.0 million and RMB57.7RMB77.5 million (US$8.4[12.2] million). These reserves are not distributable as cash dividends, loans or advances. In addition, due to restrictions under PRC laws and regulations, our PRC subsidiaries are restricted in their ability to transfer their net assets to the company in the form of dividend payments, loans or advances. Amounts of net assets restricted include paid up capital and statutory reserve funds of our PRC subsidiaries amounted to RMB398.4RMB509.4 million, RMB391.0RMB777.7 million and RMB394.4RMB936.8 million (US$57.4147.0 million) as of December 31, 2016, 20172019, 2020 and 2018,2021, respectively.
Treasury Policy
As a result of practical difficulties in remitting cash by our PRC subsidiaries outside of China, we have established a treasury policy to better utilize our financial resources and manage our cash that we generate from our operations in China. Under this policy, when our internal cash flow and liquidity forecast indicatesindicate that we have sufficient capital resources for our operating activities and our capital expenditure, we make liquid investments with a portion of our excess cash to achieve a better return on our assets than generating interest on bank deposits.
Given the limited investment channels available in China, we primarily purchase short-term wealth management products issued by commercial banks and shares of blue chip companies listed in China’s A-Share market. Meanwhile, for the strategic purpose, we invested in two HK listed companies. The short-term wealth management products are typically principal protected with limited risks. In addition, we select high-quality companies with proven track records and stable operations. Among these investments, most of them are state-owned enterprises.
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As of December 31, 2016, 20172019, 2020 and 2018,2021, we had short-term investments of nil, RMB781.9RMB437.3 million, RMB302.0 million and RMB685.5RMB557.5 million (US$99.787.5 million) and tradinginvestments in equity securities of RMB273.5RMB207.0 million, RMB307.8RMB242.4 million and RMB307.7RMB158.0 million (US$44.824.8 million). We recorded gainslosses from disposal of the short-term investments and tradinginvestments in equity securities gains of RMB11.7 millionnil and RMB24.2RMB70.4 million, respectively, in 2016 and2019, gains of nil and RMB22.6RMB2.3 million, respectively, in 2017,2020, and gains of nil and RMB14.4RMB13.6 million (US$2.1 million),million, respectively, in 2018.2021. Mark-to-market gainlosses from these tradingequity securities we recorded amounted to RMB0.4RMB29.8 million, RMB29.6 million and RMB36.6RMB8.7 million in 2016 and 2017, respectively and mark-to-market loss from these trading securities we recorded amounted to RMB72.2 million (US$10.51.4 million) in 2018.2019, 2020 and 2021, respectively.
In December 2017,January 2019, we declared a cash dividend of RMB588.4US$30.6 million, (US$90.4 million). RMB548.7 million (US$84.3 million)US$0.30 per ordinary share, or US$0.30 per ADS. Holders of our ordinary shares and ADSs as of the close of trading on February 6, 2019 were entitled to such cash dividend, wasand we paid such dividend in full in February 2019. In December 2017, and the remainder will be paid in 2018. In February 2018,2019, we declared a cash dividend of US$2325.5 million, US$0.25 per ordinary share, or US$0.25 per ADS. Holders of our ordinary shares and ADSs as of the close of trading on December 24, 2019 were entitled to such cash dividend, and we paid such dividend in full in January 2020. In December 2021, we declared a cash dividend of US$0.55 per ordinary share, or US$0.55 per ADS. Holders of our ordinary shares and ADSs as of the close of trading on December 31, 2021 were entitled to GTI, our shareholder, after the completion of offeringsuch cash dividend, and upon the receipt of relevant internal and other approvals. we paid such dividend in full in January 2022.
In addition, we plan to implement a more prudent treasury policy that involves board level discussion, approval and oversight, as well as third party professional securities trading advice. In particular, we plan to gradually liquidate our holding of our tradinginvestments in equity securities, subject to market conditions, and will put the unutilized cash in interest-bearing accounts or pursue less volatile investment options.
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Recently Issued Accounting Standards
Please see Note 2 to our consolidated financial statements included elsewhere in this annual report.
C. | Research and Development, Patents and Licenses, etc. |
Hotel Development
See “Item 4. Information on the Company—B. Business Overview—Our Technology Infrastructure” and “Item 4. Information on the Company—B. Business Overview—Hotel Development.”
Intellectual Property
See “Item 4. Information on the Company—B. Business Overview—Intellectual Property.”
D. | Trend Information |
Please refer to “—A. Results of Operations” for a discussion of the most recent trends in our services, sales and marketing by the end of 2018.2021. In addition, please refer to discussions included in such Item for a discussion of known trends, uncertainties, demands, commitments or events that we believe are reasonably likely to have a material effect on our net sales and operating revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information to be not necessarily indicative of our future operating results or financial condition.
E. |
|
In connectionCritical Accounting Policies and Significant Judgements and Estimates
We prepare financial statements in accordance with the plan of APAM Holdings, a hotel project management company wholly owned by Mr. Alex S. Xu, our chairman and chief executive officer, to invest in hotel assetsaccounting principles generally accepted in the United States, or U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect the reported amounts of our assets and liabilities and the disclosure of our contingent assets and liabilities at the end of each fiscal period and the reported amounts of revenues and expenses during each fiscal period. We evaluate these judgments and estimates based
105
on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and assumptions that we entered intobelieve to be reasonable, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a guarantee arrangement with China Everbright Bankhigher degree of judgment than others in their application.
The selection of critical accounting policies and estimates, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.
Revenue recognition
Our revenues from leased-and-operated hotels are primarily derived from hotel operations, including the rental of rooms and food and beverage sales. Each of these products and services represents an individual performance obligation and, in exchange for these services, we receive fixed amounts based on fixed rates or fixed standalone selling price. Revenue is recognized when rooms are occupied, and food and beverages are sold. Sublease rental revenues as the respective performance obligations are derived from the subleasing of partial space of leased-and-operated hotels and is recorded in leased-and-operated hotel revenue in the consolidated statements of comprehensive income on a straight-line basis over the contractual lease term satisfied.
Our revenues from franchised-and-managed hotels are derived from franchise agreements where the franchisees are required to pay (i) an initial one-time non-refundable franchise fee, and (ii) continuing franchise fees, which mainly consist of on-going management and service fees based on a certain percentage of the room revenues of the franchised-and-managed hotels and central reservation system (“CRS”) usage fee based on a fixed rate per transaction. For franchised-and-managed hotels, we have a performance obligation to provide franchisees a license to our hotel system intellectual property for use of certain of our brand names. The Bankone-time franchise fees are fixed consideration payable upon submission of East Asia Limited,a franchise application or renewal and are recognized on a straight-line basis over the initial or renewal term of the franchise agreements. We do not consider this advance consideration to include a significant financing component, since it is used to protect us from the franchisees failing to adequately complete some or all obligations under whichthe contract. The continuing fees represent variable consideration, as the transaction price is based on a percentage of underlying service revenue is recognized by the franchisees’ operations. We recognize continuing franchise fees on a monthly basis over the term of the agreement as those amounts become payable.
In addition, we made a deposit of RMB withdesignate hotel managers to certain hotels and accounts for hotel manager fees related to the former bank in orderhotels under the franchise program as revenues. Pursuant to the franchise-and-management agreements, we charge the franchisees fixed hotel manager fees to compensate us for the latter bankfranchised-and-managed hotel managers’ salaries, social welfare benefits and certain other out-of-pocket expenses as incurred. The hotel manager fee is recognized as revenue on a monthly basis.
We invite our customers to issueparticipate in a credit linemembership program with four tiers of membership – E-membership, R-membership, gold membership and platinum membership. A one-time membership fee is charged for new members except for the E-membership. The membership automatically expires after two years in the event of non-usage and is automatically renewed if used at least once within a two-year period. Members enjoy discounts on room rates, priority in hotel reservation, and accumulate membership points for their paid stays, which can be redeemed for membership upgrades, room night awards and other gifts within two years after the points are earned.
Membership fees from our membership program are earned and recognized on a straight-line basis over the expected membership duration of the different membership levels. Such duration is estimated based on our experience and is adjusted on a periodic basis to reflect changes in membership retention. The membership duration is estimated to be utilizedthree to five years depending on membership level.
Membership points earned by APAM Holdings,members represent a hotel project management company wholly ownedmaterial right to free or discounted goods or services in the future. The membership program has one performance obligation that consists of marketing and managing the program
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and arranging for award redemptions by Mr. Alex S. Xu, our chairman and chief executive officer, APAM Holdings for its investment in Bayshore, a hotel project development company wholly owned by Mr. Alex S Xu. We deposited cash of RMB65 million into a collateral account at China Everbright Bank, which was replaced with a deposit of RMB70 million in 2016, pursuant to the guarantee arrangement.members. The amount of RMB65 millionrevenue we recognize upon point redemption is impacted by the estimate of the “breakage” for points that members will never redeem. We estimate breakage based on our historical experience and RMB70 million was includedexpectations of future member behavior and will true up the estimated breakage at the end of each period. We recognized revenue net of reimbursement paid to franchisees as our performance obligation is to facilitate the transaction between the member and the franchised and managed hotels.
Impairment of long lived assets
We evaluate impairment of our long-lived assets to be held and used, including property and equipment, definite-lived intangible assets and other non-current assets, when events or changes in “restricted cash”circumstances indicate, in management’s judgment, that the carrying value of such assets may not be recoverable in accordance with ASC subtopic 360-10, Property, Plant and Equipment-Overall. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying value of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount that the carrying value exceeds the estimated fair value. Fair value is generally determined by discounting the cash flows expected to be generated by the assets, when the market prices are not readily available for the long-lived assets. We evaluate the trademark, which can be treated as infinite lived intangibles, at the end of each reporting period to determine whether events and circumstances continue to support an indefinite useful life. Impairment is tested annually or more frequently if events or changes in circumstances indicate that it might be impaired.
Long-term Investments
Our long-term investments mainly consist of equity-method investments, equity investments with readily determinable fair values and equity investments without readily determinable fair values and an available-for-sale debt investment.
Investments in entities in which we have significant influence but do not own a majority equity interest or otherwise control are accounted for using equity-method investments in accordance with ASC 323-10, Investments — Equity Method and Joint Ventures: Overall. The share of earnings or losses of such investees are recorded in earnings. We record impairment losses on these investments when the impairment is deemed other-than-temporary.
Investments in equity securities that have readily determinable fair values (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are measured at fair value, with unrealized gains and losses from fair value changes recognized in net income in the consolidated statements of comprehensive income.
For investments in equity securities without readily determinable fair value and do not qualify for the existing practical expedient in ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) to estimate fair value using the net asset value per share (or its equivalent) of the investment, we elected to use the measurement alternative to measure those investments at cost, less impairment, plus or minus changes from observable price changes in orderly transactions for the identical or similar investments of the same issuer, if any. These investments are measured at fair value on a nonrecurring basis when there are events or changes in circumstances that may have a significant adverse effect. An impairment loss is recognized in the consolidated statements of comprehensive income equal to the amount by which the carrying value exceeds the fair value of the investment. Prior to the adoption of ASU 2016-01 Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities on January 1, 2019, these investments were accounted for using the cost method of accounting, measured at cost less other-than-temporary impairment.
The available-for-sale debt investment is convertible debt instruments issued by a private company that is redeemable at the Company’s option, which are measured at fair value, with interest income recognized in net income in the consolidated statements of comprehensive income and all other changes in the carrying amount of these debt investments are recognized in other comprehensive income. An impairment loss on the available-for-sale debt investments, if any, is recognized in earnings when the decline in value is determined to be other-than-temporary.
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Income taxes
We account for income taxes using the liability method, where deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some or all of the deferred tax assets will not be realized.
We recognize the benefit of a tax position if the tax position is more likely than not to prevail based on the technical merits of the tax position. Tax positions that meet the “more likely than not” threshold are measured at the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement. We re-assessed our consolidated balance sheetsliability for unrecognized tax benefits that may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations. Changes in recognition and measurement estimates are recognized in the period in which the changes occur. We account for interest and penalties related to an uncertain tax position as a component of December 31, 2015income taxes.
Share-based compensation
Share based awards granted to employees are accounted for under ASC 718, “Compensation — Stock Compensation”, which requires that such equity awards granted to employees be measured based on the grant date fair value and 2016, respectively. In 2017,recognized as compensation expense a) immediately at grant date if no vesting conditions are required; or b) using accelerated method, net of estimated forfeitures, over the guarantee was releasedrequisite service period, which is the vesting period.
Litigation and our cash deposit was releasedcontingencies
From time to time are, and in the future, we may be, parties to or targets of lawsuits, claims, investigations, and proceedings, including but not limited to non-compliance with respect to licenses and permits, franchise agreements and lease contracts, which are handled and defended in the ordinary course of business. We may be unable to estimate the reasonably possible loss or a range of reasonably possible losses until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the collateral account.
In December 2016,court on motions or appeals, or the progress of settlement negotiations. We accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When we are not able to reasonably estimate a single amount within a range, we accrue the minimum amount. We expense legal costs, including those expected to be incurred in connection with GTI’s plana loss contingency, as incurred.
Business combinations
We account for all business combinations under the purchase method in accordance with ASC 805, Business Combinations. The cost of an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued. The costs directly attributable to acquire certainthe acquisition are expensed as incurred. Identifiable assets, unrelated to GTI’s hotel business, currently form the principal assets of GreenTree Hospitality, cash of RMB110 million was put up as performance bond in December 2016. Such amount was classified as our restricted cashliabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of December 31, 2016.
In March 2017, GTI obtained an Euro-denominated loan of approximately RMB900 million from Pudong Development Bank as part of GTI’sthe acquisition financing plan. As required by Pudong Development Bank, a restricted cash collateral of RMB900 million was deposited by GTI to secure the bank loan. Upon its formation, GreenTree Hospitality is also liable to maintain such restricted cash collateral account to secure GTI’s obligations under the bank loan.
In April 2017, the performance bond of RMB110 million was released upon completiondate, irrespective of the acquisition. In July 2017, RMB120 millionextent of any noncontrolling interests. The excess of (i) the total of the collateral was replaced by GTI with cash from one of its subsidiaries that is not part of our group, thereby releasing a corresponding amount of our cash from the restricted cash account. In December 2017, GTI repaid RMB340 millioncost of the loan in two installments, and approximately RMB560 millionacquisition, fair value of the bank loan remains outstanding. GTI has also replaced the remaining cash collateralnoncontrolling interests and acquisition date fair value of RMB780 million with 20% ofany previously held equity interest in our companythe acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the identifiable net assets of the acquiree, the difference is recognized directly in earnings.
The determination and a personal guarantee from Mr. Alex S. Xu. As a result, ourallocation of fair values to the identifiable net assets acquired, liabilities assumed and noncontrolling interest is based on various assumptions and valuation methodologies requiring considerable judgment. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash of RMB780 million was released fromflow projections, as well as the restrictedassumptions and estimates used to determine the cash account.
Other than operating lease obligations set forthinflows and outflows. We determine discount rates to be used based on the risk inherent in the table underacquiree’s current business model and
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industry comparisons. Although we believe that the caption “Tabular Disclosure of Contractual Obligations” below, we have not entered into any financial guarantees or other commitments to guaranteeassumptions applied in the payment obligations of any third parties as of December 31, 2018. We have not entered into any derivative contracts thatdetermination are indexed to our shares and classified as shareholder’s equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
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The following table sets forth our contractual obligations as of December 31, 2018:
|
| Payments Due by Period |
| |||||||||||||||||
|
| Total |
|
| Less Than 1 Year |
|
| 1-3 Years |
|
| 3-5 Years |
|
| More Than Five Years |
| |||||
|
| (in RMB thousands) |
| |||||||||||||||||
Operating lease obligations |
|
| 572,727 |
|
|
| 82,142 |
|
|
| 154,170 |
|
|
| 116,299 |
|
|
| 220,116 |
|
Other long-term liabilities |
|
| 96,574 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 96,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
| 669,301 |
|
|
| 82,142 |
|
|
| 154,170 |
|
|
| 116,299 |
|
|
| 316,690 |
|
As of December 31, 2018, we recorded uncertain tax benefits of RMB169.6 million (US$24.7 million) mainly related to transfer pricing and deductibility of expenses.
|
|
This annual report contains forward-looking statements that involve risks and uncertainties, including statementsreasonable based on our current expectations, assumptions, estimates and projections about us and our industry. The forward-looking statements are contained principally in the sections entitled “Annual report Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Industry Overview,” “Business” and “Regulation” in this annual report. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions. The forward-looking statements included in this annual report relate to, among others:
our goals and growth strategies;
our future business development, financial condition and results of operations;
trends in the hospitality industry in China and globally;
competition in our industry;
fluctuations in general economic and business conditions in China and other regions where we operate;
the regulatory environment in which we and our franchisees operate;
our proposed use of proceeds from this offering; and
assumptions underlying or related to any of the foregoing.
This annual report also contains market data relating to the hospitality industry in China, including market position, market size, and growth rates of the markets in which we participate, that are based on industry publications and reports. Statistical data in these publications and reports also include projections based on a number of assumptions. The hospitality industry in China may not growinformation available at the rates projected by market data, or at all. The failuredate of these markets to grow at the projected rates may have a material adverse effect on our business and the market price of our ADSs. If any one or more of the assumptions underlying the market data turns out to be incorrect,acquisition, actual results may differ from the projections based on these assumptions. In addition, projections, assumptions and estimates of our future performanceforecasted amounts and the futuredifferences could be material.
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the identifiable assets acquired less liabilities assumed of an acquired business. Our goodwill as of December 31, 2020 and 2021 was related to our acquisition of subsidiaries and business. We follow ASC subtopic 350-20, Intangibles-Goodwill and Other: Goodwill. Goodwill and business acquired in a business combination are not amortized, but instead tested for impairment at least annually, or more frequently if certain circumstances indicate a possible impairment may exist.
In accordance with ASC 350-20, we have assigned and assessed goodwill for impairment at the reporting unit level. A reporting unit is an operating segment or one level below the operating segment. We have determined that we have one reporting unit, which is also our only reportable segment.
We have the option to first assess qualitative factors to determine whether it is necessary to perform the two-step test in accordance with ASC 350-20, Testing Goodwill for Impairment. If we believe, as a result of the qualitative assessment, that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount, the two-step quantitative impairment test described above is required. Otherwise, no further testing is required. In the qualitative assessment, we consider primary factors such as industry and market considerations, overall financial performance of the industryreporting unit, and other specific information related to the operations. In performing the two-step quantitative impairment test, the first step compares the carrying amount of the reporting unit to the fair value of the reporting unit based on either quoted market prices of the ordinary shares or estimated fair value using a combination of the income approach and the market approach. If the fair value of the reporting unit exceeds the carrying value of the reporting unit, goodwill is not impaired and we are not required to perform further testing. If the carrying value of the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step of the impairment test in which we operateorder to determine the implied fair value of the reporting unit’s goodwill. The fair value of the reporting unit is necessarily subjectallocated to its assets and liabilities in a manner similar to a high degree of uncertainty and risk duepurchase price allocation in order to a variety of factors, including those described in “Risk Factors” and elsewhere in this annual report. You should not place undue reliance on these forward-looking statements.
The forward-looking statements made in this annual report relate only to events or information asdetermine the implied fair value of the date on whichreporting unit goodwill. If the statements are made in this annual report. Exceptcarrying amount of the goodwill is greater than its implied fair value, the excess is recognized as required by law,an impairment loss.
In 2020, we undertake no obligationelected to update any forward-looking statementschoose to reflect events or circumstances afterbypass the date on which the statements are made orqualitative assessment and proceed directly to reflect the occurrence of unanticipated events. You should read this annual reportperform a quantitative test. In 2019 and the documents that2021, we have referred to in this annual report and have filed as exhibits to the registration statement, of which this annual report isperformed a part, completely and with the understanding that our actual future results may be materially different from what we expect.qualitative assessment for its operating unit.
82ITEM 6.DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. | Directors and Senior Management |
The following table sets forth certain information relating to our current directors, executive officers and senior management.
Name | Age | Position/Title |
| ||||
Alex S. Xu ( | | 58 |
| | Chairman and chief executive officer | | |
Gregory James Karns | | 66 |
| | Director, general counsel | | |
| | 39 |
| | Independent director | | |
Bingwu Xie ( | | 52 |
| | Independent director | | |
Dong Li ( | | 46 |
| | Independent director | | |
Yiping Yang ( | | 39 |
| | Chief financial officer | | |
Wen Qi ( | | 44 |
| | Vice president, human resources and administration | | |
Yong Yang ( | | 43 |
| | Vice president, development | |
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Mr. Alex S. Xu ()is our founder and has served as our chairman of the board of directors and chief executive officer since 2004. Mr. Xu is the founder of American Pacific Homes, Inc., a premier residential real estate developerleading home builder in California and transformed now to a hotel franchisor and operator in the Western US, and has served as its chairman since 1997. He also has served as a managing director of Foothill Medical Centers since 1997. Prior to founding our company, Mr. Xu served as the chief operating officer of U.S. Uni-President Investment and Development from 1995 to 1997. From 1994 to 1996, Mr. Xu served as the director of finance with Santa Anita Realty Enterprises, Inc. From 1990 to 1994, Mr. Xu worked as the accounting and corporate data service manager for Broadway Stores Inc. Mr. Xu received a bachelor’s degree in engineering from Beijing Institute of Technology in 1984 and two master’s degrees in computer engineering and in applied mathematics from the University of Southern California in 1990.
Mr. Gregory James Karns has served as a director and general counsel of our company since 2005. Mr. Karns has worked as an associate and asis a partner successively with the U.S. law firm of Cox, Castle & Nicholson LLP, where he has worked since 1989. From 1985 to 1989, Mr. Karns worked as an associate with the law firm of Jones, Day, Reavis & Pogue. FromPogue, and Mr. Karns began his legal career in 1983 to 1985, he worked as an associate with the law firm of Kindel & Anderson. Mr. Karns received a bachelor’s degree in political science from the University of California Santa Cruz in 1980, and ahis juris doctor degree from Loyola Law School in 1983.
Mr. Akira HirabayashiMs. Yanjie (Catherine) Zhu ( ) has served as an independent director of our company since 2011. He currently serves as the chief executive officer of Accordia Golf Co., Ltd. starting from January 2018. From 2016 to 2017, Mr. Hirabayashi served as vice chairman and a director of H.I.S. Co., Ltd. and also as chief executive officer of H.I.S. Hotel Holdings Co., Ltd. From 2008 to 2016, Mr. HirabayashiDecember 2021. Ms. Zhu has served as the representative executivefinance director of Baozun Inc. (Nasdaq: BZUN and president of H.I.S.HKEX: 9991) (“Baozun”) since November 2020. Prior to joining Baozun, she served as the finance director for Cue & Co., Group Ltd. and then IBR between April 2018 and October 2020. From September 2016 to February 2018, Ms. Zhu worked as a finance controller with Xperience Communications (Shanghai) Co., Ltd. From 2007 to 2008, he servedBetween March 2013 and September 2016, she worked as a director of H.I.S.finance manager first with Lend Lease Project Management & Construction (Shanghai) Co., Ltd. From 1993, and then with Porsche Centre Shanghai Waigaoqiao Limited. Prior to 2007, Mr. Hirabayashi served successivelythat, Ms. Zhu worked as an audit manager with KPMG in its Shanghai office from August 2005 to February 2013. Ms. Zhu received a supervisor, manager, deputy general manager,bachelor’s degree in business administration from Shanghai International Studies University in July 2005. Ms. Zhu is a member of the Chinese Institute of Certified Public Accountants and senior general manager in the regional sales departmentInstitute of H.I.S. Co., Ltd. Mr. Hirabayashi graduated from Koseigakuen Senior High School in 1986.Internal Auditors.
Mr. Bingwu Xie () has served as an independent director of our company since 2011. Mr. Xie is the founder and owner and has served as a director of Global Standard Investment Management Co., Ltd. since 2009 and as a director of ValueAlert Co, Ltd. since 2005. From 2014 to 2016, Mr. Xie served as a partner of Gopher Asset Management Limited and as the deputy chief investment officer of Noah Holdings (Hong Kong) Limited. From 2009 to 2014, Mr. Xie served as a managing director in the mergers and acquisitions department of ZEG Capital Management Co., Ltd. with Zhongzhi Enterprise Group, and as corporate vice president in charge of the real estate finance division of Zhongrong International Trust Co., Limited. From 2000 to 2009, Mr. Xie held various positions with Lehman Brothers in Japan and Hong Kong as a vice president and senior vice president of the investment management division, as a vice president in the fixed income division, and served as China country head of the real estate private equity division since December 2006. Mr. Xie received a bachelor’s degree in English for science and technology from Harbin Institute of Technology in 1993 and a master’s degree in international development (economics) from the International University of Japan in 1998.
Mr. Dong Li () has served as an independent director of our company since the SEC’s declaration of effectiveness of our registration statement on Form F-1.March 2018. Mr. Li has served as a director since September 2017 and asthe chief financial officer of Tim Hortons China, a premium coffee chain network in China since July 2017September 2021. Mr. Li also served as an independent director of Boqii Holding Ltd (China’s leading pet-focused platform listed on the NYSE, ticker symbol: BQ) since September 2020, and as an independent non-executive director of Helens International Holdings Company Limited (China’s largest bar chain network listed on the Hong Kong Stock Exchange, ticker symbol: 09869) since August 2021. Prior to joining Tim Hortons China, Mr. Li served as the chief financial officer for several companies, including Ximalaya Inc., one of China’s largest online audio platforms from September 2019 to September 2021; OneSmart International Education Group Limited. Mr. Li served as chief financial officer ofLimited, a diversified premium K-12 education company in China listed on the New York Stock Exchange (ticker symbol: ONE) from July 2017 to June 2019; Pegasus Media Group Limited, a company focuses on movie and TV show production, investment, licensing, marketing and derivatives from April 2016 to April 20172017; and chief financial officer of Ecovacs Robotics Holdings Limited, a consumer robotics company in China listed on the Shanghai Stock Exchange (ticker symbol: 603486) from March 2015 to February 2016. From September 2008 to February 2015, Mr. Li worked as an associate and later vice president in investment banking at Bank of America Merrill Lynch and ICBC International in Hong Kong. Prior to that, Mr. Li worked in KPMG’s auditing practice group for an extended periodfrom August 1999 to
110
April 2006 in its Beijing and Silicon Valley offices, respectively. Mr. Li received a bachelor’s degree in accounting from School of Economics and Management, Tsinghua University in July 1999, as well as a master’s degree in business administration in finance from Kellogg School of Management, Northwestern University in June 2008. Mr. Li is a member of the Chinese Institute of Certified Public Accountants and the Certified General Accountants Association of Canada.
83
Dr. Yiping Yang ()has served as our chief financial officer since January 2019, a director of our company infrom January 2018 to March 2018, as our vice president for operations since 2017, and as our vice president for sales and marketing since 2016. Dr. Yang has worked at our company as a secretary of general managers and a group marketing director since 2016, with responsibility for sales channels, customer reservation services, online promotion, public relations, and graphic design. She initially joined our company as executive assistant to the chairman. From 2011 to 2015, Dr. Yang held various roles as a marketing director, sales manager, and assistant general manager with Jingfeng Industry Co., Ltd,Ltd., Jiangxi, a chain manufacturing company. Dr. Yang received a bachelor’s degree in applied mathematics from Shanghai Jiao Tong University in 2004 and passed the qualifying exam for the doctoral program in 2006. She received a doctoral degree in financial engineering from the Chinese University of Hong Kong in 2010.
Ms. Wen Qi ()has served as our vice president for human resources and administration since 2016. Ms. Qi has held various positions in our company since 2006. From 2013 to 2016, she served as the director of our information technology department with responsibility for scheduling programs, appraising employees’ performance and planning the development of information technology solutions for our company. From 2011 to 2013, Ms. Qi served as a director of our purchasing department. From 2008 to 2009, and from 2009 to 2011, she successively served as a supervisor and as a director of our legal affairs department. From 2006 to 2007, Ms. Qi worked as the executive secretary to the chairman of our board of directors. Ms. Qi received a bachelor’s degree in law from University of Science and Technology Beijing in 2002 and received a master’s degree in law from the University of Hertfordshire in 2005.
Mr. Yong Yang ()has served as our vice president for development since 2015. Mr. Yang worked with our company as a regional manager from 2013 to 2015 and as a regional deputy manager from 2012 to 2013. In 2012, he served as our regional director of the Southern Anhui Region. From 2011 to 2012, Mr. Yang worked with our company as a regional manager and a development specialist. From 2011 to 2010, he worked successively as a deputy manager and then manager of our Anhui branch. From 20072008 to 2009, Mr. Yang served as assistant general manager of the Hefei branch of Homeinns Hotels Co., Ltd. Mr. Yang studied economic management at the College of Economics and Management at the Anhui Administration Institute and graduated in 2004.2005.
B. | Compensation |
For the year ended December 31, 2018,2021, we paid an aggregate of approximately US$0.70.50 million in cash to our executive officers and directors.
Employment Agreements
We have entered into employment agreements with all of our executive officers. Under these agreements, each of our executive officers is employed for a specified time period. We may terminate his or her employment for cause at any time, with prior written notice, for certain acts of the employee, including but not limited to a conviction to a felony, or willful gross misconduct by the employee in connection with his employment, and in each case if such acts have resulted in material and demonstrable financial harm to us. An executive officer may, with prior written notice, terminate his or her employment at any time for any material breach of the employment agreement by us that is not remedied promptly after receiving the remedy request from the employee. Furthermore, either party may terminate the employment agreement at any time without cause upon advance written notice to the other party. Upon termination, the employee is generally entitled to a severance pay of at least one month’s salary.
Each executive officer has agreed to hold, both during and subsequent to the terms of his or her agreement, in confidence and not to use, except in pursuance of his or her duties in connection with the employment, any of our confidential information, technological secrets, commercial secrets and know-how. Our executive officers have also agreed to disclose to us all inventions, designs and techniques resulted from work performed by them, and to assign us
111
all right, title and interest of such inventions, designs and techniques. Moreover, each of our executive officers has agreed that during the term of his or her employment with us and three years thereafter: (i) not to serve, invest or assist in any business that competes with our business; and (ii) not to solicit any of our officers, directors, employees or agents.
Share Incentive Plan
2018 Share Incentive Plan
In January 2018, our board of directors adopted our 2018 share incentive plan to attract and retain personnel, provide additional incentives to our employees, directors and consultants, and promote the success of our business. The 2018 share incentive plan provides for the grant of options, restricted shares and restricted share units, collectively referred to as awards. Our board of directors has authorized the issuance of up to 9,000,000 Class A ordinary shares upon exercise of awards granted under our 2018 share incentive plan.
84
The compensation committee of our board of directors, or before the compensation committee is established, the chairman of our board of directors, will administer the 2018 share incentive plan. The compensation committee or the chairman of the board of directors, as appropriate, will determine the participants to receive awards, the type and number of awards to be granted and the terms and conditions of each award grant.
Award Agreements
Awards granted under our 2018 share incentive plan are evidenced by an award agreement that sets forth the terms, conditions and limitations for each grant, which may include the term of the award, the provisions applicable in the event of the grantee’s employment or service terminates, and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind the award.
Transfer Restrictions
The right of a grantee in an award granted under our 2018 share incentive plan may not be transferred in any manner by the grantee other than by will or the laws of succession and, with limited exceptions, may be exercised during the lifetime of the grantee only by the grantee.
Option Exercise
The term of options granted under the 2018 share incentive plan may not exceed six years from the date of grant. The consideration to be paid for our ordinary shares upon exercise of an option or purchase of shares underlying the option may include cash, check or other cash-equivalent, ordinary shares, consideration received by us in a cashless exercise, or any combination of the foregoing methods of payment.
Acceleration upon a Change of Control
If a change of control of our company occurs, the award agreement may provide for acceleration of the vesting of the awards pursuant to the agreement. Our compensation committee or our board of directors may (i) cancel the awards for fair market value, (ii) provide for issuance of substitute awards or (iii) provide that for at least 15 days prior to the change of control the awards shall be exercisable as to all shares subject thereto and such awards shall terminate after the change of control.
Termination and Amendment
Unless terminated earlier, our 2018 share incentive plan will expire after ten years. Our board of directors has the authority to amend or terminate our 2018 share incentive plan, subject to shareholder approval to the extent necessary to comply with applicable law. Shareholders’ approval is required for any amendment to the 2018 share incentive plan that
112
(i) increases the number of ordinary shares available under the 2018 share incentive plan or changes the maximum number of shares for which awards may be granted to any participant or, (ii) diminish any of the rights of the participant under any award previously granted to such participant under the plan without such participant’s consent.
85
Our board of directors has only granted options to participants in our 2018 share incentive plan. In January 2018, we granted 1,703,000 options to purchase our Class A ordinary shares to certain of our employees and directors. All of these options were subject to applicable vesting schedules. As of the date of the annual report, there were (i) 1,591,5001,022,000 Class A ordinary shares issuable upon the exercise of outstanding options and (ii) 7,408,5007,978,000 Class A ordinary shares reserved for future issuance. The table below summarizes, as of the date of this annual report, the options we have granted to our directors and executive officers under our 2018 share incentive plan.
| | | | | | | | |
|
| Number of |
| |
| |
| |
| | shares underlying |
| Exercise price | | |
| |
Name |
| options granted |
| (US$ per share) | | Grant date | | Expiration date |
Alex S. Xu | | * | | 14.00 | (1) | January 15, 2018 | | January 15, 2024 |
Gregory James Karns | | * | | 14.00 | (1) | January 15, 2018 | | January 15, 2024 |
| | | | 12.00 | (2) | January 15, 2018 | | January 15, 2024 |
Yanjie (Catherine) Zhu | | * | | 14.00 | (1) | December 31,2021 | | December 31,2027 |
Bingwu Xie |
| * |
| 14.00 | (1) | January 15, 2018 | | January 15, 2024 |
Dong Li |
| * |
| 14.00 | (1) | March 13,2018 | | March 13,2024 |
Yiping Yang |
| * |
| 12.00 | | January 15, 2018 | | January 15, 2024 |
Wen Qi |
| * |
| 12.00 | | January 15, 2018 | | January 15, 2024 |
Yong Yang |
| * |
| 12.00 | | January 15, 2018 | | January 15, 2024 |
Name |
| Number of shares underlying options granted |
| Exercise price (US$ per share) |
| Grant date |
| Expiration date | |
Alex S. Xu |
| * |
|
| 14.00 | (1) | January 15, 2018 |
| January 15, 2024 |
Gregory James Karns |
| * |
|
| 14.00 | (1) | January 15, 2018 |
| January 15, 2024 |
|
|
|
|
| 12.00 | (2) | January 15, 2018 |
| January 15, 2024 |
Akira Hirabayashi |
| * |
|
| 14.00 | (1) | January 15, 2018 |
| January 15, 2024 |
Bingwu Xie |
| * |
|
| 14.00 | (1) | January 15, 2018 |
| January 15, 2024 |
Dong Li |
| * |
|
| 14.00 | (1) | March 13, 2018 |
| March 13, 2024 |
Yiping Yang |
| * |
|
| 16.00 |
| January 15, 2018 |
| January 15, 2024 |
Xin Yue Jasmine Geffner |
| * |
|
| 12.00 |
| January 15, 2018 |
| June 29, 2019 |
Wen Qi |
| * |
|
| 12.00 |
| January 15, 2018 |
| January 15, 2024 |
Yong Yang |
| * |
|
| 12.00 |
| January 15, 2018 |
| January 15, 2024 |
* | Less than 1% of our total shares outstanding. |
(1) | Equals to the public offering price. For services as directors of our Company. |
(2) | For services as general counsel of our Company. |
| Board Practices |
Board of Directors
A company of which more than 50% of the voting power is held by a single person or entity is considered a “controlled company” under the NYSE Listed Company Manual. A controlled company need not comply with the NYSE corporate governance rules requiring a board of directors to have a majority of independent directors, to have an independent compensation committee, and to have independent nomination/corporate governance committees. As long as GTI or Mr. Alex S. Xu owns at least 50% of the voting power of our company, we will be a “controlled company” as defined under the NYSE Listed Company Manual. We have no current intention to rely on the controlled company exemption.
Our board of directors has established an audit committee, a compensation committee, and a nominating and corporate governance committee. As a foreign private issuer, we are permitted to follow home country corporate governance practices under the Corporate Governance Rules of the New York Stock Exchange.
Committees of the Board of Directors
Audit Committee
Our audit committee consists of Bingwu Xie, Akira HirabayashiYanjie (Catherine) Zhu and Dong Li. Bingwu Xie is the chairman of our audit committee. Dong Li satisfies the criteria of an audit committee financial expert as set forth under the applicable rules of the SEC. Each of Bingwu Xie, Akira HirabayashiYanjie (Catherine) Zhu and Dong Li satisfies the requirements for an “independent director” within the meaning of Section 303A of the Corporate Governance Rules of the New York Stock
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Exchange, or the NYSE, and to meet the criteria for independence set forth in Rule 10A-3 of the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act. Our audit committee consists solely of independent directors.
The audit committee oversees our accounting and financial reporting processes and the audits of our financial statements. Our audit committee is responsible for, among other things:
selecting, and evaluating the qualifications, performance and independence of, the independent auditor;
pre-approving or, as permitted, approving auditing and non-auditing services permitted to be performed by the independent auditor;
considering the adequacy of our internal accounting controls and audit procedures;
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| selecting, and evaluating the qualifications, performance and independence of, the independent auditor; |
● | pre-approving or, as permitted, approving auditing and non-auditing services permitted to be performed by the independent auditor; |
● | considering the adequacy of our internal accounting controls and audit procedures; |
● | reviewing with the independent auditor any audit problems or difficulties and management’s response; |
● | reviewing and approving related party transactions between us and our directors, senior management and other persons specified in Item 6B of Form 20-F; |
● | reviewing and discussing the quarterly financial statements and annual audited financial statements with management and the independent auditor; |
● | establishing procedures for the receipt, retention and treatment of complaints received from our employees regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters; |
● | meeting separately, periodically, with management, internal auditors and the independent auditor; and |
● | reporting regularly to the full board of directors. |
reviewing and approving related party transactions between us and our directors, senior management and other persons specified in Item 6B of Form 20-F;
reviewing and discussing the quarterly financial statements and annual audited financial statements with management and the independent auditor;
establishing procedures for the receipt, retention and treatment of complaints received from our employees regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters;
meeting separately, periodically, with management, internal auditors and the independent auditor; and
reporting regularly to the full board of directors.
Compensation Committee
Our compensation committee consists of Gregory James Karns, Alex S. Xu and Bingwu Xie. Gregory James Karns is the chairman of our compensation committee. Bingwu Xie satisfies the requirements for an “independent director” within the meaning of Section 303A of the New York Stock Exchange Corporate Governance Rules.
Our compensation committee will be responsible for, among other things:
● | reviewing, evaluating and, if necessary, revising our overall compensation policies; |
● | reviewing and evaluating the performance of our directors and executive officers and determining the compensation of our directors and executive officers; |
● | reviewing and approving our executive officers’ employment agreements with us; |
● | determining performance targets for our executive officers with respect to our incentive compensation plan and share incentive plan; |
● | administering our share incentive plan in accordance with the terms thereof; and |
● | carrying out such other matters that are specifically delegated to the compensation committee by our board of directors from time to time. |
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reviewing and evaluating the performance of our directors and executive officers and determining the compensation of our directors and executive officers;
reviewing and approving our executive officers’ employment agreements with us;Table of Contents
determining performance targets for our executive officers with respect to our incentive compensation plan and share incentive plan;
administering our share incentive plan in accordance with the terms thereof; and
carrying out such other matters that are specifically delegated to the compensation committee by our board of directors from time to time.
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee consists of Alex S. Xu, Akira HirabayashiYanjie (Catherine) Zhu and Gregory James Karns. Alex S. Xu is the chairman of our nominating and corporate governance committee. Akira HirabayashiYanjie (Catherine) Zhu satisfies the requirements for an “independent director” within the meaning of Section 303A of the New York Stock Exchange Corporate Governance Rules.
Our nominating and corporate governance committee will be responsible for, among other things:
● | selecting the board nominees for election by the shareholders or appointment by the board; |
● | periodically reviewing with the board the current composition of the board with regards to characteristics such as independence, knowledge, skills, experience and diversity; |
● | making recommendations on the frequency and structure of board meetings and monitoring the functioning of the committees of the board; and |
● | advising the board periodically with regards to significant developments in corporate governance law and practices as well as our compliance with applicable laws and regulations, and making recommendations to the board on corporate governance matters. |
selecting the board nominees for election by the shareholders or appointment by the board;
periodically reviewing with the board the current composition of the board with regards to characteristics such as independence, knowledge, skills, experience and diversity;
making recommendations on the frequency and structure of board meetings and monitoring the functioning of the committees of the board; and
advising the board periodically with regards to significant developments in corporate governance law and practices as well as our compliance with applicable laws and regulations, and making recommendations to the board on corporate governance matters.
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Under Cayman Islands law, all of our directors owe fiduciary duties to our company, including a duty of loyalty, a duty to act honestly and a duty to act in good faith and in a manner they believe to be in our best interests. Our directors must also exercise their powers only for a proper purpose. Our directors also have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association, as amended and restated from time to time. Our company has the right to seek damages if a duty owed by any of our directors is breached. In limited exceptional circumstances, a shareholder may have the right to seek damages in our name if a duty owed by our directors is breached. You should refer to “Description of Share Capital — Differences in Corporate Law” for additional information on our standard of corporate governance under Cayman Islands law.
A director who is in any way, whether directly or indirectly, interested in a contract or proposed contract or arrangement with our company is required to declare the nature of his interest at a meeting of our directors. A director may vote in respect of any contract, proposed contract, or arrangement notwithstanding that he may be interested therein, and if he does so his vote shall be counted and he may be counted in the quorum at any meeting of our directors at which any such contract or proposed contract or arrangement is considered. Our directors may exercise all the powers of our company to borrow money, and to mortgage or charge its undertaking, property and uncalled capital, and issue debentures, debenture stock or other securities whenever money is borrowed or as security for any debt, liability or obligation of the company or of any third party.
Terms of Directors and Officers
Our directors may be elected by a resolution of our board of directors, or by an ordinary resolution of our shareholders, pursuant to our amended and restated memorandum and articles of association. Each of our directors will hold office until his or her successor takes office or until his or her earlier death, resignation or removal or the expiration of his or her initial term of four years from the completion of our initial public offering.removal. A director will cease to be a director if, among other things, the director (i) dies, or becomes bankrupt or makes any arrangement or composition with his creditors;creditors, (ii) dies, or is found to be or becomes of unsound mind, (iii) resigns his office by notice in writing to the company, or (iv) without special leave of absence from our board, is absent from three consecutive board meetings and our directors resolve that his office be vacated.vacated, (v) is prohibited by any applicable law from being a director, or (vi) is removed from office pursuant to any other provision of our amended and restated memorandum and articles of association. Our officers are elected by and serve at the discretion of the board of directors.
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Members of our board of directors will be nominated by the nominating and corporate governance committee of the board. Director nominees will be elected by a simple majority vote of shareholders at our annual general meeting.
D. | Employees |
See “Item 4. Information on the Company—B. Business Overview—Employees.”
E. | Share Ownership |
The following table sets forth information with respect to beneficial ownership of our ordinary shares as of December 31, 20182021 by:
● | each of our directors and executive officers; |
● | our directors and executive officers as a group; and |
● | GTI, which is the only shareholder known to us to own beneficially 5.0% or more of our shares. |
each of our directors and executive officers;
our directors and executive officers as a group; and
GTI, which is the only shareholder known to us to own beneficially 5.0% or more of our shares.
Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment power with respect to, or the power to receive the economic benefit of ownership of, the securities. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days, including through the exercise of any option or other right or the conversion of any other security.
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The calculations in the table below are based on (i) 66,789,30068,286,954 Class A ordinary shares and (ii) 34,762,909 Class B ordinary shares outstanding as of December 31, 2018.2021.
| | | | | | |
|
| Beneficially Owned |
| Percentage of | ||
| | Ordinary Shares | | Votes Held | ||
| | Number |
| % | | % |
Directors and Executive Officers: | |
| |
| |
|
Alex S. Xu(1) |
| 91,352,209 |
| (88.7) |
| (93.2) |
Gregory James Karns |
| — |
| — |
| — |
Yanjie (Catherine) Zhu |
| — |
| — |
| — |
Bingwu Xie |
| — |
| — |
| — |
Dong Li |
| — |
| — |
| — |
Yiping Yang |
| — |
| — |
| — |
Wen Qi |
| — |
| — |
| — |
Yong Yang |
| — |
| — |
| — |
All directors and executive officers as a group |
| 91,352,209 |
| (88.7) |
| (93.2) |
Principal Shareholders: |
| |
|
|
|
|
GreenTree Inns Hotel Management Group, Inc.(2)(3)(4) | | 91,352,209 | | (88.7) | | (93.2) |
Allspring Global Investments Holdings, LLC(5) |
| 5,856,846 |
| (5.7) |
| (3.4) |
|
| Ordinary Shares Beneficially Owned |
|
| Percentage of Votes Held |
| ||||||
|
| Number |
|
| % |
|
| % |
| |||
Directors and Executive Officers: |
|
|
|
|
|
|
|
|
|
|
|
|
Alex S. Xu(1) |
|
| 91,352,209 |
|
|
| 90.0 |
|
|
| 94.0 |
|
Gregory James Karns |
|
| * |
|
|
| * |
|
|
| * |
|
Akira Hirabayashi |
|
| * |
|
|
| * |
|
|
| * |
|
Bingwu Xie |
|
| * |
|
|
| * |
|
|
| * |
|
Dong Li |
|
| * |
|
|
| * |
|
|
| * |
|
Yiping Yang |
| * |
|
| * |
|
| * |
| |||
Wen Qi |
|
| * |
|
|
| * |
|
|
| * |
|
Yong Yang |
|
| * |
|
|
| * |
|
|
| * |
|
All directors and executive officers as a group |
|
| 91,352,209 |
|
|
| 90.0 |
|
|
| 94.0 |
|
Principal Shareholder: |
|
|
|
|
|
|
|
|
|
|
|
|
GreenTree Inns Hotel Management Group, Inc.(2)(3)(4) |
|
| 91,352,209 |
|
|
| 90.0 |
|
|
| 94.0 |
|
Notes:
|
|
| Represents (i) 56,589,300 Class A ordinary shares and (ii) 34,762,909 Class B ordinary shares held by GTI. Mr. Alex S. Xu is considered to beneficially own all the shares held by GTI by virtue of (i) his director position on GTI’s 3-member board of director; and (ii) his 83.9% voting power in GTI. As a result, Mr. Alex S. Xu has the power to (i) vote, or to direct the voting of, and (ii) dispose, or to direct the disposition of, all the shares held by GTI. |
(2) |
|
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(3) | GTI’s ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to three (3) votes per share. Currently, GTI has 33,414,026 Class A ordinary shares and 57,938,182 Class B ordinary shares issued and outstanding. |
(4) | Mr. Alex S. Xu, directly or indirectly through entities controlled by him, holds 57,938,182 Class B ordinary shares of GTI, including (a) 36,340,682 Class B ordinary shares of GTI held by Mr. Xu’s family trust, for which Mr. Xu and his wife are settlors and trustees and accordingly, Mr. Xu has voting and dispositive control, (b) 17,047,500 Class B ordinary shares of GTI held by GreenTree Hotel Management, Inc., a company incorporated in Samoa and to which Mr. Xu is the sole shareholder and exercises sole voting and dispositive control, and (c) 4,550,000 Class B ordinary shares of GTI held by Keystone Pacific, LLC, a California limited liability company whose sole members are Mr. Xu, individually, and Mr. Xu’s family trust, and accordingly to which Mr. Xu exercises voting and dispositive control, which in the aggregate result in Mr. Xu’s 83.9% voting power in GTI. Mr. Kent Chien Te Wu directly or indirectly through entities controlled by him, holds 10,266,667 Class A ordinary shares of GTI, including (a) 9,666,667 Class A ordinary shares of GTI through Wu Green Tree Limited Partnership, a California limited partnership (“Wu Green Tree”), and (b) 600,000 Class A ordinary shares of GTI individually. The business office of Mr. Wu and Wu Green Tree is 260 Newport Center Drive, Newport Beach, CA 92660. The voting and dispositive power over the Class A ordinary shares of GTI held by Wu Green Tree are controlled by the two general partners of Wu Green Tree, Kent Chien Te Wu, and Maggie Tzu Chiang Wu, his wife, and accordingly Mr. Wu has the power to (i) vote, or direct the voting of, and (ii) dispose, or direct the disposition of, all GTI shares held by Wu Green Tree. Other than Mr. Xu and Mr. Wu, no other shareholder is known to us to own beneficially 5.0% or more of the shares of GTI. |
(5) | The number of ordinary shares beneficially owned is as of December 31, 2021, as reported in a Schedule 13G filed on January 19, 2022 by Allspring Global Investments Holdings, LLC, a Delaware limited liability company (“AGIH”), and consists of 5,856,846 Class A ordinary shares. The principal business office of AGIH is 525 Market St, 10th Fl, San Francisco, CA 94105. |
To our knowledge, as of December 31, 2018, 10,200,0002021, 11,697,654 Class A ordinary shares or 10.0%11.3% of our outstanding ordinary shares were held by record holders in the United States, including Deutsche Bank Trust Company Americas, the depositary bank for our ADR program. Because many of these shares are held by brokers or other nominees, we cannot ascertain the exact number of beneficial shareholders with addresses in the United States.
GTI acquired its shares in offerings that were exempted from registration under the Securities Act of 1933, as amended, or the Securities Act, because such offerings involved either private placements or offshore sales to non-U.S. persons.
We are not aware of any arrangement that may at a subsequent date, result in a change of control of our company.
89ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. | Major Shareholders |
See “Item 6. Directors, Senior Management and Employees—E. Share Ownership”
B. | Related Party Transactions |
Employment Agreements
See “Item 6. Directors, Senior Management and Employees—B. Compensation—Employment Agreements.”
Share Incentive Plan
See “Item 6. Directors, Senior Management and Employees—B. Compensation—Share Incentive Plan.”
Other Transactions with Related Parties
Guarantee for APAM Holdings, LLC
In connection with the plan of APAM Holdings, a hotel project management company wholly owned by Alex S. Xu, our chairman and chief executive officer, to invest in hotel assets in the United States, we entered into a guarantee arrangement with China Everbright Bank and The Bank of East Asia Limited, under which we made a deposit of RMB with the former bank in order for the latter bank to issue a credit line to be utilized by APAM Holdings for its investment in Bayshore, a hotel project development company wholly owned by Alex S Xu. We deposited cash of RMB65 million into a collateral account at China Everbright Bank, which was replaced with a deposit of RMB70 million in 2016, pursuant to the guarantee arrangement. The amount of RMB70 million was included in “restricted cash” in our consolidated balance sheets as of December 31, 2016. In 2017, the guarantee was released and our cash deposit was released from the collateral account.
In addition, we provided two loans to Bayshore in each of 2012 and 2013, in the aggregate amount of US$1,250,000. These loans were fully repaid by Bayshore in 2017.
Transactions with GTI
In December2019, we made a bridge loan to GTI together with Aotao and Da Niang Group for the renewal of the aforementioned merger and acquisition loan in 2016 in connection with GTI’s plan to acquire certain assets unrelated to GTI’s hotel business, currently format the principal assetsrequest of GreenTree Hospitality, cashthe lending banks. The outstanding amount of RMB110 million was put up as performance bond in December 2016. Such amount was classified as our restricted cashthe
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loan as of December 31, 2016.2019 was RMB8.4 million with an interest rate of 4.35% per annum, which was fully settled in April 2020.
In March 2017, GTI obtained an Euro-denominated loan of approximately RMB900 million from Pudong Development Bank, as part of GTI’s acquisition financing plan. As required by Pudong Development Bank, a restricted cash collateral of RMB900 million was made by GTI to secure the bank loan. Upon its formation, GreenTree Hospitality is also liable to maintain such restricted cash collateral account to secure GTI’s obligations under the bank loan.
In April 2017, the performance bond of RMB110 million was released upon completion of the acquisition. In July 2017, RMB120 million of the collateral was replaced by GTI with cash from one of its subsidiaries that is not part of our group, thereby releasing a corresponding amount of our cash from the restricted cash account. In December 2017, GTI repaid RMB340 million of the loan in two installments, and approximately RMB560 million of the bank loan remains outstanding. GTI has also replaced the remaining cash collateral of RMB780 million with 20% of equity interest in our company and a personal guarantee from Mr. Alex S. Xu. As a result, our cash of RMB780 million was released from the restricted cash account. The personal guarantee from Mr. Alex S. Xu was released upon the completion of our initial public offering, in accordance with the terms of the contract.
Transactions with CYTS Shanghai Jinyuhao International Hotel Co. Ltd.
CYTS Shanghai Jinyuhao International Hotel Co. Ltd., or JYH, is a company that owns a hotel building with a plan to develop an up-scale hotel. With an intention to invest in JYH,2021, we made a bridge loan to JYH in 2014GTI together with Aotao and subsequently procured approximately 25.8% of JYH’s equity interest in the same year. JYH also made advances to us for working capital needs in 2014 and 2015. In 2016, we repaid the advances in the amount of RMB14.2 million. In August 2016, we sold our equity interest in JYH to Shanghai Yongjin Property Management Co., Ltd. for a total consideration of RMB129.7 million, and JYH ceased to be our related party. JYH settled all outstanding amounts owed and due to be repaid to us in 2018.
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Transactions with Tianjin GreenTree Tianbao Hotel Management Co., Ltd.
We own 50% of equity interest in Tianjin GreenTree Tianbao Hotel Management Co., Ltd., or Tianbao, one of our franchisees. In 2016, 2017 and 2018, we generated franchise fee revenue from Tianbao of RMB0.5 million, RMB0.4 million and RMB0.4 million (US$0.1 million), respectively. When guests book hotel rooms through our central reservation system and opt for prepayDa Niang Group for the stay, we collectrenewal of the payment firstaforementioned merger and settle with our franchisees on a monthly basis. The RMB473.0 thousand and RMB64.6 thousand (US$9.4 thousand) asacquisition loan in 2016 at the request of December 31, 2017 and 2018, respectively represents the prepaid payment we collected for and to be settled with Tianbao.
Transactions with Yancheng Zexin Hotel Management Co., Ltd.
In July of 2018, we purchased an additional 1% equity interest in Yancheng Zexin Hotel Management Co., Ltd., or Zexin, and our equity interest in Zexin increased to 51%. As a result, Zexin became our consolidated subsidiary and ceased to be a related party of ours. In 2016 and 2017, we generated franchise fee revenue from Zexin of RMB152.3 thousand and RMB232.8 thousand (US$35.8 thousand), respectively. As of December 31, 2016, the RMB0.5 million represents franchise fees advance from Zexin. In 2017, we made a loan to Zexin.lending banks. The outstanding amount of the loan as of December 31, 20172021 was RMB3.5RMB 206.3 million with an interest rate of 4.35% per annum.
Transactions with Aotao and its subsidiaries
Shanghai Aotao Industrial Co., Ltd., or Aotao, is a catering management company controlled by GTI. In 2019, we made a bridge loan to Aotao in together with GTI and Da Niang Group, for the renewal of a merger and acquisition loan at the request of the lending banks. The outstanding amount of the loan as of December 31, 2019 was RMB20.1 million with an interest rate of 4.35% per annum, among which RMB12.2 million (US$0.51.9 million) was settled in April 2020.
In 2020, we made a bridge loan of RMB479 million (US$73.5 million) to Aotao, for the renewal of a loan in the catering sector with an interest rate of 4.35% per annum. The outstanding loan was settled in December 2020. In 2020, Aotao provided advertising promotion services to us in the aggregate amount of RMB3.9 million (US$0.6 million).
In 2021, we made a bridge loan of RMB 186 million (US$29.2 million) to Aotao, for the renewal of a loan in the catering sector with an interest rate of 4.35% per annum.The outstanding amount of the loan as of December 31, 2021 was RMB 65.1 million (US$10.2 million) . In 2021, Aotao provided advertising promotion services to us in the aggregate amount of RMB6.5 million (US$1.0 million).
Transactions with Da Niang Group
Da Niang Dumpling Catering Group Co., Ltd., together with its subsidiaries, or Da Niang, is a catering management company controlled by GTI. In 2019, we made a bridge loan to Da Niang Group in together with GTI and Aotao, for the renewal of a merger and acquisition loan at the request of the lending banks, which amount was repaid in full by December 31, 2019. We also purchased service from Da Niang Group in the amount of RMB339 thousand in 2019.
In 2020, we made a bridge loan of RMB40 million (US$6.13 million) to Da Niang Group, for the renewal of a loan with an interest rate of 4.35% per annum. The outstanding loan was settled in December 2020. In 2020, sublease revenue generated from Da Niang Group was RMB36 thousand (US$0.01 million). We also purchased services from Da Niang Group in the amount of RMB724 thousand (US$0.11 million) in 2020.
In 2021, we made a bridge loan of RMB39.8 million (US$6.2 million) to Da Niang Group, for the renewal of a loan with an interest rate of 4.35% per annum. The outstanding loan was settled in December 2021. In 2021, sublease revenue generated from Da Niang Group was RMB27 thousand (US$4.2 thousand). We also purchased services from Da Niang Group in the amount of RMB221 thousand (US$34.7 thousand) in 2021.
Transactions with Shanghai JYHM Restaurant Management Co., Ltd. (“JYHM”)
Shanghai JYHM Restaurant Management Co., Ltd., or JYHM, is a catering management company controlled by GTI. In 2019, we collected rental from JYHM in advance, and the outstanding amount due to JYHM as of December 31, 2019 was RMB312 thousand. We also purchased service from JYHM of RMB18 thousand in 2019.
In 2020, sublease revenue generated from JYHM was RMB284 thousand (US$0.04 million). We also purchased service from JYHM of RMB40 thousand (US$0.01 million) in 2020.
In 2021, sublease revenue generated from JYHM was RMB261 thousand (US$ 41 thousand). We also purchased service from JYHM of RMB668 thousand (US$0.1 million) in 2021.
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Transactions with Napa Infinity Winery (Shanghai) Inc.
Napa Infinity Winery (Shanghai) Inc., or Napa, is a wine distributor controlled by the brother of Mr. Alex S. Xu. We made advances to Napa for working capital purposes from time to time. In 2016, we made advances of RMB0.4 million, to Napa, and the outstanding balances of such advances amounted to RMB4.0 million. In 2017,2019, we made purchases of wine with Napa in the aggregate amount of RMB4.0RMB3.6 million, (US$0.6 million), which was settled by offering the advances we made to Napa. In 2019, we also generated service revenue from Napa of RMB2.4 million by offering design service and promotion service on the 168 mall from the Group. In 2020, we purchased wine from Napa in the aggregate amount of RMB2.1 million (US$0.3 million). In 2021, we purchased wine from Napa in the aggregate amount of RMB2.5 million (US$0.4 million).
Transactions with Pacific Hotel Management (Rongcheng) Co., Ltd.Yibon
Pacific Hotel Management (Rongcheng) Co., Ltd., or Rongcheng, is a foreign invested company whose legal representative is the brotherAmount due to Yibon of Mr. Alex S. Xu.RMB3.2 million comprised of receipts on behalf of Yibon which were unsecured, interest free, and repayable upon demand. We made advances to Pacific Hotel Management (Rongcheng) Co., Ltd., or Rongcheng, an investment company owning a commercial building,also generated franchise revenue from time to time for working capital purposes, including paying for local taxes and charges.Yibon of RMB681 thousand in 2019. We generated franchise revenue from Yibon of RMB852 thousand (US$0.13 million) in 2020. In 2016,2021, we made advancesgenerated franchise revenue from Yibon of RMB0.1RMB 1.3 million and the outstanding balances of such advances were RMB0.1 million. Rongcheng settled these advances with us in 2017.(US$0.2 million).
Transactions with 519 Information Technology (Shanghai) Inc.Beifu Hong Kong Industrial Co.,
519 Information Technology (Shanghai) Inc.Beifu Hong Kong Industrial Co., or 519,Beifu HK, is a wine distributorcatering management company controlled by GTI. In 2021, we made a bridge loan of RMB 169.5 million (US$26.6 million) to Beifu HK, for the brotherrenewal of Mr. Alex S. Xu, and we purchase wine to be consumed at our hotels. Asa loan in the catering sector with an interest rate of 4.35% per annum. The outstanding amount of the loan as of December 31, 2016, the RMB4,100 (US$591) due to 519 represents the outstanding payment for the wine we purchased. The amount2021 was settled in 2017.
TransactionsRMB 26.2 million with Ms. Yan Zhang
Ms. Yan Zhang was a senior officer of our company. In 2016, we lent Ms. Zhang RMB150.0 million to set up a company as part of the deal structure in an investment by GTI. The loan is unsecured and bear an annual interest rate of 3.5% and is repayable upon demand before December 31, 2017. In 2016 and 2017, Ms. Zhang repaid RMB30.0 million and RMB128.1 million, respectively and we recorded interest income of RMB4.6 million and RMB3.5 million (US$0.5 million) for the respective years. The loan was fully repaid in 2017.
In July 2017, we entered into a share transfer agreement with a company controlled by Ms. Zhang to sell its 45.29% equity interest in Wiselong Enterprise Management Co., Ltd., for a cash consideration of RMB23.4 million (US$3.6 million). We recognized a disposal gain of RMB1.6 million (US$0.3 million) in 2017. Ms. Yan Zhang ceased to be a related party of ours subsequent to her resignation on December 5, 2017.4.35% per annum.
Transactions with Steigenberger (Beijing) Hotel Management Co., Ltd.
Steigenberger (Beijing) Hotel Management Co., Ltd., or Steigenberger, is an equity investee of ours. In 2017, we made a loan to Steigenberger, and the outstanding amount of such loan as of December 31, 2017, 2018 and 20182019 was RMB225.0 thousand, (US$32.7RMB225.0 thousand). and RMB225.0 thousand, respectively. We have disposed our equity investment in Steigenberger in December 2019. The outstanding loan was settled in April 2020.
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Transactions with Shiquanmeiwei (Beijing) Catering andTianjin GreenTree Tianbao Hotel Management Co., Ltd.(“Shiquanmeiwei”)
Shiquanmeiwei (Beijing) Catering andWe own 50% of equity interest in Tianjin GreenTree Tianbao Hotel Management CO.Co., Ltd., or Shiquanmeiwei, isTianbao, one of our franchisees. In 2017, 2018 and 2019, we generated franchise fee revenue from Tianbao of RMB0.4 million, RMB0.4 million and nil, respectively. When guests book hotel rooms through our central reservation system and opt for prepay for the stay, we collect the payment first and settle with our franchisees on a Catering management company controlled by GTI. In 2018, we prepaid rental for Shiquanmeiwei,monthly basis. The RMB64.6 thousand and the outstanding amount due from Shiquanmeiweinil as of December 31, 2018 was RMB3,600.
Transactions with Shanghai JYHM Restaurant Management Co., Ltd. (“JYHM”)
Shanghai JYHM Restaurant Management Co., Ltd., or JYHM, is a restaurant management company controlled by GTI. In 2018,and 2019, respectively, represents the prepaid payment we collected rental from JYHMfor and to be settled with Tianbao. We liquidated our equity interest in advance, and the outstanding amount due to JYHM as of December 31, 2018 was RMB221,028.Tianbao in August 2019.
C. | Interests of Experts and Counsel |
Not applicable.
A. | Consolidated Statements and Other Financial Information |
Please refer to Item 1819 for a list of our annual consolidated financial statements filed as part of this annual report on Form 20-F.
Legal Proceedings
See “Item 4. Information on the Company—B. Business Overview—Legal Proceedings.”
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Dividend Policy and Distributions
In December 2017, we declared a cash dividend of RMB588.4 million. RMB548.7 million of the cash dividend was paid in December 2017, and the remainder was paid in 2018. In February and March 2018, we declared a cash dividend of US$23.0 million and US$2.6 million, respectively, and we intend to pay such cash dividend to GTI, our shareholder, upon the receipt of relevant internal and other approvals. In January 2019, we declared a cash dividend of US$0.30 per ordinary share, or US$0.30 per ADS. Holders of our ordinary shares and ADSs as of the close of trading on February 6, 2019 were entitled to such cash dividend, and we paid such dividend in full in February 2019. In December 2019, we declared a cash dividend of US$0.25 per ordinary share, or US$0.25 per ADS. Holders of our ordinary shares and ADSs as of the close of trading on December 24, 2019 were entitled to such cash dividend, and we paid such dividend in full in January 2020. In December 2021, we declared a cash dividend of US$0.55 per ordinary share, or US$0.55 per ADS. Holders of our ordinary shares and ADSs as of the close of trading on December 31, 2021 were entitled to such cash dividend, and we paid such dividend in full in January 2022.
We intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business. To the extent we have excess cash available for which we do not have any other immediate need, such as growing our business or pursuing merger or acquisition opportunities, our board of directors plans to pay a cash dividend of US$0.20 per ordinary share, or US$0.20 per ADS, per year going forward. However, ourOur board of directors has discretion as to whether to distribute any future dividends, subject to certain requirements of Cayman Islands law. See “Item 3. Key Information—Information — D. Risk Factors—Factors — Risks Related to Our ADSs—ADSs — We may not pay further dividends to our public shareholders in the foreseeable future, so you should rely on price appreciation of our ADSs for return on your investment.”
OurSubject to any rights and restrictions for the time being attached to any shares, our directors may from time to time declare dividends and other distributions on shares in issue and authorize payment of the same out of the funds of our company lawfully available therefor. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our directors decide to pay dividends, the form, frequency and amount of dividends will be based on a number of factors, including our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends on our shares, we will pay those dividends which are payable in respect of the underlying Class A ordinary shares represented by our ADSs to the depositary, as the registered holder of such Class A ordinary shares, and the depositary then will pay such amounts to our ADS holders in proportion to the underlying Class A ordinary shares represented by the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. Cash dividends on our Class A ordinary shares will be paid in U.S. dollars.
We are a holding company incorporated in the Cayman Islands. In order for us to distribute dividends to our shareholders and ADS holders, we may need to rely on dividends distributed by our subsidiaries in China. Distributions from our subsidiaries in China to us may be subject to various local taxes, such as withholding tax. In addition, regulations in China currently permit payment of dividends of a Chinese company only out of accumulated distributable after-tax profits as determined in accordance with its articles of association and the accounting standards and regulations in China.
| Significant Changes |
We have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.
| ITEM 9.THE OFFER AND LISTING
Our ADSs, each representing one of our Class A ordinary shares, have been listed on the New York Stock Exchange since March 27, 2018 under the symbol “GHG.”
Not applicable. 120
Our ADSs, each representing one of our Class A ordinary shares, have been trading on the New York Stock Exchange since March 27, 2018 under the symbol “GHG.”
Not applicable.
Not applicable.
Not applicable.
Not applicable.
We incorporate by reference into this annual report the description of our amended and restated memorandum and articles of association contained in our Form F-1 registration statement (File No. 333-223261), as amended, initially filed with the Securities and Exchange Commission on February 27, 2018. Our shareholders adopted our amended and restated memorandum and articles of association on March 11, 2018.
In the past three fiscal years, we have not entered into any material contracts other than in the ordinary course of business
See “Item 4. Information on the Company—B. Business Overview—Regulatory Matters—Regulations Relating to Foreign Currency Exchange.”
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within, the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties which are applicable to any payments made to or by our company. There are no exchange control regulations or currency restrictions in the Cayman Islands. Payments of dividends and capital in respect of our shares and ADSs will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of dividends or capital to any holder of our shares or ADSs, 121 nor will gains derived from the disposal of our shares or ADSs be subject to Cayman Islands income or corporation tax. No stamp duty is payable in respect of the issue of our shares or on an instrument of transfer in respect of our shares. Pursuant to Section 6 of the Tax Concessions
The undertaking is for a period of twenty years from November 3, 2017. People’s Republic of China Taxation Income Tax and Withholding Tax In March 2007, the National People’s Congress of China enacted the PRC Enterprise Income Tax Law, or the EIT Law, which became effective on January 1, 2008 and was amended on December 29, 2018. The EIT Law applies a uniform 25% enterprise income tax rate to PRC resident enterprises, including both foreign-invested enterprises and domestic enterprises. The EIT Law imposes an enterprise income tax of 10% on dividends distributed by a foreign-invested enterprise to its immediate holding company outside of China, if such immediate holding company is considered a “nonresident enterprise” without any establishment or place within China or if the received dividends have no connection with the establishment or place of such immediate holding company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding tax rate. The Cayman Islands, where we are incorporated, does not have such a tax treaty with China. Thus, dividends paid to us by our subsidiaries in China may be subject to the 10% withholding tax if we are considered a “non-resident enterprise” under the EIT Law. The EIT Law provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises.” The “de facto management body” is defined as the organizational body that effectively exercises overall management and control over production and business operations, personnel, finance and accounting, and properties of the enterprise. Currently, there are no detailed rules or precedents governing the procedures and specific criteria for determining “de facto management 122 Trial Measures may reflect the STA’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises or PRC enterprise groups or by PRC or foreign individuals. As such, it is still unclear if the PRC tax authorities would determine that, notwithstanding our status as the Cayman Islands holding company of our operating business in China, we should be classified as a PRC “resident enterprise.”
While we do not currently consider our company or any of our overseas subsidiaries to be a China resident enterprise, there is a risk that the PRC tax authorities may deem our company as a PRC resident enterprise since a substantial majority of the members of our management team are located in China, in which case we would be subject to the PRC enterprise income tax at the rate of 25% on worldwide income. If the Under the EIT Law, enterprises qualified as “High New Technology Enterprises,” or HNTEs, enjoy a preferential income tax rate of 15%, rather than the uniform income tax rate of 25% which otherwise would apply. Shanghai Evergreen Technology Co., Ltd. has qualified as an HNTE for the period of 2017 until now under the EIT Law, and has been subject to the preferential income tax rate of 15% during such period. On October 17, 2017, the STA issued a Public Notice of the State Administration of Taxation on Matters Concerning Withholding of Income Tax of Non-resident Enterprises at Source, or STA Public Notice 37. This STA Public Notice 37 has entered into force as of December 1, 2017, according to which, STA Circular 698 has been abolished from December 1, 2017. Under the STA Public Notice 37 and other applicable PRC laws, the withholding agent (for example, payers of PRC-sourced income to non-PRC residents) is obligated to withhold PRC income taxes from the payment. The withholding agent shall, within seven days of the day on which the withholding obligation occurs, declare and remit the withholding tax to the competent tax authority at its locality. The withholding agent shall establish account books for all tax it has withheld and remitted on a commission basis and archive relevant contractual documents, so as to record the exact information about the enterprise income withheld and remitted for the non-resident enterprise. Although the withholding agents have the obligation to withhold relevant PRC taxes, in the event of a failure to withhold, the non-PRC residents are still required to pay such taxes on their own. Failure to comply with the tax payment obligations by the non-PRC residents will result in penalties, including full payment of taxes owed, fines and default interest on those taxes. The STA issued the Announcement of State Taxation Administration on Promulgation of the Administrative Measures on Non-resident Taxpayers Enjoying Treaty Benefits (“STA Circular 35”) on October 14, 2019, which became effective on January 1, 2020. The STA Circular 35 further simplified the procedures for enjoying treaty benefits. According to the STA Circular 35, no approvals from the tax authorities are required for a non-resident taxpayer to enjoy treaty benefits, and where a non-resident taxpayer self-assesses and concludes that it satisfies the criteria for claiming treaty benefits, it may enjoy treaty benefits at the time of tax declaration or at the time of withholding through the withholding agent, but it shall gather and retain the relevant materials as required for future inspection, and accept follow-up administration by the tax authorities. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules and regulations. According to the Circular on Several Issues regarding the “Beneficial Owner” in Tax Treaties, or Circular 9, which was issued on February 3, 2018 by the STA, effective as of April 1, 2018, when determining the applicant’s status of the “beneficial owner” regarding tax treatments in connection with dividends, interest or royalties in the tax treaties, several factors, including without limitation, whether the applicant is obligated to pay more than 50% of its income in twelve months to residents in a third country or region, whether the business operated by the applicant constitutes the actual business activities, and whether the counterparty country or region to the tax treaties does not levy any tax or grants tax exemption on relevant income or levies tax at an extremely 123 low rate, will be taken into account, and they will be analyzed according to the actual circumstances of the specific cases. This circular further provides that applicants who intend to prove his or her status of the “beneficial owner” shall submit the relevant documents to the relevant tax bureau according to the Administrative Measures for Non-Resident Enterprises to Enjoy Treatments under Tax Treaties. Accordingly, GreenTree Hotel (Hong Kong), Limited may be able to enjoy the 5% withholding tax rate for the dividends they receive from our PRC subsidiaries, respectively, if they satisfy the conditions prescribed under Circular 81 and other relevant tax rules and regulations, and obtain the approvals as required. However, if the relevant tax authorities consider the transactions or arrangements we have are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable withholding tax in the future. Value-added Tax On March 23, 2016, the Ministry of Finance of China and the State Administration of Taxation of China jointly issued the Circular on the Nationwide Implementation of Pilot Program for the Collection of Value Added-Tax Instead of Business Tax, or Circular 36, which became effective on May 1, 2016. Subsequent to the effectiveness of Circular 36, most of our PRC subsidiaries’ business will be subject to value-added tax, or VAT, at a rate of 6% and they would be permitted to offset input VAT by providing valid VAT invoices received from vendors against their VAT liability. According to Circular 36, the entities and individuals providing the services within the PRC shall be subject to VAT. The services are treated as being provided within the PRC where either the service provider or the service recipient is located in the PRC. The services subject to VAT include the provision of financial services such as transferring financial instruments. Based on the definition of “financial instruments” under Circular 36, the ADSs and/or shares are likely to be treated as financial instruments. As such, where a holder of the ADSs and/or shares who is an entity or individual located outside of the PRC re-sells the ADSs and/or shares to an entity or individual located outside of the PRC and derives any gain, since neither the service provider nor the service recipient is located in the PRC, theoretically Circular 36 does not apply and the buyer does not have the obligation to withhold the VAT or the local levies. However, there is uncertainty as to the applicability of VAT if either the seller or buyer of ADSs and/or shares is located within the PRC. On April 4, 2018, the MOF and STA jointly promulgated the Circular of the Ministry of Finance and the STA on Adjustment of Value-Added Tax Rates, or Circular 32. Circular 32 became effective on May 1, 2018 and shall supersede any previously existing provisions in the case of any inconsistency. Further, On March 20, 2019, the MOF, the STA and the General Administration of Customs jointly issued the Announcement on Policies for Deepening the VAT Reform, or Announcement 39, to further slash value-added tax rates. According to the Announcement 39, (i) for general VAT payers’ sales activities or imports that are subject to VAT at an existing applicable rate of 16% or 10%, the applicable VAT rate is adjusted to 13% or 9%, respectively; (ii) for the agricultural products purchased by taxpayers to which an existing 10% deduction rate is applicable, the deduction rate is adjusted to 9%; (iii) for the agricultural products purchased by taxpayers for production or commissioned processing, which are subject to VAT at 13%, the input VAT will be calculated at a 10% deduction rate; (iv) for the exportation of goods or labor services that are subject to VAT at 16%, with the applicable export refund at the same rate, the export refund rate is adjusted to 13%; and (v) for the exportation of goods or cross-border taxable activities that are subject to VAT at 10%, with the export refund at the same rate, the export refund rate is adjusted to 9%. The Announcement 39 came into effect on April 1, 2019 and shall prevail in case of any conflict with existing provisions. Material U.S. Federal Income Tax Considerations The following summary describes the material U.S. federal income tax consequences of the As used herein, the term “U.S. Holder” means a beneficial owner of our ADSs or Class A ordinary shares that is for U.S. federal income tax purposes:
The discussion below is based upon the provisions of the Internal Revenue Code of 1986, as amended, or the Code, and regulations, rulings and judicial decisions thereunder as of the date hereof, and such authorities may be replaced, revoked or modified so as to result in U.S. federal income tax consequences different from those discussed below. In addition, this summary
This summary does not represent a detailed description of the U.S. federal income tax consequences applicable to you if you are subject to special treatment under the U.S. federal income tax laws, including if you are:
If a partnership (or other entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds our ADSs or Class A ordinary shares, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If you are a partner of a partnership holding our ADSs or Class A ordinary shares, you should consult your tax advisors. 125 This summary does not contain a detailed description of all the U.S. federal income tax consequences to you in light of your particular circumstances and does not address the Medicare tax on net investment income, U.S. federal estate and gift taxes or the effects of any state, local or non-U.S. tax laws. If you are considering the purchase ADSs If you hold ADSs, for U.S. federal income tax purposes, you generally will be treated as the owner of the underlying Class A ordinary shares that are represented by such ADSs. Accordingly, deposits or withdrawals of Class A ordinary shares for ADSs will not be subject to U.S. federal income tax. Taxation of Dividends Subject to the discussion under “— Passive Foreign Investment Company” below, the gross amount of any distributions (other than certain pro rata distributions of our shares) on the ADSs or Class A ordinary shares (including any amounts withheld to reflect
under the Non-corporate U.S. Holders will not be eligible for reduced rates of taxation on any dividends received from us if we are a passive foreign investment company, or PFIC, in the taxable year in which such dividends are paid or in the preceding taxable year (see “— Passive Foreign Investment Company” below). In the event that we are deemed to be a 126 A ordinary shares will be treated as foreign source income and will generally constitute passive category income. However, recently issued U.S. Treasury regulations that apply to taxes paid or accrued in taxable years beginning on or after December 28, 2021, or the Foreign Tax Credit Regulations, impose additional requirements for foreign taxes to be eligible for a foreign tax credit, and there can be no assurance that those requirements will be satisfied. Alternatively, instead of claiming a foreign tax credit, you may be able to deduct PRC withholding taxes on dividends in computing your taxable income, subject to generally applicable limitations under U.S. law (including that a U.S. Holder is not eligible for a deduction for foreign income taxes paid or accrued in a taxable year if such U.S. Holder claims a foreign tax credit for any foreign income taxes paid or accrued in the same taxable year). The rules governing the foreign tax credit and deductions for foreign taxes are complex. You are urged to consult your tax advisor regarding the Foreign Tax Credit Regulations and the availability of the foreign tax credit or a deduction under your particular circumstances. To the extent that the amount of any distribution exceeds our current and accumulated earnings and profits, as determined under U.S. federal income tax principles, the distribution ordinarily would be treated, first, as a tax-free return of capital, causing a reduction in the adjusted basis of the ADSs or Class A ordinary shares (thereby increasing the amount of gain, or decreasing the amount of loss, to be recognized by you on a subsequent disposition of the ADSs or Class A ordinary shares), and, second, the balance in excess of adjusted basis generally would be taxed as capital gain recognized on a sale or exchange. However, we do not expect to determine our earnings and profits in accordance with U.S. federal income tax principles. Therefore, you should expect that distributions will generally be reported to the Internal Revenue Service, or the IRS, and taxed to you as dividends (as discussed above), even if they might ordinarily be treated as a tax-free return of capital or as capital gain. Passive Foreign Investment Company In general, we will be a PFIC for any taxable year in which:
For this purpose, passive income generally includes dividends, interest, royalties and rents (other than royalties and rents derived in the active conduct of a trade or business and not derived from a related person), as well as gains from the sale of assets (such as stock) that produce passive income, foreign currency gains, and certain other categories of income. In addition, cash and other assets readily convertible into cash are generally considered passive assets. If we own at least 25% (by value) of the stock of another corporation, we will be treated, for purposes of determining whether we are a PFIC, as owning our proportionate share of the other corporation’s assets and receiving our proportionate share of the other corporation’s income. Based on the
The determination of whether or not we are a PFIC is made annually. Accordingly, If we are a PFIC for any taxable year during which you hold our ADSs or Class A ordinary shares, and you do not make a timely mark-to-market election, as described below, you will be subject to special tax rules with respect to any “excess distribution” received and any gain realized from a sale or other disposition, including a pledge, of ADSs or Class A ordinary shares. Distributions received in a taxable year that are greater than 125% of the average annual distributions received during the shorter of the three preceding taxable years or your holding period for the ADSs or Class A ordinary shares will be treated as excess distributions. Under these special tax rules:
Although the determination of whether we are a PFIC is made annually, if we are a PFIC for any taxable year in which you hold our ADSs or Class A ordinary shares, you will generally be subject to the special tax rules described above for that year and for each subsequent year in which you hold the ADSs or Class A ordinary shares (even if we do not qualify as a PFIC in any subsequent years). However, if we cease to be a PFIC, you can avoid the continuing impact of the PFIC rules by making a special election to recognize gain as if your ADSs or Class A ordinary shares had been sold on the last day of the last taxable year during which we were a PFIC. You are urged to consult your tax advisor about this election. In certain circumstances, in lieu of being subject to the special tax rules discussed above, you may make a mark-to-market election with respect to your ADSs or Class A ordinary shares provided such ADSs or Class A ordinary shares are treated as “marketable stock.” The ADSs or Class A ordinary shares generally will be treated as marketable stock if the ADSs or Class A ordinary shares are “regularly traded” on a “qualified exchange or other market” (within the meaning of the applicable U.S. Treasury regulations). Under current law, the mark-to-market election may be available to holders of ADSs because the ADSs are listed on the New York Stock Exchange, which constitutes a qualified exchange, although there can be no assurance that the ADSs will be “regularly traded” for purposes of the mark-to-market election. It should also be noted that If you make an effective mark-to-market election, for each taxable year that we are a PFIC, you will include as ordinary income the excess of the fair market value of your ADSs at the end of the year over your adjusted basis in the ADSs. You will be entitled to deduct as an ordinary loss in each such year the excess of your adjusted basis in the ADSs over their fair market value at the end of the year, but only to the extent of the net amount previously included in income as a result of the mark-to-market election. If you make an effective mark-to-market election, any gain you recognize upon the sale or other disposition of your ADSs in a year that we are a PFIC will be treated as ordinary income and any loss will be treated as ordinary loss, but such loss will only be treated as ordinary loss to the extent of the net amount previously included in income as a result of the mark-to-market election. Your adjusted basis in the ADSs will be increased by the amount of any income inclusion and decreased by the amount of any deductions under the mark-to-market rules. If you make a mark-to-market election, it will be effective for the taxable year for which the election is made and all subsequent taxable years unless the ADSs are no longer regularly traded on a qualified exchange or other market, or the IRS consents to the revocation of the election. You are urged to consult your tax advisor about the availability of the mark-to-market election, and whether making the election would be advisable in your particular circumstances. A different election, known as the “qualified electing fund” or “QEF” election, is generally available to holders of PFIC stock, but requires that the corporation provide the holders with a “PFIC Annual Information Statement” containing certain information necessary for the election, including the holder’s pro rata share of the corporation’s earnings and profits and net capital gains for each taxable year, computed according to U.S. federal income tax principles. We do not intend, however, to determine our earnings and profits or net capital gain under U.S. federal income tax principles, nor do we intend to provide U.S. Holders with a PFIC Annual Information Statement. Therefore, you should not expect to be eligible to make this election. If we are a PFIC for any taxable year during which you hold our ADSs or Class A ordinary shares and any of our non-U.S. subsidiaries is also a PFIC, you will be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules. However, you will not be able to make the mark-to-market 128 election described above in respect of any lower-tier PFIC. You are urged to consult your tax advisors about the application of the PFIC rules to any of our subsidiaries.
You will generally be required to file IRS Form 8621 if you hold our ADSs or Class A ordinary shares in any year in which we are classified as a PFIC. You are urged to consult your tax advisors concerning the U.S. federal income tax consequences of holding ADSs or Class A ordinary shares if we are considered a PFIC in any taxable year. Taxation of Capital Gains For U.S. federal income tax purposes, you will recognize taxable gain or loss on any sale, exchange or Information Reporting and Backup Withholding In general, information reporting will apply to dividends in respect of our ADSs or Class A ordinary shares and the proceeds from the sale, exchange or other disposition of our ADSs or Class A ordinary shares that are paid to you within the Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against your U.S. federal income tax liability provided the required information is furnished to the IRS in a timely manner.
Not applicable.
Not applicable. 129
We have filed this annual report on Form 20-F, including exhibits, with the SEC. As allowed by the SEC, in Item 19 of this annual report, we incorporate by reference certain information we filed with the SEC. This means that we can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this annual report. You may read and copy this annual report, including the exhibits incorporated by reference in this annual report, at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and at the SEC’s regional offices in New York, New York, and Chicago, Illinois. You can also request copies of this annual report, including the exhibits incorporated by reference in this annual report, upon payment of a duplicating fee, by writing to the SEC’s Public Reference Room for information. The SEC also maintains a website that contains reports, proxy statements and other information about issuers, such as us, who file electronically with the SEC. The address of that website is http://www.sec.gov. The information on that website is not a part of this annual report.
Not applicable. Interest Rate Risk Our exposure to interest rate risk primarily relates to interest income generated by excess cash which is mostly held in interest bearing bank deposits. As of December 31, We have not been exposed to material risks due to changes in interest rates. However, our future interest income may be lower than expected due to changes in market interest rates. Equity Price Risk We are exposed to equity price risk on our common stock holdings. As of December 31, Foreign Exchange Risk Substantially all of our revenues and most of our expenses are denominated in RMB. Our exposure to foreign exchange risk primarily relates to cash and cash equivalents denominated in U.S. dollars as a result of our past issuances of ordinary shares and proceeds from We do not believe that we currently have any significant direct foreign exchange risk and have not hedged exposures denominated in foreign currencies or any other derivative financial instruments. Although in general, our 130 exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the foreign exchange rate between U.S. dollars and RMB because the value of our business is effectively denominated in RMB, while the ADSs will be traded in U.S. dollars. The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China, or the PBOC. The PRC government allowed the Renminbi to appreciate by more than 20% against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, the exchange rate between the Renminbi and the U.S. dollar had been stable and traded within a narrow band. Since June 2010, the PRC government has allowed the RMB to appreciate slowly against the U.S. dollar, though there have been periods when the Renminbi has depreciated against the U.S. dollar. In particular, on August 11, 2015, the PBOC allowed the Renminbi to depreciate by approximately 2% against the U.S. dollar. Since then and until the end of 2016, the Renminbi has depreciated against the U.S. dollar by approximately 10%. In To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amounts available to us.
Not applicable.
Not applicable.
Not applicable.
In March 2018, we appointed Deutsche Bank Trust Company Americas, or Deutsche Bank, as the depositary bank for our ADR program. We entered into a deposit agreement with Deutsche Bank, as depositary, and all holders from time to time of our ADRs on March 26, 2018. 131 Fees and Charges An ADS holder will be required to pay the following service fees to the depositary bank and certain taxes and governmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of your ADSs):
An ADS holder, will also be responsible to pay certain fees and expenses incurred by the depositary bank and certain taxes and governmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of your ADSs) such as:
The depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary bank by the brokers (on behalf of their clients) receiving the newly issued ADSs from the depositary bank and by the brokers (on behalf of their clients) delivering the ADSs to the depositary bank for cancellation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary bank to the holders of record of ADSs as of the applicable ADS record date. The depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., share dividends, rights), the depositary bank charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary bank sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via DTC), the depositary bank generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from 132 the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary banks. In the event of refusal to pay the depositary fees, the depositary bank may, under the terms of the deposit agreement, refuse the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder. Deutsche Bank Trust Company Americas, as depositary may make payments to us or reimburse us for certain costs and expenses upon such terms and conditions as we and the depositary bank agree from time to Payments by Depositary During the year ended December 31,
None of these events occurred in any of the years ended December 31,
See “Item 10. Additional Information—B. Memorandum and Articles of Association” for a description of the rights of securities holders, which remain unchanged.
The following “Use of Proceeds” information relates to the registration statement on Form F-1, as amended (File No. 333-223261) in relation to our initial public offering, which was declared effective by the SEC on March 26, 2018. In March 2018, we completed our initial public offering in which we issued and sold 10,200,000 ADSs, representing 10,200,000 Class A ordinary shares, resulting in net proceeds to us of approximately US$133.5 million, which net of underwriting discounts and commissions. Morgan Stanley & Co. International plc, Merrill Lynch, Pierce, Fenner & Smith Incorporated and UBS Securities LLC were the representatives of the underwriters for our initial public offering. For the period from March 26, 2018, the date that the F-1 Registration Statement was declared effective by the SEC, to December 31, Disclosure Controls and Procedures We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management, including our Group Chief Executive Officer and Group Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. 133 Our management, with the participation of our Group Chief Executive Officer and Group Chief Financial Officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Management’s Annual Report on Internal Control over Financial Reporting
Because of As required by Rule 13a-15(c) of the Exchange Act, our management, under the supervision and
Management Remediation Plan We
As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, in the assessment of the emerging growth company’s internal control over financial reporting.
Changes in Internal Control over Financial Reporting
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Our Board of Directors has determined that Dong Li, who is an independent director, qualifies as an audit committee financial expert as defined in Item 16A of the instruction to Form 20-F. We have adopted a code of ethics, which is applicable to all of our directors, executive officers and employees, including our Chief Executive Officer and Chief Financial Officer. No changes have been made to the code of business conduct and ethics since its adoption and no waivers have been granted therefrom to our directors or employees. We have filed our code of business conduct as an exhibit to our F-1 registration statement (File No. 333-223261), as amended, initially filed with the Securities and Exchange Commission on February 27, 2018, and a copy is available to any shareholder upon request. This code of business conduct and ethics is also available on our website at http://ir.998.com.
Ernst & Young Hua Ming LLP has served as our independent registered public accounting firm for each of the fiscal years in the three-year period ended December 31, The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by Ernst & Young Hua Ming LLP, for the years indicated.
Pre-Approval Policies and Procedures Our audit committee is responsible for the oversight of our independent accountants’ work. The policy of our audit committee is to pre-approve all audit and non-audit services provided by Ernst & Young Hua Ming LLP, including audit services, audit-related services, tax services and other services, as described above. All audit and non-audit services performed by Ernst & Young Hua Ming LLP must be pre-approved by the Audit Committee. None. ITEM None. Not applicable.
We are a “foreign private issuer” (as such term is defined in Rule 3b-4 under the Exchange Act), and our ADSs, each representing eight ordinary shares, are listed on the New York Stock Exchange. Under Section 303A of the New York Stock Exchange Listed Company Manual, New York Stock Exchange listed companies that are foreign private issuers are permitted to follow home country practice in lieu of the corporate governance provisions specified by the New York Stock Exchange with limited exceptions. The following summarizes some significant ways in which our corporate governance practices differ from those followed by domestic companies under the listing standards of the New York Stock Exchange.
ITEM 16H.MINE SAFETY DISCLOSURE Not applicable.
Not applicable. PART III ITEM 17.FINANCIAL STATEMENTS The Registrant has elected to provide the financial statements and related information specified in Item The consolidated financial statements of GreenTree Hospitality Group Ltd. are included at the end of this annual report.
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SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
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