Huazhu Group Ltd

HKEX:1179

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Huazhu Group Q2 2018 Earnings Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, the 22nd of August 2018.

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

[Yu Ida, executive]

Thank you, Ivy. Good morning, everyone. Thanks to all of you for dialing in today, and welcome to our second 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 with you and the Q2 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 provision of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, all 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 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 Investor Relations section of Huazhu Group's website at ir.huazhu, H-U-A-Z-H-U, .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 that Huazhu continues to deliver a very strong second quarter result, both operationally and financially.

As shown on Page 2 of our presentation, our blended RevPAR continued to grow with a double-digit at 13%. As a result, our net revenues increased by 26%. With a better RevPAR and increasing scale, our operating income margin expanded by 4 percentage points from 21.9% a year ago to 26.6%. Accordingly, our adjusted EBITDA margin also reached 38.3%, up from 35.7% a year ago. Later, Teo will provide more financial data.

Let me walk you through our progress in our strategic focuses this year. The 3 focuses, as shown on Page 3, are the fast expansion of mid-scale hotels and the focus on continuous growth in same-hotel RevPAR and the innovation in upscale hotel segment.

Let's take a look at the progress in mid- and upscale hotel growth first. Page 4 shows the fast expansion in our hotel comps and room comps. At the end of Q2 this year, our mid- and upscale rooms inventory increased by 39% from a year ago, accounting for 34% in total rooms in operation. As shown on the right-hand side of the page, our pipeline for mid- and upscale rooms accounts for approximately 80% of the total number of rooms in the pipeline, up from 57% a year ago.

Our diversified mid- and upscale hotel brand portfolio with very profitable operating hotel models continued to attract franchisees into our hotel network. Today, I would like to highlight 2 brands, Mercure and Crystal Orange.

Let's take a look at Mercure first. We not only are expanding JI Hotel as our mid-scale flagship, we also successfully relaunched Mercure since we acquired master franchise rights of this brand early 2016. At the time, the brand only had 7 franchised and manachised hotels in operation and 2 in pipeline. As shown on Page 5, at the end of Q2, we had 28 Mercure hotels in operation and 44 in pipeline. We opened 5 Mercure hotels in August and we'll open 1 more before the end of August, giving a total hotel opening of 6 within this month alone.

In the first half of 2018, the same-hotel RevPAR for Mercure brand grew by 10.2%. In addition to the remarkable RevPAR performance, this brand has also been fully integrated into the Huazhu operating platform with the application of all the technologies and the procedures, which allow it to run with project level efficiency. For example, the staff-to-room ratio is currently at 0.2% -- 0.2, representing a 40% savings in headcount and personnel costs compared with its original model.

And on Page 6, we also demonstrated a very successful integration of Crystal Orange. As you may recall, we consolidated Crystal Orange back-offices operations within 100 days after the acquisition. Since the beginning of 2018, more efforts have been made to drive higher revenue growth and improved efficiency at the hotel level. At the same time, we accelerated the expansion of this brand.

The same-hotel RevPAR grew by 8.7% in the first half of 2018, faster than 7.7% in the comparable period last year. The hotel development also accelerated. At the end of Q2 2018, we had 182 Crystal Orange hotels in operation, an increase of 44 hotels from a year ago. Meanwhile, the number of hotels in the pipeline also grew from 65 a year ago to 113 by the end of Q2 this year. Cost-wise, staff-to-room ratio is reduced from 0.26 to 0.22.

Our sizable loyalty member base and a strong centralized booking boosted Crystal Orange's direct sales by 10 percentage points from 62% to 72%. Clearly, we still have further room for improvement going forward, but we are very excited about the first year results and are confident that we'll achieve more with Crystal Orange in the next few years.

In summary, on Page 7, we have a good progress in the mid-scale and upscale segment. As a result, the revenue contribution from our mid- and upscale hotels have continued to increase. In Q2 2018, the revenue from mid- and upscale hotels increased by 62% to RMB 1.2 billion, accounting for 49% of our total net revenues, up from 39% a year ago.

With that note, let's shift to the second strategic focus area of growing the same-hotel RevPAR. The result in this front is attributable to 3 factors. The first one is, of course, the company-level effort. And the second is the macroeconomy and the demand in this market. And the third one would be the industry-wide supply situation. Recently, we have received a lot of questions over the slowing down in consumer retail sales. And investors also would like to understand how will that impact the lodging industry. I will try to share our view and observation while reporting our Q2 RevPAR performance as they are related.

First of all, let's take a few minutes to look at the consumer retail sales growth and domestic travel expenditure growth from 2012 to 2017, as shown on Page 8. As you can see, the domestic travel expenditure growth has consistently been much faster than consumer retail sales in China. And in recent years, 2016 and 2017, the domestic travel expenditure growth significantly outperformed the consumer retail sales growth. Therefore, we are confident that the level of demand, as driven by the general economy, increased affluence in the society and the lifestyle change in this country, will continue to grow robustly and exceed the growth rate in retail sales. Therefore, we are not significantly concerned about some of the recent trends in the consumer retail sales growth fluctuations.

Turning to Page 9. Huazhu's same-hotel RevPAR performance has been growing in line with China domestic travel expenditure growth. Although the last year, comparable RevPAR base was very high at 8.3%, we continue to report a 7.9% same-hotel RevPAR growth in Q2 this year.

If we take a deep dive at the same-hotel RevPAR growth number, we shall take a look at Page 10. The main attributer is the ADR growth as we continue to attract customers who are willing to pay a little bit more and are looking for better-quality products. And for the first time, we have put our own occupancy performance shoulder to shoulder with the China industry average. As you can see, our occupancy has been consistently high with some seasonal fluctuations from 86% to 96% during the past few years. And the China hotels, as an industry, the occupancy has been fluctuating between 63% to 72%. So Huazhu, as a group, has outperformed the industry by 17 to 24 percentage points among the different quarters. I'd like to reiterate that this result has been achieved with the background that Huazhu has been growing very fast with gross hotel openings of 737 and 665 in 2016 and 2017, respectively. We are confident that we will be able to maintain a very strong occupancy trend as well as growing our ADR going forward.

Recently, we received some further questions on the RevPAR growth outlook and how will that impact Huazhu's financial performances. I want to share with you a little bit more of history to help you predict the future.

Please turn to Page 11. The top part of this chart shows the same-hotel RevPAR growth history for Huazhu from 2011 to 2017. As I mentioned earlier, there are 3 factors impacting the same-hotel RevPAR growth: number one, the company-level effort; number two, the macroeconomy and the demand situation; and number three, the industry-level supply situation. As you can see, before 2015, the general demand has actually been strong. However, Huazhu was really focusing on expanding our network and was not really particularly making efforts in terms of improving the same-hotel RevPAR growth. And the industry supply has been growing very fast for the economy hotels, which was the only segment we played a few years ago. So with that, you can see our RevPAR growth was not that great before 2015. However, since 2016, our effort has been shifted to better quality as well as more brand-building efforts. And that has significantly changed the trend of our same-hotel RevPAR growth. Therefore, there might be some fluctuations at the macro level. But as far as our strategy is steady and we continue to invest in the quality and brand-building, we believe we will outperform our competitors in terms of same-hotel RevPAR growth.

And at the second level, if you look at the second part of this page, we also showed our EBITDA margin from 2011 to 2017. Despite the fluctuation of our same-hotel RevPAR, the EBITDA margin actually has been quite consistently growing year-after-year, mainly because we have been adopting an asset-light model, and that helped us to surf through different economic environment as well as fluctuation in supply-demand. So going forward, we will continue our asset-light model with a continuous focus on product innovation that meets evolving needs of our consumers and franchise owners.

Let's move to the third area, which is our innovation and exploration in the upscale segment. I'm happy to report our progress in this segment on Page 12. Just a week ago, we announced our strategic acquisition of Blossom Hill Hotels and Resorts. Rooted in Lijiang and positioned as an upscale resort brand, Blossom Hill provides luxury boutique, hotel and resort with an authentic decor and a culture touch. We see this acquisition as a win-win combination for both Huazhu and Blossom Hill. With the addition of Blossom Hill to our hotel portfolio, we are able to offer more diversified choices to our over 100 million Huazhu Rewards members. At the same time, this acquisition will improve Blossom Hill's occupancy level, cost efficiency and will also accelerate their expansion. By integrating Blossom Hill with our existing hotel portfolio and providing more choices for our customers, we aim to further strengthen Huazhu's presence in the upscale hotel and resort segment.

With that, I'll turn the call over to Teo, who will walk you through our Q2 operational and financial results in more detail.

[Nee Chuan Teo, executive]

Thanks, Jenny. Good morning, everyone. Please turn to Page 14. At the end of Q2 2018, our total number of hotels in operation has reached 3,903. During the first half of 2018, we opened 274 hotels, which is the 5% under the mid- and upscale brands. During the same period, we closed 117 hotels.

Considering the acquisition of Blossom Hill and our robust pipeline, the full year target for gross hotel opening has been revised upwards from 650 to 700 to 680 to 730. As part of our quality control exercise, we will also tighten up our quality control by terminating certain franchisees who fail to maintain the quality standards through product upgrades and procurement from the authorized suppliers through Huazhu centralized procurement platform. In these connections, we will also revise up the full year target for hotel closure from 200 to 240.

Page 15 shows that our hotel pipeline has reached 839 at the end of Q2, a record-high number. Those hotels in the pipeline are expected to open during the period -- during the next 6 to 18 months. In these connections, we are confident of our hotel opening target for this year.

Turning to Page 16. In Q2, our group blended RevPAR grew by 13.2%. This was driven by an increase of ADR of 13.8% year-over-year, mainly due to the increasing mix of mid-scale hotels, RevPAR increase from better-quality economy hotels.

Let's move on to financial results on Page 17. Our net revenue grew by 25.9% year-over-year in Q2, hitting the high end of our guidance. Breaking down the revenue growth in Q2, net revenues from our leased and operated hotels improved by 23% year-over-year, and net revenues from our manachised and franchised hotels was up 37% year-over-year. In Q2, revenues from manachised and franchised hotels accounted for 24.3%, up from 22.5% a year ago. With our asset-light growth model, we expect to see the revenue contribution from manachised and franchised hotels will continue to grow moving forward.

As demonstrated on Page 18, our Q2 operating profits grew by 53.2%, and the operating margin expanded by 4.7 percentage points year-over-year to 26.6%, mainly driven by operating efficiency and partially offset by increase in preopening expenses. The hotel operating costs and other operating costs as a percentage of net revenue decreased by 2.3 percentage points year-over-year. This was mainly due to our improved blended RevPAR and better operating efficiencies from scales. The preopening expenses as a percentage of net revenue increased by 2.1 percentage points as there were more mid-scale hotels under constructions compared to last year. The SG&A expenses and other operating income as a percentage of net revenues decreased by 0.3 percentage points year-over-year. The other operating income in Q2 included a 3 -- CNY 35 million of compensation received from Crystal Orange selling shareholders as the final settlement on the sales and purchase transactions. Excluding this one-off compensation, the Q2 operating margin would have expanded by 3.3 percentage points instead of 4.7 percentage points. The higher SG&A expenses in Q2 was mainly due to increase in personnel costs relating to new hotel developments, design teams for the mid-scale hotels, the team for information technology and a quarterly accrual of a long-term profit bonus. In 2017, we accrued the entire sum of the long-term profit sharing bonus in Q4 2017.

Turning to Page 19. As mentioned in our Q1 conference call, a new accounting rule, applicable effective from January 1, 2018, require companies reporting under the U.S. GAAP to reflect the unrealized gain and losses from the fair value changes relating to the previously known as available-for-sales investment in the income statements. The unrealized losses in Q2 from equity securities was due to the lower share price at the end of Q2 compared to those at the end of Q1. These unrealized losses will have a significant impact on our GAAP net income going forward.

To better reflect our core financial performance, we excluded the impact of these fair value changes in presenting our adjusted EBITDA and net income. However, the adjusted EBITDA and net income on this page has not excluded the effect of dividends received from Accor totaling CNY 103 million and also a foreign exchange loss of CNY 131 million also -- which is also related to our investment in Accor.

The strong RevPAR growth and better operating efficiency drive our profitability. In Q2, our adjusted EBITDA increased by 35% year-over-year to CNY 965 million, while our adjusted EBITDA margin expanded by 2.6 percentage points from 35.7% to 38.3%. Our adjusted net income increased 39% year-over-year to CNY 558 million, while adjusted net income margin expanded from 20.1% to 22.1%. The adjustments mentioned on this page including -- include (sic) [ exclude ] the share-based compensation and unrealized losses from fair value changes of equity securities.

Moving on to cash flow status on Page 20. In Q2, our net cash from operation reached CNY 1.1 billion, while the CapEx for maintenance and new development totaled CNY 192 million. As a result, the free cash flow in Q2 was CNY 948 million. In this quarter, we used a portion of our excess cash to repay CNY 535 million of our U.S. dollar syndication loan. At the end of Q2, we had cash, cash equivalent and restricted cash of approximately CNY 4.5 billion.

Finally, our guidance on Page 21. For the third quarter in 2018, we expect our net revenue to grow 10.5% to 12.5%., and we also maintain our full year revenue growth rate ranging from 18% to 22%. As for the hotel openings, as mentioned earlier, we have revised upwards the full year gross hotel openings from 650 to 700 up to 680 to 730, after considering the acquisition of the Blossom Hill Hotels.

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

[Operator]

[Operator Instructions] Your first question comes from the line of Billy Ng from Bank of America Merrill Lynch.

[Billy Ng, analyst]

I have 2 questions. The first one, actually, is just a follow-up with Jenny's comments regarding the macro economy slowdown. And we saw that, as you described, like the company should be more defensive, the structure, and the company should be able to grow the EBITDA even during a downturn. But can you share what you see so far in terms of the most recent RevPAR data? And also, in terms of franchisees' interest in opening more hotel, has the recent slowdown in economy start to impact these 2 metrics a little bit?

[Min Zhang, executive]

Honestly speaking, travel industry is a lagging industry when there's any economic fluctuation, so we haven't really seen any meaningful change in terms of the demand. There was some fluctuation in the first 2 weeks of July in the travel demand, mainly because quite a few provinces actually started the children's summer holiday much later than the regular year. That had some impact for a couple of weeks. And other than that, the demand situation we are seeing continue to be strong.

[Billy Ng, analyst]

Okay. And just a follow-up on that is our Q3 revenue guidance of growing 10.5% to 12.5%, what kind of RevPAR assumption growth that we have factored in?

[Min Zhang, executive]

So Q3 numbers is not released to the public yet. We will address that when we close the quarter.

[Billy Ng, analyst]

Okay. And then a second question is regarding the Blossom Hill acquisition. Can you tell us a bit more in terms of the valuation that we pay and the company's P&L -- the target company P&L? And also, in terms of strategy, is there a possibility to bring this resort type of brands to the Tier 1 cities, like Shanghai and Beijing?

[Nee Chuan Teo, executive]

Billy, this is Teo. The purchase valuation for the entire stake of the company is approximately CNY 650 million. The base -- I mean, as we disclosed in our 6-K, we expect that with the full realizations of the [ high ramp-up ] as well as the revenue and cost [ rises ], we expect the EBITDA multiples would be approximately 13% -- 13x. Coming to the -- on whether we would actually explore the possibility of actually moving the brand into the Tier 1 cities, well, this is definitely a possibilities.

[Operator]

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

[Justin Kwok, analyst]

Maybe I have 2 broader questions, one on the strategic move to the upscale, high-end hotels and other one on the margins. On the first slide -- you made a slide talking about the progress on the Mercure, and also now you have another Blossom Hill acquisitions. I want to get a sense on this strategic move to the upscale. Are you prepared to do a lot more M&As in the space? Or are you prepared to grow your own brand like with the Joya, Grand Mercure, Mercure into a much larger pie? And in that line, are you prepared also to acquire more assets in order to kind of build some flagships to showcase your brand? That's the first part. The second question on the margins. I think, as Teo mentioned, it was -- excluding some of the one-off items, your operating margin is around 3-plus percentage point, up on a year-over-year basis. How are you seeing this trend in the second half and also to the next 2 to 3 years? Is it more a sustainable [ trait ]? Or is it -- are there other considerations that we should look for?

[Min Zhang, executive]

Okay. I will address your first question and ask Teo to address the second one. We see a clear trend of consumption upgrade in China. Therefore, we have been moving our portfolio and expanding in mid-scale and now into upscale segments. So we are really following our consumers in that growth strategy. In terms of acquired brands and growing our own brands, those 2 strategies are combined in our practice. We will typically acquire a brand, which is complementary to our existing portfolio and then use all the [ strength ] in development and in operational excellence and efficiency to strengthen that brand and grow it into a meaningful player in the market. We have done that for quite a few brands already. If you look back, we did that for ibis, ibis Styles. We talked about them in earlier quarters. We successfully did that for Mercure. We also achieved very good results with Crystal Orange. So we will repeat that practice for Blossom Hill, which today is still very small, but we see a lot of potential in this brand. At the same time, you can see our homegrown brands are also doing very well. HanTing continue to expand with very strong same-hotel RevPAR growth. JI Hotel, phenomenal growth, together also with a good RevPAR performance. Our new debuts like Manxin and also received very good review from the consumers. CitiGo was really a blast, our new innovations in urban hotels. So we have actually been very successful in launch, both in our homegrown brands as well as expanding the acquired brands. We believe we are becoming the house of brands in the hotel industry in China.

[Nee Chuan Teo, executive]

Justin, let me address the second question on margin. Like in the previous call, we have been mentioning that we -- given our asset-light model and with the increasing scale and our centralized operating platform, we will continue to see some improvement in our margin expansion, so you would expect that 1 to 1.5 percentage point increase in margin going forward as well. Of course, if the RevPAR perform much better, then you add more, a couple percentage points to margin, yes.

[Operator]

Your next question comes from the line of Tallan Zhou from Deutsche Bank.

[Tallan Zhou, analyst]

I have 2 questions. First question, I hear that July, the school vacation has been delayed for 1 week. So how does that actually impact your RevPAR growth? Second question, in terms of the guidance, is it possible for us to break down a little bit, for example, how much will be contributed by the new hotel openings and how much will be from the RevPAR growth?

[Nee Chuan Teo, executive]

Tallan, let me answer your questions. I think because that the -- starting from -- I reverse that, we have not disclosed our data, our monthly RevPAR, as to what the impact is. But what we have been seeing is that during the first 2 weeks of July, as mentioned by Jenny, there was some delayed starting of the holiday in some of the province in China. As a result, the RevPAR growth, I will say that was a bit slower at the beginning of 2 weeks. But in the second half of July and continuous into August, we see that the RevPAR has actually increased very strongly, coming back to its more normal level. So we do not -- we are not disclosing the RevPAR numbers until we close our books in September.

[Tallan Zhou, analyst]

Okay. The second question is about your guidance. Any chance you can break down a little bit, for example, how much will be contributed by the new hotels?

[Nee Chuan Teo, executive]

We have quite a bit of new hotel openings in Q3 and Q4, and -- but these hotels, they are mainly in the ramp up period, so the impact are not expected to be significant.

[Operator]

Your next question comes from the line of Juan Lin from 86Research.

[Juan Lin, analyst]

My first question is the plan of hotel closure. You mentioned the reason you are terminating the franchisees is related to quality standards and procurement process. Could you please elaborate this issue? Are you expecting more hotel shutdowns due to the similar issue? And are there any costs and expenses associated with this shutdown process? Second question is related to the acquisition of Blossom Hill. Since the acquisition of Blossom Hill is quite different from your existing hotel portfolio, I wonder that whether it means that we are shifting or expanding our focus into the holiday hotel and resort sector? What type of difficulties and synergies do you think we will have in operating Blossom Hill in the future?

[Min Zhang, executive]

In terms of quality improvements, of course, we have a clear quality standard for each brand. If you look at the closure, the closure are mainly focused on a few brands. The first one is HanTing, which is mainly due to when the franchise agreement expires, we generally require the franchisee to invest into renovation of their hotels. And in the case where the franchisees refuse to do so, we will not continue to renew their contract. So that has resulted in some number of closure for HanTing. And the closure for Starway, Elan and Hi Inn are mainly due to our entry quality control in the past few years hasn't been as strict as we are today. Therefore, as we raised the bar, some of the franchisees couldn't keep up with the new standards. And typically, if after a friendly discussion, we agreed in between the 2 parties to remove [ flag ] from their properties. So those are the main closure due to quality issues. And in terms of Blossom Hill, number one, we clearly see a very fast-growing demand for resorts and holiday facilities for the Chinese consumers. Blossom Hill definitely has been a very well-established brand in that regard. At the same time, we don't think a brand should be viewed as a wholly location-based brand. That means a brand that's starting with a resorts product can also open their urban version. And urban-started brands can also open their resort version. So we don't really view Blossom Hill going forward as a pure resort brand, and we are also going to use some of our other brands to enter into the resort market. As you rightly pointed out, the operation as well as sales and marketing of the resort property could present a different demand on the capabilities going forward. We are working on that, and we believe we'll gradually become a leader and expert in that domain.

[Operator]

[Operator Instructions] Your next question comes from the line of Carlton Lai from Daiwa.

[Carlton Lai, analyst]

I think the first question regarding the staff ratio between mid-, upscale hotels and economy hotels, I noticed that the Mercure brand is now 20 staff per 100 rooms which -- I think to me, that looks pretty low for a mid-scale hotel brand, and I think it's much lower than the Mercure hotels of -- in other countries. So just wondering what difference between the staff ratio between your higher-end hotels and your economy hotels are and how do you maintain the level of quality despite a fewer staff. And my second question is regarding on your debt levels. If I'm not mistaken, your FCF, your free cash flow in the second quarter of '18 is a record high for a quarterly basis. So can we expect faster paydown of debt going forward? And just lastly, I understand that, Jenny, you're part of the board of AccorHotels. I just want to see if there's anything specific that we're trying to achieve or -- in terms of cooperation with AccorHotels Group in the future.

[Min Zhang, executive]

Let me address the staff-to-room ratio first. As we discussed with different analysts in the past, in the core of Huazhu, we are a very technology-driven company. So in our operation in the hotel, we have adopted very advanced technology, including things like automatic check-in, check-out machines and mobile-based system to facilitate the room cleaning and the maintenance, so we also have our own proprietary CRM, PMS systems. And so we manage our operation, both frontline and the back-office, somewhat differently from the traditional operators to achieve a much higher level of efficiency. So in summary, as a fact, the secret recipe, I would say, is our continuous effort and the investment into technology.

[Nee Chuan Teo, executive]

Carlton, this is Teo. To address your question on the debt level and the use of our excess cash, yes, I would say the majority, I would say, more -- almost all of our debt are actually offshore, it's actually in the more -- the syndication loan in U.S. dollar as well as the [ margin ] financing in euro [ dollar ]. And majority -- most of the cash are actually onshore. We have generated quite a bit of excess cash within China, and we are working with the authorities on a number of ways to get an approval so what that we can get some cash out. And if there's no other uses for the cash, then we would use some of the cash to pay down the debt.

[Carlton Lai, analyst]

And I think just last question on being on the -- being on the board of Accor. Are you expecting anything different going forward?

[Nee Chuan Teo, executive]

Sorry, can you repeat the question?

[Carlton Lai, analyst]

Yes, sure. I think Jenny is now on the board of AccorHotels Group. I just want to see if there's anything that we're looking for specifically or are there going to be anything different going forward in terms of cooperation with AccorHotels?

[Nee Chuan Teo, executive]

Cooperation with Accor. It means as you have been on the board of Accor, is there any changes in cooperation with Accor.

[Min Zhang, executive]

Our cooperation with Accor has always been stable and healthy. So as of today, there's a -- we are continuing working very well with Accor at many different fronts.

[Operator]

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

[Praveen Choudhary, analyst]

A couple of questions for me. First of all, the guidance of 10.5% to 12.5%, I see these numbers not being a good reflection in the future. So here in the outyear, basically, in Q2, you had a revenue growth of, let's say, 28%, but majority of the growth came from the F&M business, which is very profitable, which grew at 37%. My question is, would you be able to give us some guidance of your third quarter revenue growth in F&M business, please?

[Nee Chuan Teo, executive]

Okay. The disclosure, we do not issue a breakdown of the revenue from the franchised and manachised business as well as the leased and operated business. I would say that -- let me give you a little more color on our revenue guidance for Q3. Now Q3 has traditionally been our, I would say, strongest quarter. But having said that is that they are affected by the number of seasonality as well as festivals. To give some little more color is that during the first 2 weeks of July, as we mentioned earlier, is that there were some delays in commencement of the holiday in some of the provinces in China. That actually causes some of the very -- they actually resulted in a slower start for Q3. In addition is that at the end of September, I would say, the second half of September, we have moon cake festivals, which will actually have some impact on our RevPAR as well as our occupancy. But last year, comparing it in 2017, the moon cake festival actually fall during the October holiday, the first week of October holiday, which impact is partially offset by the October holiday. So actually considering the impact of this moon cake festival as well as the slower start in July, we actually set our revenue growth guidance at 10.5% to 12.5% in this quarter.

[Praveen Choudhary, analyst]

Understood. I'm going to drill down a little bit more, if you don't mind. And I know you can't answer this question. What we are trying to understand is that the room growth, because you've already given the guidance in terms of what will be the number of hotels in third quarter and fourth quarter, if you see that, the growth will itself be more than 10% just on number of rooms? And so the fact that you are saying that your revenue will be only 10% to 12%, it just implies a RevPAR growth of a very small number, which is what everybody is asking you. Considering that we understand the moon festival in July weakness, even then, do you see the -- and as Jenny mentioned, the demand is actually pretty robust, excluding these things. Do you expect the RevPAR growth to be above mid-single-digit? Because Q2 was so strong at 7.9%, if the demand is still strong, we should expect -- oh, by the way, this is like-for-like. The actual RevPAR is significantly higher because you are adding significant number of mid-scale units, as you explained. So this number just doesn't tally. I mean, I don't know how to explain this, but it doesn't make sense to have a very low reported RevPAR number based on your guidance or you are lowballing your guidance so that you can beat it in Q3. If that's the case, happy to hear that, too.

[Min Zhang, executive]

I think to tie up all the numbers, there's one part you need to keep in mind is our growth going forward will be mainly driven by the franchise and the management business. And their revenue contribution is typically only 1/10 of our leased hotels. So despite our room count growth will be more than 10%, but the revenue contribution from the manachised hotels are going to be smaller proportionally to the leased hotels. That mix change will have a very significant impact on the revenue growth number reported.

[Praveen Choudhary, analyst]

Exactly why I asked the first question of knowing about F&M growth, but I understand you can't answer that. My other question is related to the Blossom Hill. Assuming that -- you mentioned $50 million or so of EBITDA, may I know, is it related to the existing EBITDA? And what occupancy level was that $50 million EBITDA? Because if it is a lower occupancy, and as you ramp it up, maybe you can make more money out of that. Secondly, if the $50 million do come in fourth quarter, why didn't you raise your guidance a little bit, assuming that number should be embedded in the full year?

[Min Zhang, executive]

Let me address your question on Blossom Hill. Blossom Hill has been a very respected brand in the market. Across different markets, their RevPAR has been approximately RMB 400 to RMB 600, and that's quite comparable to the upscale hotels in those markets. And the occupancy level, because it's currently a pure resort play, the occupancy is not as high as the urban hotels we are running today. Nevertheless, we believe, after we connect them into our loyalty program, that we will have a meaningful boost to the occupancy level. As you can see from the performance of Crystal Orange, we had significant improvement in occupancy, especially the central reservation through such connection into the loyalty program. So we believe the improvement will also happen to Blossom Hill after we complete the integration.

[Praveen Choudhary, analyst]

The question also was about did you not try to increase the guidance for full year with the help of Blossom Hill a little bit or it's too small to matter?

[Min Zhang, executive]

Blossom Hill is very, very small. The room count is, I think, a few thousand...

[Yu Ida, executive]

Room count is 570.

[Min Zhang, executive]

Yes, it's only 570 rooms as of today. So I don't think it will have a material impact on our revenue guidance.

[Praveen Choudhary, analyst]

Got it. And then one last housekeeping question, if you may. What was the percentage of revenue, EBITDA and net income from Crystal Orange in Q2, please? I'm not sure if you already disclosed it.

[Nee Chuan Teo, executive]

It is approximately like 14%.

[Praveen Choudhary, analyst]

For all 3 lines?

[Nee Chuan Teo, executive]

Sorry. Yes, combined together, the Crystal Orange as a percentage of the total revenue.

[Operator]

Your next question comes from the line of Mingge Wu from CITIC Securities.

[Michael Wu, analyst]

I have a few questions here. First is, could you provide some update on HanTing 2.0 upgrading process? So how much of -- and how much of the economy hotel same-hotel RevPAR growth is contributed by the upgrading? And the second question is according to STR, industry-wise, the growth rate of supply has exceeded that of demand in June and July. But before Q2, in most cases, demand has outpaced the supply. And so can you shed some light on your understanding on supply and demand situation because the pipeline of Huazhu also reached a historical high?

[Nee Chuan Teo, executive]

Sorry, I did not hear you clearly. Can you repeat your first question again? You go from one question after the other.

[Michael Wu, analyst]

Okay. So the first question is, can you provide some update on HanTing 2.0 upgrading process? And how much of the Q2 economy hotel same-hotel RevPAR growth is contributed by the upgrading of HanTing 2.0?

[Nee Chuan Teo, executive]

Okay. Now the HanTing 2.0 upgrade, it is currently running at approximately 30% -- it's approximately 45%. So this quarter is actually the busiest quarter. There will be more upgrade catching up maybe in the Q4 of this year. And what we have been seeing is that more of the product upgrade for the HanTing as well as the quality drive is actually pushing up the RevPAR increase for both the existing hotel as well as upgraded hotels. So what we'll be seeing is that the overall HanTing growth has been -- the RevPAR growth is approximately like coming to 8%, which is very strong.

[Michael Wu, analyst]

And the second question is, can you shed some light on your understanding about the supply and demand situation? Because according to the STR Global data, the growth rate of supply has exceeded that of demand in June and July. But before, in most cases, demand has outpaced the supply.

[Nee Chuan Teo, executive]

I do not have access to those numbers that you currently have. But what we have been seeing is that there's actually a difference between economic hotels as well as the mid-scale hotel segment. One thing we have been seeing is that the brand concentration in the economy segment has been increasing. It is mainly due to the exit of the existing, particularly the single-brand, hotels in this segment. But on the other hand is that the supply for the mid-scale hotel has been increasing at a very fast pace. But having said is that we do see that there are market capacity for this market segment where currently -- the supply is currently actually slower than the demand. As a result, we have been seeing that -- in our mid-scale hotels, we have been seeing that the -- our RevPAR continues to increase at more than 7%.

[Operator]

Excuse me, presenters, please continue.

[Yu Ida, executive]

Sorry for those still in the queue, and due to the time limit, we have to conclude for today, and we are happy and open for those who want to communicate with Huazhu. And we look forward to update you in the next quarter. Thank you.

[Operator]

Ladies and gentlemen, this concludes our conference for today. Thank you for participating, you may now all disconnect.