H World Group Ltd

BMV:HTHTN

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the China Lodging Group Q1 2018 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference call is being recorded on Tuesday, the 15th of May, 2018.

I would now like to hand the conference over to your speaker today, Ms. Ida Yu. Thank you. Please go ahead.

[Yu Ida, executive]

Thank you, Jade. Good morning, everyone. Thanks to all of you for dialing in, and welcome to our first quarter 2018 earnings conference call. Joining us today is Mr. Ji Qi, our Founder and Executive Chairman; Ms. Jenny Zhang, our CEO; and Mr. Teo Nee Chuan, our CFO.

Jenny and Teo will present the strategy review and the Q1 results. Following their prepared remarks, management will be available to answer your questions.

Before we continue, please note that the discussion today will include forward-looking statements made under the safe harbor provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today.

A number of potential risks and uncertainties are outlined in our public filings with the SEC. China Lodging Group does not undertake any obligation to update any forward-looking statements, except as required under applicable laws.

On the call today, we will also mention adjusted financial measures during the discussion of our performance. Reconciliations of those measures to comparable GAAP information can be found in the earnings release that was distributed earlier today.

As a reminder, this conference call is being recorded. The webcast of this conference call, as well as supplementary slide presentation, is available on the IR section of China Lodging Group's website at ir.huazhu.com, H-U-A-Z-H-U dot com.

Now I would like to turn the call over to Jenny. Jenny, please?

[Min Zhang, executive]

Good morning, everyone. I'm pleased to report a strong start to 2018. As shown on Page 2, in the first quarter, our blended RevPAR grew by 13.7%; net revenues increased by 29.6%; operating income margin was 14.7%, up from 10.7% a year ago; adjusted EBITDA margin was 26.8%, up from 23.5% a year ago. Teo will provide more financial analysis later.

Before we move to our strategic review, I'm also delighted to announce our strategic investment in AccorHotels in Q1. As you may recall, we formed a strategic alliance with AccorHotels in 2016. Upon the alliance, we have master franchise rights for Mercure, ibis and ibis Styles, and co-development rights for Grand Mercure and Novotel as well as a 28% stake in Accor's luxury and upscale hotel business in Pan-China region.

Accor's Chairman and CEO, Mr. Sébastien Bazin, sits on our board. We now hold approximately 4.5% stake in AccorHotels through a share purchase from open market. We have engaged in discussions for a board representation in AccorHotels. We believe this will strengthen the partnership between the 2 groups and we expect to update you the progress in the next few quarters.

Let's now move to the strategic review. Please allow me to remind you about Huazhu's 3 strategic focuses this year on Page 4. First, we continue the fast expansion of midscale hotels. Secondly, we focus on continued growth in same-hotel RevPAR through quality improvements. Third is innovation in upscale hotel segments.

Page 5 shows that our fast expansion in mid- and upscale hotels is well on track. At the end of Q1 this year, our mid- and upscale rooms increased by 92% from a year ago, accounting for 32% in total room [ comps ] in operation right now. By looking at our pipeline, mid- and upscale rooms accounted for approximately 80%, up from 50% a year ago. This is a result from our continued efforts to enrich our brand portfolio and improve brand quality to satisfy customers and franchisee's evolving needs.

Since we've formed alliance with Accor in 2016, we launched new product design and increased the brand's presence in China. This is part of our effort to expand our market share in midscale markets.

Let's take Mercure and ibis brands as example, as shown on Page 6 and Page 7. At the end of Q1, we had 19 Mercure hotels in operation and 40 in pipeline. This is more than double the network we inherited from Accor 2 years ago. In Q1, Mercure's same-hotel RevPAR grew by 12.6% year-over-year. ibis is also a new star in the entry-level midscale segment. At the end of Q1, we had 105 ibis hotels in operation and 62 in pipeline. ibis achieved 14.5% year-over-year growth in same-hotel RevPAR in Q1.

During the past 2 years, great efforts have been made to introduce new designs to Chinese customers as well as increase hotel operational efficiency to enhance the profitability. The similar programs are also rolled out for Grand Mercure, Novotel and ibis Styles. We are confident that these changes will bear fruit in the coming quarters.

With the above concrete progress in midscale segment, our mid- and upscale hotels are increasing their contribution to our revenue. In Q1 2018, the revenue from mid- and upscale hotels increased by 87% to CNY 976 million, accounting for 47% of our total net revenues, up from 33% a year ago.

Secondly, our focus on RevPAR growth. As shown on Page 9, we continued to achieve double-digit blended RevPAR growth in Q1, which is 13.7% increase year-over-year, a very strong growth in the relative low season. This is not only driven by the increase in ADR, but also by more revenue contribution from mid- and upscale hotels.

Page 10 provides a detailed view of the growth trends of our same-hotel performance for hotels in operation for at least 18 months.

In Q1, our same-hotel RevPAR increased by 6.5% with a 6.1% increase in same-hotel ADR and a 0.3 percentage point increase in occupancy.

Breaking into months, the performance in large was very strong with 9.6% in same-hotel RevPAR and such momentum continues into April as well. We expect the trend for ADR growth will continue, driven by Chinese consumers increasing spending on leisure.

As shown on Page 11, the CAGR for disposable income per capita from 2013 to 2017 was 9.1% and 10.3% for their spending on leisure.

That trend contributes to a robust domestic travel market. Statistics shows, as on Page 12, domestic travel expenditures grew a CAGR of 15% from 2013 to 2017. We remain confident for travel in emerging markets in the near term and the long term.

Thirdly, our innovation in upscale. As shown on Page 13, our Shanghai Joya Hotel had a soft opening this March. This is a flagship Joya Hotel and we have a number of experiments in design and in operations. Positioned as an upscale brand, Joya demonstrates oriental elegance. Partnering with Shang Xia, a famous luxury brand, Joya provides high-quality supplies and furniture. The price range for Joya in Xujiahui, Shanghai is between CNY 900 to CNY 1,200 per night.

With that, I will hand over the call to Teo who will provide you a more detailed analysis on quarterly results. Teo, please?

[Nee Chuan Teo, executive]

Thank you, Jenny. Good morning, everyone. Please turn to Page 15.

At the end of Q1 2018, we have 3,817 hotels in operation. We opened 127 hotels and closed 56 hotels, giving a net opening in this quarter of 71 hotels. We maintained our hotel opening guidance of 650 to 700 hotels for this year.

Page 16 shows our hotel pipeline trend since Q1 2016. We increased our hotel pipeline further in Q1, up to 744 at the end of Q1 2018, a 57% year-on-year increase from a year ago. Given such a robust hotel pipeline, we are confident in achieving our hotel opening target in 2018. Approximately 80% of the rooms in the pipeline are under mid- and upscale -- upscale brands.

Turning to Page 17. Our group blended RevPAR grew by 13.7% in Q1. The growth in RevPAR was mainly driven by an increase in ADR of 13.9%, mainly due to the increasing mix of midscale and the upgrades of economy hotels with a higher ADR as well as strong domestic travel demand that drives the same-hotel RevPAR growth.

As mentioned by Jenny earlier, our same-hotel RevPAR growth was 6.5% in Q1, and in particular, we recorded a high same-hotel RevPAR growth of 9.6% in March 2018.

Before I go over the financial, I would like to take a short while to explain the accounting rules changes that impact our revenue recognition starting from January 1, 2018. As mentioned in our previous earnings call for Q4 2017, starting from January 1, 2018, the new accounting standards on revenue recognition affects our financial statements in 2 ways.

Number one, the first recognition of initial franchise fees. Previously, our initial franchise fees were fully recorded as revenue upon hotel openings. Now, these franchise fees have to be amortized over the remaining franchise period. Number two, membership loyalty costs. Previously, the costs on membership loyalty are reflected in the hotel operations and selling expenses. Now the net charges are reflected in the net revenue line.

The comparatives on 2017 numbers in the financial statements starting from Q1 2018 have been adjusted to reflect the changes in accounting treatment.

With that, let's move on to the financial results on Page 18. Our net revenue grew by 29.6% year-over-year in Q1, or 30.3% under the previous accounting standards, exceeding the high end of our guidance for Q1. Breaking down the revenue growth in Q1, net revenue from our leased and operating -- operated hotels improved by 28% year-over-year and net revenue from our manachised and franchised hotels was up 34% year-over-year. The increase in net revenue was mainly contributed by consolidation of Crystal Orange, a contribution from the same-hotel RevPAR growth and new hotel openings. In Q1 2018, revenue from manachised and franchised hotels accounted for 24.3%, up from 23.5% a year ago.

As demonstrated on Page 19, our Q1 operating profit grew by 76.8% and the operating margin expanded by 4 percentage points year-over-year to 14.7%. The improved operating margin was mainly contributed by improved operating efficiencies from scales and partially offset by preopening expenses.

Our hotel operating costs and other operating costs as a percentage of net revenue increased by 2.3 percentage points year-over-year due to improved blended RevPAR and better efficiencies from scales. The preopening expenses as percentage of net revenue increased by 2.1 percentage points due to higher number of leased mid- and upscale hotels under construction compared to 2017. We have 37 leased hotels under construction in Q1 compared to 15 in 2017.

The SG&A expenses and other operating income as percentage of net revenue decreased by 3.8 percentage points year-over-year, mainly due to the one-off transaction costs related to Crystal Orange acquisition totaling CNY 46 million in 2017 and better operating efficiencies from scales.

Turning to Page 20. The strong RevPAR growth and better operating efficiency drive more profitability growth. In Q1 2018, our adjusted EBITDA increased by 47% year-over-year to CNY 560 million, while our adjusted EBITDA margin expanded by 3.3 percentage points from 23.5% to 26.8%. Our adjusted net income increased by 68% year-over-year to CNY 282 million, while the adjusted net income margin expanded by 3.1 percentage points from 10.4% to 13.5%.

The non-GAAP adjustment mentioned on this page included the unrealized loss from the fair value changes of equity investments totaling CNY 136 million -- CNY 136.7 million in share-based compensation. The non-GAAP adjustment on unrealized loss from the fair value changes of equity securities totaling CNY 136.7 million for the first quarter mainly represent the unrealized loss from our investment in equity securities such as AccorHotels and Quanjude.

According to the new U.S. GAAP effective from January 1, 2018, we are required to reflect the unrealized loss or gain from fair value changes related to this equity, except those which we accounted for as -- from using the equity method investment in the net income. The unrealized loss from these equity securities in the first quarter for 2018 was due to the lower share price at the end of first quarter of 2018 compared to those at the end of the fourth quarter in 2017.

This accounting treatment will have a significant impact on our GAAP net income going forward. For example, the closing price of AccorHotels was EUR 46.45 on May 11, 2018. Therefore, the unrealized gain on this Accor investment alone in the second quarter up to May 11, 2018, would have been approximately CNY 260 million.

Moving on to cash flow status on Page 21. In Q1 2018, our net cash from operations reached CNY 420 million, while the CapEx for maintenance and new developments totaled CNY 367 million. As a result, the free cash flow in Q1 was CNY 53 million.

In Q1, we drew down our loan facilities, including the syndication loans and share-based financing, totaling CNY 3.67 billion to the -- sorry, totaling CNY 3.67 million and invested approximately 3.67 -- sorry, and invested CNY 3.65 billion for our investment activities, which mainly comprises for the purchase of Accor hotel stocks.

At the end of Q1, we had cash and cash equivalent and restricted cash of approximately CNY 4 billion.

Finally, our guidance on Page 22. Thanks to the better-than-expected RevPAR outlook, we revised upwards our full year revenue growth estimate from previously 16% to 19% to 18% to 22%. For the second quarter of 2018, we expect the net revenue to grow 24% to 26% year-over-year.

With that, let's open the floor for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Justin Kwok from Goldman Sachs.

[Justin Kwok, analyst]

Perhaps I'll have 2 questions, one on the Accor, the other one on the RevPAR. On the strategic investment in Accor, I want to get a sense on 2 things. One, are you happy with the current 4.5% stake? What's the goal for the ownership level or the size of investment going forward? And the other thing that -- as you already mentioned that you started the alliance with this company since 2016, with this cross-ownership in mind, what extra or what else are you expected to achieve in the coming few years on this investment? That's the first question.

[Min Zhang, executive]

For the investment in Accor, currently we hold approximately 4.5% stake and we don't have any plan to increase the stake in the near term. And in terms of what other further value will bring to each other, we believe, by partnership, we can bring each other additional value. For part 2, we are going to have a deeper collaboration with Accor in the China market. There are a few initiatives we are under discussion. And we also feel Accor's global experience will also help us when we go overseas. And from Accor's side, our deep knowledge in loyalty program as well as in technology could be beneficial to Accor's business. So we see a lot of potential areas to collaborate further in the future business.

[Justin Kwok, analyst]

Perhaps I'll just switch to the RevPAR question then. Since you mentioned that on March you've already seen 9.6% in same-hotel RevPAR growth, could you mind to share a little bit on what you're seeing into April and May? And with the upward revision on your full year revenue guidance, what's the same-hotel RevPAR that you guys are modeling into the full year? I remember, back in March, the guidance is around 3% to 5%. So what's the target for the year now?

[Nee Chuan Teo, executive]

Okay. Thank you, Justin. This is Teo. We -- okay, coming to the first question is on the -- we -- in March, the same-hotel RevPAR growth was approximately 9.6%. In April, we see that same-hotel RevPAR growth are recording approximately the same rate as March. And we expect that this trend may actually continue for a short little while, but going forward, you will still need to be cautious to see that there's any changes on this trend. But so far, the trend has been pretty positive. The second thing is that we are revising upwards the -- our total revenue guidance. It's mainly because we see that the trend in -- during the first quarter, as well as what we see up to like April, is better than what we've already -- originally expected when you go by the guidance in March. So we estimate that the same-hotel guidance -- the same-hotel RevPAR to be in the mid-single-digit kind of range.

[Justin Kwok, analyst]

Okay, I see. Could I follow up with one more question?

[Nee Chuan Teo, executive]

Sure.

[Justin Kwok, analyst]

Yes. It's on -- it's actually on the closing. So I know that in the presentation, and also previous guidance, that you are looking at closing roughly 200 stores for 2018. Can I check, is that -- the rationale behind closing these number of stores this year, what's the broad reason? Is it franchisee issue? Is that the rezoning [ off thing ]? And into 2019 and forward, would this number continue to be this quantum?

[Nee Chuan Teo, executive]

Okay. Approximately -- we closed approximately 56 hotels, like in Q1, and we expect to close approximately 200. We maintain to be -- the closure to be at this level. And then, going forward, in Q1 2019, because I will say that approximately 50% of the closure was mainly due to the -- whereas the issues, for example, the expiry of the leases and then you said some rezoning, et cetera. So we expect that the trend will be -- we'll maintain a closure rate of approximately 200 hotels going forward as well.

[Operator]

Your next question comes from the line of Tian Hou from T.H. Capital.

[Tian Hou, analyst]

Yes. So Crystal Orange you acquired a year ago. So now we're entering into the anniversary. So I wonder what's the ADR and the occupancy trend for this Crystal Orange hotel in the current quarter -- in Q1 as well as in Q2? What's the impact of that? Or in other words, the average LIFO of a Crystal Orange, the ADR and the occupancy relative to the group, where they stay and where they're going? That's the question.

[Nee Chuan Teo, executive]

Okay. Thank you. What you see is that, Crystal Orange, we see that the -- the RevPAR -- sorry, the ADR for the Crystal Orange was actually higher than it is -- it's actually the higher end of our midscale hotels. And the ADR is still pretty maintained. However, we do see that the occupancy has improved a little bit since we took over because China Lodging has been able to channel our members into the occupancies. So -- but having said that, we see that there is still a lot more work to do, because while we are helping them to improve their RevPAR through better occupancy, we also see the opportunities for us to help them to rationalize their cost so that we can squeeze more profit up from their operations. The work has not completed and it's still ongoing. In fact, in 2017, we have completed the consolidation of the back-end office. In 2018, we continue on to streamline and to increase efficiency from the operational perspective.

[Tian Hou, analyst]

That's very helpful. I want to follow up with another question regarding the revenue composition. So currently, leased and operated hotels was about 75% of total revenue and the trend is declining. So I wonder what's the trend going forward? Should we expect the franchise hotel or manachised total contribute more to the total revenue?

[Nee Chuan Teo, executive]

Thank you. We see that for leased and operated hotels, we have a much smaller number of leased and operated hotels. Having said that, the leased and operated hotels contributed the 100% of revenue RevPAR growth, as far as the revenue. However, for the manachised hotels, we are growing a significant more numbers in terms of hotels. And however, we only get approximately 10% share of the revenue from manachised hotels. So this mix, although it shows that the trend of the revenue growth is that we will see continually increase in terms of the growth rate for the manachised hotels will be higher compared to the lease and operated hotels due to the same reason. Having said that, we expect that by going through the asset-light model, we would capitalize on the economies of scales and improve our operating profit margin.

[Tian Hou, analyst]

Okay. So I have a last question. So asset light management -- asset-light style in the hotel management. So I wonder what are kind of management system or the cloud type of management system have you guys put in place, managing not only the high-end also mid-end also low end as well as your operated hotel and the franchised hotel it seems like a quite complex task. So just wonder what's behind those light assets styles and to give you such kind of efficiency?

[Nee Chuan Teo, executive]

We treated -- we manage the leased and operated hotels and the manachised hotels in the same manner. The only difference is that for the leased and operated hotels, the entire headcount is employed by China Lodging, while under the manachised hotels, only the hotel managers are employed by China Lodging. So in a way these hotels either the leased and operated hotels as well as the manachised hotels, they are supported by a regional and centralized group which will be able to capitalize this on meeting the economies of scale. So for example, regional managers they can support say 20 to 25 hotels each. So by adding on leased and operated hotels or manachised hotels, the cap on the regional managers is the same. But having said that, is that by not having to invest in the capital expenditures for the manachised hotels as well as to pay the whole payroll of the hotel staff, China Lodging are able to capitalize on China Lodging operating platform and information technology to help the manachised hotels to achieve the similar efficiencies as our leased and operated hotels.

[Operator]

Your next question comes from the line of Billy Ng from Merrill Lynch.

[Billy Ng, analyst]

The first question, I just try to get a very quick sense of what's happening in Q2 so far. From what we heard from the industry, RevPAR has been very strong in April, but if you can provide any color in April or May, that would be appreciated.

[Nee Chuan Teo, executive]

From our numbers, we see that the RevPAR in April is approximately similar to those in March. So it's still very strong. It's still very strong.

[Billy Ng, analyst]

Okay. Then a question on tax because in particular, for this quarter, we see the tax rate actually is quite low if we back out the unrealized loss. So the effective tax rate is about only 15%. So why the tax rate has been much lower, I think not just this quarter, but also starting from fourth quarter 2017 as well. And also, that kind of tax rate, can that be sustainable for the rest of the year?

[Nee Chuan Teo, executive]

Okay. What you mentioned -- no, our effective tax rate right now is still 25.6%. Having said that, you rightly point out that there are some unrealized losses; if you think about then, the effective tax rate would be lower. The main reason is a change in the way we treated some of the deductible expenses. Previously, that -- our option expenses on the tax has been reflected in below the line, which we call it the OPI, but currently that deduction has been reflected in our tax line above in the income statement. So we expect that the trend will continue.

[Billy Ng, analyst]

Okay. And just one last thing very quickly. What does share margin financing facility mean? Like is that related to the Accor investment? And what is the cost?

[Nee Chuan Teo, executive]

Right. I'll give you a little background is that we purchased -- we purchased the Accor hotel shares using margin financing, whereby, we pledged all the shares purchased for the margin financing. The facilities that we used is approximately USD 290 million or EUR 260 million at the back of our value of our approximately EUR 590 million. So the LTV for the margin financing is approximately 40% and the interest rate, interest on the margin financing is approximately 1.7%. So the reason why we structured it in this manner is because of the taking into account of the routine dividend payable by Accor at a dividend yield of 2.3%. If you take out the recording tax, then that will be more than cover the interest expense that you need to pay on the margin financing. In fact, it's actually more than double the amount that you need to pay for the margin financing. And just to give you an example, is that we recently received the dividends, and that dividend of approximately EUR 9 million, that would be more than cover our interest expense for the entire margin financing.

[Billy Ng, analyst]

Sorry. Can I ask you again, the 1.7%, is this based on LIBOR or based on something else? I didn't understand.

[Nee Chuan Teo, executive]

It's the LIBOR. It is LIBOR, 1.7%. But LIBOR in Europe is currently 0 so the effective rate is 1.7%.

[Billy Ng, analyst]

Okay. May I ask one last thing. I know someone asked already regarding to the Accor investment. Seems like we don't have any plans to increase the stakes right now, but what will be the exit strategy? Let's say, if we -- one potential, of course, is to lead to more collaboration but on the other hand, let's say, it seems like you guys still treat it more like a financial investment right now. Do you have kind of like a target or if the share price rise another 20%, 30% or how should we think about this?

[Min Zhang, executive]

We consider the investment into Accor as a strategic investment. At the same time, we enjoy the benefits of good liquidity on the stock. Currently, we don't have a near term price target to exit. We expect through this linkage, to strengthening the partnership of the 2 parties. And given Accor has completed the project [ booster ] and also recently acquired Novotel, so we are also positive that Accor will continue to perform stronger. And we have an expectation on their stock price increase in the future.

[Operator]

Your next question comes from the line of Praveen Choudhary from Morgan Stanley.

[Praveen Choudhary, analyst]

I have 2 questions. The first one is related to midscale segment in which we are making inroads. I just wanted to understand if Jenny, can you explain the current supply-demand situation? And the devil's advocate will say that there might be too much concentration, too many other competitors are focused on the same space. How do you see that supply-demand situation? And also -- and demand is much more understandable. I think supply is where I want to understand your thoughts. And also, while your ADRs are moving very fast, are you getting closer to full scale hotels? And in China, that number is not very high. So how much more can you go? That's the first question.

[Min Zhang, executive]

Okay. Very good questions. On midscale market, we continue to see the demand growing very fast. As we just shown some of the macro numbers, the demand, the travel spending in China last year has increased by 17% and that we continue to see that strong demand coming in due to China's economy as well as the general trend of consumption upgrades. And the base supply of midscale hotels in China is actually very small. So despite there are meaningful increasing supply in the past few months and as well as in the coming years, we think there will still be quite plenty of opportunities for the midscale brand. And actually, given the huge space of the travel spending, this consumption upgrade will actually be a very huge incremental demand for midscale hotels. It won't be easy for all the hotel leaders to catch up in that end. So I don't see any risk of oversupply in the foreseeable future for midscale hotels. And on ADR, if you look at the upscale and the luxury hotels in China, there is a very strong recovery in their rate. Actually, the increase in the past year in their ADR is phenomenal. I think the statistics is above 10% increase. So I think the increase in upscale and luxury will also open up more space for our midscale and upper midscale hotels in their pricing. So we expect -- if you look at the confidence index of the high-end hotel hoteliers, it's coming to a record high based on some industry research. If you compare the hotel price in China versus some of the more developed economy, in general, Chinese hotels are still very cheap, no matter you are looking at economy, midscale, upscale or luxury. We believe with consumers more spending on traveling, the ADR of the whole industry are going to improve gradually.

[Praveen Choudhary, analyst]

My second question is related to your pipeline. You have 744 hotels in the pipeline. In fourth quarter '16, you had only 442. Do you think that your current guidance for the net openings of 450 to 500 is too conservative considering your pipeline has gone up substantially over the last 2 year?

[Nee Chuan Teo, executive]

Right. We would like to maintain the hotel openings of 650 to 700, given that we appreciate that the pipeline has increased. But having said that, is that we would see. We would look at these numbers in Q2 to see how they will develop because it's always better to revise upwards than revise downwards. So we'll keep it at that and we'll see how it goes in Q2.

[Min Zhang, executive]

I would say there is a chance that we might see the guidance, but we also see the regulatory control across China, especially the main cities are very tight right now. So we are seeing our franchisees hotels as well as some of our own lease hotels, their opening schedule is delayed by some of those regulatory changes. That's something we will always need to be cautious about.

[Praveen Choudhary, analyst]

Got it. Maybe a last question for me, if I may. Can you update us in terms of your thought around acquisitions? You have done some really good acquisitions historically, including Crystal Orange, but your cash pile has depleted. Again, your gearing level is very good, but how should we think about any future acquisitions, whether in China or overseas?

[Min Zhang, executive]

We surely see acquisitions as a supplementary tool to our organic growth to expand [ or war ] our network and our business base. As we stated earlier, we are very disciplined and selective in our acquisitions. We look at the strategic fit, the valuation and our own capability of integration. So we have been continually exploring different opportunities, but up to now we don't have anything close to a firm deal yet.

[Operator]

[Operator Instructions] The next question comes from the line of Tallan Zhou from Deutsche Bank.

[Tallan Zhou, analyst]

I have 3 questions. First one, because last quarter, we had, I think, CNY 4.5 million transaction -- sorry, CNY 45 million transaction fee for Crystal Orange. So am I correct in expecting an accelerating adjusted EBITDAR or net profit in the second quarter? Because we don't have that in second quarter. That's my first question.

[Nee Chuan Teo, executive]

Sorry. The CNY 46 million acquisition cost was related to 2017.

[Tallan Zhou, analyst]

So that's why I'd say second quarter 2018, we will see an accelerating EBITDAR growth. [indiscernible] is the same.

[Nee Chuan Teo, executive]

So what you are trying to say is that in Q2 is that we may not have a margin growth will be as much, because we do not have the benefit of higher -- of a low comp, in back in 2017, correct?

[Tallan Zhou, analyst]

Yes.

[Nee Chuan Teo, executive]

Okay. I would say that when we determine the overall margin growth, as mentioned to you, overall in 2018, we expect a margin of say, 1.5% to 2% margin expansion. We expect to use it from the entire operations, from the economy of scale from -- due to the increasing scales. Having said that is that the growth in EBITDA margin may not be as high as you rightly pointed out. But having said that is that we do see that the better RevPAR in Q2 compared to the Q1 helps to improve the margin going forward, because Q1 is actually one of the lowest -- is our lowest, slowest season in the entire year.

[Tallan Zhou, analyst]

Okay, got you. Second question is, can you help us to break down the 29.5% revenue growth. Like, I just want to know how much growth is contributed by Crystal Orange? Because last quarter, we don't have that.

[Nee Chuan Teo, executive]

Okay. The revenue growth of 29.6%, of which approximately 18% is coming from the Crystal Orange consolidation and the remaining approximately like 11.6% was from our operating.

[Tallan Zhou, analyst]

Okay. Last question. You mentioned that accounting change on preopening so that now we need to -- sort of we can just recognize it one time, right. So if everything remained pretty much the same as last quarter, how much our EBITDA or operating profit would have been higher?

[Nee Chuan Teo, executive]

Let me correct you. The accounting change is not on the preopening. The accounting changes is on the revenue recognition on the initial fee, our franchise fee that we receive.

[Min Zhang, executive]

As well...

[Nee Chuan Teo, executive]

As well as our loyalty membership fees. So I would say that the...

[Tallan Zhou, analyst]

Very little impact to EBITDAR.

[Nee Chuan Teo, executive]

Yes, I would say the impact is not significant.

[Operator]

[Operator Instructions] Your next question comes from the line of Juan Lin from 86Research.

[Juan Lin, analyst]

My first question is on the upscale hotels. Could you please elaborate a little bit more on your experiment, the progress of your experiment in upscale segment innovation and outlook of operating metrics such of number of rooms, RevPAR, ADR and occupancy rate with upscale segment? Second question is regarding the personnel cost. In first quarter, personnel cost as a percentage of lease and operating revenue seems to have increased on a year-over-year basis. Could you please elaborate the reason behind it and whether leased and operated revenue-related personnel costs will continue trending up on a year-over-year basis going forward?

[Min Zhang, executive]

We believe upscale market is getting more and more attractive to us. One is the RevPAR growth in upscale, the recovery is quite significant. And secondly, I think we are primarily a brand and a management company, the upscale and the luxury hotels provide a much bigger revenue base for fee generation. And from the customer life cycle perspective, we also want to be able to offer a reach widespread, full range kind of product to our customers so we can meet their needs in different occasion and different stage of their lives. So given that, entry into the upscale market is strategically important for us. For now, we are still at the early stage. We are exploring the possibility of enhancing the Joya product. As you can see from the new Joya in Shanghai, we want to position that as a very elegantly designed upscale brand. We are also working on Accor's brands such as Novotel and Grand Mercure. We have launched a new Mercure -- a new Novotel just a couple of months ago also in Shanghai, which is also a very attractive location as well as a product design. We expect to open a new Grand Mercure in the central location of Guangzhou which is also an important Tier 1 city. So we are going to test with those field flagship properties to gain more experience in this domain. And once we achieve success in those initial flagships, we believe we are going to expand much quicker in this area.

[Nee Chuan Teo, executive]

Okay. In addressing your second question on the increase in the payroll cost, you rightly pointed out that there is some escalation on the payroll cost. The reason behind that is because we made some adjustments on the -- we revised upwards the unit payment of our cleaning ladies. The reason why we do that is because we think that by increasing -- by giving them a better pay for the better quality of work that they will perform, we will provide a product, a clean product that our customer will highly demand. So in that way, we hope that the increase in the cleanliness will actually help us to attract more customers, which will improve our RevPAR further. So we expect that the percentage of the payroll as a percentage of net revenue will maintain at the Q1 level going forward. And of course, having said that, we hope that our staff will earn more money because they perform a better work with better profitability on each hotel.

[Operator]

There are no further questions at this time. I would now like to hand the conference back to today's presenters. Please continue.

[Yu Ida, executive]

Thank you, everyone. And this concludes today's call. We look forward to updating you in the next earnings call in August. Thank you. Bye-bye.

[Operator]

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.