H World Group Ltd

BMV:HTHTN

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Huazhu Group Limited Q3 2019 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

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

[Yu Ida, executive]

Thank you, operator. Good morning, good afternoon or good evening, depending on where you are in the world, and thanks to all of you for dialing in today. Welcome to Huazhu Third Quarter 2019 Earnings Conference Call.

Joining us today is Mr. Ji Qi, our Founder, Executive Chairman and CEO; Ms. Jenny Zhang, our Executive Vice Chairlady; and Mr. Teo Nee Chuan, our CFO. They will review our strategy and the Q3 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. Huazhu Group does not undertake any obligation to update any forward-looking statements, except as required under applicable law.

On the call today, we will also mention adjusted financial measures during the discussion of our performance. Reconciliation of those measures to comparable GAAP information can be found in our earnings release that was distributed 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 in the Investor Relations section of Huazhu Group's website at ir.huazhu.com.

Now I will turn the call over to Mr. Ji. Ji Qi, please?

[Qi Ji, executive]

Hello, everyone. Today, I will share Huazhu's long-term growth path with you from my perspective as a company founder. Building a world-class hotel company has always been in my mind, I have also been thinking of what steps are required to get there. I think that our hotels brand typically follow a curved line from its progress, growing establishment to growth, to maturity and often, to decline.

How do we avoid this all too common decline? My view is that when the curve begins pointing downwards, you have to find a new function, a new power, and new direction so the curve takes off again. For the curve to continue, [ it ups and advance ] sustainable, the company must possess robust innovative capability and resilience. Our company, Huazhu Group, will be a world-class global company only after it has reached sufficient scale and strength in geographic areas also outside China.

On Slide 2, similar to the wave principle that I've just mentioned, I separated Huazhu's historical hotel group growth path into 4 big waves. The first wave started back in 2005 with our HanTing brand, now a leading economical brand serving the vast majority of the Chinese population. This increase in core capital with [ possible income], we are well prepared for the next wave with our midscale hotels.

Back in 2010, we started to develop the JI brand as the pioneer for the midscale hotel [ brand ]. It took a number of years for us to establish JI brand awareness. But by 2015, we've had a profitable JI brand business and also reasonable scale. I still remember there was a lot of concern from our Huazhu investors questioning our plan to develop this [ midscale ] for the brand. They were worried about uncertainty for this new midscale segment because of the negative impact on our company's short-term profitability.

Today, JI Hotel -- JI brand is the leading and popular midscale hotel brand with 2,059 hotels. We plan to open at least 400 JI brand hotel in 2020.

With Huazhu's strong position in midscale and economical segments, I'm now thinking how to capture this opportunity.

The next wave for the luxury and upscale segment. I think that it can take an even longer time for us to build a new luxury and upscale brand from scratch because this brand requires richer stories and service qualities. That's why we choose to enrich our luxury and upscale brand portfolio through acquisition. This will help to shorten our own learning period, and we will benefit from new perspective of our employees in the newly acquired business.

I recently announced acquisition of DH. It's perfect [ strategic fit ] to our luxury and upscale brands. This acquisition also initialized our footprint in the countries outside China as we have now planned to [ offer in ] our sales support.

Please now turn to Slide 3. We just -- we have just reached our first 5,000 hotels milestone. We aim to achieve the 10,000 hotels milestone within the next 3 to 5 years.

Now we turn to Slide 4. The brand is the second of our chain hotel rooms as the percentage of the overall lodging industry in China is about 20% only. This is low compared to 40% in Europe and 70% in U.S. Therefore, there's still much room for further consolation (sic) [ consolidation ] in China, and we are confident that Huazhu is in the best position to be the leading consolidator.

Now Slide 5. We can see that with the acquisition of Deutsche Hospitality, Huazhu now has a rich brand portfolio in each segment from economy up to the luxury and up to upscale segments. This figure consolidates the China lodging industry.

Turning to Slide 6, please. If you look at the Marriott growth -- growth path, 30 years ago in 1990, 95% of Marriott rooms or in the U.S. is home-based. So looking into [ internationalization ], Marriott shares over home country rooms declined over the next 10 to 20 years to about 80% of the global total. Now 30 years later in 2019, even after taking over the Starwood Hotel Group with a great international presence, Marriott still has about [ 36% ] of the rooms in this space. Likewise, Huazhu has just started to grow outside our home country. We still have 96% of rooms in China after consolidation and Deutsche Hospitality Hotels acquisition. That said, we still think we still continue having a mature presence in our home country going forward. This will be a very exciting journey and I hope you will be with us along the way.

With that, I will hand over to Jenny, who will walk you through our strategical achievement in the quarter. Thank you.

[Min Zhang, executive]

Thank you, Qi Ji, and hello to everyone. Please now turn to Slide 8, and let's review Huazhu's 3 areas of strategic focus this year.

First of all, we are continuing the rapid expansion of our hotel network. Secondly, we are focusing on innovative technology applications to improve the guest experience and our operational efficiencies.

Third, the strategic deployment in our upscale hotel segment.

As we turn to Slide 9, note the lighter blue bars on the left show strong acceleration of our hotel openings during Q3, with more than 5 hotels opened every day, triple that of Q3 2018. Among the net increase of 486 hotels in Q3, 46% was contributed by our soft brands.

We are delighted to see our reacceleration of soft brands start to bear fruit. In the first 9 months of 2019, the darker blue bars on the right show that we added 921 net hotels, about 200% year-over-year growth.

As we expect future hotel expansion to accelerate given our strong growing pipeline, as shown on Page 10, we have a pipeline of 1,736 in hotels, equivalent to 34% of our hotels in operation. This ratio has improved from 23% at Q3 last year. The strong growth is mainly attributed to franchised and manachised business, which was 97% of our total unopened pipeline.

Technology is essential for Huazhu's sustained growth. Today, I would like to share some remarkable achievements with you.

First of all, on Page 12 -- on Page 11, our loyalty program continued to increase and reached 139 million members by the end of Q3 2019. It represents a 46% CAGR from year 2011.

Secondly, on Slide 12. The advanced booking through our online travel reservations contributed about 40% of our total room bookings. More than 45 million people downloaded our Huazhu smartphone app, 45 million, and more than 25 million people are following Huazhu on WeChat. Our digital booking and digital in-house functions have attracted more and more members to choose our online reservation channels. The strong central reservation capability significantly accelerates the ramp-up of our new hotels and also help mature hotels to maintain a high occupancy.

Third, about 53% of our overall transaction value is processed through online payment. This includes both advanced payment through central reservation tools, as I just mentioned, and QR code scanning payment at hotels. We offer online payment services through traditional credit cards as well as mobile payment means, such as Alipay, Apple Pay, WeChat Pay and Union Pay. The easiness of payment significantly enhances our customer experience when they deal with us.

Finally, I want to update you on our progress in the upscale segment. As shown on Slide 14, our Joya Hotel in Chengdu Taikoo Li is scheduled to greet guests by the end of 2019. 3 more Joya Hotels will open in the first quarter of 2020, 2 in Shanghai and 1 in Hangzhou. In addition, next year, the second urban hotel under the Blossom Hill brand will open in Shanghai after a very successful Blossom Hill Hotel in Beijing.

Let's move to Slide 15. I would like to take this opportunity to elaborate our recently announced acquisition of Deutsche Hospitality or DH. DH is a leading German operator with a rich heritage dating back to 1930. Its flagship brand, Steigenberger, is a reputable luxury hotel brand across Europe, North Africa and the Middle East. DH has 5 brands, 118 hotels in operation and 36 in pipeline across 19 countries.

The dedicated DH management team has multinational experience for hotel development and operations. DH forecasted its 2019 revenue of EUR 490 million, with an EBITDA of approximately EUR 40 million. At an enterprise value of about EUR 700 million, the valuation of the acquisition is approximately 17.5x 2019 forecast EBITDA. We expect, through growing this business, the forward multiple is expected to decrease to about 10x after 3 years. We expect this deal to close in January 2020 upon the completion of certain customary conditions.

Please allow me to share our view about this deal. First of all, let's turn to Slide 16. We think DH is a deal of the right size. As you can see, on a pro forma basis, assuming DH is part of Huazhu today, DH would account for 4% of Huazhu's rooms, 27% of Huazhu's revenues and 9% of Huazhu's EBITDA. The transaction value is approximately 7% of Huazhu's market cap. This is a deal size that is meaningful but not too big for us as a first step of going international.

Secondly, Huazhu and DH form a very complementary brand portfolio. Most of DH brands are positioned in upscale and the luxury segment.

As shown on Slide 17, post acquisition, DH will account for 79% of Huazhu rooms in luxury and upscale segment and 3.1% and 0.4% in midscale and economy segments, respectively. We are glad that the new brands and the existing portfolio of DH will strengthen Huazhu's position in the luxury and upscale segment.

Thirdly, this deal helps Huazhu to establish a geographic footprint in Europe, Middle East and Africa. As shown on Page 18, the geographic coverage of the 2 companies have no overlap. So it's going to be a meaningful step for us to establish a global hotel network. A global network has a natural synergy of channeling customers to their familiar brands, and thus, achieving an advantage in attracting customers all over the world.

On top of what we just shared, the synergies that will be generated after this acquisition will also include the following, as shown on Page 19. First of all, the DH brands will have accelerated expansion by leveraging Huazhu's current strong presence in China; and secondly, Huazhu will successfully establish our initial footprint into Europe, Middle East and Africa; thirdly, we envision Huazhu's loyalty program and our direct sales capability will help DH to strengthen their competitiveness in their existing markets and also help their operation of their current hotels; finally, Huazhu's leading technology will help improve DH's operation even further. We expect improvement in the back office operation efficiency and the customer interfaces going forward.

For those investors on today's call who have not yet experienced any of the wonderful DH hotels, we would like to quickly brief you through some of their pictures of the new brands, who are going to join Huazhu's family in a couple of months.

So on Slide 20 and 21, I want to give you a quick flash on Steigenberger Hotels and Resorts. Under which brand, we have 60 hotels housed in historic traditional buildings as well as lively city residences. We also offer health and beauty oasis that's at the very heart of nature.

On Slide 22, the IntercityHotel brand offers more than 40 upper mid-range urban hotels, all of which are located within easy walking distance of railway stations, airports or other public transportation hotpots.

Slide 23 highlights the MAXX by Steigenberger brand, a new and charismatic concept, which places the focus on the essentials in accordance with its motto, MAXXimize your stay.

On Slide 24, Jaz in the City branded hotels reflects metropolitan lifestyle and draws upon the local music and culture scene.

Last but not the least, on Slide 25. The Zleep Hotels is a well-positioned and well-known brand in Scandinavia which offer service and design at a great rate for the many.

With that, I will hand the call over to Teo. Teo will walk you through our Q3 operational and financial results in more detail. Teo, please?

[Nee Chuan Teo, executive]

Thank you, Jenny, and hello, everyone. We are very excited to report our third quarter results, with double-digit growth in our number of rooms, net revenues and EBITDA.

As shown on Slide 27, at the end of Q3 this year, we had a total number of 504,000 rooms, an increase of 23% from the end of Q3 2018.

Total turnover at hotel level, reached CNY 9.9 billion, an increase of 19% from a year ago. Our net revenues increased by 10% from CNY 2.8 billion to CNY 3.1 billion in Q3 2019. Our adjusted EBITDA stood at CNY 0.9 billion for Q3 2019 as compared to CNY 1 billion in the third quarter last year.

However, the pro forma adjusted EBITDA would have been CNY 1.1 billion or 36.3% of net revenue in Q2 2019, if excluding the impact of our significant investment in development teams, upscale brand hotels, IT capabilities and foreign exchange loss related to our investment in Accor shares.

Our investment in development teams have started to be reflected in our increasing pipeline hotels whilst our investment in IT has begun to reward us by the increasing share of online central reservations and online payments, which will help to drive our sustained future growth.

Please now turn to Slide 28. In Q3, our blended RevPAR dropped by 0.8%. The ADR grew by 2.6% contributed by an increasing mix of mid and upscale and upgraded hotels with higher ADR. However, the higher ADR was offset by a 3 percentage point decrease in occupancy. Lower occupancy was largely attributable to the softer macroeconomic environment.

Turn to Slide 29. Our same-hotel RevPAR declined by 3.8% in Q3. Our ADR dropped by 1.1% and our occupancy decreased by 2.5 percentage points year-over-year, mainly attributable to softness in macroeconomic conditions.

RevPAR growth trends into 4Q '19 has remained relatively weak and still slow business travel demands. Despite a 3 percentage point decrease in the same-hotel occupancy, our mature hotel occupancy still remains high at 9%. This occupancy level still outperformed the industrial average by 20 percentage points. In this connection, we continue to see more growth opportunities through further consolidation in the Chinese lodging industry.

Moving on to financial results on Slide 30. Our net revenues grew by 10.4% in Q3, in line with our guidance of 9% to 11%. As we look at revenue components, net revenues from our leased and operated hotels increased by 2 percentage year-over-year, and net revenues from our manachised and franchised hotels were up 34% compared to last year.

In Q3, revenue that was contributed by our asset-light manachised and franchised business model contributed 30.7% of our total revenues, up by 5.4 percentage points from last year. We expect the contribution from our franchised segment will continue to increase going forward.

We have consistently made good progress in our midscale hotel segment. As shown on Slide 31, in Q3, revenue from mid and upscale hotels increased by 23% to CNY 1.7 billion, accounting for 57% of the total hotel revenues, up from 51% a year ago.

Let's now turn to Slide 32 and look at operating income and margin. The reported income and -- from operation was CNY 703 million compared to CNY 775 million last year. The reported operating margin was 23%, 5 percentage points lower compared to 2018.

The lower operating profit and margin was mainly due to our investment in hotel development teams, upscale hotels and IT capabilities. Excluding these investments, the pro forma income from operations would have been CNY 803 million compared to CNY 775 million last year.

The pro forma operating margin would have been 26.3% compared to 28% in Q3 last year. As we updated our last quarterly earnings call, we have increased the headcount of our development teams. The result has been positive. We have seen unopened pipeline hotels increase by 88% to 1,736 at the end of Q3, as compared to 934 at the end of Q3 last year. The faster hotel network expansion will bring in revenue and operating profits when they are opened.

Another area where we have invested is in our IT talent pool. As Jenny explained in her presentation earlier, our technology capabilities allow us to drive both operational efficiencies and better customer experience.

As Jenny also mentioned earlier, we have recorded a higher share of advanced online central reservations and online payments. These changes benefit our financial performance. Our technology team is also working on a good number of other projects, which we will incorporate into our hotel operations. We will share these developments with you at a later time.

As also mentioned by Jenny earlier, we made a strategic deployment into the upscale hotel segment by expanding our team and securing a number of strategically located properties in Shanghai, Beijing, Hangzhou and Chengdu for our upscale brands. This has caused our payroll costs and preoperating expenses to increase as compared to last year. We will start to see benefits from the first of these upscale hotels as we start operations and generate revenue from the end of 2019 forward.

We believe all these investments will bring in additional revenue and drive margin expansion in the coming periods.

In this quarter, we also recorded a lower other operating income as compared to 2018. This is mainly due to a compensation received from landlords on termination of certain leased hotels totaling CNY 40 million in Q3 2018.

Moving on to the cash flow status on Slide 33. In Q3 2019, we recorded a net cash from operations of CNY 1 billion. After deducting the CapEx for maintenance and new developments of CNY 390 million, the free cash flow generated in Q3 was CNY 617 million. We generated approximately CNY 533 million from the sales of our investments. We used this process to repay approximately CNY 605 million of our offshore syndication loan. At the end of Q3, our cash and cash equivalents and restricted cash balance was approximately CNY 4.5 billion.

Please now turn to Slide 34 on how we plan to fund our Deutsche Hospitality acquisition. This will be an all-cash transaction. We will use a new syndication bank borrowing of EUR 440 million and the balance using our own cash.

The bank borrowings will be in euros, bearing an interest of 2.3% before tax. Post transactions, our net debt EBITDA multiple will reach 2.89x. This is well within the 4x limit of our borrowing covenants. However, we plan to use the cash generated from our operations as well as cash from our disposal of investments to pay down these bank borrowings in the coming years. This will help us to reduce our net debt-to-EBITDA multiple to below 2.5x.

Finally, on Slide 35, our guidance. We will maintain our full year revenue guidance of 10% to 12%. In 2020, we expect to open approximately 1,700 hotels. This 1,700 number represents an accelerated hotel opening target as compared to 2019.

With that, let's go to the Q&A.

[Operator]

[Operator Instructions] Your first question today comes from the line of Tian Hou from T.H. Capital.

[Tian Hou, analyst]

I have a few questions. One is that in China this year, one of the main theses is to go lower-tier cities. So I wonder if this thesis is applicable to Huazhu or not. That's number one. Number two, for the hotels we're planning to open next year. How many do you expect are going to be the self -- leased, self-leased and operated? So that is 1 question. And also, also related to this new hotel opens. We already have more than 500 -- 5,000 hotels, and as a relative item, so what are the challenges for the management you guys envision you're going to face? That's my question.

[Nee Chuan Teo, executive]

I think I will answer the second question and how many leased and operated hotels to be opened next year. And then I'll leave the other 2 questions to our Chairman, Qi Ji.

Next year-over-year, we plan to open approximately 1,700 hotels, of which 25 of which is leased and operated and the rest is manachised hotels.

[Qi Ji, executive]

[Foreign Language]

[Yu Ida, executive]

[Interpreted] I will translate the answers of Mr. Ji.

To your first question, in order to reach 10,000 hotels in the next 3 to 5 years, going down to the lower-tier city is inevitable, and it's -- we must go down first. The top management team and also the key members of development team has done 3x grassroot survey in the 3 cities -- in the 3 trips in the Northwestern part, Central part and East part of China, and the feedback is very positive. We are confident that our flagship brands like HanTing and JI Hotel and also some soft brand hotels who had very positive return of...

[Qi Ji, executive]

All of the soft brands.

[Yu Ida, executive]

[Interpreted] All of the soft brand hotels, we have very positive return in these low-tier cities because, first of all, lack of the good quality products in those cities. So there's -- second is that the rental cost is very low in these cities. So we could provide really good product with more spacious area in these cities. And we believe the upper midscale and upscale brands like Crystal Orange, like Joya and others will follow the later steps of the JI Hotel and HanTing after these 2 brands are fully established in those areas.

[Tian Hou, analyst]

[Foreign Language]

[Qi Ji, executive]

[Foreign Language]

[Yu Ida, executive]

[Interpreted] Okay. So there are twofolds of our answer to your questions. First of all, a hotel is actually a very labor-intensive work. And as we develop larger and larger, there's a -- we're going to manage, like, more than 10 -- sorry, 100,000, even 200,000 people. So therefore, we're going to improve our technology and reduce the reliance of the people by providing more cloud-based, for example, PMS, AI technology and other, et cetera. It is not only just a reduced reliance on people. It is also important to improve the efficiency of their work, help them make a better and savvy decision based on the daily work. That's 1 fold. The other fold is actually hotel is a human business, talking about the client service. And it's very important that we give enough caring and respect to our associates and create a very good working place for our employees.

So therefore, we're going to strengthen our development in coaching and career development and also all the -- sorry, the -- all the other kind of facilities to provide a better workplace. For example, the dormitory and also the uniform and all kinds of related service to our people.

[Operator]

Your next question comes from the line of Ken Chong from Jefferies.

[Ken Chong, analyst]

Congratulations on the strong results. I've got 2 questions. First is on the hotel opening guidance next year. I just want to get a sense on also the net hotel closure next year. And also, will we still emphasize on soft brands next year? And how many of them carry us -- are going to be from soft brands and if there are any margin difference from our hotel portfolio?

The second question is regarding the acquisition of Deutsche Hospitality. I understand most of the hotels are in the lease-and-operate model and they have a meaningfully lower EBITDA margin than our group. I'm just wondering how would this impact our margin next year when we consolidate. And also, when they have [ 36 ] hotels under the pipeline, how would that impact our preopening expense?

[Nee Chuan Teo, executive]

To answer your question, so your first question is on the guidance on the closure. We expect that the closure will be approximately the same amount -- the number of hotels in this year. I think you'd be in the range of approximately, like, 300 is number one. Number two is that of the 1,700 hotels that we are opening, approximately, like, 500 which will be in the soft brands. The [ take ] rate is actually lower and because there's -- we are in between the phase of developing and building the scale to study this kind of soft brand hotels. So we do not expect that the net profit contribution from this hotel will be significant in the coming year. And only until that we do our [ seventh ] scale, I would say that in the next few years, that we start to see a more meaningful profit contribution from the soft brand hotels.

Regarding your second question is for Deutsche Hospitality. Approximately, right, over the morning, 63, 63 -- 52% of which are actually leased hotels. So I would say that going forward, is that we put it our new opening guidance of 1,700 hotels, does not include the pipeline of Deutsche Hospitality yet. So we would need to actually -- after the closure, then we will actually see the -- how firmly we will incorporate the numbers in the next year's guidance.

And the second question is about the Deutsche Hospitality margin is that, yes, the Deutsche Hospitality have actually a lower EBITDA margin compared to Huazhu. But having said that, while we have been -- is that if you-- after the incorporate numbers is that our EBITDA margin will invariably reduce. But having said that, it is -- we are talking about an increasing EBITDA that we are talking of, and I would say that if you look at it from a separate perspective because we think that there is a significant potential and synergy. As mentioned by Jenny earlier, we will bring in the brand into China for fast expansion in China, and also that we would actually export some of our technical capabilities and loyalty programs to help them to improve their operating efficiencies in their home base.

[Operator]

Your next question comes from the line of Justin Kwok from Goldman Sachs.

[Justin Kwok, analyst]

Perhaps I got 2 questions for Mr. Qi. The first one is about -- well, very exciting to see you spend more time in the front line on the company. What would be a strategic focus for you in the coming 1 to 2 years? What exactly do you want to achieve as you take on more management duties on a day-to-day basis?

And the second thing, it's also very interesting to see you getting more brands on the upscale side with the DH acquisition. From the overall brand portfolio point of view, are you now quite happy with what you're having, which is already over 20 brands? Or do you think that in the next 1 to 2 years, you are still on the acquisition for more brands as a focus? Or are you actually more looking at the M&A angle for you to expand into overseas? And just 2 questions.

And then another question, probably more near term, as you give out a bit more guidance in 2020 on your opening, what would be the sense on the RevPAR side on the same-hotel basis?

[Foreign Language]

[Nee Chuan Teo, executive]

Let me now answer the question on our outlook on RevPAR. I will say that at the current stage is that we -- I would say into Q4 is that -- and we see that the trend is actually quite similar when compared to Q3, where we receive that there was still some softness in the occupancy due to the slow [ moving ] business, and we haven't seen a recovery yet. And I will say that, okay, there was a lot of talk about a government [ who stings ] as well as the toying of the Sino-U.S. kind of trade war. But having said that, as I mentioned in the earlier conference call, there is always a flip-flop between the response from the U.S., where recently, the Trump administration has also heightened up some of the conflicts again. So this may have a negative impact on the Chinese economy. But having said that, you expect that the RevPAR trend going forward to be approximately maybe flat, I would say, either flat or maybe -- may move down, slightly down, to the slightly negative kind of territory in the coming 12 months.

[Qi Ji, executive]

[Foreign Language]

[Yu Ida, executive]

[Interpreted] Okay. So as we all know, there are a lot of [ uncertainties ] rising in the past 1 year, no matter the U.S.-China relationship, also a lot of change in domestic U.S. and also what's happening in Hong Kong recently. That's 1 fold of the international geopolitics environment. And then the second is in the business segment of travel industry, VAT is very active as well as OTA and also there's an emergent entrant called OU. So there's a lot of things happening. And so that's created uncertainty of our business environment. Facing this situation, while I didn't spend enough time previously in the past years at the front line, but we realize, considering all the external factors, it is important for me to take the CEO role and enhance our management capacity at the top level together with Jenny. And meantime, we will also bring more young and loyal blood of Huazhu to create the environment and the opportunity for them to contribute to the next development of our company as well.

And coming back to your question. First of all, the focus of the next 2 years, we think right now, it's a kind of downturn. Overall, macro-wise, it is a challenging external environment. But usually, winter is a good time for the strong players. We think our capabilities in loyalty program management capability as well as the IT system will help us to enable more and more individual hotels help us to connect and build a more chain effect in this industry. So we think we could help the entire industry to go through this cycle better and create a more resilient industry. And also, we have a lot of employees, like 200,000, 300,000 employees who are -- live a very average life and who didn't have the chance to go to the college, and we feel very strong responsibility to our employees as well as our franchisees. So we would like to share the responsibility and pass with them together.

And talking about the acquisition of DH. First of all, we would -- I would like to emphasize that China will still be the focus of our growth because the development potential as well as the speed of China is unprecedented compared to other geographies in the world. And talking about DH, it's -- the management team is very professional and stabilized. Taking the CEO, Thomas Willms, for example. His 3 generation is the hoteliers, and he feels very strong pride as well as loyalty to this company. Our acquisition -- so our view, first of all, is that the upscale brands as well as luxury brand has a big potential of growth in China. And we would like to buy this international brand because we all observed that the international brand can -- usually is advantaged compared to local brands in the upscale segments. That's why we would like to bring more international brands into China in complementing our local brands in the upscale segment. As you -- referring back to my chart of the 4 waves, this acquisition has actually laid the ground for our preparation to enter into the upscale segment. Second is this acquisition size, we think, is a reasonable size. Not too big, not too small. We would like to be patient and take step-by-step approach to develop the overseas growth platform.

[Operator]

Your final question today comes from the line of Lina Yan from HSBC.

[Hau-Yee Yan, analyst]

I very much agree with the Chairman's comments that you have to continuously invest in the new business drivers for the business. So I still have a question regarding the DH acquisitions. Huazhu's share has enjoyed a premium valuation versus your peer hotel operators in China because investors like your asset-light model. And also, you have been focused on the limited service formats. When -- after you, like, acquired DH, how can you make sure, like, the DH asset is not a drag on your total return on invested capital. Specifically, when you talk about the plan to bring their upscale brands into China. I'm wondering what kind of positioning you are thinking about? Are they going to be like the full-service hotels normally for luxury brands? Or it's kind of like, it will be a similar type like a Joya, like a limited service version in China?

[Qi Ji, executive]

[Foreign Language]

[Yu Ida, executive]

[Interpreted] This question is about the brand of the DH. So first of all, there are 2 major brands under this DH platform, one is the Steigenberger. It's a legendary story brand in Germany from the 4-star, 5-star in the luxury segment. For example, there's the World Economic Forum, there's a -- leading conference venue is in the Steigenberger Hotel in Davos. There's another brand called Intercity. It's a 4-star hotel as well. It has a relationship with the Deutsche Railway. And our positioning for these 2 brands is the following: The Steigenberger will be a standard 5-star hotel, tailored for management contract, and it will be a full-service hotel rather than limited service. And typical clients will be government and real estate -- sorry, real [ estate ] developer. And Intercity is more like a 4-star hotel and for business occasions. It can be full-service and sometimes limited service. This brand will probably develop faster than the full-service Steigenberger. And in general, we think that China's development of these 2 brands will be fairly quick. And we anticipate the growth will -- sorry, the sites will exceed Germany in the midterm, probably.

[Min Zhang, executive]

Okay, operator.

[Operator]

Thank you. Ladies and gentlemen, that is all the time we have for questions today. Today's conference call has now concluded. Thank you for participating. You may now disconnect.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]