Huazhu Group Ltd

HKEX:1179

Earnings Call Transcript 2021-Q2

[Operator]

Good day, and thank you for standing by. Welcome to the Huazhu Group Limited Q2 2021 Earnings Conference Call. [Operator Instructions] Please be advised that this conference is being recorded. [Operator Instructions]

I would like to hand the conference over to your speaker today, [ Jason ]. Please go ahead.

[Unknown Executive]

Thank you, Karina. Good morning, and good evening, everyone. Thanks for joining us today. Welcome to Huazhu Group's 2021 Second Quarter and Interim Earnings Conference Call. Joining us today is our Founder and CEO, Mr. Qi Ji; our President, Mr. Jin Hui; our Chief Digital Officer, Ms. Liu Xinxin; our CFO, Ms. Chen Hui; our Deputy CFO, Ms. Ye Fei and Mr. Li Dong. Following their prepared remarks, management will be available to answer your questions.

Before we continue, please note that the discussion today will 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, 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 SEC. Huazhu Group does not undertake any obligations to update any forward-looking statements except as required by applicable laws.

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 yesterday.

As a reminder, this conference call is being recorded. The webcast of this conference call as well as supplementary slide presentation is available on Huazhu Group's website at ir.huazhu.com.

With that, now I will turn the call over to Mr. Ji Qi. Mr. Ji, please.

[Qi Ji, executive]

Good morning, and good evening, everyone. Thank you for joining us today. I would like to give you an overview of our business. In the second quarter, our China RevPAR recovered to 102% of the same period of 2019, supported by strong leisure traveling demand in May but offset by a relatively weak RevPAR recovery in June due to COVID-19 resurgence in Guangdong Province and traffic control in Beijing.

However, unfortunately, the delta variant of COVID-19 was again detected in Nanjing since late July, with further spreading into many other provinces and cities. The delta variant prompted the Chinese government posed another round of strict traveling restrictions, which seriously affected our performance in August.

Our European business saw some positive trends with RevPAR recovering to 50% to 60% over 2019 level during the summer holidays. This is mainly due to the continued progress of vaccination and the restriction ease. However, we remain cautious on the future recovery of the European governments, especially the German government, are still carefully monitoring the situation regarding the delta variant and a potential impact from it.

Looking ahead, uncertainties brought by the pandemic may exist for a longer-than-expected time, and we expect to be well prepared to overcome any business turbulences in the near term. Nevertheless, in the long term, we have a high confidence in China's future economic growth and think the upward trend of the China lodging industry remains intact. Therefore, we will be implementing our strategies, such as further penetration of low-tier cities, speeding up of upper-mid scale and upscale segments, organizational upgrades and talent acquisition as well as concentrating on high-quality hotel expansion to support our sustainable growth.

With that, I will turn the call to Jin Hui to update our recent business developments. Thank you.

[Hui Jin, executive]

[Interpreted] Thank you, Ji Qi. As usual, I will discuss our recent business recovery trend in details. Please turn to Page 2. For the second quarter, our RevPAR recovery shows upward trends with RevPAR in April and in May recovered to 100% and 106%, respectively.

However, as mentioned by Ji Qi earlier, due to the COVID-19 resurgence in Guangdong and traffic control in Beijing since late May, our RevPAR recovery until June slowed down. If we exclude the impact from the Guangdong and Beijing, our RevPAR recovery for the remaining areas was on track in June.

Unfortunately, since last July, a new wave of delta variant of COVID-19 was detected again in Nanjing and spreading into many other cities in China. Post that, the government imposed another round of strict traveling restrictions, which negatively affected traveling demand and significantly affected our business as August was normally a peak season for traveling. Therefore, due to the impact from the delta variant as the historical high base as of August 23, our RevPAR only recovered to 46% of 2019 level.

However, we saw the recent wave of delta variant has been largely confront given the good prevention measures posed by the government. The newly confirmed case declined significantly from the peak.

Please turn to Page 3. For the hotel development, we achieved a record high number of new signings at 1,502 for the first half of this year, increased by nearly 50% year-over-year.

At the same time, our lower-tier cities penetration is further accelerating. Lower-tier cities proportion accounted over 50% for both our current hotel pipeline and the new signings.

Moreover, we have already penetrated into overall 1,000 cities as of June, including both hotels sale operation and pipeline, added 200 cities compared to the same period of last year.

However, please note that given the travel restrictions due to the delta variant of COVID-19, as we mentioned above, our recent new signings and construction progress were also negatively affected.

Please turn to Page 4. For our upper-middle hotel segment, we will use multi-brand strategy to further exploring the market opportunities. Our up middle hotel brand portfolio includes Crystal Orange, Intercity, Mercure, Manxin, Madison and Novotel.

As of June 2021, we have a total of 404 upper middle hotels in operation and 248 in pipeline. We are targeting to achieve over 1,000 upper middle hotels in operation and pipeline by the end of 2023.

On 9th of July, we announced a license agreement between Steigenberger and Porsche Design Group to establish a joint hotel brand. This is another breakthrough into the upscale and luxury hotel segment globally. Please turn to Page 5.

We are planning to open at least 8 hotels in next 10 years. Those hotels will be all located in prime area of international metropolitan.

Similar to other international hotel brands operation with luxury brands, our cooperation with Porsche Design brand will further enhance our Steigenberger's brand positioning and wellness globally. It would help us to catch more opportunities in upscale and luxury segments in the future.

Now please turn to Page 6. Along with our lower-tier cities penetration, our membership program synergies to lower-tier cities and ability of traffic generation to hotels are the most concerned parts that you may have. We are very happy to see that our CRS contribution in lower-tier cities achieved 256%, very close to the higher-tier cities and has demonstrated our ability to further to lower-tier markets.

We constant -- please turn to Page 7. We constantly emphasize on the data security matters, and it is the bottom line and highest priority for Huazhu. First of all, we have established the information securities committees and set up the information securities standards.

Secondly, our data are all saved locally. And lastly, we have received various certificate on data security. As shown in our slides, in the year of 2019, Huazhu became the first domestic hotel group which received ISO 27001 certificate. And in 2020, Huazhu became one of the global hotel groups, which received ISO 27701 certificate. Additionally, Huazhu has also obtained the PCI DSS, Payment Card Industry Data Security Standard certificate.

Please turn to Page 8. As we acquired Deutsche Hospitality, we launched 500 days digitalization plan for it. As of second quarter, all functions and systems set up is completed and are ready to use. We are now in the stage of massive rollout. We're targeting to roll out to 70% of DH hotels by the end of this year and 100% completion next year.

With that, now I will turn the call to Ms. Ye Fei to discuss our second quarter operational and financial performance.

[Fei Ye, executive]

Thank you, Jin Hui. Good morning, and good evening to everyone, wherever you are. Let's move on to our operational and financial review for the second quarter of 2021. As shown on Slide 10, our hotel network expanded by 15% in the second quarter to 692,000 rooms compared to the second quarter of last year of 599,000 rooms. Excluding DH, Legacy-Huazhu hotel network expanded by 16% year-on-year to roughly 668,000 rooms in the second quarter.

For our hotel turnover in the second quarter, our total turnover grew by 98% year-over-year to RMB 13 billion in the second quarter. It was mainly due to our continuous network expansion in China and the initial recovery of Deutsche Hospitality operation as well as the low base for both China and the European business last year.

Excluding DH, Legacy-Huazhu hotel net turnover grew 95% year-on-year to RMB 12.7 billion in the second quarter and recorded 45 percentage increase if compared with the second quarter 2019. The growth is mainly driven by the hotel network expansion under the asset-light model.

Turning to Page 11. Legacy-Huazhu's blended RevPAR for the second quarter grew 2% from 2019 to RMB 210 The ADR in the second quarter grew by 8% to RMB 255 compared to 2019. While the occupancy in the second quarter is still 5 percentage lower compared to 2019. It was mainly caused by the COVID-19 situation, especially the resurgence in Guangdong during and also the traffic control in Beijing in June.

Turning to Page 12. Our Legacy-DH business saw initial recovery in the second quarter since German government imposed a lockdown from last November. Thanks to the continued progress of vaccination and the restriction ease, our Legacy-DH blended RevPAR for the second quarter grew 26 percentage to EUR 20 compared to the second quarter of 2020. The occupancy improved by 6 percentage points compared to the last -- second quarter last year, while the ADR dropped by 6% to EUR 82.

Please see our financial results on Slide 13. Total net revenue grew by 84% year-on-year to RMB 3.6 billion in second quarter 2021. Excluding DH, Legacy-Huazhu recorded an 85-percentage year-on-year growth rate to RMB 3.4 billion. The revenue was slightly below our previous guidance. It was mainly due to the COVID-19 resurgence in Guangdong proppants and traffic control in Beijing, as mentioned before.

Excluding the impact from the above-mentioned areas, the revenue growth was actually in line with our previous guidance. Breaking down the revenue of the second quarter, leased and owned revenue increased by 85% year-on-year to RMB 2.3 billion. Excluding DH, the leased and owned revenue of Legacy-Huazhu grew by 84% year-on-year to RMB 2.1 billion.

Net revenue from manachised and franchised hotels grew by 89% to RMB 1.2 billion, mainly driven by the 89% year-over-year growth of Legacy-Huazhu. Due to the further expanding hotel network with asset-light module, manachised and franchised revenue contribution enlarged to 36 percentage in the second quarter compared to -- compared with the 35 percentage in the second quarter 2020 at the group level. For Legacy-Huazhu, the manachised and franchised model also expanded to 38 percentage in the second quarter of 2021 compared with 37 percentage a year ago.

Now let's move on to the cost and profitability section on Slide 14. In the second quarter 2021, the reported operating income turned positive to RMB 629 million compared to a loss of RMB 494 million last year and a loss of RMB 575 million a quarter ago, mainly due to the business recovery in both China and Europe. Excluding DH, the Legacy-Huazhu operation income in the second quarter 2021 was RMB 763 million compared to a loss of RMB 207 million last year and a loss of RMB 172 million a quarter ago.

The hotel operating costs and other operating costs for the second quarter of 2021 was RMB 2.8 billion, increased by 28% year-on-year. The cost increase was mainly driven by the Legacy-Huazhu, which recorded RMB 2.2 billion hotel operating costs, indicating a 29% year-on-year growth. The increase was mainly attributable to the higher rental cost of the new upscale hotels, higher hotel level personnel costs as we expand growing our hotel networks rapidly, and the higher D&A, depreciation and amortization costs, which were related to the upscale hotel openings and upgrading of existing hotels.

As we mentioned in the previous quarters, our future expansion of upscale hotels will mainly use asset-light model. Therefore, our preopening cost declined by 84% year-on-year and 20% Q-on-Q to only RMB 16 million in the second quarter of 2021.

Our SG&A in the second quarter 2021 increased by 49% year-on-year to RMB 553 million, mainly driven by the increase of Legacy-Huazhu. Excluding DH, the SG&A for Huazhu increased by 71% year-on-year to RMB 423 million. The increase was mainly attributable to the increase of selling and marketing expenses due to the revenue recovery, the increase of headcount for our BTG support penetration into lower-tier cities, the increase of personnel cost for upscale business unit and the increase of the IT investment as well.

Other operating income in the second quarter 2021 increased by 121 percentage to RMB 362 million, mainly due to the EUR 38 million subsidy received from the German government. This is related to the 2020 lockdown period.

Turning to Page 15. Our adjusted EBITDA income turned positive to RMB 1 billion compared to a loss of RMB 97 million a year ago. DH's EBITDA loss in the second quarter was RMB 73 million, narrowed from RMB 235 million last year, mainly due to the government subsidy. Excluding DH, Legacy-Huazhu recorded adjusted EBITDA income of 100 -- sorry, RMB 1.1 billion, grew by 709 percentage in the second quarter of 2020.

In the second quarter of 2021, we recorded adjusted net income of RMB 464 million compared to a loss of RMB 476 million a year ago. Excluding DH, Legacy-Huazhu recorded an adjusted net income of RMB 579 million compared with RMB 253 million loss in the second quarter of 2020. The non-GAAP pro forma adjustment mentioned in this page included unrealized gain or losses from fair value change of equities related to some of our investments.

Coming to the cash position. We further lowered net debt of RMB 4.4 billion by the end of the second quarter compared with RMB 5.2 billion by the end of the first quarter, and there's no risk of reaching the financial covenants of the USD 1 billion syndication loan. Our cash balance was RMB 6.2 billion, and the unutilized bank facilities was RMB 6.8 billion. This cash and bank facilities would allow us to further pay down Huazhu's bank debt in 2021 and also 2022's PPE and also will be used to weather any unforeseen circumstances.

Coming to DH's update on Page 18. The recovery is coming to the right direction, although the path is bumping. Vaccination commenced since December 2020 has been speeding up in the second quarter of 2021. Restrictions will ease, especially towards people who recovered from infection and people with either complete injection or negative test results. As of August 23, about 64% of German population have received at least one shot and 59% of the whole population was fully vaccinated.

DH's occupancy rises continuously from about 19% in Q1, 24% in Q2 and now is about 50% in the August summer time. The recovery ratio compared to 2019 is about 54% in July and 67% in August month-to-date. Meantime, DH is taking further actions to reduce costs and preserve cash, including negotiating for lease waivers, streaming line overhead at both hotel and headquarter levels. The impact of the extension of the lockdown will be also partially offset by the short-term worker allowance and also the special government subsidy, of which EUR 38 million subsidies have been successfully received and recorded in Q2 relating to the 2020 lockdown.

The company is still working towards more government subsidy, which would be related to the 2021 lockdown. The company's cash position is sufficient and still have another EUR 12 million credit line available.

Turning to Page 19 on guidance. Considering the impact of COVID-19 resurgence in Guangdong and traffic control in Beijing in late May and the impact of delta variant spreading from Nanjing to several cities in China recently, we lowered our Q3 and full year revenue guidance. For the third quarter of 2021, we expect net revenue growth to be in the range of 8% to 12% compared to the third quarter of 2020 and 4% to 8% if excluding DH.

To provide a more guidance, excluding the impact of COVID-19, I do expect net revenue growth will be in the range of 12% to 16% compared to pre-COVID-19 results in the third quarter of 2019, and the net revenue reduction will be in the range of 3% to 7% if excluding DH.

For the full year of 2021, we now expect the net revenue growth in the range of a 29% to 33% or to the range from 34% to 38%, excluding DH. To provide a more meaningful guidance, excluding the impact of COVID-19, Huazhu expect the net revenue growth will be in the range of 17% to 21% compared with pre-COVID-19 results of 2029 or to the range from 2% to 6% excluding DH.

Please note that our current revenue guidance is based on the expectation that the recent delta variant of COVID-19 resurgence can be well sustained by the beginning of September. However, given the future situation of pandemic is still uncertain and unpredictable, when we need to adjust our guidance accordingly. We also keep the gross opening target of 1,600 and 1,800 hotels unchanged, but the signing speed of the new pipeline and the construction of new hotels in the next few months will be affected as well.

With that, let's open up for Q&A.

[Operator]

[Operator Instructions] Your first question comes from the line of Tian Ho from TH Capital.

[Tian Hou, analyst]

Yes. I have 2 questions. And would you please give us some color on the member situation? How -- so in 2Q, how many members newly added? And what is your channel for member acquisition? So that is number one question. Number two, in your Q3 guidance, and what do you see in China in terms of traveling hotel demands as well as COVID? It seems like the COVID here and there always have us. So I just wonder how -- in this guidance, how much do you already see in your guidance? What's the base for your Q3 guidance, domestic guidance?

[Unknown Executive]

[Foreign Language] Okay. And let me just switch to the English. I think I can answer the first question. I will then turn to Mr. Jin Hui for the second question. In Q2, from the membership recruitment, the number was 6 million increased, okay? Anyway, I think that we continue the best practice to develop a new member -- to develop a member recruitment, such as something like the hotel based from the all service touching points. Adjusted to be transfer to the member and how to make sure something like the frequency, okay?

But I think that from the second wave, this is -- we encourage our team and developers like the B2B and the B2C from the local SLT and corporate SLTs. And number 3, this is the most important but something with Univision. This is -- well, we do a lot of partnership with B2B2C or B2B2B, such as just Alipay and WeChat and even like DD. We do this kind of partnership with many useful way to do the external -- I mean, the Huazhu membership recruitment. That's for my question for number one.

[Hui Jin, executive]

[Interpreted] For our Q3 revenue guidance, we have admit that the Chinese government had imposed a very strict traveling restrictions in prevention control measurements that really affected our business performance recently. For the Q3 guidance and full year guidance, our current estimate and expectation for the RevPAR recovery for the third quarter on the same hotel level, we are expecting the RevPAR in third quarter will be recovered to 70% to 75% of 2019 level and 90% to 95% of -- in fourth quarter of 2019 level.

Again, as I mentioned previously in my prepared remarks, our current forecast and revenue guidance are very much based on -- there will be no massive COVID-19 resurgence happen again in the remaining of this year. Thank you.

[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 about lower-tier cities. I just wanted to understand what are the challenges that you are facing in lower-tier cities? It seems like it's going very well based on the pipeline. But if you can talk about any challenges that you're facing in future?

And the second one relates to the other strategy, which is upscale strategy. I wanted to understand what portion of upscale hotel opening would be in lease and operating versus franchised and managed? The reason for asking this question is to understand how long will it take before you can have a good size of these hotels? And during that time, what kind of cost do you have to incur? I remember previously, you used to have very big preopening expenses. Should we worry about similar expenses going forward?

[Hui Jin, executive]

[Interpreted] Okay. So for the lower-tier cities, actually, the lower-tier cities penetration is progressing pretty well. But we have to say that we are still facing some of the challenges, especially for the local sales and also matching and meeting the local customers' demand. For these areas, we are continuously adjusting our strategies, especially on the sales team to improve this area for helping us to further penetrate.

In addition, we also try to building up localized employment and the staff team and also supporting our lower-tier cities penetration as well.

We will be doing quite a lot of organizational restructuring, especially for those lower-tier cities in different district and areas.

So for Huazhu, we divided the hotel segment into 4 segments, which including economic, middle scale, upper middle scale as well as the upscale. Within these 4 segments, we always think the most interesting parts as well as the attractive area as those upscale -- up and middle scale and below and include those economic, middle and upper middle scale. And for the upscale segment for China market, it's more like a consolidation story.

As you may know that the upscale segment hotel -- upscale hotel segment in China was run -- what was kind of a supplementary for the property developers as well as for the government. It's not a real market-driven investment many years ago. There's a lot of existing hotels in the market.

For Huazhu, we have been operating with Sunac through the joint venture, and we will do some incremental hotels in this area. But in the longer term, we were also trying to consolidate the market by leveraging our capabilities.

And for the developing model, we are -- we will no longer use the leased and own business model. We rather choose a franchise or hotel management contract, which is the asset line. In current stage, we are still exploring and learning and doing the research in upscale hotel segment rather than the timing that we are going to get some return from those investments. Thank you.

[Operator]

Our next question comes from the line of Lin Yong from Haitong International.

[Yong Lin, analyst]

My question was regarding the DH hotel. I was wondering to what extent you can increase the margin profile of DH hotel by the digitalization, as you just mentioned, the new entrant metrics would be helpful.

[Qi Ji, executive]

As question for the DH progress, okay? I think up to today, we just fulfilled the one global digital platform ready. And now this is for the -- we have already launched the massive [indiscernible] in the DH for all the hotels.

As we shared before, the one digital platform is not only focused on the business operation efficiency, but also just to do something like the loyalty and even the CIS contribution. So we hope that we can improve the CIS contribution from before, I think the [indiscernible] is now around 1% or 2%. We hope that we can achieve in the coming new year -- to achieve around 20%. This is the target, the business target.

On the other hand, we are not only just to focus for the CIS contribution, but also to give a serious attention to the global loyalty platform, such as the recruitment, the membership recruitment. And according to the current plan, we would like to officially launch the new global loyalty program. We call it -- this is a H World, will be released officially at the beginning of October. So that is a digital program, not only focused for the one point. We hope that we can very quickly deploy the one digital platform for the all hotels in DH. And then we can achieve the business value in the coming several years -- in the coming year by building the digital program, by the operational efficiency improvement program, by the CIS contribution and the global loyalty. That's all. Thank you.

[Fei Ye, executive]

This is Ye Fei. I just wanted to build on Ji Qi's point. I think you asked a very good question. And right now, I think it's still too early to tell you the margin improvement of digitalization because we are still in the first phase of setting up the infrastructure and preparing for the rollout. Right now, the company's focus is still sharpening the brand and reducing the loss of operations and then bringing the brand back to Asia. But your question is very important, and it's also our midterm target as well. I think putting into more digital equipments and also solutions can help strongly support the company's streaming line its organization.

Right now, we have a rough target that we probably need to reduce -- I mean optimize like 20% to 30% of the staff, both in the headquarter and also the operation level through the several years program. And I believe this will contribute at least several percentage points regarding the margin improvement.

[Operator]

Your next question comes from the line of Simon Cheung from Goldman Sachs.

[Simon Cheung, analyst]

I got 2 questions. I remember, in the first quarter, you mentioned something related to the cleanup of the hotel. In particular on Elan, some of the lower branded hotel. I wanted to get a sense about the update. And it's grateful to see that you maintained your growth guidance for the year, 1,600 to 1,800. I wanted to get a sense how is the trend looking like perhaps quarter-to-date in the third quarter and your competitive level of achieving that target? What sort of assumptions you have made in for -- in order to achieve that guidance? That's the first question.

The second one, if I use your forward guidance, the revenue guidance, excluding or not excluding DH. It seemingly like that you're expecting the revenue for DH would jump to around call it RMB 600 million in the fourth quarter compared to, I think, second quarter, you're running at about RMB 254 million. So doubling. I think that's basically all driven by RevPAR, supposedly. So at that level, would you expect your EBITDA to be breaking even for your DH operation individually?

[Hui Jin, executive]

[Interpreted] For Elan brand, as you may know, it was our soft brands, used to penetrating into the economic segment. But then you may also know that we have many other brands in this segment, including Ni Hao, Ni Inn. And we are using different products to further penetrate and enlarge our market share in this segment. And for Elan, for sure that we are continuously going to do quality control and eliminating those unqualified Elan on our operations as well as pipeline.

[Fei Ye, executive]

So Simon, I wanted to clarify your question regarding the DH. I think your first one is asking about the guidance for the fourth quarter of DH's revenue. Is that correct? And also, the second one is that you wanted to understand the development of DH in Europe.

[Simon Cheung, analyst]

Yes, yes, correct. Because I'm just using your full year guidance versus your third quarter guidance. Seemingly, you're baking in quite a bit of a step-up in terms of fourth quarter revenue expectations. So if that were to be achieved and would you be able to turn EBITDA breakeven by fourth quarter of this year? That's the really the question.

[Fei Ye, executive]

I think your -- first of all, I think the fourth quarter probably -- we are generally positive about DH improvement of occupancy, but we still be cautious about the recovery given there might be a fourth wave of delta variant on the way. So I think we -- based on our guidance, the revenue for the fourth quarter is certainly -- will be the highest among all the quarters. But however, it's still -- I think it's still not reach the breakeven point yet.

But having said that, the company is still working hard on striving for another government subsidy, which is related to the 2021 lockdown. That's regarding the DH. And on the development of DH brand, first of all, as we mentioned before, we're bringing DH's major brand back to China, particularly Steigenberger and also Steigenberger -- sorry, Porsche Design, et cetera, and also Intercity and also the MAXX brand as upscale brand as well. That's number one.

And in Europe, we are positive about the market consolidation in the lower-tier segment, especially the economy and mid-scale segments. And DH's brand is actually -- enjoy a pretty good market reputation, especially in terms of Intercity in Germany and Zleep in the northern part of Europe. So we are going to continue to grow these two brands, combining both lease model and also management franchise model in Europe.

And in the meantime, would also sharpen the top brands like the Steigenberger and the MAXX by further improving the the product design and also infrastructure facilities as well in order to establish the Steigenberger as a truly upscale brand in the European market and also trying to find the right expansion model across the globe.

[Operator]

Your next question comes from the line of [ Bruce Me ] from UBS.

[Unknown Analyst]

So I have 2 small questions. The first one is, as you previously mentioned, one of the challenges when penetrating into lower-tier cities is to meet different franchisees demand on brand. So may I ask currently for the hotels in pipeline and new signing in lower-tier cities, how much are from the core brands such as HanTing and Gee Hotel? And how much is a soft brand?

And my second question is that if we look at the [ SIM ] brand, so how is the take rate in lower-tier cities compared with Tier 1, Tier 2 cities?

[Hui Jin, executive]

[Interpreted] For our current lower-tier cities penetration, the currently from our new signings, Gee Hotel and HanTing brands are still the key brands for the penetration and accounts roughly 70% to 75% of the new signings. And some other brands such as Starway, Orange as well as Ni Hao are also progressing pretty well.

Sorry, can you please repeat your second question?

[Unknown Analyst]

Sure. So my second question is, if we look at the SIM brands, for example -- take Taiguli as example, so how is the take rate, for example, the franchise fees compared between lower-tier cities and Tier 1, Tier 2 cities. So I just want to understand in the margin comparison between the lower-tier cities and Tier 1 cities?

[Hui Jin, executive]

[Interpreted] Our take rate for HanTing and Gee Hotel brands in the lower-tier cities are very close to the higher-tier cities or at similar level, as you may see that our CRS contribution in the lower-tier city are very close to the higher-tier city. Therefore, at the percentage perspectives, the charge rate or the take rates are very similar to each other. Thank you.

[Operator]

I would like to hand the conference back to today's presenters for any closing remarks. Please continue.

[Unknown Executive]

Thank you, everyone, for taking your time with us today, and we look forward to connect with you again in upcoming quarters. Thank you, and goodbye.

[Operator]

This concludes today's conference call. 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.]