F-1/A 1 d482491df1a.htm AMENDMENT NO. 3 TO FORM F-1 AMENDMENT NO. 3 TO FORM F-1
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As filed with the Securities and Exchange Commission on March 26, 2018

Registration No. 333-223261

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 3

to

Form F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

GreenTree Hospitality Group Ltd.

(Exact name of Registrant as specified in its charter)

 

 

 

Cayman Islands   7011   Not Applicable

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

2451 Hongqiao Road, Changning District

Shanghai 200335

People’s Republic of China

+86-21-3617-4886

(Address and Telephone Number of Registrant’s Principal Executive Offices)

 

 

Law Debenture Corporate Services Inc.

801 2nd Avenue, Suite 403

New York, NY 10017, United States

+1-212-750-6474

(Name, address and telephone number of agent for service)

 

 

 

Chris K.H. Lin, Esq.  

Allen C. Wang, Esq.

Daniel Fertig, Esq.  

Zheng Wang, Esq.

Simpson Thacher & Bartlett LLP  

Latham & Watkins

35th Floor, ICBC Tower  

18th Floor, One Exchange Square

3 Garden Road  

8 Connaught Place, Central

Central, Hong Kong  

Hong Kong

+852-2514-7600  

+852-2912-2500

Approximate date of commencement of proposed sale to the public:

As soon as practicable after the effective date of this registration statement.

 

 

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

Emerging growth company  ☒

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act.  ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered(1)(2)

 

Amount to be

Registered(2)(3)

 

Proposed Maximum

Offering

Price per Share(3)

 

Proposed Maximum

Aggregate Offering

Price(3)

 

Amount of
Registration Fee(4)

Class A ordinary shares, par value US$0.50 per share

  11,730,000   US$18.00   US$211,140,000   US$26,287

 

 

(1) American depositary shares, or ADSs, evidenced by American depositary receipts issuable upon deposit of the Class A ordinary shares registered hereby will be registered under a separate registration statement on Form F-6, as amended (Registration No. 333-223659). Each ADS represents one (1) Class A ordinary share.
(2) Includes (a) Class A ordinary shares represented by ADSs that may be purchased by the underwriters pursuant to their option to purchase additional ADSs and (b) all Class A ordinary shares represented by ADSs initially offered and sold outside the United States that may be resold from time to time in the United States. Offers and sales of shares outside the United States are being made pursuant to Regulation S under the Securities Act of 1933, as amended, and are not covered by this Registration Statement.
(3) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act of 1933, as amended.
(4) Previously paid.

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the U.S. Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting any offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (subject to completion)

Issued                     , 2018

10,200,000 American Depositary Shares

 

LOGO

GreenTree Hospitality Group Ltd.

REPRESENTING 10,200,000 CLASS A ORDINARY SHARES

 

 

GreenTree Hospitality Group Ltd. is offering 10,200,000 American depositary shares, or ADSs. Each ADS represents one (1) Class A ordinary share, par value US$0.50 per share. This is our initial public offering and no public market currently exists for our ADSs or shares.

 

 

We are an “emerging growth company” under applicable U.S. federal securities laws and are eligible for reduced public company reporting requirements. Immediately prior to the completion of this offering, our outstanding share capital will consist of 56,589,300 Class A ordinary shares and 34,762,909 Class B ordinary shares, all of which will be owned by our parent company, GreenTree Inns Hotel Management Group, Inc., a Cayman Islands company, or GTI. Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to one (1) vote. Each Class B ordinary share is entitled to three (3) votes if such Class B ordinary share is owned by GTI, Mr. Alex S. Xu, our founder, chairman and chief executive officer, Mr. Alex S. Xu’s family trusts or his or the family trust’s designated transferees, and is convertible into one (1) Class A ordinary share at any time if such Class B ordinary share is owned by any other holder. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.

GTI will beneficially own 84.7% of our Class A ordinary shares and 100% of our Class B ordinary shares immediately after the completion of this offering and 94.0% of the aggregate voting power of our total issued and outstanding share capital immediately after the completion of this offering. The voting power of our company owned by GTI is indirectly owned by Mr. Alex S. Xu, our founder, chairman and chief executive officer, as he owns 83.9% of voting power of GTI, which entitles Mr. Xu to nominate or replace all directors of GTI, and determine how GTI exercises the voting power in our company. Following the completion of this offering and as long as GTI or Mr. Alex S. Xu owns at least 50% of the voting power of our company, we will be a “controlled company” as defined under the NYSE Listed Company Manual. We have no current intention to rely on the controlled company exemption.

 

 

Prior to this offering, there has been no public market for the ADSs or our shares. It is currently estimated that the initial public offering price per ADS will be between US$16.00 and US$18.00. We have applied to list our ADSs on the New York Stock Exchange under the symbol “GHG.”

 

 

Investing in the ADSs involves risks. See “Risk Factors” beginning on page 14.

 

 

PRICE US$             AN ADS

 

 

 

     Price to public      Underwriting
Discounts

and
Commissions(1)
     Proceeds
before
expense
to Company
 

Per ADS

   US$                   US$                   US$               

Total

   US$                   US$                   US$               

 

(1) For a description of compensation payable to the underwriters, see “Underwriting.”

We have granted the underwriters the right to purchase up to 1,530,000 additional ADSs to cover over-allotments within 30 days after the date of this prospectus.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved of these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the ADSs to purchasers on or about                 , 2018.

 

 

 

MORGAN STANLEY

  BofA Merrill Lynch   UBS INVESTMENT BANK

 

 

 

  ICBC International  

Prospectus dated                 , 2018.


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LOGO


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TABLE OF CONTENTS

 

Prospectus Summary

     1  

Risk Factors

     14  

Special Note Regarding Forward-Looking Statements

     51  

Use of Proceeds

     52  

Dividend Policy

     53  

Capitalization

     54  

Dilution

     55  

Exchange Rate Information

     57  

Enforcement of Civil Liabilities

     58  

Our History and Corporate Structure

     60  

Selected Consolidated Financial and Operating Data

     62  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     66  

Industry Overview

     96  

Business

     101  

Regulation

     125  

Management

     139  

Principal Shareholder

     146  

Related Party Transactions

     148  

Description of Share Capital

     151  

Description of American Depositary Shares

     161  

Shares Eligible for Future Sale

     171  

Taxation

     173  

Underwriting

     181  

Expenses Related to this Offering

     191  

Legal Matters

     192  

Experts

     193  

Where You Can Find More Information

     194  

Index to Consolidated Financial Statements

     F-1  

This prospectus contains estimates and information concerning our industry, including market position, market size, and growth rates of the markets in which we participate, that are based on industry publications and reports. This prospectus contains statistical data and estimates published by various sources. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to these estimates. We have not independently verified the accuracy or completeness of the data contained in these industry publications and reports. The industry in which we operate is subject to a high degree of uncertainty and risk due to variety of factors, including those described in the “Risk Factors” section. These and other factors could cause results to differ materially from those expressed in these publications and reports.

 

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No dealer, salesperson or other person is authorized to give any information or to represent as to anything not contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell, and we are seeking offers to buy, only the ADSs offered hereby, and only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or any sale of the ADSs.

Neither we nor the underwriters have done anything that would permit this offering or the possession or distribution of this prospectus or any filed free writing prospectus in any jurisdiction where other action for that purpose is required, other than in the U.S. persons outside the U.S. who come into possession of this prospectus or any free writing prospectus filed with the U.S. Securities and Exchange Commission, or SEC, must inform themselves about, and observe any restrictions relating to, the offering of the ADSs and the distribution of this prospectus or any filed free writing prospectus outside of the U.S.

Until                 , 2018 (the 25th day after the date of this prospectus), all dealers that buy, sell or trade ADSs, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained in greater detail elsewhere in this prospectus. This summary may not contain all of the information that you should consider before investing in our ADSs. You should carefully read the entire prospectus, including “Risk Factors” and the financial statements, before making an investment decision.

We are the leading pure play franchised hotel operator in China as franchised-and-managed hotels represent almost all of the hotels in our hotel network. In 2016, we were the fourth largest economy to mid-scale hotel group in China in terms of number of hotel rooms according to China Hospitality Association. As of December 31, 2017, we had the highest proportion of franchised-and-managed hotels among the top four economy to mid-scale hotel networks in China, with 98.9% of hotels in our network as of those dates being franchised-and-managed hotels. As of December 31, 2017, our hotel network comprised 2,289 hotels with 190,807 rooms in China, covering all four centrally-administrated municipalities and 263 cities throughout all 27 provinces and autonomous regions in China, as well as an additional 306 hotels with 23,157 rooms that were contracted for or under development. Out of those 306 hotels, 129 hotels were contracted for, and the remaining 177 hotels were under development and are expected to commence operation by June 2018.

We operate one of the fastest growing economy to mid-scale hotel networks in China, with over 13 years of proven results and experience. Furthermore, we achieved the 2,000-hotel milestone through organic growth. From December 31, 2012 to December 31, 2017, we grew from 792 to 2,289 hotels at a CAGR of 23.7% and from 70,934 rooms to 190,807 rooms at a CAGR of 21.9%. As a result of our strategic focus on building a dense network of hotels in the most affluent regions in China with high growth potential, 50.5% of our hotels were located in Shanghai Municipality, Jiangsu, Zhejiang and Anhui Provinces, or the Greater Yangtze River Delta region, while 12.8% of our hotels were located in Beijing/Tianjin/Hebei region as of December 31, 2017.

We sell a predominant proportion of our room nights through our strong direct sales channels comprising our website and mobile app. In 2015, 2016 and 2017, we sold approximately 97% of our room nights through our direct sales channels, while online travel agencies, or OTAs, only contributed approximately 3% of our room nights. Our strong direct sales channels, combined with a loyal customer base, have contributed to our financial success. Over the years, we have grown a strong base of loyal members at a CAGR of approximately 42% from approximately 1.8 million members as of December 31, 2010. As of December 31, 2017, we had over 820,000 corporate clients who were able to settle directly with us or our franchisees and enjoy a preferential room rate and approximately 21 million members who registered with us and enjoyed a range of different benefits, including discounts on room rates, priority in making hotel reservations. In 2015, 2016 and 2017, our corporate clients and loyal members booked 72.9%, 72.9% and 73.0%, respectively, of our room nights.

We have built a strong “GreenTree Inns” brand as a result of our long-standing dedication in the hospitality industry in China and consistent quality of our services, signature hotel designs, broad geographic coverage and convenient locations. We have positioned our brands to appeal to value- and quality-conscious business travelers and leisure travelers. Starting from our GreenTree Inns hotels in 2004, we have successfully rolled out a number of brands to establish a full product suite, which we believe enables us to capture a wide spectrum of market opportunities. Our current brand portfolio comprises (i) mid- to up-scale brands including GreenTree Eastern founded in 2012, and newly launched Gme, Gya and VX brands with an aggregate of nine hotels being contracted; (ii) mid-scale brands including GreenTree Inns founded in 2004 and GreenTree Alliance founded in 2008; and (iii) economy brands including Vatica founded in 2013 and Shell founded in 2016.

We have established a highly effective and scalable franchise management system that enables us to win franchisees and grow rapidly. This platform not only ensures quality service be consistently delivered to our guests, but also helps our franchisees integrate into our hotel network smoothly and quickly. Our strong and



 

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supportive franchise platform and disciplined return-driven model enable our franchisees to generate highly attractive investment returns, which we believe is both a strong attraction for prospective franchisees and a strong incentive for existing franchisees to open multiple hotels.

As a result of our pure play franchise business model, strong direct sales channels, loyal hotel guests and effective management and operational platform, we have consistently achieved highly attractive profitability, as evidenced by our Adjusted EBITDA of RMB323.1 million, RMB338.5 million and RMB440.8 million (US$67.8 million), Adjusted EBITDA margin of 50.9%, 52.3% and 56.6%, net income of RMB235.7 million, RMB265.8 million and RMB285.1 million (US$43.8 million), net margin of 37.1%, 41.0% and 36.6% and return on equity of 34.5%, 29.5% and 32.4% for 2015, 2016 and 2017, respectively. See “Summary Consolidated Financial and Operating Data — Non-GAAP Financial Data.” We have also been able to grow our network substantially and generate strong cash flow consistently since inception in 2004 with minimal debt and equity financing. In 2015, 2016 and 2017, we generated net operating cash inflow of RMB357.3 million, RMB443.6 million and RMB476.7 million (US$73.3 million) and did not have any outstanding indebtedness as of December 31, 2017.

Our Strengths

We have achieved a leading position in China’s economy to mid-scale hotel industry through our dedication in addressing the needs of our hotel guests and franchisees. We believe that we possess the following strengths which contribute to our success and differentiate us from our competitors:

 

    leading pure play franchise hotel operator in China with attractive returns;

 

    one of the largest hotel networks in China through rapid organic growth;

 

    97% of room nights sold through direct sales channels with loyal membership base;

 

    strong brand recognition with a diverse product suite;

 

    effective management and operational system with people-first philosophy; and

 

    guests and franchisees-focused and service-oriented culture with an experienced management team.

Our Strategies

Our goal is to become a leading economy to mid-scale hotel network globally for business and leisure travelers. We intend to achieve this goal by executing on the following strategies:

 

    enhance our leading position by expanding our hotel network;

 

    enhance profitability and performance of our hotels in operations;

 

    strengthen brand recognition and expand our membership base by leveraging our membership program;

 

    meet evolving market demand through brand portfolio mix diversification; and

 

    attract, retain and promote well-trained employees.

Our Challenges

We believe some of the major risks and uncertainties that may materially and adversely affect us include the following:

 

    our results of operations are subject to conditions typically affecting the hospitality industry;


 

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    we are subject to various risks inherent in the franchised-and-managed business model;

 

    we may not be able to renew our existing franchise agreements or renegotiate new franchise agreements when they expire;

 

    failure to comply with government regulations relating to the franchise, hospitality industry, construction, fire prevention, food hygiene, safety and environmental protection could materially and adversely affect our business and results of operations;

 

    the legal rights of our franchisees and us to use certain leased properties could be challenged by property owners or other third parties, which could prevent our franchisees or us from continuing to operate the affected hotels or increase the costs associated with operating these hotels;

 

    we may not be able to successfully attract new franchisees and compete for franchise agreements and, as a result, we may not be able to achieve our planned growth;

 

    the leases of our franchisees and us could be terminated early, we or our franchisees may not be able to renew the existing leases on commercially reasonable terms and the rents could increase substantially, which could materially and adversely affect our operations;

 

    our financial condition and results of operations may be materially affected if our strategy to diversify our brand portfolio and mix of hospitality offerings is not successfully implemented; and

 

    our results of operations may fluctuate significantly due to seasonality and other factors.

We also face other challenges, risks and uncertainties that may materially and adversely affect our business, financial condition, results of operations and prospects. You should consider the risks discussed in “Risk Factors” and elsewhere in this prospectus before investing in our ADSs.

Corporate Structure and History

We are a Cayman Islands holding company and conduct our operations in China through our PRC subsidiaries. GreenTree Inns Hotel Management Group, Inc., a company incorporated in Samoa, or GreenTree Samoa, was formed to be the holding company of all but two of our PRC subsidiaries that operate our hotels in the PRC. GreenTree Samoa also owns 100% of the equity interest in Pacific Hotel Investment, Inc. and GreenTree Suites Management Corp., which owns 100% of the equity interest in the other two of our PRC subsidiaries.

Following the completion of this offering and as long as GTI or Mr. Alex S. Xu owns at least 50% of the voting power of our company, we will be a “controlled company” as defined under the NYSE Listed Company Manual. We have no current intention to rely on the controlled company exemption.

The following diagram illustrates our ownership structure immediately before our initial public offering. It omits all our subsidiaries and joint ventures. See “Our History and Corporate Structure” for our corporate structure showing the material subsidiaries and joint ventures.

 

LOGO

 

Note:

(1)

GTI holds 56,589,300 Class A ordinary shares and 34,762,909 Class B ordinary shares in our company. GTI is entitled to cast 160,878,027 votes. Class A ordinary shares are entitled to one (1) vote per share and



 

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  holders of Class B ordinary shares are entitled to three (3) votes per share, in respect of matters requiring the votes of shareholders of our company. Holders of our Class A and Class B ordinary shares have the same rights to dividend and other distributions.

Immediately after the completion of this offering, 56,589,300 of our Class A ordinary shares and 34,762,909 of our Class B ordinary shares will be owned by GTI, our parent company. The following diagram illustrates our ownership structure immediately after the completion of this offering.

 

LOGO

 

Notes:

(1) GTI holds 56,589,300 Class A ordinary shares, 34,762,909 Class B ordinary shares and is entitled to cast 160,878,027 votes. Mr. Alex S. Xu is considered to beneficially own these shares and has power to direct these votes. See “Principal Shareholder.”
(2) In aggregate, the public shareholders hold 10,200,000 Class A ordinary shares and are entitled to cast an aggregate of 10,200,000 votes.

After the completion of this offering, GTI intends to register and distribute to each of its shareholders not more than 60% of the number of our shares that represent the percentage of such shareholder’s ownership in GTI as of the closing date of this offering. As a condition to receive our shares, GTI’s shareholders will be required to enter into lock-up agreements with us to agree, among others, not to offer, sell, contract to sell, pledge, grant any option to purchase, purchase any option or contract to sell, grant any right or warrant to purchase, lend, make any short sale, file a registration statement, or make any demand for or exercise any right to file a registration statement, under the Securities Act or otherwise dispose of any of our shares prior to the expiry of a six-month period following the date of this prospectus. The number of our shares subject to such lock-up agreements will be reduced by 25% at the end of the six month period following the date of this prospectus and each six month period thereafter through the two-year anniversary of the date of this prospectus.

Our Corporate Information

Our principal executive offices are located at 2451 Hongqiao Road, Changning District, Shanghai 200335, People’s Republic of China. Our telephone number at this address is +86-21-3617-4886. Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Investors should submit any inquiries to the address and telephone number of our principal executive offices set forth above.

Our corporate website is www.998.com. The information contained on our websites is not a part of this prospectus. Our agent for service of process in the United States is Law Debenture Corporate Services Inc., located at 801 2nd Avenue, Suite 403, New York, NY 10017.



 

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Implications of Being an Emerging Growth Company

As a company with less than US$1.07 billion in revenue for the last fiscal year, we qualify as an “emerging growth company” pursuant to the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. We will take advantage of the extended transition period. As a result of this election, our financial statements may not be comparable to other public companies that comply with the public company effective dates for these new or revised accounting standards.

We will remain an emerging growth company until the earliest of (i) the last day of our fiscal year during which we have total annual revenues of at least US$1.07 billion; (ii) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (iii) the date on which we have, during the previous three year period, issued more than US$1.07 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.

Conventions That Apply to This Prospectus

Unless we indicate otherwise, references in this prospectus to:

 

    “ADR” or “ADRs” are to the American depositary receipts, which, if issued, evidence our ADSs;

 

    “ADSs” are to our American depositary shares, each of which represents one (1) Class A ordinary share;

 

    “Adjusted EBITDA” are to Adjusted EBITDA as calculated and presented in the “Summary Consolidated Financial and Operating Data”, “Selected Consolidated Financial and Operating Data”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and elsewhere in this prospectus;

 

    “China” and the “PRC” are to the People’s Republic of China, excluding, for the purposes of this prospectus only, Taiwan, the Hong Kong Special Administrative Region and the Macao Special Administrative Region;

 

    “GreenTree Inns” brand are to hotels operated under the GreenTree Inns and GreenTree Inns Express brands;

 

    “leased-and-operated hotels” are to hotels that we lease or own the premises and operate;

 

    “RMB” or “Renminbi” are to the legal currency of China;

 

    “ramp up stage” are to hotels in operation that have been open for six or fewer months;

 

    “RevPAR” are to revenue per available room, which is calculated by multiplying our hotels’ average daily room rate, or ADR, by its occupancy rate;

 

    “shares” are to, collectively, our Class A ordinary shares and Class B ordinary shares, par value US$0.50 per share;

 

    “Tier 1 cities” are to the term used by the National Bureau of Statistics of China and refer to Beijing, Shanghai, Shenzhen and Guangzhou;


 

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    “Tier 2 cities” are to the 32 major cities, other than Tier 1 cities, as categorized by the National Bureau of Statistics of China, including provincial capitals, administrative capitals of autonomous regions, direct-controlled municipalities and other major cities designated as “municipalities with independent planning” by the State Council;

 

    “US$,” “U.S. dollars,” or “dollars” are to the legal currency of the United States;

 

    “U.S. GAAP” are to accounting principles generally accepted in the United States; and

 

    “we,” “us,” “our company” and “our” are to GreenTree Hospitality Group Ltd., our Cayman Islands holding company, and its subsidiaries, as the context requires.

Our reporting currency is the Renminbi. This prospectus also contains translations of certain foreign currency amounts into U.S. dollars for the convenience of the reader. Unless otherwise stated, all translations of Renminbi into U.S. dollars were made at RMB6.5063 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 29, 2017. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. On March 16, 2018, the noon buying rate for Renminbi was RMB6.3300 to US$1.00.

The number of our shares that will be outstanding after this offering is calculated based on 91,352,209 shares outstanding as of the date of this prospectus, and excludes:

 

    1,703,000 Class A ordinary shares issuable upon the exercise of options to purchase Class A ordinary shares that were outstanding as of the date of this prospectus; and

 

    an additional 7,297,000 Class A ordinary shares reserved for future issuance under our 2018 share incentive plan.

Except as otherwise indicated, all information in this prospectus assumes:

 

    no exercise by the underwriters of their option to purchase up to an additional 1,530,000 ADSs representing 1,530,000 Class A ordinary shares from us.


 

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THE OFFERING

 

ADSs Offered by Us

10,200,000 ADSs

 

Public Offering Price

We estimate that the initial public offering price will be between US$16.00 and US$18.00 per ADS.

 

ADSs Outstanding Immediately After This Offering

10,200,000 ADSs.

 

Shares Outstanding Immediately After This Offering

101,552,209 shares, comprising 66,789,300 Class A ordinary shares, and 34,762,909 Class B ordinary shares, excluding shares issuable upon the exercise of options outstanding under our 2018 share incentive plan as of the date of this prospectus.

 

Over-Allotment Option

We have granted to the underwriters an option, exercisable for 30 days from the date of this prospectus, to purchase up to an aggregate of 1,530,000 additional ADSs at the initial public offering price, less underwriting discounts and commissions, solely for the purpose of covering over-allotments.

 

The ADSs

Each ADS represents one (1) Class A ordinary share.

 

  The depositary will be the holder of the Class A ordinary shares underlying the ADSs and you will have the rights as provided in the deposit agreement among us, the depositary and holders and beneficial owners of ADSs from time to time.

 

  You may surrender your ADSs to the depositary to withdraw the Class A ordinary shares underlying your ADSs. The depositary will charge you a fee for such an exchange.

 

  We may amend or terminate the deposit agreement for any reason without your consent. Any amendment that imposes or increases fees or charges or which materially prejudices any substantial existing right you have as an ADS holder will not become effective as to outstanding ADSs until 30 days after notice of the amendment is given to ADS holders. If an amendment becomes effective, you will be bound by the deposit agreement as amended if you continue to hold your ADSs.

 

  To better understand the terms of the ADSs, you should carefully read the section in this prospectus entitled “Description of American Depositary Shares.” We also encourage you to read the deposit agreement, which is an exhibit to the registration statement that includes this prospectus.

 

Shares

Our shares will consist of Class A ordinary shares and Class B ordinary shares immediately prior to the completion of this offering.



 

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Holders of Class A ordinary shares and Class B ordinary shares have the same rights except for voting and conversion rights. Each Class A ordinary share is entitled to one vote; each Class B ordinary share is entitled to three (3) votes if such Class B ordinary share is owned by GTI, Mr. Alex S. Xu, our founder, chairman and chief executive officer, Mr. Alex S. Xu’s family trusts or his or the family trust’s designated transferees, and is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale of Class B ordinary shares by a holder thereof to any person or entity which is not an affiliate of such holder, such Class B ordinary shares shall be automatically and immediately converted into the same number of Class A ordinary shares. For a description of Class A ordinary shares and Class B ordinary shares, see “Description of Share Capital.”

 

Use of Proceeds

We estimate that we will receive net proceeds of approximately US$156.6 million from this offering, assuming an initial public offering price of US$17.00 per ADS, the mid-point of the estimated range of the initial public offering price set forth on the cover of this prospectus, after deducting estimated underwriter discounts, commissions and estimated offering expenses payable by us. We plan to use the net proceeds we will receive from this offering for general corporate purposes in line with our strategies, including for the organic expansion of our hotel chain and the improvement of existing hotel properties, potential acquisitions of domestic and overseas operators that will complement our operations and accelerate our expansion plan, and for working capital and other general corporate purposes. See “Use of Proceeds” for more information.

 

Risk Factors

See “Risk Factors” and other information included in this prospectus for a discussion of the risks relating to investing in our ADSs. You should carefully consider these risks before deciding to invest in our ADSs.

 

Directed ADS Program

At our request, the underwriters have reserved up to 5% of the ADSs being offered by this prospectus for sale to and purchase by our directors, officers, employees, business associates and related persons at the initial public offering price through a directed share program in accordance with applicable laws. The sales will be made by UBS Financial Services Inc., a selected dealer affiliated with UBS Securities LLC, an underwriter of this offering, through a directed share program. We do not know if these persons will choose to purchase all or a portion of these reserved ADSs, but any purchases they do make will reduce the number of ADSs available to the general public. Any reserved ADSs not so purchased will be offered by the underwriters to the general public on the same terms as the other ADSs.

 

Listing

We have applied to list our ADSs on the New York Stock Exchange.


 

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Proposed Trading Symbol

GHG

 

Depositary

Deutsche Bank Trust Company Americas

 

Lock-up

We and our sole shareholder, GTI, have agreed with the underwriters to certain lock-up restrictions in respect of our shares, ADSs, and/or any securities convertible into or exchangeable or exercisable for any of our shares or ADSs, during the period ending six months after the completion of this offering, subject to certain exceptions. See “Shares Eligible for Future Sale” and “Underwriting.”

 

  After the completion of this offering, GTI intends to register and distribute to each of its shareholders not more than 60% of the number of our shares that represent the percentage of such shareholder’s ownership in GTI as of the closing date of this offering. As a condition to receiving our shares, GTI’s Shareholders will be required to enter into lock-up agreements with us to agree, among others, not to offer, sell, contract to sell, pledge, grant any option to purchase, purchase any option or contract to sell, grant any right or warrant to purchase, lend, make any short sale, file a registration statement, or make any demand for or exercise any right to file a registration statement, under the Securities Act or otherwise dispose of any of our shares prior to the expiry of a six-month period following the date of this prospectus. The number of our shares subject to such lock-up agreements will be reduced by 25% at the end of the six month period following the date of this prospectus and each six month period thereafter through the two-year anniversary of the date of this prospectus.


 

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Summary Consolidated Financial and Operating Data

The following summary consolidated statements of comprehensive income data for the years ended December 31, 2015, 2016 and 2017 and the summary consolidated balance sheet data as of December 31, 2015, 2016 and 2017 have been derived from our audited consolidated financial statements included elsewhere in this prospectus.

Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP.

Our historical results are not necessarily indicative of results to be expected for any future period. The following summary consolidated financial data for the periods and as of the dates indicated are qualified by reference to and should be read in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” both of which are included elsewhere in this prospectus.

 

     Year ended December 31,  
     2015     2016     2017  
     RMB     RMB     RMB     US$  
     (in thousands)  

Summary Consolidated Statements of Comprehensive Income Data:

    

Revenues

        

Leased-and-operated hotels

     204,761       183,773       189,134       29,069  

Franchised-and-managed hotels

     397,987       421,577       535,632       82,325  

Membership fees

     31,972       42,439       53,365       8,202  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     634,720       647,789       778,131       119,596  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating costs and expenses

        

Hotel operating costs

     (264,335     (240,132     (233,646     (35,910

Selling and marketing expenses

     (24,643     (26,609     (45,032     (6,921

General and administrative expenses

     (64,308     (77,933     (121,657 )(1)      (18,698

Other operating expenses

     (14,757     (3,073     (5,629     (866
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     (368,043     (347,747     (405,964     (62,395

Other operating income

     21,095       12,222       15,284       2,349  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     287,772       312,264       387,451       59,550  

Interest income and other, net

     19,643       22,039       26,238       4,032  

Interest expense

     —         —         (1,443     (221

Gains from trading securities

     25,545       24,564       59,165       9,094  

Other income (expense), net

     —         1,322       1,191       183  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     332,960       360,189       472,602       72,638  

Income tax expense

     (80,077     (83,924     (186,651 )(2)      (28,688
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before share of loss in equity investees

     252,883       276,265       285,951       43,950  

Share of loss in equity investees, net of tax

     (17,213     (10,465     (900     (138
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     235,670       265,800       285,051       43,812  

Net loss attributable to noncontrolling interests

     123       173       349       54  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ordinary shareholders

     235,793       265,973       285,400       43,866  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes one-time share-based compensation expenses of RMB38.0 million (US$5.8 million) in 2017 for GTI’s shares granted to certain of our directors for their past services as directors.
(2) Includes withholding taxes of RMB67.7 million (US$10.4 million) incurred in connection with a cash dividend distributed by our subsidiaries incorporated in the PRC during the year ended December 31, 2017.


 

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The following table presents a summary of our consolidated balance sheet data as of December 31, 2015, 2016 and 2017:

 

     As of December 31,  
     2015      2016      2017  
     RMB      RMB      RMB      US$  
     (in thousands)  

Summary Consolidated Balance Sheet Data:

     

Cash and cash equivalents

     505,857        896,783        161,964        24,893  

Property and equipment, net

     141,394        110,436        96,669        14,858  

Intangible assets, net

     5,981        4,927        3,727        573  

Goodwill

     2,959        2,959        2,959        455  

Long-term investments

     81,158        35,497        122,509        18,829  

Total assets

     1,407,151        1,875,751        1,755,983        269,890  

Deferred revenue

     151,101        201,356        253,361        38,941  

Total liabilities

     629,947        848,827        1,023,378        157,291  

Total shareholders’ equity

     777,204        1,026,924        732,605        112,599  

Total liabilities and shareholders’ equity

     1,407,151        1,875,751        1,755,983        269,890  

The following tables present certain unaudited financial data and selected operating data as of and for the years ended December 31, 2015, 2016 and 2017:

 

     As of December 31,  
     2015      2016      2017  

Summary Operating Data:

        

Total hotels in operation

     1,651        1,964        2,289  

Franchised-and-managed hotels

     1,611        1,932        2,263  

Leased-and-operated hotels

     40        32        26  

Total hotel rooms in operation

     146,176        168,238        190,807  

Franchised-and-managed hotels

     141,434        164,207        187,505  

Leased-and-operated hotels

     4,742        4,031        3,302  

Number of cities

     210        234        263  

 

     Year Ended December 31,  
     2015     2016     2017  

Occupancy rate (as a percentage)(1)

      

Total hotels in operation

     77.8     80.4     82.6

Franchised-and-managed hotels

     78.3     80.9     82.9

Leased-and-operated hotels

     66.8     66.4     70.3

Average daily rate (in RMB)

      

Total hotels in operation

     152       153       157  

Franchised-and-managed hotels

     152       152       156  

Leased-and-operated hotels

     160       164       186  

RevPAR (in RMB)

      

Total hotels in operation

     118       123       130  

Franchised-and-managed hotels

     119       123       129  

Leased-and-operated hotels

     107       109       131  


 

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(1) Based on number of available rooms.

 

     Year Ended December 31,  
     2015      2016      2017  
     RMB      RMB      RMB      US$  
     (in thousands, except for percentage)  

Non-GAAP Financial Data

           

Adjusted EBITDA(1)

     323,117        338,470        440,800        67,751  

Adjusted EBITDA Margin(2)

     50.9%        52.3%        56.6%     

 

(1) We believe that Adjusted EBITDA, as we present it, is a useful financial metric to assess our operating and financial performance before the impact of investing and financing transactions, income taxes and certain non-core and non-recurring items in our financial statements.

The presentation of Adjusted EBITDA should not be construed as an indication that our future results will be unaffected by other charges and gains we consider to be outside the ordinary course of our business.

The use of Adjusted EBITDA has certain limitations because it does not reflect all items of income and expenses that affect our operations. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our operating and financial performance. Depreciation and amortization expense for various long-term assets, income tax and share-based compensation have been and will be incurred and are not reflected in the presentation of Adjusted EBITDA. Each of these items should also be considered in the overall evaluation of our results. Additionally, Adjusted EBITDA does not consider capital expenditures and other investing activities and should not be considered as a measure of our liquidity. We compensate for these limitations by providing the relevant disclosure of our depreciation and amortization, interest expense/income, gains/losses from trading securities, income tax expenses, share-based compensation, share of loss in equity investees and other relevant items both in our reconciliations to the corresponding U.S. GAAP financial measures and in our consolidated financial statements, all of which should be considered when evaluating our performance.

The term Adjusted EBITDA is not defined under U.S. GAAP, and Adjusted EBITDA is not a measure of net income, operating income, operating performance or liquidity presented in accordance with U.S. GAAP. When assessing our operating and financial performance, you should not consider this data in isolation or as a substitute for our net income, operating income or any other operating performance measure that is calculated in accordance with U.S. GAAP. In addition, our Adjusted EBITDA may not be comparable to Adjusted EBITDA or similarly titled measures utilized by other companies since such other companies may not calculate Adjusted EBITDA in the same manner as we do.



 

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A reconciliation of Adjusted EBITDA to net income, which is the most directly comparable U.S. GAAP measure, is provided below:

 

     Year Ended December 31,  
     2015      2016      2017  
     (RMB)      (RMB)      RMB      US$  
     (in thousands)  

Net income

     235,670        265,800        285,051        43,812  

Deduct:

           

Other operating income

     21,095        12,222        15,284        2,349  

Interest income and other, net

     19,643        22,039        26,238        4,032  

Gains from trading securities

     25,545        24,564        59,165        9,094  

Other income (expense), net

     —          1,322        1,191        183  

Add:

           

Other operating expenses

     14,757        3,073        5,629        866  

Income tax expense

     80,077        83,924        186,651        28,688  

Share of loss in equity investees, net of tax

     17,213        10,465        900        138  

Interest expense

     —          —          1,443        221  

Share-based compensation

     —          —          38,048        5,848  

Depreciation and amortization

     41,683        35,355        24,956        3,836  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA (Non-GAAP)

     323,117        338,470        440,800        67,751  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by our total revenues.


 

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RISK FACTORS

You should consider carefully all of the information in this prospectus, including the risks and uncertainties described below, before making an investment in our ADSs. Any of the following risks could have a material adverse effect on our business, financial condition and results of operations. In any such case, the market price of our ADSs could decline, and you may lose all or part of your investment.

Risks Related to Our Business

Our results of operations are subject to conditions typically affecting the hospitality industry.

Our results of operations are subject to conditions typically affecting the hospitality industry, including the following:

 

    changes in national, regional or local economic conditions;

 

    natural disasters or travelers’ fears of exposure to serious contagious diseases;

 

    changes in travel patterns;

 

    changes in governmental regulations that influence or determine wages, prices or construction costs;

 

    local market conditions such as an oversupply of, or a reduction in demand for, hotel rooms;

 

    our ability to secure desirable locations for our hotels;

 

    the attractiveness of our hotels to potential guests and competition from other hotels;

 

    changes in occupancy and room rates;

 

    increases in operating costs and expenses due to inflation and other factors;

 

    our ability to develop and maintain positive relations with current and potential franchisees; and

 

    the performance of managerial and other employees of our hotels.

Changes in any of these conditions could adversely affect our occupancy rates, average daily rates and RevPAR or otherwise adversely affect our business, results of operations and financial condition.

We are subject to various operational risks inherent in the franchised-and-managed business model.

Our success could be adversely affected by the performance of our franchised-and-managed hotels. As of December 31, 2017, we franchised-and-managed approximately 98.9% of our hotels, and we derived 62.7%, 65.0% and 68.8% of our revenues from those hotels in 2015, 2016 and 2017, respectively. We plan to increase the number of franchised-and-managed hotels in operation to increase our national presence in China. Our franchisees may not be able to develop hotel properties on a timely basis, which could adversely affect our growth strategy and may impact our ability to collect fees from them on a timely basis.

We oversee and manage the operations of our franchised-and-managed hotels pursuant to various franchise agreements. However, we are not able to control the actions of our franchisees. Under those franchise agreements, our franchisees are typically responsible for developing hotel properties on a timely basis, bearing the costs and expenses of developing and operating the hotels, including costs of renovating the hotels to our standards and recruiting and employing hotel staff. However, if our franchisees have difficulties in accessing capital or are reluctant to make investments for the management or renovation of the hotels, we may not able to force them to secure the required capital and the quality of our franchised-and-managed hotels’ operations may be thereby diminished.

We normally require our franchisees to secure relevant governmental approvals and permits for operating the hotels in our standard franchise agreements and require that our franchisees provide us with some basic

 

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approvals and permits, including business license, special industry license and fire prevention safety inspection certificates. However, some of our franchisees may not be able to obtain such approvals or permits in a timely manner, or at all. See “— Failure to comply with government regulations relating to the franchise, hospitality industry, construction, fire prevention, food hygiene, safety and environmental protection could materially and adversely affect our business and results of operations.”

As many factors affecting the operations of those hotels are beyond our control, we cannot assure you that the quality of the services in our franchised-and-managed hotels are consistent with our standards and requirements. Although we send for routine inspection purposes regional managers and members of our quality control team to franchised-and-managed hotels on a regular basis, we may not be able to identify problems in their operations and make responses on a timely basis. As a result, our image and reputation may suffer, which may have a material adverse effect on our business and results of operations.

In addition to quality standards, safety incidents such as fire accidents may occur at our franchised-and-managed hotels despite our supervision. Any such occurrence may result in substantial reputational harm to us and our brands. In addition, if such safety incidents occur at any of the franchised-and-managed hotels that do not possess the relevant licenses, permits or inspection certificate, there could be substantial negative publicity, thereby triggering large-scale government actions that could impact our entire hotel network, which in turn will have a material adverse impact on our business, results of operations and financial condition.

Although our proprietary information system can collect operational and financial data of each hotel, we may not be able to avoid fraud or manipulation of such data by some franchisees, which may adversely affect the ability to effectively respond to potential issues. In addition, many of our franchisees do not own the hotel land or the property but typically lease the property from landlords who are either a property owner or a sub-lessor. We cannot assure you that all landlords who lease the hotel property to our franchisees have good and marketable title, or have unencumbered rights to lease or sub-lease the property to our franchisees. If any third party such as the ultimate property owners or relevant governmental authorities successfully challenge the lease of our franchisees, or if our franchisees fail to renew the leases when they expire, or if the landlords early terminate the lease, or if the properties or lands owned or leased by our franchisees are demolished, acquired or otherwise reclaimed by the government, our franchisees may have to close their hotels and thus terminate the franchise agreements and as a result, our business and results of operations may be adversely affected. Moreover, the term of lease for some of the property of our franchisees is shorter than the typical term of our franchise agreements. We cannot assure you that upon expiration, these franchisees will be able to renew their leases in order to perform their franchise agreements with us.

We may not be able to renew our existing franchise agreements or renegotiate new franchise agreements when they expire.

We franchise hotels to third parties pursuant to franchise agreements. These franchise agreements may be renegotiated or may expire. The versions of franchise agreements we have used during recent years typically have an initial term of 15 to 20 years except for the franchise agreements with our GreenTree Alliance franchisees and Shell franchisees. We plan to renew our existing franchise agreements upon expiration or renegotiate with our franchisees for new franchise agreements. However, we may be unable to retain our franchisees on satisfactory terms, or at all. If a significant number of our existing franchise agreements expire and new franchisees do not cover those expired franchises, our revenue and profit may decrease in the future, and our results of operations could be materially and adversely affected.

As the hospitality industry in China is highly competitive, the terms of our franchise agreements are influenced by contract terms offered by our competitors. We cannot assure you that the terms of franchise agreements for new franchised-and-managed hotels entered into or renewed in the future will be as favorable as the terms under our existing franchise agreements. If such agreements cannot be renewed on satisfactory terms upon expiration, our results of operations could be materially and adversely affected.

 

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Failure to comply with government regulations relating to the franchise business model, hospitality industry, construction, fire prevention, food hygiene, safety and environmental protection could materially and adversely affect our business and results of operations.

Our business is subject to various compliance and operational requirements under PRC laws and regulations, which include public safety, construction, fire prevention, public area hygiene, health and sanitation and environmental protection, as well as requirements related to construction or decoration of hotel premises. The failure of any of our hotels to comply with applicable laws and regulations may incur substantial fines and penalties from the relevant PRC government authorities. Each hotel in our network must hold a basic business license and a special industry license issued by local government authorities and must conduct its hotel operations within the business scope of its business license. These hotels must also obtain various other licenses and permits. For example, if our hotels provide catering service, they are required to obtain a food operation permit. In addition, any project construction undertaken by our hotels may be subject to governmental approvals or filings requirements, and our failure to comply with the aforementioned requirements may subject us to fines or the suspension or even the cessation of operations, which could materially and adversely affect our business, financial condition and results of operations. In any event, we may not be able to obtain all permits, licenses, certificates and other approvals required by government regulations, which could negatively impact our business and significantly harm our reputation.

As of February 27, 2018, out of our 26 leased-and-operated hotels, eight and one have not obtained the fire prevention safety inspection certificates and the public area hygiene permits, respectively, two are applying to have their public area hygiene permits examined and verified, and two of our leased-and-operated hotels engaging in the catering service business as of February 27, 2018 were either in the process of renewing or applying for their food operation permits. Given the significant discretion local government authorities have in the examination of our application as well as other factors beyond our control, we may be unable to renew or obtain our food operation permits at all. In addition, we have only been provided with and reviewed the relevant governmental approvals and permits for the operation of 1,862 out of our 2,263 franchised-and-managed hotels in operation as of December 31, 2017, and have found that:

 

    approximately 1% of these hotels did not provide us with the business license;

 

    approximately 10% of these hotels did not provide us with the special industry license;

 

    approximately 16% of these hotels did not provide us with the fire prevention safety inspection certificate; and

 

    approximately 11% of these hotels did not provide us with the public hygiene license.

For our leased-and-operated hotels that have not obtained the necessary licenses, and to the extent that the franchisees who did not provide us with the licenses had not obtained the licenses prior to the commencement of their operations, the legal consequences will be as follows:

 

    Business license: fines, suspension of operation, warnings, orders to suspend or cease continuing operations, confiscations of illegal gains or fines, and even up to 15 days of detention;

 

    Special industry license: warnings or fines of up to RMB1,000, and even up to a 15-days detention. In addition, pursuant to various local regulations, hotels failing to obtain the special industry license may be subject to warnings, orders to suspend or cease continuing business operations, confiscations of illegal gains or fines.

 

    Fire prevention safety inspection certificate: (i) suspension of construction of projects, and/or use or operation of the business; and (ii) fines between RMB30,000 and RMB300,000;

 

    Public hygiene license: a range of administrative penalties depending on the seriousness of a hotel’s activities: (i) warnings; (ii) fines between RMB500 and RMB30,000; or (iii) suspension of operations for rectification, or revocation of public hygiene license; and

 

    Food operation permit: (i) confiscation of illegal gains, food illegally produced for sale and tools, facilities and raw materials used for illegal production; or (ii) fines between RMB50,000 and RMB100,000 if the value of food illegally produced is less than RMB10,000 or fines of 10 to 20 times of the value of food if such value is equal to or greater than RMB10,000.

 

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If any franchisee is subject to the foregoing legal consequences, whether fines or orders to suspend or even cease operations, due to its failure to obtain necessary licenses and permits or to comply with other requirements, our image and reputation may suffer, and such franchisee may defer making or refuse to make payments in breach of its franchise agreement with us. As we hold equity interests in certain of our franchisees, any regulatory non-compliance by such franchisees may also decrease the value of our investments. In either case, our business and results of operations may be adversely affected. Furthermore, as to certain hotels that are being converted from the leased-and-operated model to the franchised-and-managed model, if any franchisee refuses to return and uses any of our hotels’ permits in breach of their supplementary agreements with us, our company as the registered permit holder could be held liable for any regulatory non-compliance by our franchisees. See “— Our hotels being converted into franchised-and-managed hotels may not be able to obtain their own operational licenses or fail to pay us the rent materially and adversely affect our business and results of operations.”

In respect of our franchising business, we are subject to a comprehensive disclosure requirement when recruiting and managing our franchisees. In the past, we have not received penalties in relation to such requirements. However, our communication with our franchisees could be found in violation of these requirements in the future.

We are also required to file our sample franchise agreements and file annual reports with the provincial level counterpart of the PRC Ministry of Commerce for record-keeping purposes in connection with the execution, withdrawal and renewal of any amendment to franchise agreements in the preceding calendar year. After filing the initial information regarding the operations of our hotel franchise business, the information regarding the execution, withdrawal and renewal of any amendment to franchise agreements for the calendar year 2016 have not been filed with the government authorities. Accordingly, we could be subject to fines of up to an aggregate amount of RMB100,000 for each of our operating subsidiaries which fails to make the filing in a timely manner as required by applicable regulations.

We started to franchise our Shell brand from early 2016. However, we may not satisfy all the prerequisites for franchising our Shell brand under relevant PRC laws and regulations. If the competent government authorities establish that we have no adequate qualification to franchise our Shell brand, we could be subject to penalties including confiscation of relevant gain and fines between RMB100,000 and RMB500,000. We have filed with the competent government authorities to establish these qualifications.

Furthermore, holders of 70% of equity interest in Yibon Hotel Group Co., Ltd., or Yibon, an equity investee of ours, have the right to exchange their equity interest in Yibon into our shares in 2020. See “Description of Share Capital — History of Securities Issuances — Outstanding Right Exchangeable with our Shares.” If we are deemed to acquire control of Yibon after the exchange, Yibon will become one of our subsidiaries and we may bear the legal consequences if any of Yibon’s hotels are not in compliance with applicable PRC laws and regulations. Accordingly, any such non-compliance could adversely affect our results of operations and financial condition. If Yibon becomes one of our subsidiaries, we will also face challenges and related risks of integrating Yibon with the rest of our company. Following the exchange of the equity interests in Yibon, we will consolidate the results of operation of Yibon in our financial statements as a subsidiary. As a result, we will be exposed to the risks of Yibon’s business and financial results, which could negatively impact our results of operation and financial condition.

We may terminate franchise agreements earlier under certain circumstances, and we may have disputes with our franchisees which may materially and adversely affect our business and result of operations.

Our franchisees may terminate our franchise agreements in the event that, among others, the franchised-and-managed hotels’ performance is worse than they expect. Although they are not permitted to do so by our franchise agreements, the franchisees may still attempt to unilaterally terminate their franchise agreements. In such instances, we may have disputes with them, and it will be difficult for us to force them to continue the

 

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performance of our franchise agreements until they expire. If the franchise agreements are eventually terminated either based on a settlement between us and the franchisees or with a judgment or arbitral award which requires the franchisees to compensate us for our losses and costs, such compensation may not cover our losses which we have suffered as a result of the early termination, and we may no longer receive the franchise fees and related management fees from the termination. Furthermore, if our franchisees breach or terminate their franchise agreements with us before the hotel commences operation, we might not be able to grow our hotel network as planned.

Due to our rapid expansion in recent years, we have added a large number of new franchised-and-managed hotels into our hotel network, some of which may not be able to provide consistent and high quality service to meet our standards. To avoid potential damage to our brand name and to ensure the quality of services provided to our guests, we may terminate our franchise agreements with such franchisees. In addition, if any of our franchisees defaults or commits wrongdoing and fails to cure defaults or wrongdoings, we may also need to terminate our franchise agreements. Although our franchise agreements typically allow us to terminate the agreements under many circumstances, our franchisees may dispute our termination or our claim and in such cases we have to submit such disputes for the settlement by courts or arbitration. For example, as of January 31, 2018, we had 29 pending legal proceedings in connection with the franchised-and-managed hotels. Also, we have in the past closed and may close in the future certain franchised-and-managed hotels as a result of disputes with the franchisees for their failure to comply with our requirements on, among other things, the punctual payment of our franchise fees or management fees, the decoration or operation standard, use of our brand, maintenance of the hotel condition and appearance, the avoidance of competition between the franchisees, including keeping appropriate distances between the franchised-and-managed hotels. For example, in 2017, we terminated 65 franchised-and-managed hotels that did not comply with our brand and operating standards. If a significant number of our existing franchise agreements are terminated early, our revenue and profit may decrease in the future.

In case of a dispute with our franchisees, even if such disputes can be resolved in favor of us, the disputes could divert our management attention, affect our brand image, and incur cost for us. There could also be situations where the franchisee is not in a position to sufficiently compensate us for losses which we have suffered as a result of their defaults or wrongdoings. If we eventually terminate any franchisees, we will lose such franchisees and can no longer collect franchise fees and management fees from them. If new franchisees do not cover those terminated franchises, our results of operations and financial conditions could be materially and adversely affected.

Our hotels being converted into franchised-and-managed hotels may not be able to obtain their own operational licenses or fail to pay us the rent materially and adversely affect our business and results of operations.

During the past few years, we have sought to convert some hotels from the leased-and-operated model over to the franchised-and-managed model through selling relevant business assets and handed over the management of such hotels, in most of the cases pursuant to an asset, business and personnel transfer agreement, or Transfer Agreements, to certain individuals or entities that have subsequently entered into franchise agreements with us and have therefore become our new franchisees. According to the Transfer Agreements, such new franchisees shall take over and operate such hotels on their own account and shall take the risks and enjoy the benefit of operating such hotels from the completion of the transfer contemplated by such agreements. However, the Transfer Agreements typically allow our franchisees under such arrangements to continue to use the hotel’s permits that were previously obtained by us and remain in the name of our company for a transitional period. As of December 31, 2017, some of the abovementioned new franchisees were still using our relevant hotels’ permits. However, all but two of these franchisees have executed a supplementary agreement which requires them to stop using and return to us our hotels’ permits upon execution of the supplementary agreements. Such supplementary agreements also require the franchisees to indemnify us against all losses, costs or liabilities incurred by us for their defaults under such agreements. However, if any franchisees refuse to return and continue to use any of our

 

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hotels’ permits, our company could be held liable as the registered permit holder for any regulatory non-compliance on the part of our franchisees. As a result, any breach by our franchisees of relevant regulations could cause us to incur relevant legal liability under PRC law, which may materially affect our brand image and our results of operations. In addition, in such instances, because the relevant leases have not been transferred to our new franchisees, we continued to be the tenants of the relevant hotel premises and we remain liable to pay the rent to our landlords, and may not thereafter be fully compensated by the new franchisees. As a result, our result of operations and financial conditions may be materially and adversely affected by the default of such franchisees. Furthermore, such arrangement between us and the new franchisees could be deemed as a sublease, and our landlords may claim that our subleasing arrangement without our landlords’ consent constitutes a default. In such cases, we may be required by our landlords to terminate sublease arrangements and compensate their losses, if any, which may further increase our costs and risks. Moreover, we may not be able to enforce our rights against the franchisees under the supplementary agreements, which would hinder our ability to prevent the franchisees from using our hotel permits and negatively impact our business and our reputation.

Our leased-and-operated hotels are subject to a number of operational risks.

For hotels under the leased-and-operated model, a significant portion of operating costs, including rent, is fixed. Accordingly, a decrease in revenues could result in a disproportionately larger decrease in earnings because the operating costs and expenses are unlikely to decrease proportionately. For example, the period during both the New Year and Chinese Spring Festival holidays generally accounts for a smaller portion of our annual revenues than the other periods, but the expenses do not vary in proportion to changes in occupancy rates and revenues. Major construction work near our hotel may also have a negative impact on the occupancy rate. We need to continue to pay rent and salaries, make regular repairs, perform maintenance and renovations and invest in other capital improvements for our leased-and-operated hotels throughout the year to maintain their attractiveness. Therefore, our leased-and-operated hotels’ costs and expenses may remain constant or increase even if their revenues decline. The operation of each leased-and-operated hotel goes through the stages of development, ramp-up and mature operation. Our involvement in the development of such properties presents a number of risks, including construction delays or cost overruns, which may result in increased project costs or forgone revenue. During the development stage, significant pre-opening expenses will be incurred, and at the ramp-up stage, which is usually six months, when the occupancy rate increases gradually, revenues generated by these hotels may be insufficient to cover their operating costs, which are relatively fixed in nature. As a result, most newly opened leased-and-operated hotels may not achieve profitability until they reach mature operations. We also may be unable to recover development costs we incur for projects that are not completed. Any expansion of our leased-and-operated hotel portfolio would incur significant pre-opening expenses during the development stage and relatively low revenues during the ramp-up stage of such newly opened leased-and-operated hotels, which expenses may have a significant negative impact on our results of operations. Properties that we develop could become less attractive due to market saturation, oversupply or changes in market demand, with the result that we may not be able to recover development costs as we expect, or at all.

We also may acquire or develop owned-and-operated hotels on a limited, case-by-case basis to seize unusually attractive business opportunities. Any such owned-and-operated hotels will be subject to risks similar to those of our leased-and-operated hotels. Such owned-and-operated hotels will also be subject to depreciation in the value paid by us for the underlying hotel property, which usually is influenced by macroeconomic and local political and economic factors.

As of December 31, 2017, we were in the process of liquidating five of our PRC subsidiaries and branches which previously operated leased-and-operated hotels. In liquidating such subsidiaries and branches, we need to complete various deregistration procedures, which may be time consuming and therefore we cannot assure you that such subsidiaries and branches can be deregistered in a timely manner. In the future, we may need to liquidate more subsidiaries and branches which have ceased to operate leased-and-operated hotels.

 

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The legal rights of our franchisees and us to use certain leased properties could be challenged by property owners or other third parties, which could prevent our franchisees or us from operating the affected hotels or increase the costs associated with operating these hotels.

For all of our franchised-and-managed hotels and all but two of our leased-and-operated hotels, we and our franchisees do not hold property ownership with respect to the premises under which those hotels are operated. Instead, we and our franchisees rely on leases or contracted management arrangements with third parties who either own the properties or lease the properties from the ultimate property owner. As of December 31, 2017, four of the ultimate owners of the properties of our leased-and-operated hotels failed to provide us with the relevant title certificates. As to these four ultimate owners, if they have not obtained and provided such title certificates because the relevant properties were constructed by such ultimate owners without having obtained or in violation of a construction project planning permit, our lease of such properties may be challenged or even invalidated by a government authority or relevant dispute resolution institution. Meanwhile, the property title certificates for the premises on which approximately half of our leased-and-managed hotels are located have a different designated use from the actual usage of those properties, and our lease of such properties may be challenged by relevant government authorities and subject us to cessation of operations or fines in an amount of up to RMB30,000 for each property or approximately RMB390,000 in aggregate. If the property owners’ title and the legal rights of our franchisees and us to the leases of such properties are successfully challenged by a government authority or dispute resolution institution as mentioned above, the development or operations of our hotels on such properties could be adversely affected.

In addition, we and our franchisees are subject to the risks of potential disputes with property owners or our immediate lessors and to forced closure of hotels by the government. Such disputes and forced closures, whether resolved in the favor of our franchisees and us, may divert management attention of our franchisees and us, harm our reputation or otherwise disrupt and adversely affect our business.

Where immediate lessors are not the ultimate owners of hotel properties operated by our franchisees and us, in some instances, no consent was obtained from the owners to sublease the hotel properties to our franchisees or us. A property owner’s failure to duly obtain the title to the property or a sub-lessor’s failure to receive any necessary approvals from the ultimate owner or the primary lease holder, as applicable, could potentially invalidate the underlying lease or result in the renegotiation of such lease which may lead to less favorable terms. Some of the properties we or our franchisees lease from third parties were subject to mortgages at the time the leases were signed. In such circumstances and where consent to the lease was not obtained from the mortgage holder, the lease may not be binding on the transferee of the property if the mortgage holders foreclose on the mortgage and transfer the property, which could in turn materially and adversely affect the ability of our franchisees and us to operate the hotel facility located on such property. In the past, although our operations have not been disrupted simply due to the lack of title certificates or consent from the owners, such events could occur in the future.

We also sublease the property parts we do not use to third parties and in some instances where we have closed or converted our leased-and-operated hotels, we may also need to sublease the whole properties we leased for such hotels to third parties to save costs if our landlords do not agree to early terminate our lease. In some instances, no written consent was obtained from our landlords to sublease such property parts or the whole property to third parties. Our failure to receive any necessary approvals from our landlords could potentially invalidate the underlying lease or result in our default under such subleases, which may in turn affect our business. In addition, if our sub-lessees are not able to pay us rent in a timely manner or at all, we are obligated to pay the rent to our landlords on our own account. If we fail to pay such rent, we may be required by our landlords to terminate the sublease arrangements and compensate their losses, if any, which may adversely affect our result of operations and our financial condition.

 

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If we are unable to compete successfully, our business, financial condition and results of operations may be harmed.

The hospitality industry in China is highly competitive. Competition in the industry is primarily based on room rates, quality of accommodation, brand name recognition, convenience of location, geographic coverage, service quality, range of services and guest amenities. We compete primarily with other economy to mid-scale hotel brands as well as regional and local economy hotels. We also compete with three- and four-star hotels, as we offer rooms with standards comparable to many of those hotels while maintaining competitive pricing. Furthermore, we compete with other hotels for guests in each market segment in which we operate, as our typical business and leisure traveler guests may change their travel, spending and consumption patterns and choose to stay in hotels in different markets. New and existing competitors may offer competitive rates, greater convenience, services or amenities or superior facilities, which could attract guests away from our hotels, resulting in a decrease in occupancy and average daily rates for our hotels. In addition, competition among franchised hotels is intense in attracting potential franchisees and retaining existing franchisees. We believe that hotel operators choose hospitality franchisors based on primarily the value and quality of a franchisor’s brand, reputation and service and the extent to which affiliation with that franchisor may increase the franchisee’s hotel occupancy rates and profitability. Any of these factors may have an adverse effect on our competitive position, results of operations and financial condition.

We may not be able to successfully attract new franchisees and compete for franchise agreements and, as a result, we may not be able to achieve our planned growth.

Our growth strategy includes expanding through franchised-and-managed hotels by entering into franchise agreements with our franchisees. We believe that our ability to attract new franchisees and compete for franchise agreements with them depends primarily on our brand recognition and reputation, the results of our overall operations in general and the success of our current franchised-and-managed hotels. Other competitive factors for franchise agreements include marketing support, membership program, efficiency of our central reservation system, our ability to provide systems and support to assist franchisees to operate their hotels cost-effectively. The terms of any new franchise agreements that we obtain also depend on the terms that our competitors offer for those agreements. In addition, if the availability of suitable locations for new properties decreases, or governmental planning or other local regulations change, the supply of suitable properties for additional franchised-and-managed hotels could diminish. If the performance of our franchised-and-managed hotels is less successful than that of our competitors’ hotels or if we are unable to offer terms as favorable as those offered by our competitors, we may not be able to compete effectively for new franchise agreements and we may not be able to attract as many new franchisees as we expect. As a result, we may not be able to achieve our planned growth and our business and results of operations may be materially and adversely affected.

The leases of our franchisees and us could be terminated early, we and our franchisees may not be able to renew the existing leases on commercially reasonable terms and the rents paid by us or our franchisees could increase substantially, which could materially and adversely affect our operations.

The terms of leases for our franchised-and-managed hotels and leased-and-operated hotels typically provide, among other things, that the lease could be terminated under certain legal or factual conditions. If any such lease were terminated early, operations of the related hotel property may be interrupted or discontinued and costs may be incurred by us or our franchisees to relocate to another location. Furthermore, we may be liable to our lessors, guests, franchisees and other vendors and may be required to pay losses and damages due to our default under relevant contracts. As a result, our business, results of operations and financial condition could be materially and adversely affected.

Although we intend to coordinate with our franchisees to renew existing leases of our franchised-and-managed hotels, and to renew existing leases of certain of our leased-and-operated hotels, there can be no assurance that we and our franchisees will be able to renew such leases and maintain current hotel operations on

 

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satisfactory terms, or at all. In particular, we and our franchisees may experience increased rent payments and increased operating cost in connection with renegotiating leases. If we and our franchisees fail to maintain current hotel operations on satisfactory terms upon expiration of the leases, the respective operating costs of our company and our franchisees may increase, the ability of our franchisees to pay their franchise fees may decline, and overall profits generated from hotel operations may decrease. If we and our franchisees are unable to pass on increased costs to our guests through room rate increases, the operating margins and earnings of our company and our franchisees could decrease and our results of operations could be materially and adversely affected.

We may terminate our leases early for certain reasons and any failure by us to terminate a lease for cause may subject us to payment of liquidated damages.

Our leases typically allow us to terminate the lease early under limited circumstances, and in some instances, our leases contain a term which requires us to pay the contingent rent for our wrongful early termination of such agreements. In the past, we have early terminated some leases of hotel properties and closed our leased-and-operated hotels underlying such leased properties, and disputes arose between us and our landlords whereby we were demanded to pay the contingent rents and liquidated damages. If such disputes occur in the future, and resolved in favor of our landlords, we may need to pay losses and damages to the landlords and as a result, our business, results of operations and financial condition could be materially and adversely affected.

Our growth depends on our ability to increase revenues generated by our existing hotels.

While sales growth will depend in part on our plans for new hotel openings, deeper penetration into existing and new geographic markets and increased sales at our existing hotels will also affect our sales growth and will continue to be critical factors affecting our revenue and profit. Our ability to increase the revenues generated by our hotels depends in part on our ability to successfully implement our growth strategy and related initiatives. Our ability to penetrate further into the existing geographic markets where we already have a presence depends in part on our ability to successfully market ourselves and to maintain and increase sales to our existing members and attract more members to our membership program. We may not be able to achieve our targeted sales growth at our existing hotels, and sales at existing hotels could decrease. In addition, we may not be able to achieve our targeted level of expansion within existing and new geographic markets. The occurrence of any of such events may have a material adverse effect on our business, financial condition and results of operations.

Our growth depends on our ability to grow the number of hotels in operation.

Our growth depends on our ability to open and profitably operate new hotels under both franchised-and-managed model and leased-and-operated model. In 2015, 2016 and 2017, we opened 386, 401 and 424 new franchised-and-managed hotels. In each of 2015 and 2017, we opened one new leased-and-operated hotel. We opened no new leased-and-operated hotels in 2016. We plan to increase the number of our hotels in the future. We may not be successful in identifying and leasing or franchising additional hotel properties at desirable locations and on commercially reasonable terms or at all. In more developed cities, it may be difficult to increase the number of hotels because we or our competitors may already have operations in such cities. In less developed cities, demand for our hotels may not increase as rapidly as we expect. We also may incur substantial costs in connection with evaluating hotel properties and negotiating with property owners, including ones that we are subsequently unable to lease or franchise.

The growth in the number of hotels is subject to numerous risks, many of which are beyond our control. Among other risks, the following factors affect our ability to open and operate additional hotels profitably and achieve growth in the number of our hotels:

 

    the availability and cost of suitable hotel locations;

 

    the availability and cost of capital to fund construction or conversion;

 

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    cost-effective and timely construction of hotels (which construction can be delayed due to, among other reasons, labor and materials availability, labor disputes, local zoning and licensing matters, and weather conditions);

 

    the ability of our company and our franchisees to secure required governmental permits;

 

    the availability of qualified hotel management staff and other personnel;

 

    our ability to enhance our reservation, operational and service delivery systems to support additional franchisees in a timely and cost-effective manner;

 

    our ability to effectively and efficiently implement our development plan;

 

    our ability to introduce our brands into new markets, any failure of which may adversely impact potential property owners’ or franchisees’ acceptance of and confidence in us; and

 

    our ability to attract new qualified franchisees and to retain existing franchisees.

We may not be able to manage our expected growth, which could adversely affect our results of operations.

We have experienced substantial growth since our inception. We have increased the number of our total hotels in operation in China from eight as of December 31, 2005 to 2,289 as of December 31, 2017, and we intend to focus on developing additional franchised-and-managed hotels in different geographic locations in China and internationally, as well as growing through mergers, acquisitions and strategic alliances. This expansion has placed, and will continue to place, substantial demands on our managerial, operational, technological, financial and other resources. There can be no assurance that we will be able to effectively manage our growth. If our growth initiatives fail, and if we fail to integrate new alliances, merged entities or acquired targets into our network, our businesses and prospects may be materially and adversely affected.

Our planned expansion will also require us to maintain the consistency of our brands and the quality of our services to ensure that our brands do not suffer as a result of any deviations, whether actual or perceived. In order to manage and support our growth, we must improve our existing operational, administrative and technological systems and our financial and management controls, and recruit, train and retain qualified hotel managerial personnel as well as other administrative and sales and marketing personnel, particularly as we expand into new markets.

We cannot assure you that we will be able to effectively and efficiently manage the growth of our operations, recruit and retain qualified personnel and integrate new franchised-and-managed hotels into our operations, whether they are organically developed or strategically acquired. Any failure to effectively and efficiently manage our expansion may materially and adversely affect our ability to capitalize on new business opportunities, which in turn may have a material adverse effect on our business, financial condition and results of operations.

Acquisitions, financial investment or strategic investment may have an adverse effect on our ability to manage our business and harm our results of operations and financial condition.

If we are presented with appropriate opportunities, we may acquire or invest in businesses or assets. For example, we acquired 30% equity interest in Yibon Hotel Group Co., Ltd. and 50% equity interest in Steigenberger (Beijing) Hotel Management Co., Ltd. in 2017.

The existing and future acquisitions or investments may expose us to potential risks, including risks associated with unforeseen or hidden liabilities, risks that acquired or invested companies will not achieve anticipated performance levels, diversion of management attention and resources from our existing business, difficulty in integrating the acquired businesses with our existing operational infrastructure, and inability to generate sufficient revenues to offset the costs and expenses of acquisitions or investments. In addition,

 

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following completion of an acquisition or investment, our management and resources may be diverted from their core business activities due to the integration process, which diversion may harm the effective management of our business. Furthermore, it may not be possible to achieve the expected level of benefits after integration and the actual cost of delivering such benefits may exceed the anticipated cost. Any difficulties encountered in the acquisition or investment and integration process may have an adverse effect on our ability to manage our business and harm our results of operations and financial condition. If a financial or strategic investment is unsuccessful, then in addition to the diversion of management attention and resources from our existing business, we may lose the value of our investment, which could have a material adverse effect on our financial condition and results of operations.

Our expansion into new markets may present increased risks.

We plan to open new hotels in markets in China as well as internationally where we have little or no operating experience. Those markets may have different regulatory requirements, competitive conditions, consumer preferences and discretionary spending patterns as compared to our existing markets. As a result, any new hotels we open in those markets may be less successful than hotels in our existing markets. Guests and franchisees in any new market may not be familiar with our brands and we may need more time to build brand awareness in that market through greater investments in advertising and promotional activities than we anticipated. We may find it more difficult in new markets to hire, motivate and keep qualified employees who share our vision, passion and culture. Hotels operated in new markets also may have lower average sales or higher operating costs than hotels in existing markets. Sales at hotels operated in new markets may take longer than expected to ramp up and reach expected sales and profit levels, and may never do so, thereby affecting our overall profitability.

Our financial condition and results of operations may be materially affected if our strategy to diversify our brand portfolio and mix of hospitality offerings is not successfully implemented.

We intend to diversify our brand portfolio and mix of hospitality offerings with GreenTree Eastern, Gme, Gya, VX, Vatica and Shell branded hotels to cover market segments from economy to mid- to up-scale markets. We may not possess enough knowledge or experience in expanding into these new market segments and we may face more competition in such new market segments. In addition, the strategy to diversify our mix of hospitality offerings may increase the cash needs of our operations and may distract our management’s attention and energy. If such strategies are not successful, our business, financial condition and results of operations may be materially and adversely affected.

If we fail to maintain our relationships with our members and corporate account clients, our business and growth prospects could be materially and adversely affected.

Historically, we have derived a portion of our revenues from our members and from our cooperation arrangements with certain corporate account clients such as banks, airlines and other large companies. In 2015, 2016 and 2017, we sold approximately 97% of our room nights through our direct sales channels. We expect that these members and corporate account clients will contribute to the growth of our business in the near future.

We cannot assure you that our members will remain loyal patrons of our hotels and that our corporate account clients will agree to renew the relevant cooperation agreements upon their expiration, or enter into new agreements with us on substantially similar terms. Our negotiating position with corporate account clients also is limited given the competition in China’s hospitality industry. If we fail to enhance or maintain our relationships with our members, and the frequency of member stays at our hotels declines as a result, or if our corporate account clients decline to renew their cooperation agreements or propose new agreements with commercial terms less favorable to us, our business and growth prospects could be materially and adversely affected.

In addition, our members are allowed to redeem their bonus points for various gifts or merchandises offered by 168mall, which has been operated under the domain name of https://mall.998.com, and such activities might

 

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be deemed to be a business operated by us without an operating permit for value-added telecommunications services, and may subject us to regulatory investigation, order of rectification, and a fine. As of the date of this prospectus, we have ceased to use this domain name.

If our franchisees are unable to maintain our hotels’ condition and appearance, our hotel occupancy rates may decline.

In order to maintain the condition and appearance of hotels in our network, our hotels require ongoing renovations and other leasehold improvements, including periodic replacement of broken or used furniture, fixtures and equipment. Such investments and expenditures require ongoing funding and, to the extent our franchisees cannot fund these expenditures from existing cash or cash flow generated from operations, our franchisees must borrow or raise capital through financing. Our franchisees may not be able to access capital and our franchisees may be unwilling to spend available capital when necessary, even if required by the terms of our franchise agreements. If our franchisees continue to operate hotels while they are under refurbishment or improvement, there may be instances where refurbishment or improvements would seriously disrupt hotel operations and adversely affect the revenues of the relevant hotels. If our franchisees do not make needed leasehold investments and improvements, our hotels could become less attractive to our potential guests, we could lose market share to our competitors and our hotel occupancy rates may decline. Moreover, disruptions and other risks associated with renovation and improvements could have an adverse effect on our business, financial condition and results of operations.

If the value of our brand portfolio or image diminishes, it could have a material and adverse effect on our business and results of operations.

Our continued success in maintaining and enhancing our brand portfolio and image depends, to a large extent, on the ability of our franchisees and us to satisfy customer needs by maintaining consistently high quality services across our hotel network, as well as their and our ability to respond to competitive pressures. If we and our franchisees are unable to do so, our occupancy rates may decline, which could in turn adversely affect our results of operations. Our business may also be adversely affected if our brands, public image or reputation were to be diminished by the operations of any of our hotels, whether due to our franchisees failing to operate hotels according to our requirements, unsatisfactory service, accidents or otherwise. Our brand portfolio is integral to our sales and marketing efforts. In addition, the trademark “GreenTree Inn” in the U.S. was registered by a company owned by Mr. Alex S. Xu, our chairman and chief executive officer and currently used by a chain of ten hotels in the U.S. owned by a company majority owned by Mr. Alex S. Xu. We cannot exert control over any of these hotels in the United States. If these hotels experience any quality issues or are involved in any incidents, despite the fact that our current operations are primarily in China, our reputation can be negatively affected, and the value and image of our brands can diminish. If the value of our brand image is diminished or if our brands do not continue to be attractive to guests and franchisees, our business and results of operations may be materially and adversely affected.

Our results of operations may fluctuate significantly due to seasonality and other factors.

The hospitality industry is subject to fluctuations in revenues due to seasonality. The seasonality of our business may cause fluctuations in our quarterly operating results. Generally, the first quarter, in which both the New Year and Spring Festival holidays fall, accounts for a lower percentage of our annual revenues than other quarters of the year. Furthermore, our overall results of operations may fluctuate significantly from period to period because of several factors, including the timing of new hotel openings, revenue loss associated with the temporary closure of existing hotels for refurbishment, and any losses incurred by our franchisees or us due to hotel closures. As a result, our results of operations may fluctuate significantly from period to period and comparison of different periods, or even the same periods during different years, may not be meaningful. Our results for a given fiscal period are not necessarily indicative of results to be expected for any other fiscal period.

 

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Substantial defaults or delays in payment by our franchisees and corporate customers or the deterioration of the financial condition of our franchisees or corporate clients may have an adverse effect on our cash flows, working capital, financial condition and results of operations.

Our accounts receivable mainly consist of amounts due from our franchisees and corporate clients whose employees are guests in our leased-and-operated hotels. Our corporate clients may choose to settle with us directly, and we typically require our franchisees to pay various fees pursuant to their franchise agreements with us on a monthly or annual basis. Our franchisees and corporate clients may delay their payments beyond the time periods set forth in our agreed credit arrangements. Furthermore, in order to accelerate our expansion, we plan to use our surplus cash to finance the opening of new franchised-and-managed hotels by franchisees who have a proven track record with us. There can be no assurance that our franchisees will always repay us timely once we begin the financing plan. Our liquidity and cash flows from operations may be adversely affected if our accounts receivable cycles or collection periods lengthen or if we encounter a material increase in defaults of payment of our accounts receivable or repayment of the amounts we have lent to our franchisees.

Our operating results are affected by the ability of our franchisees to pay our franchise management fees. An extended period of hotel room vacancy or decrease in room rates, which may be the result of a variety of factors such as unfavorable economic conditions in China and globally, may adversely affect the operating results and financial condition of our franchisees. These negative operating conditions could result in the financial failure of our franchisees and result in the delayed payment of franchise management fees or other revenues derived from our franchised-and-managed hotels or the termination of their franchise agreements. As a result, our business, prospects and results of operations may be adversely affected.

Failure to retain our senior management could harm our business.

We place substantial reliance on the hospitality and other consumer-service industry experience and the institutional knowledge of members of our senior management team. Mr. Alex S. Xu, our founder, chairman and chief executive officer, is particularly important to our future success due to his substantial experience in the property development, hospitality and other consumer service industries. We do not carry key person insurance on any members of our senior management team. The loss of the services of one or more of these members of our senior management team due to their departure or otherwise could hinder our ability to effectively manage our business and implement our growth strategies. Finding suitable replacements for Mr. Xu or other members of our senior management team could be difficult, and competition for such personnel of similar experience is intense. If we lose their services, our business may be adversely affected.

If we or our franchisees are not able to hire, train and retain qualified managerial and other employees, our brand and our business may be materially and adversely affected.

Our managerial and other employees manage our hotels and interact with our guests on a daily basis. They are critical to maintaining the quality and consistency of our services as well as our established brand and reputation. It is important for our franchisees and us to attract qualified managerial and other employees who have experience in hospitality or other consumer-service industries and are committed to high levels of service. There may be a limited supply of such qualified individuals in the cities in China where we and our franchisees have operations or where we intend to expand. In addition, it is difficult to ascertain and evaluate intangible criteria of candidates, and whether they will share our vision, dedication, passion and culture, during the recruitment process. We and our franchisees must hire and train qualified managerial and other employees on a timely basis to keep pace with our rapid growth while maintaining consistently high quality services across our hotels in various geographic locations. Regular training needs to be provided to our managerial and other employees so that they are equipped with up-to-date knowledge of various aspects of our hotel operations and can meet our demand for quality services. We and our franchisees also need to offer opportunities for development and career advancement in order to retain qualified managerial and other hotel staff. If we or our franchisees fail to do so, the quality of our services may decrease in one or more of the markets where the hotels in our network are located, which in turn, may have a material and adverse effect on our brand and our business.

 

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Interruption or failure of our information and operational systems could impair our ability to effectively provide our services, which could damage our reputation.

Our ability to provide consistent quality services throughout our hotel network depends on the operation of our proprietary information and operational systems, including our central reservation, hotel management, data analysis and inter-department support systems. Any damage to or failure of our systems could interrupt our service. Our systems are vulnerable to damage or interruption as a result of power loss, telecommunications failures, computer viruses, fires, floods, earthquakes, interruptions in access to our toll-free numbers, hacking or other attempts to harm our systems, and similar events. Our servers, which are maintained in Shanghai, may also be vulnerable to break-ins, sabotage and vandalism. Some of our systems are not fully backed up, and our disaster recovery planning does not account for all possible scenarios. In addition, our systems and technologies may become outdated and we may not be able to replace or introduce upgraded systems as quickly as our competitors or within budgeted costs for such upgrades. If we experience frequent or persistent system failures, our quality of services and our reputation could be harmed. The steps we need to take to increase the reliability and safety of our systems may be costly, which could reduce our operating margins, and may not be successful in reducing the frequency or duration of system failures and service interruptions.

Failure to maintain the integrity of internal or customer data could result in harm to our reputation or subject us to costs, liabilities, fines or lawsuits.

Our business involves collecting and retaining large volume of internal and customer data, including credit card numbers and other personal information as our various information technology systems enter, process, summarize and report such data. We also maintain information about various aspects of our operations as well as our employees. The integrity and protection of our customer, employee and company data is critical to our business. Our customers and employees expect that we will adequately protect their personal information. We are required by applicable laws to keep strictly confidential the personal information that we collect, and to take adequate security measures to safeguard such information. Our security measures and those of our third-party service providers may not be adequate for the protection of our customer, employee or company data.

In addition, computer hackers, foreign governments or cyber terrorists may attempt to penetrate our network security and our website. Unauthorized access to our proprietary internal and customer data may be obtained through break-ins, sabotage, breach of our secure network by an unauthorized party, computer viruses, computer denial-of-service attacks, employee theft or misuse, breach of the security of the networks of our third-party service providers, or other misconduct. Because the techniques used by computer programmers who may attempt to penetrate and sabotage our proprietary internal and customer data change frequently and may not be recognized until launched against a target, we may be unable to anticipate these techniques. Unauthorized access to our proprietary internal and customer data may also be obtained through inadequate use of security controls. The laws and regulations applicable to security and privacy are becoming increasingly important in China. The theft, loss, fraudulent or unlawful use of customer, employee or company data could harm our reputation or result in remedial and other costs, liabilities, fines or lawsuits.

Any failure to protect our trademarks and other intellectual property rights could negatively impact our business.

Our brand, trade name, trademarks and other intellectual property are critical to our success. The success of our business depends in part upon our continued ability to use our brands, trade names and trademarks to increase brand awareness and to further develop our brands. As of December 31, 2017, we had a total of 177 trademarks, 22 software registration certificates, one copyright and 11 patents registered in China. The expiration dates of our trademarks fall between 2018 and 2027, including “GreenTree Inn.” Once the ten-year term of our registered trademarks has expired, we will be able to renew our trademark registrations for another ten years upon paying a renewal fee. If we are unable to renew one or more trademark registrations, our ability to use such trademarks could be impaired, and our business and results of operations could be materially and adversely affected.

 

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Furthermore, the unauthorized reproduction or infringement of our trade name or trademarks or other intellectual property could diminish the value of our brand and its market acceptance, competitive advantage or goodwill. For example, our proprietary operational IT system, which has not been patented, copyrighted or otherwise registered as our intellectual property, is a key component of our competitive advantage and our growth strategy. As of December 31, 2017, we have received 22 software registration certificates for certain of our proprietary information and operational systems including our Central Reservation System (CRS), Property Management System (PMS) and certain other quality control systems. Although we have been granted software registration certificates in respect of some of our proprietary information and operational systems, these systems could be infringed upon by third parties, which may adversely affect our business, financial condition and results of operations. As of December 31, 2017, we also have received 11 patent registrations, including ten design patents for furnishings used in our hotels and one utility patent for a proprietary door design. Because the protection of a company’s intellectual property provided under PRC laws and regulations is less than that afforded under United States laws and regulations, the measures we take to protect our brands, trade names, trademarks and other intellectual property rights may not be adequate to prevent their unauthorized use by third parties. Furthermore, the application of laws governing intellectual property rights in China and abroad is uncertain and evolving, and could involve substantial risks to us. If we are unable to adequately protect our brands, trade names, trademarks and other intellectual property rights, we may lose these rights and our business may suffer materially. For example, in order to protect our brands, in the past we have filed lawsuits against certain hotel operators which had alleged to be our franchised-and-managed hotels but have not entered into any agreements with us.

We could also be subject to claims for infringement, invalidity, or indemnification relating to third parties’ intellectual property rights. Such third party claims may be time-consuming and costly to defend, divert management attention and resources, or require us to enter into licensing agreements, which may not be available on commercially reasonable terms, or at all.

The restaurants operated by our hotels face risks related to instances of food-borne illnesses and other food safety accidents.

Some of our hotels directly operate the restaurant located in the hotels. The restaurant business is susceptible to food-borne illnesses and other food safety accidents. We cannot assure you that our internal controls and training will be fully effective in preventing all food-borne illnesses. Furthermore, our reliance on third-party food suppliers and distributors increases the risk that food-borne illness incidents could be caused by third-party food suppliers and distributors outside of our control and the risk of multiple locations being affected rather than a single restaurant. New illnesses resistant to any precautions may develop in the future, or diseases with long incubation periods could arise that could give rise to claims or allegations on a retroactive basis. Reports in the media of instances of food-borne illnesses could, if highly publicized, negatively impact restaurant sales, forcing the closure of some restaurants and affect our customers’ confidence in our hotel business. Furthermore, other illnesses, such as hand, foot and mouth disease or avian influenza, could adversely affect the supply of some of the restaurants’ food products and significantly increase such restaurants’ costs, which may also adversely affect the results of operations of the relevant hotels.

Accidents or injuries in our hotels may adversely affect our reputation and subject us to liability.

There are inherent risks of accidents or injuries in hotels. One or more accidents or injuries such as fire accident, slip and fall and accident during property renovation at any of our hotels could adversely affect our safety reputation among guests and potential guests, decrease our overall occupancy rates and increase our costs by requiring us to take additional measures to make our safety precautions even more visible and effective. If accidents or injuries occur at any of our hotels, we may be held liable for costs related to the injuries. Our property and liability insurance policies may not provide adequate coverage and we may be unable to renew our insurance policies or obtain new insurance policies without increases in cost or decreases in coverage levels.

 

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In addition, if any incidents, particularly fire accidents, occur in any of the leased-and-operated hotels that do not possess the relevant licenses, permits, title certificate or fire safety inspection certificate, or is located on properties where the actual use and the designated land or property use are inconsistent, there could be substantial negative publicity, thereby triggering large-scale government actions that impact our entire hotel network, which in turn will have a material adverse impact on our business, results of operations and financial condition.

We are subject to risks related to litigation filed by or against us, and adverse litigation results may harm our business and financial condition.

We have been, and may in the future be, a party to litigation and other proceedings filed by or against us, including actions relating to among others property lease, franchise agreements with our franchisees, infringement of our brands, employment related disputes, personal injury, property damage or other harm resulting from acts or omissions by individuals or entities outside of our control, including franchisees and third-party property owners. Various disputes in connection with the properties we lease or with the franchise agreements may occur from time to time, which may cause our hotel operations to be affected or in worst-case scenario, to be ceased. For example, as of January 31, 2018, we had one pending legal proceeding in connection with the leased hotel properties and had 29 pending legal proceedings in connection with the franchised-and-managed hotels. In addition, the research and examinations that we conduct on both the hotel properties and the potential franchisees before entering into franchise agreements, may not be sufficient for us to identify all relevant information. As a result, we may be in dispute with our franchisees, which may result in litigation filed by or against us. See “Business — Legal Proceedings.”

The outcome of legal proceedings is uncertain, we cannot predict with certainty the cost of defense, the cost of prosecution or the ultimate outcome of thereof, including remedies or damage awards, and adverse results in such litigation and other proceedings may disrupt our business, materially and adversely affect our reputation, results of operations, financial condition and prospects. Moreover, if any claims against us were to prevail, we would be subject to monetary or other liabilities, which could strain our financial resources, consume the time and attention of our management and otherwise have an adverse effect on our business, financial condition and results of operations.

Our lessors’ failure to comply with lease registration and other compliance requirements under PRC law may subject these lessors or us to fines or other penalties that may negatively affect our ability to operate our hotels.

As an operator and manager of our leased hotel properties, we are subject to a number of land- and property-related legal requirements. For instance, under PRC law, all lease agreements are required to be registered with the local land and real estate administration bureau. Our standard lease agreement generally requires the lessor to make such registrations. However, as of December 31, 2017, because our lessors failed or reluctant to provide necessary documents for us to register the leases, 23 lessors of our leased-and-operated hotels had not obtained registrations of their leases from the relevant authorities as required despite our repeated requests to these lessors to obtain registrations, as required under our lease agreements with them. In addition, based on the specific land use right certificates and property ownership certificates held by some of our lessors of the leased-and-operated hotels, approximately half of 26 of hotel properties we own or lease and operate are restricted to industrial and other uses, rather than qualified for hotel operation use. The failure of these 23 lessors to register lease agreements as required by law or to ensure that the hotel properties are operated in compliance with their designated use may subject these lessors or us to fines or other penalties in the amount of up to RMB10,000 for each hotel property or approximately RMB230,000 in aggregate, which may negatively affect our ability to operate the hotels covered under those leases. Moreover, the failure to use the property in compliance with the intended usage designated by the land use right certificates or the property ownership certificates may subject the lessors or us to fines in the amount of up to RMB30,000 for each property, invalidate the lease agreements, confiscation of relevant gains or subject them or us to temporary suspension or termination of operations.

 

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We are subject to various claims and disputes in the ordinary course of business, and increases in the amount or severity of these claims and disputes could adversely affect us.

We are exposed to various claims and disputes related to commercial operations, personal injury, property damage, labor disputes and other matters in the ordinary course of our business. Developments in regulatory, legislative or judicial standards, material changes to dispute resolution trends, or a catastrophic accident or series of accidents, including accidents that affect our franchisees or vendors, involving any or all of commercial operations, property damage, personal injury, and labor disputes could have a material adverse effect on our operating results, financial condition and reputation.

For example, approximately 3% of our room nights are booked through OTAs, to whom we pay agency fees for such services. If we were to have a dispute with an OTA, the volume of our room inventory booked through such OTA may decline, or the OTA may block reservations of our rooms or remove our hotels from their website entirely, pending resolution of the dispute. As a result, our business and results of operations may be adversely affected.

In addition, our franchisees may suspend or terminate their cooperation with us voluntarily or involuntarily due to various reasons, including disagreement or dispute with us, failure to maintain requisite approvals, licenses or permits or to comply with other governmental regulations, and events beyond our or their control, such as inclement weather, natural disasters, transportation interruptions or labor unrest or shortage. For example, although the trademark for our current Shell brand has been and is used in public, this trademark is still in the process of being registered. Franchisees of our Shell brand may object to or decline to pay franchise fees charged by us, and third parties may use or exploit this trademark due to its non-registration. Due to intense competition in China’s hospitality industry, our existing franchisees may also discontinue their cooperation with us and work with our competitors instead. We may not be able to promptly replace our franchisees on a timely and cost-effective basis, or at all. As a result of any disruptions associated with our franchisees, our guest satisfaction, brands, reputation, operations and financial performance may be materially and adversely affected.

We may encounter disputes from time to time relating to our use of intellectual property of third parties.

We may encounter disputes from time to time over rights and obligations concerning intellectual property, and we may not prevail in those disputes. We cannot assure you that personnel in our leased-and-operated hotels will not use intellectual property of third parties without proper authorization. We may incur liability for such unauthorized or infringing use, and be subject to additional claims in the future. Any such claim of infringement or unauthorized use of intellectual property could result in costly litigations and divert the attention and resources of our management.

The growth of online and other hotel reservation intermediaries and travel consolidators may adversely affect our margins and profitability.

In 2015, 2016 and 2017, approximately 3% of our room nights were booked through OTAs to whom we pay commissions for such services. If these intermediaries and consolidators become the primary channel through which our guests make their bookings, they may be able to negotiate higher commissions, reduced room rates, or other significant concessions from us. The operations of these travel intermediaries and consolidators may adversely affect our ability to control the supply and price of our room inventory, which would in turn adversely affect our margins and profitability.

We will be a “controlled company” within the meaning of the NYSE Listed Company Manual.

Immediately after the completion of this offering, GTI will beneficially own 84.7% of our Class A ordinary shares and 100% of our Class B ordinary shares and 94.0% of the aggregate voting power of our total issued and outstanding share capital. The voting power of our company owned by GTI is indirectly owned by Mr. Alex S. Xu, our founder, chairman and chief executive officer, as he owns 83.9% of voting power of GTI, which entitles Mr. Xu to nominate or replace all directors of GTI, and determine how GTI exercises the voting power in our company. After the completion of this offering, GTI intends to register and distribute to each of its shareholders not more than 60% of the number of our shares that represent the percentage of such shareholder’s ownership in

 

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GTI as of the closing date of this offering. As a condition to receive our shares, GTI’s shareholders will be required to enter into lock-up agreements with us to agree, among others, not to offer, sell, contract to sell, pledge, grant any option to purchase, purchase any option or contract to sell, grant any right or warrant to purchase, lend, make any short sale, file a registration statement, or make any demand for or exercise any right to file a registration statement, under the Securities Act or otherwise dispose of any of our shares prior to the expiry of a six month period following the date of this prospectus. The number of our shares subject to such lock-up agreements will be reduced by 25% at the end of the six month period following the date of this prospectus and each six month period thereafter through the two-year anniversary of the date of this prospectus. Following the completion of this offering and as long as GTI or Mr. Alex S. Xu owns at least 50% of the voting power of our company, we will be a “controlled company” as defined under the NYSE Listed Company Manual. For so long as we remain a controlled company under that definition, we are permitted to elect to rely on certain exemptions from corporate governance rules, including an exemption from the rule that a majority of our board of directors must be independent directors. As a result, you may not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.

Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes.

Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes, particularly in locations where we operate a large number of hotels. China has in the past experienced significant natural disasters, including earthquakes in Western and Southwestern China, extreme weather conditions, as well as health scares related to epidemic diseases, and any similar event could materially impact our business in the future. If a disaster or other disruption were to occur in the future that affects the regions where we have or are developing franchised-and-managed or leased-and-operated hotels, our operations could be materially and adversely affected due to loss of personnel and damages to property. Even if we are not directly affected, such a disaster or disruption could affect our guests, which could harm our results of operations.

In addition, our business could be affected by public health epidemics, such as the outbreak of avian influenza, severe acute respiratory syndrome, or SARS, Zika virus, Ebola virus, or other disease. If any of our employees is suspected of having contracted a contagious disease, we may be required to apply quarantines or suspend our operations. Furthermore, any future outbreak may restrict economic activities in affected regions, resulting in reduced business volume, temporary closure or quarantine of hotels in operation or otherwise disrupt our operations and adversely affect our results of operations.

Losses caused by epidemics, natural disasters and other catastrophes, including SARS, H1N1 and H7N9 influenza, earthquakes or floods, are either uninsurable or too expensive to justify insuring against in China. In the event an uninsured loss or a loss in excess of insured limits occurs, we could lose all or a portion of the capital we have invested in a hotel, as well as the anticipated future revenue from the hotel. In that event, we might nevertheless remain obligated for any financial obligations related to the hotel. Similarly, war (including the potential of war), terrorist activities (including the threat of terrorist activities), social unrest and heightened travel security measures, as well as geopolitical uncertainty and international conflict may affect travel and may in turn affect our business, financial conditions, and results of operations. If our franchised-and-managed hotels are affected by these incidents, we might lose our revenue stream from those hotels. In addition, we may not be adequately prepared in contingency planning or recovery capability in relation to a major incident or crisis, and as a result, our operational continuity may be adversely affected and our reputation may be harmed.

We have limited insurance coverage.

We carry property insurance that covers the assets that we own at our leased-and-operated hotels, but such property insurance does not cover the buildings or any other assets owned by our lessors or the assets of the franchised-and-managed hotels. Although we generally require our lessors and our franchisees to purchase customary insurance policies, we cannot guarantee that they will adhere to such requirements. In addition, we do not have any business disruption insurance coverage for our operations to cover losses that may be caused by natural disasters or catastrophic events, such as SARS or avian flu. Any business disruption or natural disaster may result in our incurring substantial costs and diversion of our resources. In addition, there are inherent risks of

 

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accidents or injuries in hotels. One or more accidents or injuries at any of our hotels could adversely affect our safety reputation among customers and potential customers, decrease our overall occupancy rates and increase our costs by requiring us to take additional measures to make our safety precautions even more visible and effective. In the future, we may be unable to renew our insurance policies or obtain new insurance policies without increases in cost or decreases in coverage levels. We may also encounter disputes with insurance providers regarding payments of claims that we believe are covered under our policies. If we were held liable for amounts and claims exceeding the limits of our insurance coverage or outside the scope of our insurance coverage, our reputation, our business, results of operations and financial condition may be materially and adversely affected.

We may require additional financing for our business, which may not be available on terms acceptable to us, or at all, or would increase our financial leverage and may be difficult to service.

We may require additional financial resources to support our growth, future development and any investments, including mergers or acquisitions, that we may pursue. The amount and timing of such additional financing needs will vary depending on the timing of our new hotel openings, investments in converting new leased-and-operated hotels and searching and developing relationships with potential franchisees and the amount of cash flow from our operations. If our internal resources are insufficient to satisfy our financing requirements, we may seek additional financing by selling additional equity or debt securities or obtaining a credit facility. The sale of additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that may, among other things, potentially restrict our operations or our ability to pay dividends. Servicing such debt obligations could also be burdensome to our operations. If we fail to service our debt obligations or are unable to comply with the relevant debt covenants, we could be in default under the relevant debt obligations and our liquidity and financial conditions may be materially and adversely affected.

Our ability to obtain additional capital on acceptable terms is subject to a variety of uncertainties, including:

 

    investors’ perception of, and demand for, securities of businesses in the PRC hospitality industry;

 

    conditions of the U.S. and other capital markets in which we may seek to raise funds;

 

    our future results of operations, financial condition and cash flows;

 

    PRC governmental regulation of foreign investment in the hospitality industry in China;

 

    economic, political and other conditions in China; and

 

    PRC governmental policies relating to foreign currency borrowings.

We cannot assure you that future financing will be available in amounts or on terms acceptable to us, if at all. If we fail to raise additional funds, we may need to sell debt or additional equity securities, reduce our growth to a level that can be supported by our cash flow or defer planned expenditures.

We will recognize a substantial amount of share-based compensation expense upon the completion of this offering, which will have a significant impact on our results of operations.

We adopted our 2018 share incentive plan in January 2018, pursuant to which we may grant options to purchase up to 9,000,000 of our Class A ordinary shares. On January 15, 2018, we issued 1,703,000 share options to our directors and employees where such share options are vested 25% for each of the four years with effect from the vesting commencement date which is the completion date of this offering. As a result, we expect to begin to recognize share-based compensation expenses of RMB81.0 million (US$12.4 million) over the vesting period. As of the date of this prospectus, we have outstanding options with respect to 1,703,000 Class A ordinary shares that have been granted to our employees, directors and consultants under the 2018 share incentive plan. We are required to account for share options granted to our employees, directors and consultants in accordance with Codification of Accounting Standards, or ASC 718, “Compensation — Stock Compensation” and ASC 505-50, “Equity, Equity-Based Payments to Non-Employees.”

For the year ended December 31, 2017, we recorded one-time share-based compensation expenses of RMB38.0 million (US$5.8 million) for GTI’s shares issued to certain of our directors for their past services as

 

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directors. We believe share-based incentive awards enhance our ability to attract and retain key personnel and employees, and we will continue to grant stock options and other share-based awards to employees in the future. If our share-based compensation expenses continue to be significant, our results of operations would be materially and adversely affected.

A material weakness in our internal control over financial reporting has been identified, and if we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results, meet our reporting obligations or prevent fraud.

Prior to this offering, we were a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our management has not completed an assessment of the effectiveness of our internal control over financial reporting and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. In connection with the audit of our consolidated financial statements for the years ended December 31, 2015, 2016 and 2017, we and our independent registered public accounting firm identified one material weakness as of December 31, 2015, 2016 and 2017, in accordance with the standards established by the Public Company Accounting Oversight Board of the United States, or PCAOB. We have implemented and are continuing to implement a number of measures to address the material weakness identified. For details, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Internal Control Over Financial Reporting.” We are working to remediate these findings, we cannot assure you that we will not identify additional material weaknesses or significant deficiencies in the future.

Furthermore, had our independent registered public accounting firm conducted an audit of our internal control over financial reporting, such firm might have identified additional material weaknesses and deficiencies. Upon the completion of this offering, we will become a public company in the United States subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, will require that we include a report of management on our internal control over financial reporting in our annual report on Form 20-F beginning with our annual report for the fiscal year ending December 31, 2019. In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, after we become a public company, our reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation. In addition, we may not be able to timely file our periodic reports as a public company under U.S. securities laws, which could limit the amount of information that investors receive about our company in the future and adversely affect the price of our ADSs, our business and our reputation.

In documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs.

Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list,

 

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regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.

We are an “emerging growth company” and may not be subject to requirements that other public companies are subject to, which could harm investor confidence in us and our ADSs.

The Jumpstart Our Business Startups Act, or the JOBS Act, contains provisions that, among other things, relax certain requirements for qualifying public companies. We are an “emerging growth company” as defined under the JOBS Act and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies, including an exemption from the requirement to comply with the auditor attestation requirements of Section 404 and an exemption from the requirement to adopt and comply with new or revised accounting standards at the same time as other public companies. We will remain an emerging growth company until the earliest of (i) the last day of our fiscal year during which we have total annual gross revenues of at least US$1.07 billion; (ii) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (iii) the date on which we have, during the previous three year period, issued more than US$1.0 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter.

The JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We will take advantage of the extended transition period. As a result of this election, our financial statements may not be comparable to other public companies that comply with the public company effective dates for these new or revised accounting standards.

We also expect that these new rules and regulations could make it more expensive for us to renew director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee.

We cannot predict if investors will find our ADSs less attractive because we may rely on these exemptions. If some investors find our ADSs less attractive as a result, there may be a less active trading market for our ADSs and our ADS price may be more volatile.

Risks Related to Doing Business in China

Adverse changes in the Chinese economy could have a material adverse effect on the hospitality industry in China which could adversely affect our business.

We conduct all of our operations in China and all of our revenues are derived from our operations there. As the travel and hospitality industry is highly sensitive to business and personal discretionary spending levels, it tends to decline during general economic downturns. Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. The Chinese economy differs from the economies of most developed countries in many aspects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the China’s economy has experienced significant growth in the past 30 years, growth has been uneven across different regions and among various economic sectors of China. We cannot assure you that the China’s economy will continue to grow, or that if there is growth, such growth will be steady and uniform. If there is a slowdown, such a slowdown could have a negative effect on our business.

Changes in the political and economic policies of the PRC government may materially and adversely affect our business, financial condition and results of operations and may result in our inability to sustain our growth strategy.

The PRC economy differs from the economies of most developed countries in many respects, including the extent of government involvement, level of development, growth rate, and control of foreign exchange and

 

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allocation of resources. Although the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the PRC government plays a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, regulating financial services and institutions and providing preferential treatment to particular industries or companies.

While the PRC economy has experienced significant growth in the past, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall PRC economy, but may also have a negative effect on us. Our financial condition and results of operations could be materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. In addition, the PRC government has implemented in the past certain measures to control the pace of economic growth. These measures may cause decreased economic activity, which in turn could lead to a reduction in demand for our services and consequently have a material adverse effect on our businesses, financial condition and results of operations.

Uncertainties with respect to the Chinese legal system could adversely affect us.

We conduct our business primarily through our subsidiaries in China. Our operations in China are governed by PRC laws and regulations. Our subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is based on written statutes and their interpretation by the Supreme People’s Court of the PRC. Unlike common law systems, prior court decisions may be cited for reference but have limited precedential value. Since 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently-enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published court decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties and may not be as consistent and predictable as in other jurisdictions. In addition, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after the violation occurs. For example, historically we have used a portion of our excess cash to purchase shares that are listed on the PRC stock exchanges. We may be subject to investigations by relevant government authorities, severe penalties or other administrative measures for our purchases of those shares due to restrictions or prohibitions on our operational activities in the PRC. In addition, we may be subject to fines of up to RMB30,000 in connection with the purchase of publicly traded shares in certain Chinese companies engaged in industries in which foreign investments are restricted or prohibited. As we are not aware of any precedent in implementing these current legal restrictions or prohibitions, we cannot predict whether these restrictions will be implemented and if so, the quantum of the fines that may be assessed.

Furthermore, any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our business and results of operations.

 

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Governmental control of currency conversion may limit our ability to utilize our revenues effectively and affect the value of your investment.

The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive all of our revenues in RMB. Under our current structure, our income will be primarily derived from dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency dominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE, by complying with certain procedural requirements. However, foreign exchange transactions under our capital account items are subject to significant foreign exchange controls and require approval from the SAFE or its local branches. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions if foreign currencies reserve falls below certain level. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

Fluctuations in exchange rates could result in foreign currency exchange losses and could materially reduce the value of your investment.

The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC and other governments. On July 21, 2005, the PRC government changed its policy of pegging the value of the RMB to the U.S. dollar. More recently, from December 31, 2015 to December 31, 2016, the RMB depreciated approximately 6.7% against the U.S. dollar. In 2017, however, the RMB appreciated approximately 6.7% against the U.S. dollar. It remains unclear what further fluctuations may occur.

Substantially all of our revenues, costs and expenses are denominated in RMB. We are a holding company and we rely on dividends paid by our operating subsidiaries in China for our cash needs. Any significant revaluation of the RMB may materially reduce any dividends payable on, our ADSs in U.S. dollars. To the extent that we need to convert U.S. dollars we receive from this offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive. Conversely, if we decide to convert our RMB into U.S. dollars for business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount.

Limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert RMB into foreign currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.

Rapid urbanization and changes in zoning and urban planning in China may cause our hotel properties to be demolished, expropriated or otherwise affected.

China is undergoing a rapid urbanization process, and zoning requirements and other governmental mandates with respect to urban planning of a particular area may change. When zoning requirements or other governmental mandates change with respect to the areas where our hotels are located, the affected hotels may need to be demolished or removed. As a result, we may have to relocate our hotels to other locations. We have experienced such demolition and relocation in the past and we may encounter additional demolition and relocation cases in the future. As of February 27, 2018, one of our leased-and-operated hotels is expected to cease operations due to urban planning. Our hotels could suffer from demolitions or interruptions due to zoning or other local regulations in the future. Any such demolition and relocation could cause us to lose primary locations

 

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for our hotels and cause the licenses and permits held by the hotels facing demolition to not be renewed or even be revoked, and we may not be able to achieve comparable operational results following the relocations. While we may be reimbursed for such demolition and relocation, we cannot assure you that the reimbursement, as determined by the relevant government authorities, will be sufficient to cover our direct and indirect losses. Accordingly, our business, results of operations and financial condition may be adversely affected.

Furthermore, the PRC government has the statutory power to acquire or demolish any land in the PRC for reason of changes in urban planning or zoning or otherwise. In such events, we may be forced to relocate or close our hotels. Although we might be paid compensation for such forced acquisition, demolishment or closure, the amount of compensation to be awarded to us may not cover our losses and adversely affecting our operations.

Failure to comply with PRC regulations regarding the registration requirements for employee stock ownership plans or share option plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

In December 2006, the People’s Bank of China promulgated the Administrative Measures of Foreign Exchange Matters for Individuals, which set forth the respective requirements for foreign exchange transactions by individuals (both PRC or non-PRC citizens) under either the current account or the capital account. In January 2007, the State Administration of Foreign Exchange issued implementing rules for the Administrative Measures of Foreign Exchange Matters for Individuals which, among other things, specified approval requirements for certain capital account transactions such as a PRC citizen’s participation in the employee stock ownership plans or stock option plans of an overseas publicly listed company. Pursuant to the Notice of the State Administration of Foreign Exchange on Issues concerning Foreign Exchange Administration of the Overseas Investment and Financing and the Round-trip Investment Made by Domestic Resident through Special-Purpose Companies, or Circular 37, issued on July 4, 2014, PRC residents who participate in share incentive plans in overseas non-publicly listed SPVs due to their position as director, senior management or employees of the PRC subsidiaries of the overseas SPVs may submit applications to SAFE or its local branches for the foreign exchange registration with respect to such overseas SPVs.

On February 25, 2012, the State Administration of Foreign Exchange promulgated the Circulars on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Equity Incentive Plans of Overseas-Listed Company, or the Stock Option Rules. Under these rules, PRC citizens who participate in an equity incentive plan of an overseas publicly listed company are required to register to handle issues such as foreign exchange registration, account establishment, funds transfer and remittance, and entrust an overseas institution, or the “Overseas Trustee” to handle issues like exercise of options, purchase and sale of corresponding stocks or equity and transfer of corresponding funds. A “Domestic Agency” shall be a domestic company participating in the equity incentive plan or a domestic institution which is qualified for asset custody business as chosen by us according to PRC law.

We adopted our 2018 share incentive plan in January 2018. Our board of directors has authorized the issuance of up to 9,000,000 Class A ordinary shares upon exercise of awards granted under our 2018 share incentive plan. See “Management — Share Incentive Plan.” We and our PRC citizen employees who participate in the 2018 share incentive plan will be subject to these regulations and may not be able to complete the foreign exchange registration until our company becomes a publicly listed company in the United States. As such, the 2018 share incentive plan provides that PRC citizen participants shall not exercise their options nor shall they purchase or subscribe for our shares before our company becomes a publicly listed company in the United States. After this offering, we plan to advise our employees and directors participating in the 2018 share incentive plan to handle foreign exchange matters in accordance with the Stock Option Rules. We cannot provide any assurance that we or the PRC individual participants of our share incentive plans have complied or will comply with the requirements imposed by the Stock Option Rules. If we or our PRC optionees fail to comply with these regulations, we or our PRC optionees may be subject to fines and other legal or administrative sanctions, and our ability to further grant shares or share options under our share incentive plans to, and to adopt additional share incentive plans for, our directors and employees may be restricted. Such events could adversely affect our operations. See “Regulation — Regulations on Employee Stock Incentive Plans of Overseas Publicly-Listed Company.”

 

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Further, a notice concerning the individual income tax on earnings from employee share options jointly issued by Ministry of Finance, or the MOF, and the State Administration of Taxation, or the SAT, on March 28, 2005, and its implementing rules, provide that domestic companies that implement employee share option programs shall (i) file the employee share option plans and other relevant documents to the local tax authorities having jurisdiction over them before implementing such employee share option plans; (ii) file share option exercise notices and other relevant documents with the local tax authorities having jurisdiction over them before exercise by the employees of the share options, and clarify whether the shares issuable under the employee share options mentioned in the notice are the shares of publicly listed companies; and (iii) withhold taxes from the PRC employees in connection with the PRC individual income tax. To comply with the requirement, we will file the 2018 share incentive plan with the relevant local tax bureau.

Our employment practices may be adversely impacted under the labor contract law of the PRC.

The PRC National People’s Congress promulgated the Labor Contract Law which became effective on January 1, 2008 and was amended on December 28, 2012, and the State Council promulgated implementing rules for the labor contract law on September 18, 2008. The labor contract law and the implementing rules impose requirements concerning, among others, the execution of written contracts between employers and employees, the time limits for probationary periods, and the length of employment contracts. The interpretation and implementation of these regulations are still evolving, our employment practices may violate the labor contract law and related regulations and we could be subject to penalties, fines or legal fees as a result. If we are subject to severe penalties or incur significant legal fees in connection with labor law disputes or investigations, our business, financial condition and results of operations may be adversely affected.

The Labor Contract Law prohibits an employer to establish staff dispatching companies to place workers with themselves or their subsidiaries. We have established a subsidiary which is the employer of most our employees of other subsidiaries. This subsidiary has entered into a service outsourcing arrangement with other relevant subsidiaries of us. Since the current labor dispatch regulation does not clearly define the distinction of labor dispatch and service outsourcing business, our service outsourcing arrangement could be considered as labor dispatch by the relevant PRC government authorities and our abovementioned subsidiary might be regarded as dispatching entity and therefore subject us to fines, or termination of such outsourcing arrangement.

In accordance with the PRC Social Insurance Law and the Regulations on the Administration of Housing Fund and other relevant laws and regulations, China establishes a social insurance system and other employee benefits including basic pension insurance, basic medical insurance, work-related injury insurance, unemployment insurance, maternity insurance, housing fund, and a handicapped employment security fund, or collectively the Employee Benefits. An employer shall pay the Employee Benefits for its employees in accordance with the rates provided under relevant regulations and shall withhold the social insurance and other Employee Benefits that should be assumed by the employees. For example, an employer that has not made social insurance contributions at a rate and based on an amount prescribed by the law, or at all, may be ordered to rectify the non-compliance and pay the required contributions within a stipulated deadline and be subject to a late fee of up to 0.05% or 0.2% per day, as the case may be. If the employer still fails to rectify the failure to make social insurance contributions within the stipulated deadline, it may be subject to a fine ranging from one to three times the amount overdue.

Under the Regulations on the Administration of Housing Fund, PRC companies must register with applicable housing fund management centers and establish a special housing fund account in an entrusted bank. Both PRC companies and their employees are required to contribute to the housing funds.

We have not made adequate contributions to employee benefit plans, as required by applicable PRC laws and regulations. We have recorded accruals for the estimated underpaid amounts for the current employees in our financial statements. However, we have not made any accruals for the interest on underpayment and penalties that may be imposed by the relevant PRC government authorities. If we are subject to investigations related to non-compliance with labor laws and are imposed severe penalties or incur significant legal fees in connection with labor law disputes or investigations, our business, financial condition and results of operations may be adversely affected.

 

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We rely principally on dividends and other distributions on equity paid by our subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our ability to borrow money or pay dividends to holders of our ADSs.

As a holding company, we rely principally on dividends and other payments from our wholly owned operating subsidiaries in China for our cash requirements, including funds necessary to service any debt we may incur, to pay dividends and other cash distributions to our shareholders and to pay our operating expenses. If our subsidiaries or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our subsidiaries are permitted to pay dividends to us only out of their accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. Pursuant to laws applicable to entities incorporated in the PRC, each of our subsidiaries in the PRC must make appropriations from after tax profit to a statutory surplus reserve fund. The reserve fund requires annual appropriation of 10% of after tax profit (as determined under accounting principles generally accepted in the PRC at each year-end) after offsetting accumulated losses from prior years, until such reserve reaches 50% of the subsidiary’s registered capital. The reserve fund can only be used to increase the registered capital and eliminate further losses of the respective companies under PRC regulations. As of December 31, 2015, 2016 and 2017, total statutory reserves of our PRC subsidiaries were RMB47.3 million, RMB55.3 million and RMB57.7 million (US$8.9 million). These reserves are not distributable as cash dividends, loans or advances. In addition, due to restrictions under PRC laws and regulations, our PRC subsidiaries are restricted in their ability to transfer their net assets to the company in the form of dividend payments, loans or advances. Amounts of net assets restricted include paid up capital and statutory reserve funds of our PRC subsidiaries amounted to RMB407.0 million, RMB398.4 million and RMB391.0 million (US$60.1 million) as of December 31, 2015, 2016 and 2017, respectively. As a result, our Chinese subsidiaries are restricted in their ability to transfer a portion of their net assets to us or any of our other subsidiaries in the form of dividends, loans or advances. Limitation on the ability of our Chinese subsidiaries to pay dividends to us or any of our other subsidiaries could materially and adversely limit our ability to borrow money outside of China or pay dividends to holders of our ADSs. Also see “— Risks Related to Doing Business in China — It is unclear whether we will be considered as a PRC “resident enterprise” under the Enterprise Income Tax Law of the PRC, and depending on the determination of our PRC “resident enterprise” status, dividends paid to us by our PRC subsidiaries may be subject to PRC withholding tax, we may be subject to 25% PRC income tax on our worldwide income, and holders of our ADSs may be subject to PRC withholding tax on dividends on, and gains realized on their transfer of, our ADSs.”

PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiaries which would materially and adversely affect our liquidity and our ability to fund and expand our business.

In utilizing the proceeds of this offering in the manner described in “Use of Proceeds,” as an offshore holding company of our PRC subsidiaries, we may make loans to our PRC subsidiaries, or we may make additional capital contributions to our PRC subsidiaries. Any loans or additional capital contributions to our PRC subsidiaries are subject to PRC regulations and approvals. For example, loans by us to our subsidiaries in China, which are foreign-invested enterprises, to finance their activities cannot exceed statutory limits and must be registered with the SAFE or its local counterpart.

We may also decide to finance our subsidiaries by means of capital contributions. According to the relevant PRC regulations on foreign-invested enterprises in China, depending on the total amount of investment, capital contributions to our PRC subsidiaries are no longer subject to the approval of the PRC Ministry of Commerce or its local branches. Instead, we are required to file and submit required information and documents online within 30 days of such event. However, we cannot assure you that the regulations will always remain favorable to us. If the regulations are revised in the future or we fail to complete such registration or obtain such approvals on time,

 

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our ability to use the proceeds from the offering of the ADSs and to capitalize our operations in the PRC may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

Except for the filing required by PRC Ministry of Commerce or its local branches, when using the capital contributions to exchange for RMB funds, the domestic institutions including foreign-invested enterprises, must comply with certain foreign exchange requirements. For example, SAFE promulgated the Circular of the State Administration of Foreign Exchange on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or Circular 16, on June 9, 2016. Under Circular 16, the foreign exchange receipts under capital accounts of a domestic institution and the RMB funds obtained thereby from foreign exchange settlements may be used for expenditure under current accounts within its business scope or expenditure under capital accounts permitted by laws and regulations. However they may not be used (i) directly or indirectly, for expenditure beyond the enterprise’s business scope or expenditure prohibited by laws and regulations of the state; (ii) unless otherwise specified, directly or indirectly, for investments in securities or other investments than banks’ principal-secured products; (iii) for the granting of loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and (iv) for the construction or purchase of real estate for purposes other than self-use (except for real estate enterprises). In addition, the RMB funds obtained thereby from foreign exchange settlements may not be used to repay RMB loans if the proceeds of such loans have not been fully used by the domestic institution, including a foreign-invested company like us.

We cannot assure you that we will be able to obtain these government approvals on a timely basis, if at all, with respect to future capital contributions by us to our subsidiaries. If we fail to receive such approvals, our ability to use the proceeds of this offering and to capitalize our PRC operations may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.

It is unclear whether we will be considered as a PRC “resident enterprise” under the Enterprise Income Tax Law of the PRC, and depending on the determination of our PRC “resident enterprise” status, dividends paid to us by our PRC subsidiaries may be subject to PRC withholding tax, we may be subject to 25% PRC income tax on our worldwide income, and holders of our ADSs may be subject to PRC withholding tax on dividends on, and gains realized on their transfer of, our ADSs.

Under the PRC Enterprise Income Tax Law and its Implementation Regulations, or the EIT Law, dividends, interest, rent, royalties and gains on transfers of property payable by a foreign-invested enterprise in China to its foreign investor who is a non-resident enterprise without any establishment or place of business within China or if the received dividends, interest, rent, royalties and gains have no connection with the establishment or place of business of such foreign investor will be subject to a 10% withholding tax, unless such non-resident enterprise’s jurisdiction of incorporation has a tax treaty with China that provides for a reduced rate of withholding tax. Under the EIT Law, an enterprise established outside China with its “de facto management body” within China is considered a “resident enterprise” in China and is subject to the Chinese enterprise income tax at the rate of 25% on its worldwide income. The “de facto management body” is defined as the organizational body that effectively exercises overall management and control over production and business operations, personnel, finance and accounting, and properties of the enterprise. There are no detailed rules or precedents governing the procedures and specific criteria for determining “de facto management body.”

The Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. According to Circular 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a “de facto management body” in China and will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are met: (i) the primary location of the day-to-day operational management is in China; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in China; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholders

 

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meeting minutes are located or maintained in China; and (iv) 50% or more of voting board members or senior executives habitually reside in China.

Although substantially all of our operational management is based in the PRC, it is unclear whether PRC tax authorities would require (or permit) us to be treated as a PRC resident enterprise. It is also unclear whether the dividends we receive from our PRC subsidiaries will constitute dividends between “qualified resident enterprises” and therefore qualify for exemption from withholding tax if we are deemed to be a “resident enterprise” for PRC enterprise income tax purposes. We are not controlled by a Chinese enterprise or PRC enterprise group and as such we do not believe that our company meets all of the conditions to be deemed a PRC resident enterprise. For the same reasons, we believe our other subsidiaries located outside China are not PRC resident enterprises. In addition, we are not aware of any offshore holding companies with a corporate structure similar to ours ever having been deemed a PRC “resident enterprise” by PRC tax authorities. However, the tax resident status of an enterprise is subject to determination by PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” While we do not currently consider our company or any of our overseas subsidiaries to be a PRC resident enterprise, there is a risk that the PRC tax authorities may deem our company as a PRC resident enterprise since a substantial majority of the members of our management team are located in China, in which case we would be subject to the PRC enterprise income tax at the rate of 25% on our worldwide income.

If the Chinese tax authorities determine that we are a resident enterprise for PRC enterprise income tax purposes, among other things, we would be subject to the PRC enterprise income tax at the rate of 25% on our worldwide taxable income, substantially higher than the 10% withholding tax rate to which we are subject as a non-PRC resident enterprise. Furthermore, if we are treated as a PRC resident enterprise, payments of dividends by us may be regarded as derived from sources within the PRC and therefore we may be obligated to withhold PRC income tax at 10% on payments of dividends on the ADSs or shares to non-PRC resident enterprise investors. In the case of non-PRC resident individual investors, the tax may be withheld at a rate of 20%. In addition, if we are treated as a PRC resident enterprise, any gain realized on the transfer of the ADSs and/or shares by non-PRC resident investors may be regarded as derived from sources within the PRC and accordingly may be subject to a 10% PRC income tax in the case of non-PRC resident enterprises or 20% in the case of non-PRC resident individuals. The PRC tax on dividends and/or gains may be reduced or exempted under applicable tax treaties between the PRC and the holder’s home country.

In addition, under the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Resident Enterprises, or SAT Public Notice 7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. Gains derived from such indirect transfer may be subject to PRC enterprise income tax. According to SAT Public Notice 7, “PRC taxable assets” include assets attributed to an establishment in China, immoveable properties in China, and equity investments in PRC resident enterprises. See “Regulation — Regulations Relating to Tax.” As part of our restructuring, GreenTree Hospitality Group Ltd., or GreenTree Hospitality, the listing entity for the purpose of this offering, acquired through a share exchange the entire share capital of GreenTree Samoa, including the equity interests in most of our PRC operating subsidiaries then held by it. See “Our History and Corporate Structure.” This acquisition of equity interests in our PRC operating subsidiaries by GreenTree Hospitality may be deemed to be an indirect transfer of PRC taxable assets, and the gains from the acquisition may be subject to PRC enterprise income tax at a rate of up to 25%. However, there is uncertainty as to the implementation details of SAT Public Notice 7. If SAT Public Notice 7 was determined by the tax authorities to be applicable to the abovementioned and other of our transactions involving PRC taxable assets, we might be required to spend valuable resources to comply with SAT Public Notice 7 or to establish that the relevant transactions should not be taxed under SAT Public Notice 7. If such transactions involving PRC taxable assets were subject to PRC enterprise income tax, our results of operations and financial condition could be adversely affected.

 

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If additional remedial measures are imposed on the “big four” PRC-based accounting firms, including our independent registered public accounting firm, in administrative proceedings brought by the SEC alleging such firms’ failure to meet specific criteria set by the SEC with respect to requests for the production of documents, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.

Starting in 2011, the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S. listed companies operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese accounting firms access to their audit work papers and related documents. The firms were, however, advised and directed that under Chinese law they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC.

In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. In January 2014, the administrative law judge reached an initial decision to impose penalties on the firms including a temporary suspension of their right to practice before the SEC. The accounting firms filed a petition for review of the initial decision. On February 6, 2015, before a review by the commissioners of the SEC had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet specified criteria, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of a new proceeding against a firm, or in extreme cases the resumption of the current proceeding against all four firms.

In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, United States-listed companies and the market price of our ADSs may be adversely affected.

If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our consolidated financial statements, our consolidated financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delay or abandonment of this offering, delisting of our ADSs from the New York Stock Exchange or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.

Risks Related to Our ADSs and this Offering

There has been no public market for our ordinary shares or ADSs prior to this offering, and you may not be able to resell our ADSs at or above the price you paid, or at all.

Prior to this initial public offering, there has been no public market for our ordinary shares or ADSs. We have applied to list the ADSs on the New York Stock Exchange. Our ordinary shares will not be listed on any exchange or quoted for trading on any over-the-counter trading system. If an active trading market for our ADSs does not develop after this offering, the market price and liquidity of our ADSs will be materially and adversely affected.

 

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The initial public offering price for our ADSs will be determined by negotiations between us and the underwriters and may bear no relationship to the market price for our ADSs after the initial public offering. We cannot assure you that an active trading market for our ADSs will develop or that the market price of our ADSs will not decline below the initial public offering price.

The market price for our ADSs may be volatile.

The market price for our ADSs may be highly volatile and subject to wide fluctuations in response to factors including the following:

 

    negative media reports and coverage regarding us or other companies in the hospitality industry;

 

    regulatory developments in our target markets affecting us, our customers or our competitors;

 

    announcements of studies and reports relating to the quality of our solutions or those of our competitors;

 

    actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;

 

    changes in financial estimates by securities research analysts;

 

    conditions in the travel and hospitality industries;

 

    changes in the economic performance or market valuations of other hospitality companies;

 

    announcements by us or our competitors of new brands, acquisitions, strategic relationships, joint ventures or capital commitments;

 

    addition or departure of our senior management;

 

    fluctuations of exchange rates between the RMB and U.S. dollar;

 

    potential litigation or administrative investigations;

 

    release or expiry of lock-up or other transfer restrictions on our outstanding ADSs or ordinary;

 

    sales or perceived potential sales of additional ordinary shares or ADSs; and

 

    general economic or political conditions in China.

In addition, the securities market from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our ADSs.

Because the initial public offering price is substantially higher than our net tangible book value per share, you will experience immediate and substantial dilution.

If you purchase ADSs in this offering, you will pay more for your ADSs than the amount paid by our existing shareholders for their ordinary shares on a per ADS basis. As a result, you will experience immediate and substantial dilution of US$14.61 per ADS, representing the difference between the initial public offering price of US$17.00 per ADS (the mid-point of the estimated range of the initial public offering price shown on the front cover of this prospectus) and our net tangible book value per ADS as of December 31, 2017, after giving effect to the net proceeds to us from this offering. In addition, you may experience further dilution to the extent that our ordinary shares are issued upon the exercise of share options.

We may not pay dividends in the foreseeable future after this offering, you must rely on price appreciation of our ADSs for return on your investment.

We intend to retain most, if not all, of our available funds and any future earnings after this offering to fund the development and growth of our business. As a result, we may not pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.

 

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Our board of directors has discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value after this offering or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.

Substantial future sales of our ADSs in the public market, or the perception that these sales could occur, could cause the price of our ADSs to decline.

Additional sales of our ADSs in the public market after this offering, or the perception that these sales could occur, could cause the market price of our ADSs to decline. Upon completion of this offering, we will have 101,552,209 ordinary shares outstanding including 34,762,909 Class B ordinary shares and 66,789,300 Class A ordinary shares, 10,200,000 Class A ordinary shares of which are represented by ADSs. All Class A ordinary shares represented by ADSs sold in this offering will be freely transferable without restriction or additional registration under the Securities Act. The 34,762,909 Class B ordinary shares and 56,589,300 Class A ordinary shares held by our existing shareholder will be available for sale, upon the expiration of the six-month lock-up period beginning from the date of this prospectus, subject to volume and other restrictions as applicable under Rule 144 and 701 under the Securities Act. Any or all of these shares may be released prior to expiration of the lock-up period at the discretion of the representative of underwriters for this offering. To the extent shares are released before the expiration of the lock-up period and these shares are sold into the market, the market price of our ADSs could decline.

GTI has pledged 20% of our ordinary shares to Pudong Development Bank, and following the completion of this offering will be required to pledge additional ordinary shares. If Pudong Development Bank forecloses on these shares, the market price of our ADSs could decline.

GTI has pledged 20% of our ordinary shares to Pudong Development Bank as security under a Euro-denominated loan of approximately RMB900 million obtained in March 2017. Approximately RMB560 million of the loan remains outstanding. Following completion of this offering, GTI will be required to pledge ordinary shares in an amount that results in Pudong Development Bank having a pledge of no fewer than 20% of our ordinary shares, and may be required to pledge additional ordinary shares if the market price of our ADSs declines. If GTI breaches certain covenants and obligations under the loan agreement, an event of default could result and Pudong Development Bank could exercise its right to accelerate all the debt under the loan agreement and foreclose on the pledged shares. The pledged shares are not subject to a lock-up agreement, and any future sale of the ordinary shares upon foreclosure could cause the market price of our ADSs to decline.

Our corporate actions are substantially controlled by our officers, directors and principal shareholders.

After this offering, our executive officers and directors will beneficially own approximately 89.2% of our outstanding shares. These shareholders could exert substantial influence over matters requiring approval by our shareholders, including electing directors and approving mergers or other business combination transactions. The concentration of our share ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs. These actions may be taken even if they are opposed by our other shareholders, including those who purchase ADSs in this offering.

 

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As a foreign private issuer, we are permitted to adopt certain practices of our home country, the Cayman Islands, in relation to corporate governance matters that differ significantly from the New York Stock Exchange corporate governance listing standards; these practices afford less protection to shareholders than they would enjoy if we complied fully with the New York Stock Exchange corporate governance listing standards.

We have applied to list our ADSs on the New York Stock Exchange. The New York Stock Exchange Listed Company Rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the New York Stock Exchange corporate governance listing standards.

For instance, we are not required to: (i) have a majority of the board be independent; (ii) have a compensation committee or a nominations or corporate governance committee consisting entirely of independent directors; or (iii) have regularly scheduled executive sessions with only independent directors each year. We intend to rely on some or all of these exemptions. As a result, you may not be provided with the benefits of certain corporate governance requirements of the New York Stock Exchange.

You may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise your right to direct how the ordinary shares underlying your ADSs are voted.

Except as described in this prospectus and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares evidenced by our ADSs on an individual basis. Holders of our ADSs will appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to direct how the ordinary shares underlying your ADSs are voted.

If we ask for your instructions and upon timely notice from us, the depositary will notify you of the upcoming vote and arrange to deliver our voting materials to you, which contain, among other things, a statement as to the manner in which your voting instructions may be given, including an express indication that such instructions may be given or deemed given to the depositary to give a discretionary proxy to a person designated by us if no instructions are received by the depositary from you on or before the response date established by the depositary. However, no voting instruction shall be deemed given and no such discretionary proxy shall be given with respect to any matter if we inform the depositary we do not wish such proxy given, substantial opposition exits or the matter materially and adversely affects the rights of holders of the ordinary shares.

Voting at any meeting of our shareholders will be by poll.

You may not be able to participate in any future rights offerings which may cause dilution to your holdings and you may not receive cash dividends if it is impractical to make them available to you.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register both the rights and securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. Under the deposit agreement for the ADSs, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act, or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to establish a necessary exemption from registration under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.

 

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After the completion of this offering, GTI intends to register and distribute to each of its shareholders not more than 60% of the number of our shares that represent the percentage of such shareholder’s ownership in GTI as of the closing date of this offering. As a condition to receive our shares, GTI’s shareholders will be required to enter into lock-up agreements on all of our shares which they own prior to the expiry of a six-month period following the date of this prospectus. The number of our shares subject to such lock-up agreements will be reduced by 25% at the end of the six month period following the date of this prospectus and each six month period thereafter through the two-year anniversary of the date of this prospectus.

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not to distribute such property to you.

You may be subject to limitations on transfer of your ADSs.

Your ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited, because we are incorporated under Cayman Islands law, conduct substantially all of our operations in China and the majority of our directors and executive officers reside outside the United States.

We are incorporated in the Cayman Islands, and conduct substantially all of our operations in China through our wholly owned subsidiaries in China. Most of our directors and executive officers reside outside the United States and some or all of the assets of those persons are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the Cayman Islands or in China in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind in a U.S. court, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and executive officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. For more information regarding the relevant laws of the Cayman Islands and China, see “Enforcement of Civil Liabilities.”

Our corporate affairs are governed by our memorandum and articles of association, as amended and restated from time to time, and by the Companies Law (2016 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against our directors and us, actions by minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws as compared to the United States, and provides significantly less protection to investors. In addition, Cayman

 

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Islands companies may not have standing to initiate a shareholder derivative action in U.S. federal courts. As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against us, our management, directors or major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

Our articles of association will contain anti-takeover provisions that could have an adverse effect on the rights of holders of our ordinary shares and ADSs.

Our amended and restated memorandum and articles of association contain provisions which could limit the ability of others to acquire control of our company, including a provision that grants authority to our board directors to establish from time to time one or more series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series. The provisions could deprive our shareholders of the opportunity to sell their shares at a premium over the prevailing market price by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transactions.

Our management will have considerable discretion as to the use of the net proceeds from this offering.

Our management will have considerable discretion in the application of the net proceeds received by us from this offering. See “Use of Proceeds.” You will not have the opportunity, as part of your investment decision, to assess whether proceeds are being used appropriately. You must rely on the judgment of our management regarding the application of the net proceeds of this offering. The net proceeds may be used for corporate purposes that do not improve our efforts to maintain profitability or increase our ADS price. The net proceeds from this offering may be placed in investments, such as short-term investments, that do not produce income or that lose value.

We may become a passive foreign investment company, or PFIC, which could result in adverse U.S. tax consequences to U.S. investors.

The determination of whether or not we are a PFIC is made on an annual basis and will depend on the composition of our income and assets from time to time. Specifically, for any taxable year, we will be classified as a PFIC for U.S. federal income tax purposes if either (i) 75% or more of our gross income in that taxable year is passive income or (ii) the average percentage of our assets (which includes cash) in that taxable year which produce, or are held for the production of, passive income is at least 50%.

Based on the past and projected composition of our income and assets, and the valuation of our assets, including goodwill, we do not expect to be a PFIC for the foreseeable future (not including the current taxable year), although there can be no assurance in this regard. It is unclear, however, whether we will be a PFIC for the current taxable year. If a “controlled foreign corporation” (as defined for U.S. federal income tax purposes), or CFC, is a “publicly traded corporation” for the taxable year, the PFIC asset test is applied based on the value of the CFC’s assets. Otherwise, the asset test is applied based on the adjusted tax bases of the CFC’s assets as determined for the purposes of computing earnings and profits under U.S. federal income tax principles. We are a CFC for the current taxable year, and while we expect to become a publicly traded corporation sometime close to the end of our first quarter, it is unclear how the asset test will apply to us in respect of our current taxable year, as it is not clear how the asset test should be applied to a CFC in respect of its taxable year in which it becomes a publicly traded corporation (specifically, it is not clear whether the CFC can be treated as a “publicly traded corporation” for the taxable year). If we are not treated as a publicly traded corporation for the current taxable year, there is a significant risk that we will be treated as a PFIC. You should consult your tax advisors about how to apply the asset test with respect to us for the current taxable year. For taxable years in which we are treated as a publicly traded corporation, or for which we are no longer a CFC, the calculation of the value of our assets will be based, in part, on the quarterly market value of our ADSs, which is subject to change. See “Taxation — Material U.S. Federal Income Tax Considerations — Passive Foreign Investment Company.”

 

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If we are a PFIC for any taxable year during which you hold our ADSs or Class A ordinary shares, our PFIC status could result in adverse U.S. federal income tax consequences to you if you are a U.S. Holder, as defined under “Taxation — Material U.S. Federal Income Tax Considerations.” For example, if we are or become a PFIC, you may become subject to increased tax liabilities under U.S. federal income tax laws and regulations, and will become subject to burdensome reporting requirements. See “Taxation — Material U.S. Federal Income Tax Considerations — Passive Foreign Investment Company.” There can be no assurance that we will not be a PFIC for our current or any future taxable year.

We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”

As a public company, we will incur significant accounting, legal and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the New York Stock Exchange, have detailed requirements concerning corporate governance practices of public companies, including Section 404 of the Sarbanes-Oxley Act relating to internal controls over financial reporting. As a company with less than US$1.07 billion in net revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting and permission to delay adopting new or revised accounting standards until such time as those standards apply to private companies. We will take advantage of the extended transition period. As a result of this election, our financial statements may not be comparable to other public companies that comply with the public company effective dates for these new or revised accounting standards.

We expect these and other rules and regulations applicable to public companies to increase our accounting, legal and financial compliance costs and to make certain corporate activities more time-consuming and costly. We are evaluating and monitoring developments with respect to these new rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of incurring such costs. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.

In the past, shareholders of a public company often brought securities class action suits against the company following periods of instability in the market price of that company’s securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations, which could harm our results of operations and require us to incur significant expenses to defend the suit. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

 

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Our dual-class ordinary share structure with different voting rights could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.

Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to three (3) votes per share if such Class B ordinary share is owned by GTI, Mr. Alex S. Xu, our founder, chairman and chief executive officer, Mr. Alex S. Xu’s family trusts or his or the family trust’s designated transferees. We will issue Class A ordinary shares represented by our ADSs in this offering. Our existing shareholder GTI will hold 56,589,300 Class A ordinary shares and all the 34,762,909 Class B ordinary shares, upon the completion of this offering. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, and Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Due to the disparate voting rights attached to shares in these two classes, GTI will own approximately 94.0% of the total voting power of our outstanding ordinary shares immediately after the offering. Mr. Alex S. Xu, our founder, chairman and chief executive officer, by virtue of this 83.9% voting power of GTI, which entitles Mr. Xu to nominate or replace all directors of GTI, and determine how GTI exercises the voting power in our company, is considered to beneficially owned the shares held by GTI. As a result, Mr. Xu will have significant voting rights over matters requiring shareholder approval, including the election and removal of directors and certain corporate transactions, such as mergers, consolidations and other business combinations. This concentrated control could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.

Holders of ADSs have fewer rights than shareholders and must act through the depositary to exercise their rights.

Holders of our ADSs do not have the same rights as our registered shareholders. As a holder of our ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights which attach to the underlying Class A ordinary shares represented by your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement. Upon receipt of your voting instructions in a timely manner, the depositary will vote or attempt to vote the underlying Class A ordinary shares in accordance with these instructions. You will not be able to directly exercise your right to vote with respect to the underlying Class A ordinary shares unless you withdraw the shares and become the registered holder of such shares prior to the record date for the general meeting. Under our amended and restated memorandum and articles of association, the minimum notice period required to be given by our company to our registered shareholders to convene a general meeting will be ten calendar days. When a general meeting is convened, you may not receive sufficient notice of the meeting to enable you to withdraw the Class A ordinary shares represented by your ADSs and become the registered holder of such shares to allow you to attend the general meeting or to cast your vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. In addition, under our amended and restated memorandum and articles of association, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the underlying Class A ordinary shares represented by your ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the general meeting or to vote directly.

Under the deposit agreement, if we request the depositary to act at a general meeting, we will give the depositary notice of the meeting at least 30 business days in advance of the meeting in order to give you a reasonable opportunity to instruct the depositary as to the exercise of voting rights relating to Class A ordinary shares underlying your ADSs. However, the depositary and its agents may not be able to send voting instructions to you or carry out your voting instructions in a timely manner. Where any matter is to be put to a vote at a general meeting, we will make all reasonable efforts to cause the depositary to notify you of the upcoming vote

 

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and to deliver our voting materials to you in a timely manner, but we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the Class A ordinary shares underlying your ADSs. Furthermore, the depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote. As a result, you may not be able to exercise your right to direct how the underlying Class A ordinary shares represented by your ADSs are voted and you may lack recourse if the underlying Class A ordinary shares represented by your ADSs are not voted as you request. In addition, in your capacity as an ADS holder, you will not be able to call a shareholders’ meeting.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve risks and uncertainties, including statements based on our current expectations, assumptions, estimates and projections about us and our industry. The forward-looking statements are contained principally in the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Industry Overview,” “Business” and “Regulation” in this prospectus. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. In some cases, these forward-looking statements can be identified by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “potential,” “continue,” “is/are likely to” or other similar expressions. The forward-looking statements included in this prospectus relate to, among others:

 

    our goals and growth strategies;

 

    our future business development, financial condition and results of operations;

 

    trends in the hospitality industry in China and globally;

 

    competition in our industry;

 

    fluctuations in general economic and business conditions in China and other regions where we operate;

 

    the regulatory environment in which we and our franchisees operate;

 

    our proposed use of proceeds from this offering; and

 

    assumptions underlying or related to any of the foregoing.

This prospectus also contains market data relating to the hospitality industry in China, including market position, market size, and growth rates of the markets in which we participate, that are based on industry publications and reports. Statistical data in these publications and reports also include projections based on a number of assumptions. The hospitality industry in China may not grow at the rates projected by market data, or at all. The failure of these markets to grow at the projected rates may have a material adverse effect on our business and the market price of our ADSs. If any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate is necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. You should not place undue reliance on these forward-looking statements.

The forward-looking statements made in this prospectus relate only to events or information as of the date on which the statements are made in this prospectus. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date on which the statements are made or to reflect the occurrence of unanticipated events. You should read this prospectus and the documents that we have referred to in this prospectus and have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds from this offering of approximately US$156.6 million, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us and based upon an assumed initial offering price of US$17.00 per ADS (the mid-point of the estimated range of initial public offering price shown on the front cover page of this prospectus). A US$1.00 increase (decrease) in the assumed initial public offering price of US$17.00 per ADS would increase (decrease) the net proceeds to us from this offering by US$9.5 million, after deducting the estimated underwriting discounts and commissions and estimated aggregate offering expenses payable by us and assuming no change to the number of ADSs offered by us as set forth on the front cover page of this prospectus.

We plan to use the net proceeds we will receive from this offering for general corporate purposes in line with our strategies, including the following:

 

    approximately 25% of the net proceeds of this offering for the organic expansion of our hotel chain and the improvement of existing hotel properties, including conversion of existing leased-and-operated hotels to new brands, including Gme, Gya and VX;

 

    approximately 60% of the net proceeds of this offering for potential acquisitions of domestic and overseas operators that will complement our operations and accelerate our expansion plan. Currently, we have not entered into any binding agreement for any acquisition nor identified any definite acquisition target; and

 

    the remaining amount, approximately 15% for working capital and other general corporate purposes, including marketing and upgrading our IT system.

The foregoing represents our intentions as of the date of this prospectus with respect of the use and allocation of the net proceeds of this offering based upon our present plans and business conditions, but our management will have significant flexibility and discretion in applying the net proceeds of the offering.

The occurrence of unforeseen events or changed business conditions may result in application of the proceeds of this offering in a manner other than as described in this prospectus.

To the extent that the net proceeds we receive from this offering are not immediately applied for the above purposes, we intend to invest our net proceeds in short-term, interest bearing, debt instruments or bank deposits.

In utilizing the proceeds of this offering, we, as an offshore holding company, are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries only through loans or capital contributions, and only if we satisfy applicable government registration and approval requirements. Subject to satisfaction of applicable government registration and approval requirements, we may extend inter-company loans to our PRC subsidiaries or make additional capital contributions to our PRC subsidiaries to fund their capital expenditures or working capital. We cannot assure you that we will be able to obtain these government registrations or approvals on a timely basis, if at all. See “Risk Factors — Risks Related to Doing Business in China — PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiaries which would materially and adversely affect our liquidity and our ability to fund and expand our business.”

 

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DIVIDEND POLICY

In December 2017, we declared a cash dividend of RMB588.4 million (US$90.4 million). RMB548.7 million (US$84.3 million) of the cash dividend was paid in December 2017, and the remainder will be paid in 2018. In February and March 2018, we declared a cash dividend of US$23.0 million and US$2.6 million, respectively, and we intend to pay such cash dividend to GTI, our shareholder, after the completion of this offering and upon the receipt of relevant internal and other approvals. Other than this dividend, we do not have any present plan to pay any dividends on our shares or ADSs in the foreseeable future. We intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

Any future determination to pay dividends will be made at the discretion of our board of directors, subject to certain requirements of Cayman Islands law. Our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our directors decide to pay dividends, the form, frequency and amount of dividends will be based on a number of factors, including our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends on our shares, we will pay those dividends which are payable in respect of the underlying Class A ordinary shares represented by our ADSs to the depositary, as the registered holder of such Class A ordinary shares, and the depositary then will pay such amounts to our ADS holders in proportion to the underlying Class A ordinary shares represented by the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. See “Description of American Depositary Shares.” Cash dividends on our Class A ordinary shares, if any, will be paid in U.S. dollars.

We are a holding company incorporated in the Cayman Islands. In order for us to distribute any dividends to our shareholders and ADS holders, we rely on dividends distributed by our subsidiaries in China. Distributions from our subsidiaries to us may be subject to various local taxes, such as withholding tax. In addition, regulations in China currently permit payment of dividends of a Chinese company only out of accumulated distributable after-tax profits as determined in accordance with its articles of association and the accounting standards and regulations in China. See “Risk Factors — Risks Related to Doing Business in China — We rely principally on dividends and other distributions on equity paid by our subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our ability to borrow money or pay dividends to holders of our ADSs.”

 

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CAPITALIZATION

The following table sets forth our capitalization as of December 31, 2017 presented on:

 

    an actual basis;

 

    a pro forma basis to reflect (i) the intended distribution of cash dividends of US$23.0 million in February 2018 and US$2.6 million in March 2018 to GTI and (ii) the redesignation of 7,954,048 Class B ordinary shares as Class A ordinary shares; and

 

    a pro forma as adjusted basis to reflect (i) the intended distribution of cash dividends US$23.0 million in February 2018 and US$2.6 million in March 2018 to GTI, (ii) the redesignation of 7,954,048 Class B ordinary shares as Class A ordinary shares and (iii) the issuance and sale of the shares in the form of ADSs by us in this offering, at an assumed initial public offering price of US$17.00 per ADS, the mid-point of the estimated range of initial public offering price shown on the front cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

The pro forma information below is illustrative only and our capitalization following the completion of this offering is subject to adjustment based on the initial public offering price of our ADSs and other terms of this offering determined at pricing. You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of December 31, 2017  
     Actual     Pro Forma     Pro forma as adjusted  
     RMB     US$     RMB     US$     RMB     US$  
    

(in thousands)

 

Shareholders’ equity:

            

Class A ordinary shares

     160,190       24,621       186,388       28,648       219,570       33,747  

Class B ordinary shares

     140,697       21,625       114,499       17,598       114,499       17,598  

Additional paid-in capital

     212,310       32,631       212,310       32,631       1,200,802       184,560  

Retained earnings

     223,134       34,295       56,712       8,717       56,712       8,717  

Accumulated other comprehensive loss

     (4,086     (628     (4,086     (628     (4,086     (628

Noncontrolling interests

     360       55       360       55       360       55  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     732,605       112,599       566,183       87,021       1,587,857       244,049  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total capitalization

     732,605       112,599       566,183       87,021       1,587,857       244,049  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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DILUTION

If you invest in our ADSs, your interest will be diluted to the extent of the difference between the initial public offering price per ADS and our net tangible book value per ADS after this offering. Dilution results because the initial public offering price per Class A ordinary share is substantially in excess of the book value per share attributable to the existing shareholders for our presently outstanding shares.

Our net tangible book value as of December 31, 2017 was approximately RMB725.9 million (US$111.6 million), or RMB7.95 (US$1.22) per share as of that date, and US$1.22 per ADS. Net tangible book value represents the amount of our total consolidated assets, less the amount of our intangible assets, goodwill and total consolidated liabilities. Dilution is determined by subtracting net tangible book value per share, after giving effect to the issuance and sale by us of 10,200,000 Class A ordinary shares in the form of ADSs in this offering at an assumed initial public offering price of US$17.00 per ADS (the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus) after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us.

Without taking into account any other changes in net tangible book value after December 31, 2017 other than to give effect to the intended distribution of cash dividends and the issuance and sale by us of 10,200,000 Class A ordinary shares in the form of ADSs in this offering, at an assumed initial public offering price of US$17.00 per ADS (the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus) after deduction of the underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2017 would have been US$243.0 million, or US$2.39 per outstanding share and US$2.39 per ADS. This represents an immediate increase in net tangible book value of US$1.17 per share and US$1.17 per ADS to the existing shareholders and an immediate dilution in net tangible book value of US$14.61 per share and US$14.61 per ADS to investors purchasing ADSs in this offering.

The following table illustrates such dilution:

 

     Per share      Per ADS  

Actual net tangible book value as of December 31, 2017

   US$ 1.22      US$ 1.22  

Pro forma net tangible book value after giving effect to the intended distribution of cash dividends

   US$ 0.94      US$ 0.94  

Pro forma as adjusted net tangible book value after giving effect to the intended distribution of cash dividends and this offering

   US$ 2.39      US$ 2.39  

Assumed initial public offering price

   US$ 17.00      US$ 17.00  

Dilution in net tangible book value to new investors in the offering

   US$ 14.61      US$ 14.61  

The amount of dilution in net tangible book value to new investors in this offering set forth above is determined after giving effect to this offering from the public offering price per share.

A US$1.00 increase (decrease) in the assumed public offering price of US$17.00 per ADS (the mid-point of the estimated initial public offering price range shown on the front cover page of this prospectus) would increase (decrease) our pro forma as adjusted net tangible book value after giving effect to the offering by US$9.5 million, the pro forma as adjusted net tangible book value per share and per ADS after giving effect to this offering by US$0.09 per share and US$0.09 per ADS and the dilution in pro forma as adjusted net tangible book value per share and per ADS to new investors in this offering by US$0.91 per share and US$0.91 per ADS, assuming no change to the number of ADS offered by us as set forth on the front cover page of this prospectus, and after deducting underwriting discounts and commissions and other offering expenses.

The following table summarizes, on a pro forma basis as of December 31, 2017, the differences between existing shareholders and the new investors with respect to the number of shares (in the form of ADSs or shares) purchased from us, the total consideration paid and the average price per share and per ADS paid before deducting the underwriting discounts and commissions and estimated offering expenses. The total number of

 

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shares does not include Class A ordinary shares underlying the ADSs issuable upon the exercise of the option to purchase additional ADSs granted to the underwriters.

 

     Shares Purchased     Total Consideration     Average
Price per
Share
     Average
Price per
ADS
 
     Number      Percent     Amount      Percent       
     (in millions of US$, except number of shares and percentages)  

Existing shareholders

     91,352,209        90   US$ 53.6        24   US$ 0.59      US$ 0.59  

New investors

     10,200,000        10   US$ 173.4        76   US$ 17.00      US$ 17.00  

Total

     101,552,209        100   US$ 227.0        100   US$ 2.24      US$ 2.24  

If the underwriters were to fully exercise the over-allotment option to purchase 1,530,000 additional shares of our Class A ordinary shares from us, the percentage of our shares held by existing shareholders would be 88.6%, and the percentage of shares of our common stock held by new investors would be 11.4%.

The pro forma information discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our ADSs and other terms of this offering determined at pricing.

 

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EXCHANGE RATE INFORMATION

Almost all of our revenue and expenses are denominated in Renminbi. This prospectus contains translations of Renminbi amounts into U.S. dollars at specific rates solely for the convenience of the reader. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this prospectus were made at a rate of RMB6.5063 to US$1.00, the exchange rate set forth in the H.10 statistical release of the Federal Reserve Board on December 29, 2017. We make no representation that the Renminbi or U.S. dollar amounts referred to in this prospectus could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all. The Chinese government imposes control over its foreign currency reserves in part through direct regulation of the conversion of Renminbi into foreign exchange and through restrictions on foreign trade. On March 16, 2018, the noon buying rate for Renminbi was RMB6.3300 to US$1.00.

The following table sets forth information concerning exchange rates between the Renminbi and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this prospectus or will use in the preparation of our periodic reports or any other information to be provided to you. For all dates and periods, the exchange rate refers to the exchange rate as set forth in the H.10 statistical release of the Federal Reserve Board.

 

     Noon Buying Rate  
     Period End      Average(1)      Low      High  
     (RMB per US$1.00)  

2012

     6.2301        6.2990        6.3879        6.2221  

2013

     6.0537        6.1412        6.2438        6.0537  

2014

     6.2046        6.1704        6.2591        6.0402  

2015

     6.4778        6.2869        6.4896        6.1870  

2016

     6.9430        6.6549        6.9580        6.4480  

2017

     6.5063        6.7350        6.9575        6.4773  

August

     6.5888        6.6670        6.7272        6.5888  

September

     6.6533        6.5690        6.6591        6.4773  

October

     6.6328        6.6254        6.6533        6.5712  

November

     6.6090        6.6200        6.6385        6.5967  

December

     6.5063        6.5932        6.6210        6.5063  

2018

           

January

     6.2841        6.4232        6.5263        6.2841  

February

     6.3280        6.3183        6.3471        6.2649  

March (through March 16)

     6.3300        6.3297        6.3565        6.3093  

 

Source: Federal Reserve Statistical Release

 

(1) Annual averages are calculated using the average of the rates on the last business day of each month during the relevant year. Monthly averages are calculated using the average of the daily rates during the relevant month.

 

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ENFORCEMENT OF CIVIL LIABILITIES

We are incorporated under the laws of the Cayman Islands as an exempted company with limited liability. We are incorporated in the Cayman Islands because of certain benefits associated with being a Cayman Islands company, such as political and economic stability, an effective judicial system, a favorable tax system, the absence of foreign exchange control or currency restrictions and the availability of professional and support services. However, the Cayman Islands has a less developed body of securities laws as compared to the U.S. and provides protections for investors to a lesser extent. In addition, Cayman Islands companies may not have standing to sue before the federal courts of the U.S.

Most of our operations are conducted in China, and most of our assets are located in China. In addition, most of our directors and officers are residents of jurisdictions other than the U.S. and all or a substantial portion of their assets are located outside the U.S. As a result, it may be difficult for investors to effect service of process within the U.S. upon us or these persons, or to enforce against us or them judgments obtained in U.S. courts, including judgments predicated upon the civil liability provisions of the securities laws of the U.S. or any state in the U.S. It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors.

We have appointed Law Debenture Corporate Services Inc. as our agent to receive service of process with respect to any action brought against us in the U.S. District Court for the Southern District of New York under the federal securities laws of the U.S. or of any state in the U.S. or any action brought against us in the Supreme Court of the State of New York in the County of New York under the securities laws of the State of New York.

Maples and Calder (Hong Kong) LLP, our counsel as to Cayman Islands law, and Zhonglun W&D Law Firm, our counsel as to PRC law, have advised us that there is uncertainty as to whether the courts of the Cayman Islands or the PRC would, respectively, (i) recognize or enforce judgments of U.S. courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the U.S. or any state in the U.S. and (ii) entertain original actions brought in the Cayman Islands or the PRC against us or our directors or officers predicated upon the securities laws of the U.S. or any state in the U.S.

Maples and Calder (Hong Kong) LLP has informed us that the uncertainty with regard to Cayman Islands law relates to whether a judgment obtained from the U.S. courts under the civil liability provisions of the securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman company. Because the courts of the Cayman Islands have yet to rule on whether such judgments are penal or punitive in nature, it is uncertain whether they would be enforceable in the Cayman Islands.

In addition, Maples and Calder (Hong Kong) LLP has advised us that although there is no statutory recognition in the Cayman Islands of judgments obtained in the federal or state courts of the U.S., and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments, a judgment obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (i) is given by a foreign court of competent jurisdiction, (ii) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (iii) is final, (iv) is not in respect of taxes, a fine or a penalty, and (v) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands.

Zhonglun W&D Law Firm has advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedure Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedure Law based either on treaties between the PRC and the country where the judgment is made or on principles of reciprocity between jurisdictions. However, as of the

 

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date of this prospectus, the PRC does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, courts in China will not recognize or enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or social public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or in the Cayman Islands. Furthermore, it will be difficult for U.S. shareholders to initiate actions against us in the PRC in accordance with PRC laws because we are incorporated under the laws of the Cayman Islands and it will be difficult for U.S. shareholders, by virtue only of holding our ADSs or ordinary shares, to establish a connection to the PRC for a PRC court to have jurisdiction as required under the PRC Civil Procedure Law.

 

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OUR HISTORY AND CORPORATE STRUCTURE

We are a Cayman Islands holding company and conduct our operations in China through our PRC subsidiaries. GreenTree Inns Hotel Management Group, Inc., a company incorporated in Samoa, or GreenTree Samoa, was formed to be the holding company of all but two of our PRC subsidiaries that operate our hotels in the PRC. GreenTree Samoa also owns 100% of the equity interest in Pacific Hotel Investment, Inc. and GreenTree Suites Management Corp., each of which owns 100% of the equity interest in the other two of our PRC subsidiaries.

We began our hotel business in the PRC in September 2004 through GreenTree Inns Hotel (Weihai) Management Group Inc., or GreenTree Weihai, which was incorporated on November 14, 2003 and 100% owned by American Pacific Homes Inc., a company wholly owned by Mr. Alex S. Xu, our founder, chairman and chief executive officer. In September 2010, GreenTree Weihai was merged into GreenTree Samoa as a wholly owned subsidiary of GreenTree Samoa. In October 2010, upon completion of a share exchange, GreenTree Samoa became a wholly-owned subsidiary of GreenTree Inns Hotel Management Group, Inc., or GTI, a company incorporated in the Cayman Islands.

GreenTree Hospitality Group Ltd., or GreenTree Hospitality, the listing entity for the purpose of this offering, was incorporated in October 2017 as a wholly-owned subsidiary of GTI. In November 2017, GreenTree Hospitality issued 48,635,251 Class A ordinary shares and 42,716,957 Class B ordinary shares to GTI in exchange for the entire share capital of GreenTree Samoa then held by GTI. On March 11, 2018, we redesignated 7,954,048 of our Class B ordinary shares as Class A ordinary shares. Immediately after the completion of this offering, 84.7% of our Class A ordinary shares and 100% of our Class B ordinary shares will be owned by GTI, our parent company. Subsequently, GTI intends to register and distribute to each of its shareholders not more than 60% of the number of our shares that represent the percentage of such shareholder’s ownership in GTI as of the closing date of this offering. As a condition to receiving our shares, GTI’s shareholders will be required to enter into certain lock-up agreements with us in respect of our shares which they own prior to the expiry of a six-month period following the date of this prospectus. The number of our shares subject to such lock-up agreements will be reduced by 25% at the end of the six month period following the date of this prospectus and each six month period thereafter through the two-year anniversary of the date of this prospectus. Following the completion of this offering and as long as GTI or Mr. Alex S. Xu owns at least 50% of the voting power of our company, we will be a “controlled company” as defined under the NYSE Listed Company Manual. We have no current intention to rely on the controlled company exemption.

Our principal executive offices are located at 2451 Hongqiao Road, Changning District, Shanghai 200335, People’s Republic of China. Our telephone number at this address is +86-21-3617-4886.

 

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The following diagram illustrates our corporate structure and the place of organization and ownership interest of each of our subsidiaries as of the date of this prospectus. It omits certain entities that are immaterial to our results of operations, business and financial condition. Unless otherwise indicated, equity interests depicted in this diagram are held as to 100%.

 

LOGO

 

Note:

(1) GTI holds 56,589,300 Class A ordinary shares and 34,762,909 Class B ordinary shares in our company. GTI is entitled to cast 160,878,027 votes. Class A ordinary shares are entitled to one (1) vote per share and Class B ordinary shares are entitled to three (3) votes per share in respect of matters requiring the votes of shareholders of our company if such Class B ordinary share is owned by GTI, Mr. Alex S. Xu, our founder, chairman and chief executive officer, Mr. Alex S. Xu’s family trusts or his or the family trust’s designated transferees. Our Class A and Class B ordinary shares have the same rights to dividend and other distributions.

 

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SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following selected consolidated statements of comprehensive income data for the years ended December 31, 2015, 2016 and 2017 and the selected consolidated balance sheet data as of December 31, 2015, 2016 and 2017 have been derived from our audited consolidated financial statements included elsewhere in this prospectus.

Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP.

Our historical results are not necessarily indicative of results to be expected for any future period. The following selected consolidated financial data for the periods and as of the dates indicated are qualified by reference to and should be read in conjunction with our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” both of which are included elsewhere in this prospectus.

 

     Year ended December 31,  
     2015     2016     2017  
     RMB     RMB     RMB     US$  
     (in thousands)  

Selected Consolidated Statements of Comprehensive Income Data:

    

Revenues

        

Leased-and-operated hotels

     204,761       183,773       189,134       29,069  

Franchised-and-managed hotels

     397,987       421,577       535,632       82,325  

Membership fees

     31,972       42,439       53,365       8,202  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     634,720       647,789       778,131       119,596  

Operating costs and expenses

        

Hotel operating costs

     (264,335     (240,132     (233,646     (35,910

Selling and marketing expenses

     (24,643     (26,609     (45,032     (6,921

General and administrative expenses

     (64,308     (77,933     (121,657 )(1)      (18,698

Other operating expenses

     (14,757     (3,073     (5,629     (866
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     (368,043     (347,747     (405,964     (62,395

Other operating income

     21,095       12,222       15,284       2,349  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     287,772       312,264       387,451       59,550  

Interest income and other, net

     19,643       22,039       26,238       4,032  

Interest expense

     —         —         (1,443     (221

Gains from trading securities

     25,545       24,564       59,165       9,094  

Other income (expense), net

     —         1,322       1,191       183  

Income before income taxes

     332,960       360,189       472,602       72,638  

Income tax expense

     (80,077     (83,924     (186,651 )(2)      (28,688
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before share of loss in equity investees

     252,883       276,265       285,951       43,950  

Share of loss in equity investees, net of tax

     (17,213     (10,465     (900     (138
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     235,670       265,800       285,051       43,812  

Net loss attributable to noncontrolling interests

     123       173       349       54  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ordinary shareholders

     235,793       265,973       285,400       43,866  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes one-time share-based compensation expenses of RMB38.0 million (US$5.8 million) in 2017 for GTI’s shares granted to certain of our directors for their past services as directors.
(2) Includes withholding taxes of RMB67.7 million (US$10.4 million) incurred in connection with a cash dividend distributed by our subsidiaries incorporated in the PRC during the year ended December 31, 2017.

 

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The following table presents a summary of our consolidated balance sheet data as of December 31, 2015, 2016 and 2017:

 

     As of December 31,  
     2015      2016      2017  
     RMB      RMB      RMB      US$  
     (in thousands)  

Selected Consolidated Balance Sheet Data:

     

Cash and cash equivalents

     505,857        896,783        161,964        24,893  

Property and equipment, net

     141,394        110,436        96,669        14,858  

Intangible assets, net

     5,981        4,927        3,727        573  

Goodwill

     2,959        2,959        2,959        455  

Long-term investments

     81,158        35,497        122,509        18,829  

Total assets

     1,407,151        1,875,751        1,755,983        269,890  

Deferred revenue

     151,101        201,356        253,361        38,941  

Total liabilities

     629,947        848,827        1,023,378        157,291  

Total shareholders’ equity

     777,204        1,026,924        732,605        112,599  

Total liabilities and shareholders’ equity

     1,407,151        1,875,751        1,755,983        269,890  

The following tables present certain unaudited financial data and selected operating data as of and for the years ended December 31, 2015, 2016 and 2017:

 

     As of December 31,  
     2015      2016      2017  

Selected Operating Data:

        

Total hotels in operation

     1,651        1,964        2,289  

Franchised-and-managed hotels

     1,611        1,932        2,263  

Leased-and-operated hotels

     40        32        26  

Total hotel rooms in operation

     146,176        168,238        190,807  

Franchised-and-managed hotels

     141,434        164,207        187,505  

Leased-and-operated hotels

     4,742        4,031        3,302  

Number of cities

     210        234        263  

 

     Year Ended December 31,  
     2015     2016     2017  

Occupancy rate (as a percentage)(1)

      

Total hotels in operation

     77.8     80.4     82.6

Franchised-and-managed hotels

     78.3     80.9     82.9

Leased-and-operated hotels

     66.8     66.4     70.3

Average daily rate (in RMB)

      

Total hotels in operation

     152       153       157  

Franchised-and-managed hotels

     152       152       156  

Leased-and-operated hotels

     160       164       186  

RevPAR (in RMB)

      

Total hotels in operation

     118       123       130  

Franchised-and-managed hotels

     119       123       129  

Leased-and-operated hotels

     107       109       131  

 

(1) Based on number of available rooms.

 

 

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     Year Ended December 31,  
     2015      2016      2017  
     RMB      RMB      RMB      US$  
     (in thousands, expect for percentage)  

Non-GAAP Financial Data

           

Adjusted EBITDA(1)

     323,117        338,470        440,800        67,751  

Adjusted EBITDA Margin(2)

     50.9%        52.3%        56.6%     

 

(1) We believe that Adjusted EBITDA, as we present it, is a useful financial metric to assess our operating and financial performance before the impact of investing and financing transactions, income taxes and certain non-core and non-recurring items in our financial statements.

The presentation of Adjusted EBITDA should not be construed as an indication that our future results will be unaffected by other charges and gains we consider to be outside the ordinary course of our business.

The use of Adjusted EBITDA has certain limitations because it does not reflect all items of income and expenses that affect our operations. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our operating and financial performance. Depreciation and amortization expense for various long-term assets, income tax and share-based compensation have been and will be incurred and are not reflected in the presentation of Adjusted EBITDA. Each of these items should also be considered in the overall evaluation of our results. Additionally, Adjusted EBITDA does not consider capital expenditures and other investing activities and should not be considered as a measure of our liquidity. We compensate for these limitations by providing the relevant disclosure of our depreciation and amortization, interest/expense income, gains/losses from trading securities, income tax expenses, share-based compensation, share of loss in equity investees and other relevant items both in our reconciliations to the corresponding U.S. GAAP financial measures and in our consolidated financial statements, all of which should be considered when evaluating our performance.

The term Adjusted EBITDA is not defined under U.S. GAAP, and Adjusted EBITDA is not a measure of net income, operating income, operating performance or liquidity presented in accordance with U.S. GAAP. When assessing our operating and financial performance, you should not consider this data in isolation or as a substitute for our net income, operating income or any other operating performance measure that is calculated in accordance with U.S. GAAP. In addition, our Adjusted EBITDA may not be comparable to Adjusted EBITDA or similarly titled measures utilized by other companies since such other companies may not calculate Adjusted EBITDA in the same manner as we do.

 

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A reconciliation of Adjusted EBITDA to net income, which is the most directly comparable U.S. GAAP measure, is provided below:

 

     Year Ended December 31,  
     2015      2016      2017  
     (RMB)      (RMB)      RMB      US$  
     (in thousands)  

Net income

     235,670        265,800        285,051        43,812  

Deduct:

           

Other operating income

     21,095        12,222        15,284        2,349  

Interest income and other, net

     19,643        22,039        26,238        4,032  

Gains from trading securities

     25,545        24,564        59,165        9,094  

Other income (expense), net

     —          1,322        1,191        183  

Add:

           

Other operating expenses

     14,757        3,073        5,629        866  

Income tax expense

     80,077        83,924        186,651        28,688  

Share of loss in equity investees, net of tax

     17,213        10,465        900        138  

Interest expense

     —          —          1,443        221  

Share-based compensation

     —          —          38,048        5,848  
  

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation and amortization

     41,683        35,355        24,956        3,836  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA (Non-GAAP)

     323,117        338,470        440,800        67,751  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by our total revenues.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the section entitled “Selected Consolidated Financial Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Overview

We are the leading pure play franchised hotel operator in China as franchised-and-managed hotels represent almost all of the hotels in our hotel network. In 2016, we were the fourth largest economy to mid-scale hotel group in China in terms of number of hotel rooms, according to China Hospitality Association. As of December 31, 2017, we had the highest proportion of franchised-and-managed hotels among the top four major economy to mid-scale hotel networks in China, with 98.9% of hotels in our network as of those dates being franchised-and-managed hotels. As of December 31, 2017, our hotel network comprised 2,289 hotels with 190,807 rooms in China, covering all four centrally-administrated municipalities and 263 cities throughout all 27 provinces and autonomous regions in China, as well as an additional 306 hotels with 23,157 rooms that were contracted for or under development. Out of those 306 hotels, 129 hotels were contracted for, and the remaining 177 hotels were under development and are expected to commence operation by June 2018.

We generate our revenues from the management fees and upfront initial franchise fees we collect from our franchised-and-managed hotels, and from the operations of our leased-and-operated hotels. Under the franchised-and-managed model, we generate revenues from the initial franchise fee and from the recurring franchise management fees derived from the hotel’s revenues. For our leased-and-operated hotels, we lease or own the hotel premises and are responsible for the development costs, capital expenditures and operating expenses, whereas for our franchised-and-managed hotels, the franchisees are responsible for the development cost, capital expenditures and operating expenses and as a result, we expect hotels operated under leased-and-operated model to generate more revenue but also incur greater operating expenses and require higher capital investment for us compared to hotels operated under the franchised-and-managed model.

Our current brand portfolio comprises (i) mid- to up-scale brands including GreenTree Eastern founded in 2012, and newly launched Gme, Gya and VX brands with an aggregate of nine hotels being contracted; (ii) mid-scale brands including GreenTree Inn founded in 2004 and GreenTree Alliance founded in 2008; and (iii) economy brands including Vatica founded in 2013 and Shell founded in 2016.

In 2015, 2016 and 2017, we sold approximately 97% of our room nights through our direct sales channels comprising our website and mobile app, while OTAs only contributed approximately 3% of our room nights. Our strong and effective direct sales channels enable us and franchises to effectively reduce sales and marketing expense and enhance profitability.

As a result of our pure play franchise business model, our strong direct sales channels, our loyal hotel guests and our effective management and operational platform, we have consistently achieved highly attractive profitability, as evidenced by our Adjusted EBITDA of RMB323.1 million, RMB338.5 million and RMB440.8 million (US$67.8 million), Adjusted EBITDA margin of 50.9%, 52.3% and 56.6%, net income of RMB235.7 million, RMB265.8 million and RMB285.1 million (US$43.8 million), net margin of 37.1%, 41.0% and 36.6% and return on equity of 34.5%, 29.5% and 32.4% for 2015, 2016 and 2017, respectively. We have also been able to grow our network substantially and generate strong cash flow consistently since inception in 2004 with minimal debt and equity financing. In 2015, 2016 and 2017, we generated net operating cash inflow of RMB357.3 million, RMB443.6 million and RMB476.7 million (US$73.3 million) and did not have any outstanding indebtedness as of December 31, 2017.

 

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Factors Affecting Our Results of Operations

While our business is affected by factors relating to general economic conditions and the hospitality industry in China, we believe that our results of operations are also affected by company specific factors, including, among others:

 

    The total number of hotels and hotel rooms in our hotel network. Our revenues are affected to a significant extent by the number of hotels and hotel rooms we have in operation. We generate substantially all of our revenues from room nights sold at our leased-and-operated hotels and the franchise management fees we charge to each of our franchised-and-managed hotels. Furthermore, we believe expanding geographic coverage of our hotel network through increasing the number of hotels will enhance our brand recognition. Our ability to expand our hotel network depends on whether we can provide consistent quality services to our guests and franchisees and whether we can enhance our brand recognition in the market and win the competition for suitable property sites and quality franchisee candidates.

 

    The proportion of mature hotels in our hotel portfolio. We define mature hotels as those that have been in operation for more than six months. It typically takes six months for our newly opened franchised-and-managed hotels to ramp up before such hotels can generate normal and stable franchise management fees and for our new leased-and-operated hotels’ income to exceed the hotel operating costs which are generally fixed in nature.

The operation of each leased-and-operated hotel goes through three stages: development, ramp up and mature operations. During the ramp up stage, when the occupancy rate is relatively low, revenues generated by these new leased-and-operated hotels may be insufficient to cover their operating costs. The lower franchise management fees generated by our franchised-and-operated hotels during the ramp up stage and the pre-opening expenses incurred during the development stage and the lower profitability during the ramp-up stage for our leased-and-operated hotels may have a significant negative impact on our financial performance. The table below illustrates the net increases our hotels during 2015, 2016 and 2017.

 

     Year Ended
December 31,
 
     2015     2016     2017  

Hotels opened

     387       401       425  

Hotels closed

     (80     (88     (100
  

 

 

   

 

 

   

 

 

 

Net increase in total hotels

     307       313       325  

We track the performance of our hotels by comparing hotel revenue of our hotels during ramp up stage and mature hotels, calculated on a monthly rolling basis, taking into account the total number of hotels during ramp up stage and mature hotels in any particular period of time.

The table below illustrates the comparison of performance between mature hotels and hotels during ramp up stage.

 

     Year Ended
December 31,
 
     2015      2016      2017  

Mature franchised-and-managed hotels(1)

     1,380        1,639        1,983  

RevPAR (in RMB)

     120        123        129  

Franchised-and-managed hotels during ramp up stage

     231        293        280  

RevPAR (in RMB)

     86        86        87  

 

(1) As of end of the period.

 

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     Year Ended December 31,  
     2015      2016      2017  

Mature leased-and-operated hotels(1)

     39        32        26  

RevPAR (in RMB)

     107        109        131  

Revenue (in RMB thousands)

     204,761        183,773        189,134  

 

(1) As of end of the period.

 

    The fixed nature of our hotel operating costs. For our leased-and-operated hotels, a significant portion of our operating costs and expenses, including rental and base salary, is generally fixed. As a result, an increase in our revenues achieved through higher RevPAR will generally result in higher profitability, whereas a decrease in our revenues could result in a disproportionately large decrease in our earnings.

 

    Seasonality and special events. The hospitality industry is subject to fluctuations in revenues due to seasonality. Generally, the first quarter, in which both the New Year and Spring Festival holidays fall, accounts for a lower percentage of our annual revenues than the other quarters of the year. In addition, certain special events, such as large-scale exhibition, concerts or sports events, may increase the demand for our hotels significantly as such special events may attract travelers into and within the regions in China where we operate hotels.

Key Performance Indicators

We utilize a set of non-financial and financial key performance indicators which our senior management reviews frequently. The review of these indicators facilitates timely evaluation of the performance of our business and effective communication of results and key decisions, allowing our business to react promptly to changing customer demands and market conditions.

Our non-financial key performance indicators consist of increase in the total number of hotels and hotel rooms in our hotel network, as well as RevPAR achieved by our leased-and-operated hotels and franchised-and-managed hotels. RevPAR is a commonly used operating measure in the hospitality industry and is defined as the product of average occupancy rates and average daily rates achieved. Occupancy rates of our hotels mainly depend on the locations of our hotels, product and service offering, the effectiveness of our sales and brand promotion efforts, our ability to effectively manage hotel reservations, the performance of managerial and other employees of our hotels, as well as our ability to respond to competitive pressure. We set the room rates of our hotels primarily based on the location of hotels, room rates charged by our competitors within the same locality, and our relative brand and product strength in the city or city cluster.

Our financial key performance indicators consist of revenues, operating costs and expenses, which are discussed in greater detail in the following paragraphs. In addition, we use Adjusted EBITDA, a non-GAAP financial measure, as a key financial performance indicator to assess our results of operations before the impact of investing and financing transactions and income taxes. We believe that Adjusted EBITDA is widely used by other companies in the hospitality industry and may be used by investors as a measure of our financial performance. See “— Results of Operations” for a reconciliation of Adjusted EBITDA to net income.

 

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Revenues. We primarily derive our revenues from operation of our leased-and-operated hotels and various types of fees we charge our franchisees in relation to our franchised-and-managed hotels. We also generate revenue from the one-time membership fees charged to our hotel guests. Our revenues are net of a value-added tax of 6% and other related taxes. The following table sets forth our revenues generated by our franchised-and-managed hotels and leased-and-operated hotels, both in absolute amount and as a percentage of total revenues for the year indicated.

 

     Year Ended December 31,  
   2015      2016      2017  
     RMB      %      RMB      %      RMB      US$      %  
     (in thousands, except for percentages)  

Revenues:

                    

Leased-and-operated hotels(1)

     204,761        32.3        183,773        28.4        189,134        29,069        24.3  

Franchised-and-managed hotels

     397,987        62.7        421,577        65.0        535,632        82,325        68.8  

Membership fees

     31,972        5.0        42,439        6.6        53,365        8,202        6.9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

     634,720        100.0        647,789        100.0        778,131        119,596        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Including revenue from two owned and operated hotels.

 

    Franchised-and-managed Hotels. In 2015, 2016 and 2017, we generated revenues of RMB398.0 million, RMB421.6 million and RMB535.6 million (US$82.3 million) from our franchised-and-managed hotels, which accounted for 62.7%, 65.0% and 68.8% of our revenues for the respective years. Going forward, we expect the number of our franchised-and-managed hotels as a percentage of the total number of hotels in our network to further increase.

We select franchisees who are property owners, existing hotel operators or hotel investors. We train and manage general managers for our franchised-and-managed hotels and impose the same standards on all franchised-and-managed hotels to ensure product quality and consistency across our hotel network. Pursuant to the franchise-and-management agreements, we charge the franchisees fixed hotel manager fees to compensate us for the franchised-and-managed hotel managers’ salaries, social welfare benefits and certain other out-of-pocket expenses as incurred. The hotel manager fee is recognized as revenue on a monthly basis. Management services we provide to our franchisees generally include appointing and training hotel managers, obtaining access to and integrating into our central reservation system and our proprietary IT system, providing sales and marketing support, conducting quality assurance inspections, and providing other operational support and information. Our franchisees are responsible for operating expenses and the costs of developing and operating the hotels, including renovating the hotels according to our standards. We believe that our franchised-and-managed model has enabled us to quickly and effectively expand our geographical coverage and increase our market share in an asset-light manner by utilizing the local knowledge and relationships of our franchisees and the properties that they may own or have access to which are suitable for future hotel business cooperation with us.

Our revenues from franchised-and-managed hotels are primarily affected by the number of hotels and the revenues generated by the franchised-and-managed hotels. Our franchise agreements typically run for an initial term of 15 to 20 years. We collect franchise management fees from our franchisees and do not bear loss, if any, incurred by our franchisees. Our franchisees are generally required to pay us an initial franchise fee ranging between RMB150,000 and RMB250,000, depending on the number of rooms in the hotel. They are also responsible for all costs and expenses related to hotel construction and renovation. In addition, our franchise agreements typically provide for a monthly franchise management fee of 3% to 5% of the total revenues generated by each franchised-and-managed hotel. In general, we charge franchisees who open multiple hotels under our franchised-and-managed model a lower fee to reward their loyalty. On average, we charged our franchisees a monthly franchise management fee of 4.2%, 4.3% and 4.4% of the total revenues generated by each franchised-and-managed hotel in 2015, 2016 and 2017. We also collect from franchisees a reservation fee on a per

 

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room night basis for using our central reservation system, an annual IT system maintenance fee and a part of the membership registration fee to service customers who join our membership program at franchised-and-managed hotels. A number of these hotel general managers are our direct employees and the franchisees will reimburse us the general managers’ salary which is recognized as part of our revenues.

The table below sets forth the revenues from initial franchise fee and recurring franchise management fees, both in absolute amount and as a percentage of our revenues generated from franchised-and-managed hotels for the years indicated:

 

     Year Ended
December 31,
 
     2015      2016      2017  
     RMB      %      RMB      %      RMB      US$      %  
     (in thousands, except for percentage)  

Initial franchise fee

     73,893        18.6        48,517        11.5        56,176        8,634        10.5  

Recurring franchise management fee

     324,094        81.4        373,060        88.5        479,456        73,691        89.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Revenues from franchised-and-managed hotels

     397,987        100.0        421,577        100.0        535,632        82,325        100.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Revenues from recurring franchise management fee as a percentage of our revenues from franchised-and-managed hotels increased from 81.4% 2015 to 88.5% in 2016 and further to 89.5% in 2017, due to a continuous increase in the number of franchised-and-managed hotels in operation from 2015 to 2017.

 

    Leased-and-operated Hotels. In 2015, 2016 and 2017, we generated revenues of RMB204.8 million, RMB183.8 million and RMB189.1 million (US$29.1 million) (including RMB20.9 million, RMB27.2 million and RMB42.2 million (US$6.5 million) sublease rental revenue for 2015, 2016 and 2017, respectively) from our leased-and-operated hotels, which accounted for 32.3%, 28.4% and 24.3% of our revenues for the respective years. As we plan to focus on our franchised-and-managed model, we do not expect revenues from our leased-and-operated hotels to increase in the future as a percentage of our revenue.

For our leased-and-operated hotels, we own or lease properties from property owners or lessors and we are responsible for hotel conversion and customization to conform to our standards, as well as for repairs and maintenance and operating costs and expenses of properties over the term of the lease. We are also responsible for hotel operations and management, including hiring, training and supervising the hotel managers and employees required to operate our hotels and purchasing supplies. Our typical lease term ranges from 15 to 20 years with an initial three to six month rent free period. We generally pay rent on a quarterly or semi-annual basis.

Our revenues generated from leased-and-operated hotels are significantly affected by the following:

 

    the total number of leased-and-operated hotels in our hotel network;

 

    the total number of leased-and-operated hotel rooms in our hotel network; and

 

    RevPAR achieved by our leased-and-operated hotels, which represents the product of average daily rates and occupancy rates.

The growth of revenues generated from our leased-and-operated hotels depend significantly upon our ability to expand our hotel network into new locations in China and maintain competitive rates.

 

   

Membership Fees. The one-time membership fee we charge in relation to our paid memberships are recognized as our revenue on a straightline basis over the estimated life of the membership, which is

 

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three to six years, depending on the membership level. In 2015, 2016 and 2017, we generated revenues of RMB32.0 million, RMB42.4 million and RMB53.4 million (US$8.2 million) from our paid membership program. Going forward, as we continue to promote our paid membership program, we expect the revenue generated from membership fees to increase in absolute term.

Operating Costs and Expenses. Our operating costs and expenses consist of hotel operating costs, selling and marketing expenses and general and administrative expenses. The following table sets forth the components of our operating costs and expenses, both in absolute amount and as a percentage of total revenues for the year indicated.

 

     Year Ended December 31,  
     2015      2016      2017  
     RMB      %      RMB      %      RMB      US$      %  
     (in thousands, except for percentages)  

Operating costs and expenses:

                    

Hotel operating costs:

                    

Rental

     72,019        11.3        65,616        10.1        60,253        9,261        7.7  

Utilities

     18,015        2.8        17,274        2.7        16,692        2,566        2.1  

Personnel costs

     38,683        6.1        32,754        5.1        27,546        4,234        3.5  

Depreciation and amortization

     39,816        6.3        33,751        5.2        22,979        3,532        3.0  

Consumables, food and beverage

     18,372        2.9        14,162        2.2        13,470        2,070        1.7  

Costs of general managers of franchised-and-managed hotels

     42,336        6.7        45,516        7.0        54,292        8,344        7.0  

Other costs of franchised-and-managed hotels

     19,420        3.1        18,822        2.9        23,498        3,612        3.0  

Others

     15,674        2.5        12,237        1.9        14,916        2,291        2.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total hotel operating costs

     264,335        41.7        240,132        37.1        233,646        35,910        30.0  

Selling and marketing expenses

     24,643        3.9        26,609        4.1        45,032        6,921        5.8  

General and administrative expenses

     64,308        10.1        77,933        12.0        121,657        18,698        15.6  

Other operating expenses

     14,757        2.3        3,073        0.5        5,629        866        0.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating costs and expenses

     368,043        58.0        347,747        53.7        405,964        62,395        52.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

    Hotel operating costs. Our hotel operating costs consist of costs and expenses directly attributable to the operations of our franchised-and-managed and leased-and-operated hotels. Operating costs primarily include costs related to our leased and operated hotels, including rental payments and utility costs, compensation and benefits for our hotel based employees, costs of hotel room consumable products, such as bedding accessories, towel and sanitary amenities, depreciation and amortization of leasehold improvements and others including maintenance expenses, telecommunication expenses and public service charges, as well as costs related to our franchised-and-managed hotels, including (i) compensation and benefits for franchised-and-managed hotel general managers appointed and trained by us, the regional managers of the operating department and other headquarter personnel that serve the franchise and managed hotels, and (ii) related travel and telecommunication expenses. We anticipate that our hotel operating costs as a percentage of total revenues will decrease in general primarily due to (i) the enlarged base of relatively mature hotels in our leased-and-operated hotel portfolio, (ii) the increased revenue contribution from our franchised-and-managed hotels, and (iii) the relatively fixed nature of a significant portion of our operating costs and expenses.

 

   

Selling and marketing expenses. Our selling and marketing expenses consist primarily of commissions to travel intermediaries, expenses for marketing programs and materials, expenses in relation to our membership program, compensation and benefits for our sales and marketing personnel, and others including entertainment expenses and travel expenses for our sales and marketing personnel. We

 

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expect that our selling and marketing expenses will increase as our sales increase and as we expand into new geographic locations and promote our brand.

 

    General and administrative expenses. Our general and administrative expenses consist primarily of compensation and benefits, including share based compensation, for our corporate and regional office employees and other employees who are not sales and marketing or hotel-based employees, costs of third-party professional services, travel and accommodation expenses, bad debt provision and other expenses which include bank charges and stamp duty. We expect that our general and administrative expenses will increase in the near term as we hire additional personnel and incur additional costs in connection with the expansion of our business and with being a public company, including costs of enhancing our internal controls.

Taxation

We are incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, we are not subject to income or capital gain tax. In addition, dividend payments are not subject to withholding tax in the Cayman Islands.

GreenTree Hotel Inns Management Group Inc., or GreenTree Samoa, is incorporated in the Independent State of Samoa, or Samoa. Under the current law of Samoa, GreenTree Samoa is not subject to income or capital gain tax. In addition, dividend payments are not subject to withholding tax in Samoa.

On March 16, 2007, the National People’s Congress, the Chinese legislature, passed the Enterprise Income Tax Law, and on December 6, 2007, the PRC State Council issued the Implementation Regulations of the Enterprise Income Tax Law, both of which became effective on January 1, 2008. The Enterprise Income Tax Law and its Implementation Regulations, or the EIT Law, applies a uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises. Enterprises qualified as “High New Technology Enterprises”, or HNTEs, enjoy a preferential income tax rate of 15%. A subsidiary of ours was qualified as an HNTE during 2014 to 2017 under the EIT Law. This subsidiary has been entitled to a preferential corporate income tax rate of 12.5% for a three year period during 2013 to 2015 and will be entitled to a preferential income tax rate of 15% during 2016 to 2017. We have renewed the HNTE qualification and extended the preferential income tax treatment of this subsidiary from 2018 to 2020.

If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the Chinese Enterprise Income Tax Law, it would be subject to enterprise income tax on its global income at a rate of 25%. See “Risk Factors — Risks Related to Doing Business in China — It is unclear whether we will be considered as a PRC “resident enterprise” under the Enterprise Income Tax Law of the PRC, and depending on the determination of our PRC “resident enterprise” status, dividends paid to us by our PRC subsidiaries may be subject to PRC withholding tax, we may be subject to 25% PRC income tax on our worldwide income, and holders of our ADSs may be subject to PRC withholding tax on dividends on, and gains realized on their transfer of, our ADSs.”

Internal Control over Financial Reporting

In connection with the preparation and external audit of our consolidated financial statements as of and for the years ended December 31, 2015, 2016 and 2017, our auditors, an independent registered public accounting firm, noted one material weakness in our internal control over financial reporting. The material weakness identified related to insufficient accounting expertise necessary to comply with U.S. GAAP and SEC reporting and compliance requirements. Neither we nor our independent registered public accounting firm undertook a comprehensive assessment of our internal control for purposes of identifying and reporting material weaknesses and other control deficiencies in our internal control over financial reporting as we and they will be required to do after we become a public company. In light of the material weakness that were identified as a result of the limited procedures performed, we believe it is possible that, had we performed a formal assessment of our internal control over financial reporting or had our independent registered public accounting firm performed an audit of our internal control over financial reporting, additional control deficiencies would have been identified.

 

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We will improve our financial control over financial reporting through (i) arranging appropriate U.S. GAAP training for all relevant accounting personnel; (ii) preparing a comprehensive set of accounting policies and procedures manual, making such manual readily accessible to guide the day-to-day operations of our accounting and finance personnel to ensure the timely and consistent accounting application; (iii) implementing a formal review process for the financial statement close process; and (iv) establishing an internal audit department within close proximity of the date of our initial public offering to, among other things, review our internal control processes, policies and procedures to ensure compliance with the Sarbanes-Oxley Act. However, the implementation of these measures may not fully address the material weakness in our internal control over financial reporting. We are not able to estimate with reasonable certainty the costs that we will need to incur to implement these and other measures designed to improve our internal control over financial reporting. See “Risk Factors — Risks Related to Our Business — A material weakness in our internal control over financial reporting has been identified, and if we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results, meet our reporting obligations or prevent fraud.”

The process of designing and implementing an effective financial reporting system is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a financial reporting system that is adequate to satisfy our reporting obligations. See “Risk Factors — Risks Related to Our Business — A material weakness in our internal control over financial reporting has been identified, and if we fail to maintain an effective system of internal controls over financial reporting, we may not be able to accurately report our financial results, meet our reporting obligations or prevent fraud.”

As a company with less than US$1.07 billion in revenue for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards.

We intend to choose to take advantage of the extended transition period. As a result of this election, our financial statements may not be comparable to other public companies that comply with the public company effective dates for these new or revised accounting standards.

Critical Accounting Policies

We prepare financial statements in accordance with accounting principles generally accepted in the United States, or U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect the reported amounts of our assets and liabilities and the disclosure of our contingent assets and liabilities at the end of each fiscal period and the reported amounts of revenues and expenses during each fiscal period. We evaluate these judgments and estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and assumptions that we believe to be reasonable, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.

The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.

 

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Revenue recognition

We recognize revenues when all of the following have occurred: persuasive evidence of arrangement with the customer, services have been performed, fees are fixed or determinable and collectability of the fees is reasonably assured, as prescribed by ASC 605-10, Revenue Recognition, Overall.

Our revenues from leased-and-operated hotels are primarily derived from hotel operations, including the rental of rooms and food and beverage sales from those hotels administrated under our brand names. Revenue is recognized when rooms are occupied and food and beverages are sold. Sublease rental revenue are derived from the subleasing of partial space of leased-and-operated hotels and is recorded in leased-and-operated hotel revenue in the consolidated statements of comprehensive income on a straight line basis over the contractual lease term.

Our revenues from franchised-and-managed hotels are derived from franchise agreements where the franchisees are required to pay (i) an initial one-time non-refundable franchise fee, and (ii) continuing franchise fees, which mainly consist of on-going management and service fees based on a certain percentage of the room revenues of the franchised-and-managed hotels and central reservation system, or CRS, usage fee based on a fixed rate per transaction. The one-time franchise fee is recognized when we have fulfilled all our commitments and obligations, including the assistance to the franchisees in property design, leasehold improvement, construction project management, systems installation, personnel recruiting and training, which is generally when the franchised-and-managed hotel opens for business. Continuing franchise fees are recognized when the underlying service revenue is recognized by the franchisees’ operations. The CRS usage fees are recognized when the services are provided.

In addition, we designate hotel managers to certain hotels and account for hotel manager fees related to the hotels under the franchise program as revenues. Pursuant to the franchise and management agreements, we charge the franchisees fixed hotel manager fees to compensate us for the franchised-and-managed hotel managers’ salaries, social welfare benefits and certain other out-of-pocket expenses as incurred. The hotel manager fee is recognized as revenue on a monthly basis and is included in franchised-and-managed hotel revenue in our consolidated statements of comprehensive income.

We invite our customers to participate in a membership program. We have four tiers of membership — e-membership, regular membership, gold membership and platinum membership. A one-time membership fee is charged for new members except for the e-membership. The membership automatically expires after two years in the event of non-usage. The membership is automatically renewed if used at least once within a two-year period. Members enjoy discounts on room rates, priority in hotel reservation, and accumulate membership points for their paid stays, which can be redeemed for membership upgrades, room night rewards and other gifts within two years after the points are earned.

One time fees from the sale of membership cards under our paid membership program are recognized on a straight line basis over the expected membership term, which is three to six years depending on membership level, based on our historical membership data. We will continue to monitor membership activity patterns and will re-assess estimated lives of memberships at each reporting period.

Impairment of long lived assets

We evaluate our long lived assets and finite lived intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When these events occur, we measure impairment by comparing the carrying amount of the assets to future undiscounted net cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying amount of the assets, we will recognize an impairment loss based on the fair value of the assets. Fair value is generally determined by discounting the cash flows expected to be generated by the assets, when the market prices are not readily available for the long lived assets. We recognized impairment charges of RMB7.1 million, nil and nil for long lived assets for the years ended December 31, 2015, 2016 and 2017, respectively.

 

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Investments

Our investments mainly consist of cost method and equity method investments as well as held-to-maturity investments and trading securities.

Entities where we own less than 20% of the voting securities and does not have the ability to exercise significant influence over operating and financial policies are accounted as cost-method investment. Whereas entities where we have significant influence but does not own a majority equity interest or otherwise control are accounted as equity-method investments in accordance to ASC323-10, Investments — Equity Method and Joint Ventures: Overall. Share of earnings or losses of such investees are recorded in earnings. We record impairment losses on these investments when the impairment is deemed other-than-temporary.

The securities that we have the positive intent and the ability to hold to maturity are classified as held-to-maturity securities and stated at amortized cost, whereas the securities that we buy and hold principally for the purpose of selling them in the near term are classified as trading securities with unrealized holding gains and losses for trading securities are included in earnings.

Income taxes

We account for income taxes using the liability method, where deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some or all of the deferred tax assets will not be realized.

We recognize the benefit of a tax position if the tax position is more likely than not to prevail based on the technical merits of the tax position. Tax positions that meet the “more likely than not” threshold are measured at the largest amount of tax benefit that has a greater than fifty percent likelihood of being realized upon settlement. We re-assessed our liability for unrecognized tax benefits that may be affected by changing interpretations of laws, rulings by tax authorities, changes and/or developments with respect to tax audits, and expiration of the statute of limitations. Changes in recognition and measurement estimates are recognized in the period in which the changes occur. We account for interest and penalties related to an uncertain tax position as a component of income taxes.

Share-based compensation

Share based awards granted to employees are accounted for under ASC 718, “Compensation — Stock Compensation”, which requires that such share-based awards granted to employees be measured based on the grant date fair value and recognized as compensation expense (a) immediately at grant date if no vesting conditions are required; or (b) using graded vesting method, net of estimated forfeitures, over the requisite service period, which is the vesting period.

Fair Value of Our Ordinary Shares

Prior to the completion of this offering, we were a private company with no quoted market prices for our ordinary shares. We engaged an independent third party valuation firm to assist us in the determination of the estimated fair value of options granted for purposes of assessing the share-based compensation in connection with employee share options granted. The table below sets forth our estimates of the fair value of our ordinary shares:

 

Date

   Fair Value per
Ordinary Share
(US$)
     DLOM(1)     Discount
Rate
 

January 15, 2018

     16.39        5     12

 

(1) “DLOM” refers to discount for lack of marketability.

 

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The determination of the fair value of our ordinary shares requires complex and subjective judgments to be made regarding our projected financial and operating results, our unique business risks, the liquidity of our shares and our operating history and prospects at the time of valuation.

We considered three generally accepted approaches to value our ordinary shares: the market approach, cost approach and income approach. We have adopted the income approach as our primary approach and used the market approach as a crosscheck. We have not relied on the cost approach because it does not directly include information about the economic benefits contributed by our assets, business or business interests.

The income approach is based on the assumption that value emanates from expectations of future income and cash flows. The income approach seeks to convert future economic benefits into a present value, and involves applying appropriate discount rates to estimated cash flows that are based on earnings forecasts. Our revenue and earnings growth rates, as well as major milestones that we have achieved, contributed to the increase in the fair value of our ordinary shares. However, the fair value analyses are inherently uncertain and highly subjective and are based on assumptions, including no material changes in the existing political, legal and economic conditions in the markets which we operate; our ability to retain competent management, key personnel and staff to support our ongoing operations; and no material deviation in market conditions from economic forecasts.

Under the income approach, we have applied the discounted cash flow method. We have used the concept of “free cash flow to firm,” or FCFF, being the cash flows left over after covering capital expenditure and working capital needs, to assess the overall enterprise value of our operating companies. Present value of our FCFF is a measure of enterprise value and a 100% equity interest is subsequently derived by taking the enterprise value, subtracting existing debt and adding cash and cash equivalents. Enterprise value is estimated based on the estimated present value of future net cash flows that the business is expected to generate over a forecasted period and an estimate of the present value of cash flows beyond that period, which is referred to as terminal value.

The estimated present value is calculated using a discount rate based on the weighted average cost of capital, or WACC, which accounts for the time value of money and the appropriate degree of risks inherent in the business. Our calculation of WACC was determined based on a consideration of the factors including risk-free rate, comparative industry risk, equity risk premium, company size and non-systemic risk factors. We have assumed a WACC of 12% the grant date.

We have applied a discount for lack of marketability, or DLOM, to reflect the fact that there is no ready public market for our shares as we are a closely held private company.

The assumptions used in the above methodology are inherently uncertain. Different assumptions and judgments would affect our calculation of the fair value of the underlying ordinary shares for the options granted, and the valuation results and the amount of share-based compensation expenses would also vary accordingly.

The market approach uses the guideline company method, which considers valuation metrics based on trading multiples of a selected industry peer group of companies.

Litigation and contingencies

From time to time are, and in the future, we may be, parties to or targets of lawsuits, claims, investigations, and proceedings, including but not limited to non-compliance respect to licenses and permits, franchise agreements and lease contracts, which are handled and defended in the ordinary course of business. We may be unable to estimate the reasonably possible loss or a range of reasonably possible losses until developments in such matters have provided sufficient information to support an assessment of the range of possible loss, such as quantification of a damage demand from plaintiffs, discovery from other parties and investigation of factual allegations, rulings by the court on motions or appeals, or the progress of settlement negotiations. We accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably

 

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estimated. When we are not able to reasonably estimate a single amount within a range, we accrue the minimum amount. We expense legal costs, including those expected to be incurred in connection with a loss contingency, as incurred.

Results of Operations

The following table sets forth a summary of our consolidated results of operations, both in absolute amount and as a percentage of total revenues for the year indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. We believe that the year to year comparison of operating results should not be relied upon as being indicative of future performance.

 

     Year Ended December 31,  
     2015     2016     2017  
     RMB     %     RMB     %     RMB     US$     %  
     (in thousands, except for percentage)  

Consolidated Statement of Comprehensive Income Data:

              

Revenues:

              

Leased-and-operated hotels

     204,761       32.3       183,773       28.4       189,134       29,069       24.3  

Franchised-and-managed hotels

     397,987       62.7       421,577       65.0       535,632       82,325       68.8  

Membership fees

     31,972       5.0       42,439       6.6       53,365       8,202       6.9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     634,720       100.0       647,789       100.0       778,131       119,596       100.0  

Operating costs and expenses:

              

Hotel operating costs

     (264,335     (41.7     (240,132     (37.1     (233,646     (35,910     (30.0

Selling and marketing expenses

     (24,643     (3.9     (26,609     (4.1     (45,032     (6,921     (5.8

General and administrative expenses

     (64,308     (10.1     (77,933     (12.0     (121,657 )(1)      (18,698     (15.6

Other operating expense

     (14,757     (2.3     (3,073     (0.5     (5,629     (866     (0.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

     (368,043     (58.0     (347,747     (53.7     (405,964     (62,395     (52.1

Other operating income

     21,095       3.3       12,222       1.9       15,284       2,349       2.0  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

     287,772       45.3       312,264       48.2       387,451       59,550       49.9  

Interest income and other, net

     19,643       3.1       22,039       3.4       26,238       4,032       3.4  

Interest expenses

     —         —         —         —         (1,443     (221     (0.2

Gain from trading securities

     25,545       4.0       24,564       3.8       59,165       9,094       7.4  

Other income/expense, net

     —         —         1,322       0.2       1,191       183       0.2  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     332,960       52.4       360,189       55.6       472,602       72,638       60.7  

Income tax expense

     (80,077     (12.6     (83,924     (13.0     (186,651 )(2)      (28,688 )      (24.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before share of loss in equity investees

     252,883       39.8       276,265       42.6       285,951       43,950       36.7  

Share of loss in equity investees, net of tax

     (17,213     (2.7     (10,465     (1.6     (900     (138     (0.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     235,670       37.1       265,800       41.0       285,051       43,812       36.6  

Net loss attributable to noncontrolling interests

     123       0.0       173       0.0       349       54       0.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to ordinary shareholders

     235,793       37.1       265,973       41.0       285,400       43,866       36.7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes one-time share-based compensation expenses of RMB38.0 million (US$5.8 million) in 2017 for GTI’s shares granted to certain of our directors for their past services as directors.
(2) Includes withholding taxes of RMB67.7 million (US$10.4 million) incurred in connection with a cash dividend distributed by our subsidiaries incorporated in the PRC during the year ended December 31, 2017.

 

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The following tables present certain unaudited financial data and selected operating data as of and for the years ended December 31, 2015, 2016 and 2017:

 

     As of December 31,  
     2015      2016      2017  

Selected Operating Data:

        

Total hotels in operation

     1,651        1,964        2,289  

Franchised-and-managed hotels

     1,611        1,932        2,263  

Leased-and-operated hotels

     40        32        26  

Total hotel rooms in operation

     146,176        168,238        190,807  

Franchised-and-managed hotels

     141,434        164,207        187,505  

Leased-and-operated hotels

     4,742        4,031        3,302  

Number of cities

     210        234        263  

 

     Year Ended December 31,  
     2015     2016     2017  

Occupancy rate (as a percentage)(1)

      

Total hotels in operation

     77.8     80.4     82.6

Franchised-and-managed hotels

     78.3     80.9     82.9

Leased-and-operated hotels

     66.8     66.4     70.3

Average daily rate (in RMB)

      

Total hotels in operation

     152       153       157  

Franchised-and-managed hotels

     152       152       156  

Leased-and-operated hotels

     160       164       186  

RevPAR (in RMB)

      

Total hotels in operation

     118       123       130  

Franchised-and-managed hotels

     119       123       129  

Leased-and-operated hotels

     107       109       131  

 

(1) Based on number of available rooms.

 

     Year Ended December 31,  
     2015      2016      2017  
     RMB      RMB      RMB      US$  
     (in thousands, except for percentage)  

Non-GAAP Financial Data

           

Adjusted EBITDA(1)

     323,117        338,470        440,800        67,751  

Adjusted EBITDA Margin(2)

     50.9%        52.3%        56.6%     

 

(1) We believe that Adjusted EBITDA, as we present it, is a useful financial metric to assess our operating and financial performance before the impact of investing and financing transactions, income taxes and certain non-core and non-recurring items in our financial statements.

The presentation of Adjusted EBITDA should not be construed as an indication that our future results will be unaffected by other charges and gains we consider to be outside the ordinary course of our business.

The use of Adjusted EBITDA has certain limitations because it does not reflect all items of income and expenses that affect our operations. Items excluded from Adjusted EBITDA are significant components in understanding and assessing our operating and financial performance. Depreciation and amortization expense for various long-term assets, income tax and share-based compensation have been and will be incurred and are not reflected in the presentation of Adjusted EBITDA. Each of these items should also be considered in the overall evaluation of our results. Additionally, Adjusted EBITDA does not consider capital expenditures and other investing activities and should not be considered as a measure of our liquidity. We compensate for these limitations by providing the relevant disclosure of our depreciation and

 

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amortization, interest/expenses income, gains/losses from trading securities, income tax expenses, share-based compensation, share of loss in equity investees and other relevant items both in our reconciliations to the corresponding U.S. GAAP financial measures and in our consolidated financial statements, all of which should be considered when evaluating our performance.

The term Adjusted EBITDA is not defined under U.S. GAAP, and Adjusted EBITDA is not a measure of net income, operating income, operating performance or liquidity presented in accordance with U.S. GAAP. When assessing our operating and financial performance, you should not consider this data in isolation or as a substitute for our net income, operating income or any other operating performance measure that is calculated in accordance with U.S. GAAP. In addition, our Adjusted EBITDA may not be comparable to Adjusted EBITDA or similarly titled measures utilized by other companies since such other companies may not calculate Adjusted EBITDA in the same manner as we do.

A reconciliation of Adjusted EBITDA to net income, which is the most directly comparable U.S. GAAP measure, is provided below:

 

     Year Ended December 31,  
     2015      2016      2017  
     (RMB)      (RMB)      RMB      US$  
     (in thousands)  

Net income

     235,670        265,800        285,051        43,812  

Deduct:

           

Other operating income

     21,095        12,222        15,284        2,349  

Interest income and other, net

     19,643        22,039        26,238        4,032  

Gains from trading securities

     25,545        24,564        59,165        9,094  

Other income (expense), net

     —          1,322        1,191        183  

Add:

           

Other operating expenses

     14,757        3,073        5,629        866  

Income tax expense

     80,077        83,924        186,651        28,688  

Share of loss in equity investees, net of tax

     17,213        10,465        900        138  

Interest expense

     —          —          1,443        221  

Share-based compensation

     —          —          38,048        5,848  
  

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation and amortization

     41,683        35,355        24,956        3,836  
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA (Non-GAAP)

     323,117        338,470        440,800        67,751  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) Adjusted EBITDA margin is calculated by dividing Adjusted EBITDA by our total revenues.

Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

Revenues. Our total revenues increased by 20.1% from RMB647.8 million in 2016 to RMB778.1 million (US$119.6 million) in 2017.

 

    Franchised-and-managed hotels. Revenues from our franchised-and-managed hotels increased by 27.1% from RMB421.6 million in 2016 to RMB535.6 million (US$82.3 million) in 2017. This growth was primarily due to the increased number of hotels in our franchised-and-managed hotel portfolio from 1,932 hotels and 164,207 hotel rooms as of December 31, 2016 to 2,263 hotels and 187,505 hotel rooms as of December 31, 2017. The increase in the occupancy rate from 80.9% in 2016 to 82.9% in 2017 and the RevPAR from RMB123 in 2016 to RMB129 in 2017, driven by stronger brand recognition, also contributed to the growth of revenues from our franchised-and-managed hotels.

 

   

Leased-and-operated hotels. Revenues from our leased-and-operated hotels, including sublease rental revenues of RMB27.2 million and RMB42.2 million (US$6.5 million) for 2016 and 2017, respectively, increased by 2.9% from RMB183.8 million in 2016 to RMB189.1 million (US$29.1 million) in 2017. This growth was primarily due to the opening of one leased-and-operated hotel and increases in the occupancy rate from 66.4% in 2016 to 70.3% in 2017 and the RevPar from RMB109 in 2016 to RMB131 in 2017, which in turn was the result of our stronger brand recognition. Such increases were

 

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partially offset by a decrease in the number of our leased-and-operated hotels as we converted six leased-and-operated hotels to franchised-and-managed hotels and we closed one leased-and-operated hotel.

 

    Membership Fees. Revenues from membership fees increased by 25.7% from RMB42.4 million in 2016 to RMB53.4 million (US$8.2 million) in 2017, primarily as a result of an increase in the number of our paid members from approximately 14 million as of December 31, 2016 to approximately 17 million as of December 31, 2017 as we continued to promote our paid membership program.

Hotel operating costs. Our hotel operating costs decreased by 2.7% from RMB240.1 million in 2016 to RMB233.6 million (US$35.9 million) in 2017. The decrease was primarily due to a decrease in the number of our leased-and-operated hotels as we converted six leased-and-operated hotels to franchised-and-managed hotels and we closed one leased-and-operated hotel, partially offset by the costs associated with one leased-and-operated hotel opened in 2017. Our hotel operating costs as a percentage of total revenues decreased from 37.1% in 2016 to 30.0% in 2017, primarily due to the increasing revenue contribution from our franchised-and-managed hotels.

Selling and marketing expenses. Our selling and marketing expenses increased by 69.2% from RMB26.6 million in 2016 to RMB45.0 million (US$6.9 million) in 2017, primarily due to increased membership points in exchange for awards, an increase in marketing personnel and related travel expenses. For the same reason, our selling and marketing expenses increased as a percentage of our revenues from 4.1% in 2016 to 5.8% in 2017.

General and administrative expense. Our general and administrative expenses increased by 56.1% from RMB77.9 million in 2016 to RMB121.7 million (US$18.7 million) in 2017, primarily as a result of one-time share-based compensation expenses of RMB38.0 million (US$5.8 million) for GTI’s shares granted to certain of our directors for their past services as directors. For the same reason, our general and administrative expense as a percentage of our revenues increased from 12.0% in 2016 to 15.6% in 2017.

Other operating expense. Our other operating expense increased by 83.2% from RMB3.1 million in 2016 to RMB5.6 million (US$0.9 million) in 2017, primarily due to loss incurred on the disposal of six of our leased-and-operated hotels.

Other operating income. Our other operating income increased by 25.1% from RMB12.2 million in 2016 to RMB15.3 million (US$2.3 million) in 2017, primarily due to the government subsidies of RMB10.2 million (US$1.6 million) we received in 2017, as compared with the government subsidies of RMB8.6 million we received in 2016.

Income from operations. As a result of the foregoing, our income from operations increased by 24.1% from RMB312.3 million in 2016 to RMB387.5 million (US$59.6 million) in 2017. As a percentage of our revenues, our income from operations increased from 48.2% in 2016 to 49.9% in 2017.

Interest income and other, net. Our net interest income increased by 19.1% from RMB22.0 million in 2016 to RMB26.2 million (US$4.0 million) in 2017, primarily due to an increase in interest income from higher average aggregate balances of cash and cash equivalents, restricted cash and short-term investment in 2017.

Gain from trading securities. Our gain from trading securities increased by 140.9% from RMB24.6 million in 2016, including a gain from disposal of trading securities of RMB24.2 million and a mark-to-market gain of RMB0.4 million, to RMB59.2 million (US$9.1 million) in 2017, including a gain from disposal of trading securities of RMB22.6 million (US$3.5 million) and a mark-to-market gain of RMB36.6 million (US$5.6 million). The balance of our trading securities increased from RMB273.5 million as of December 31, 2016 to RMB307.8 million (US$47.3 million) as of December 31, 2017. All of these securities were shares of Chinese companies listed on China’s A share market. Any realized or unrealized gains or losses resulting from the fluctuations of the market value of these securities will be recognized in earnings in the period which they occur.

 

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Income tax expense. Our income tax expenses increased by 122.4% from RMB83.9 million in 2016 to RMB186.7 million (US$28.7 million) in 2017, primarily due to an increase in our taxable income. In addition, we incurred withholding taxes of RMB67.7 million (US$10.4 million) as our subsidiaries incorporated in the PRC distributed a cash dividend in 2017. As a result of the foregoing, our effective tax rate increased from 23.3% in 2016 to 39.5% in 2017.

Share of loss in equity investee, net of tax. We recognized loss of RMB10.5 million for our equity investments in certain investees, including RMB9.4 million, RMB0.6 million and RMB0.5 million as to CYTS Shanghai Jinyuhao International Hotel Co. Ltd., or JYH, Yancheng Zexin Hotel Management Co., Ltd., or Zexin, and GreenTree Tianbao Hotel Management Co., Ltd., or Tianbao, respectively, in 2016, as compared with loss of RMB0.9 million, including RMB0.8 million and RMB0.1 million as to Zexin and Tianbao, respectively, in 2017, as a result of the net losses of these companies in proportion to our equity interest in them. As we disposed of our investment in JYH in 2016, the net loss of JYH is not reflected on our financial statements since then.

Net income attributable to our ordinary shareholders. As a result of the foregoing, our net income attributable to our ordinary shareholders increased by 7.3% from RMB266.0 million in 2016 to RMB285.4 million (US$43.9 million) in 2017. Our net margin, defined as our net income attributable to our ordinary shareholders as a percentage of our revenues, decreased from 41.0% in 2016 to 36.7% in 2017.

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

Revenues. Our total revenues increased by 2.1% from RMB634.7 million in 2015 to RMB647.8 million in 2016.

 

    Franchised-and-managed hotels. Revenues from our franchised-and-managed hotels increased by 5.9% from RMB398.0 million in 2015 to RMB421.6 million in 2016. This growth was primarily due to the increased number of hotels in our franchised-and-managed hotel portfolio from 1,611 hotels and 141,434 hotel rooms as of December 31, 2015 to 1,932 hotels and 164,207 hotel rooms as of December 31, 2016. The increase in the occupancy rate from 78.3% in 2015 to 80.9% in 2016 and the RevPAR from RMB119 in 2015 to RMB123 in 2016, resulted primarily from the increased brand recognition achieved through our marketing efforts also drove the growth of revenues from our franchised-and-managed hotels.

 

    Leased-and-operated hotels. Revenues from our leased-and-operated hotels, including sublease rental revenues of RMB20.9 million and RMB27.2 million for 2015 and 2016, respectively, decreased by 10.3% from RMB204.8 million in 2015 to RMB183.8 million in 2016. This decrease was primarily due to the fact that we converted five of our leased-and-operated hotels to franchised-and-managed hotels and we closed three of our leased-and-operated hotels as we focused on our franchised-and-managed model to facilitate our expansion throughout China.

 

    Membership Fees. Revenues from membership fees increased by 32.5% from RMB32.0 million in 2015 to RMB42.4 million in 2016, primarily as a result of our effort in promoting our paid-membership program and an increase in our paid members from approximately 11 million as of December 31, 2015 to approximately 14 million as of December 31, 2016.

Hotel operating costs. Our hotel operating costs decreased by 9.2% from RMB264.3 million in 2015 to RMB240.1 million in 2016. The decrease was primarily due to a decrease in the number of our leased-and-operated hotels as we converted five of our leased-and-operated hotels to franchised-and-managed hotels and we closed three of our leased-and-operated hotels. Our hotel operating costs as a percentage of total revenues decreased from 41.7% in 2015 to 37.1% in 2016, primarily due to a decrease in the number of our leased-and-operated hotels.

Selling and marketing expenses. Our selling and marketing expenses increased by 8.1% from RMB24.6 million in 2015 to RMB26.6 million in 2016, as we increased the expenditure on selling and marketing activities

 

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in responses to a larger hotel network in 2016. As a percentage of our revenues, our selling and marketing expenses remained relatively stable.

General and administrative expense. Our general and administrative expenses increased by 21.2% from RMB64.3 million in 2015 to RMB77.9 million in 2016, primarily as a result of an increase in our per-capita salary we paid to our administrative personnel in 2016. As a percentage of our revenues, our general and administrative expense increased from 10.1% in 2015 to 12.0% in 2016.

Other operating expense. Our other operating expense decreased by 79.1% from RMB14.8 million in 2015 to RMB3.1 million in 2016, primarily due to a decrease in leased-and-operated hotel closeout costs of RMB11.8 million in 2016.

Other operating income. Our other operating income decreased by 42.2% from RMB21.1 million in 2015 to RMB12.2 million in 2016, primarily due to decreases in hotel closeout income and vendor rebates of RMB6.6 million and RMB1.8 million, respectively, in 2016.

Income from operations. As a result of the foregoing, our income from operations increased by 8.5% from RMB287.8 million in 2015 to RMB312.3 million in 2016. As a percentage of our revenues, our income from operations increased from 45.3% in 2015 to 48.2% in 2016.

Interest income and other, net. Our net interest income increased by 12.2% from RMB19.6 million in 2015 to RMB22.0 million in 2016, primarily due to an increase in interest income from our short-term investments resulting from higher average balances of short-term investments in 2016. As of December 31, 2015 and 2016, the balance of our short-term investment was RMB185.0 million and nil, respectively.

Gain from trading securities. Our gain from trading securities decreased by 3.5% from RMB25.5 million in 2015, including gain from disposal of trading securities of RMB17.1 million and a mark-to-market gain of RMB8.4 million, to RMB24.6 million in 2016, including a gain from disposal of trading securities of RMB24.2 million and a mark-to-market gain of RMB0.4 million. The balance of our trading securities increased from RMB213.6 million as of December 31, 2015 to RMB273.5 million as of December 31, 2016. Most of these securities are shares of Chinese companies listed on China’s A share market. Any realized or unrealized gains or losses resulting from the fluctuations of the market value of these securities will be recognized in earnings in the period which they occur.

Income tax expense. Our income tax expenses increased by 4.7% from RMB80.1 million in 2015 to RMB83.9 million in 2016, primarily due to an increase in our taxable income. Our effective tax rates for 2015 and 2016 were 24.1% and 23.3%, respectively.

Share of loss in equity investee, net of tax. We recognized loss of RMB17.2 million, including RMB16.8 million for our equity investment in JYH in 2015 and RMB10.5 million, including RMB9.4 million and RMB0.6 million for our equity investment in JYH and Zexin, respectively, in 2016, as a result of the net losses of these companies in proportion to our equity interest in them.

Net income attributable to our ordinary shareholders. As a result of the foregoing, our net income attributable to our ordinary shareholders increased by 12.8% from RMB235.8 million in 2015 to RMB266.0 million in 2016. Our net margin increased from 37.1% in 2015 to 41.0% in 2016.

Our Selected Quarterly Results of Operations

The following table presents our selected unaudited quarterly results of operations for the periods indicated. This information should be read together with our consolidated financial statements and related notes included

 

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elsewhere in this prospectus. We believe that the quarter-to-quarter comparison of operating results should not be relied upon as being indicative of future performance.

 

    For the Three Months Ended  
        March 31,    
2016
        June 30,      
2016
    September 30,
2016
    December 31,
2016
      March 31,    
2017
          June 30,    
2017
    September 30,
2017
    December 31,
2017
 
    (in RMB thousands)  

Consolidated Statement of Comprehensive Income Data:

               

Revenues:

               

Leased-and-operated hotels

    42,629       47,723       48,385       45,036       41,763       47,064       47,930       52,377  

Franchised-and-managed hotels

    88,246       99,759       113,728       119,844       112,236       134,262       149,392       139,742  

Membership fees

    9,567       10,289       11,063       11,520       12,268       12,620       13,800       14,677  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    140,442       157,771       173,176       176,400       166,267       193,946       211,122       206,796  

Operating costs and expenses:

               

Hotel operating costs

    (63,162     (62,501     (59,664     (54,805     (57,035     (57,726     (59,840     (59,045

Selling and marketing expenses

    (6,291     (6,258     (7,310     (6,750     (9,654     (9,402     (10,281     (15,695

General and administrative expenses

    (16,721     (16,023     (20,811     (24,378     (18,435     (18,146     (21,337     (63,739 )(1) 

Other operating expenses

    (1     (825     (209     (2,038     (853     (295     (140     (4,341
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

    (86,175     (85,607     (87,994     (87,971     (85,977     (85,569     (91,598     (142,820 ) 

Other operating income

    2,370       2,189       6,946       717       344       4,722       9,071       1,147  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    56,637       74,353       92,128       89,146       80,634       113,099       128,595       65,123  

Interest income and other, net

    3,525       9,484       7,659       1,371       6,735       5,936       7,552       6,015  

Interest expense

    —         —         —         —         —         (261     (667     (515

(Losses) Gains from trading securities

    (3,935     2,471       18,995       7,033       11,582       24,385       13,008       10,190  

Other income (expense), net

    —         —         28,625       (27,303     (41     (29     (376     1,637  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    56,227       86,308       147,407       70,247       98,910       143,130       148,112       82,450  

Income tax expense

    (13,101     (20,110     (34,345     (16,368     (23,837     (34,494     (35,695 )(2)      (92,625 )(3) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (Loss) before share of loss in equity investees

    43,126       66,198       113,062       53,879       75,073       108,636       112,417       (10,175

Share of (loss) gain in equity investees, net of tax

    (3,353     (3,652     (3,637     177       (566     52       (637     251  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    39,773       62,546       109,425       54,056       74,507       108,688       111,780       (9,924 ) 

Net loss attributable to noncontrolling interests

    107       28       24       14       28       7       13       301  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to ordinary shareholders

    39,880       62,574       109,449       54,070       74,535       108,695       111,793       (9,623 ) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

Notes:

(1) Includes one-time share-based compensation expenses of RMB38.0 million (US$5.8 million) for GTI’s shares granted to certain of our directors during the three months ended December 31, 2017.
(2) Includes withholding taxes of RMB3.7 million (US$0.6 million) incurred in connection with a cash dividend distribution by our subsidiaries incorporated in the PRC in the three months ended September 30, 2017.
(3) Includes withholding taxes of RMB64.0 million (US$9.8 million) incurred in connection with a cash dividend distributed by our subsidiaries incorporated in the PRC in the three months ended December 31, 2017.

 

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The following table presents our selected unaudited quarterly results of operations for the periods indicated, as a percentage of total revenues:

 

    For the Three Months Ended  
        March 31,    
2016
        June 30,      
2016
    September 30,
2016
    December 31,
2016
      March 31,    
2017
          June 30,    
2017
    September 30,
2017
    December 31,
2017
 
    (%)  

Consolidated Statement of Comprehensive Income Data:

               

Revenues:

               

Leased-and-operated hotels

    30.4       30.2       27.9       25.5       25.1       24.3       22.7       25.3  

Franchised-and-managed hotels

    62.8       63.3       65.7       68.0       67.5       69.2       70.8       67.6  

Membership fees

    6.8       6.5       6.4       6.5       7.4       6.5       6.5       7.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    100.0       100.0       100.0       100.0       100.0       100.0       100.0       100.0  

Operating costs and expenses:

               

Hotel operating costs

    (45.0     (39.6     (34.5     (31.1     (34.3     (29.8     (28.3     (28.6

Selling and marketing expenses

    (4.5     (4.0     (4.2     (3.8     (5.8     (4.8     (4.9     (7.6

General and administrative expenses

    (11.9     (10.2     (12.0     (13.8     (11.1     (9.4     (10.1     (30.8

Other operating expenses

    (0.0     (0.5     (0.1     (1.2     (0.5     (0.2     (0.1     (2.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating costs and expenses

    (61.4     (54.3     (50.8     (49.9     (51.7     (44.2     (43.4     (69.1 ) 

Other operating income

    1.7       1.4       4.0       0.4       0.2       2.5       4.3       0.6  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    40.3       47.1       53.2       50.5       48.5       58.3       60.9       31.5  

Interest income and other, net

    2.5       6.0       4.4       0.8       4.1       3.1       3.6       2.9  

Interest expense

    —         —         —         —         —         (0.1     (0.3     (0.2

(Losses) Gains from trading securities

    (2.8     1.6       11.0       4.0       7.0       12.6       6.2       4.9  

Other income (expense), net

    —         —         16.5       (15.5     (0.0     (0.0     (0.2     0.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    40.0       54.7       85.1       39.8       59.6       73.9       70.2       39.9  

Income tax expense

    (9.3     (12.7     (19.8     (9.3     (14.3     (17.8     (16.9     (44.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (Loss) before share of loss in equity investees

    30.7       42.0       65.3       30.5       45.3       56.1       53.3       (4.9 ) 

Share of (loss) gain in equity investees, net of tax

    (2.4     (2.3     (2.1     0.1