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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549




FORM 6-K



REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Month of October 2017

Commission File Number: 001-34656

China Lodging Group, Limited
(Translation of registrant's name into English)

No. 2266 Hongqiao Road
Changning District
Shanghai 200336
People's Republic of China
(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F    ý        Form 40-F    o

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):    o

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):    o



EXHIBIT INDEX

Exhibit Number
  Description

Exhibit 99.1

  Unaudited Condensed Consolidated Interim Financial Statements—China Lodging Group, Limited

Exhibit 99.2

 

Management's Discussion and Analysis of Financial Condition and Results of Operations—China Lodging Group, Limited

Exhibit 99.3

 

Audited Consolidated Financial Statements—Crystal Orange Hotel Holdings Limited

Exhibit 99.4

 

Unaudited Pro Forma Condensed Combined Financial Information

EX-101.INS

 

XBRL Taxonomy Instance Document

EX-101.SCH

 

XBRL Taxonomy Extension Schema Document

EX-101.CAL

 

XBRL Taxonomy Calculation Linkbase Document

EX-101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

EX-101.LAB

 

XBRL Taxonomy Label Linkbase Document

EX-101.PRE

 

XBRL Taxonomy Presentation Linkbase Document



SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

    CHINA LODGING GROUP, LIMITED

(Registrant)

 

 

By:

 

/s/ TEO NEE CHUAN

        Name:   Teo Nee Chuan
        Title:   Chief Financial Officer

Date: October 26, 2017




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EXHIBIT INDEX
SIGNATURES


Exhibit 99.1

CHINA LODGING GROUP, LIMITED

INDEX TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Unaudited Condensed Consolidated Balance Sheets as of December 31, 2016 and June 30, 2017

    F-2  

Unaudited Condensed Consolidated Statements of Comprehensive Income for the Six-month Period Ended June 30, 2016 and 2017

   
F-4
 

Unaudited Condensed Consolidated Statements of Cash Flows for the Six-month Period Ended June 30, 2016 and 2017

   
F-5
 

Notes to the Unaudited Condensed Consolidated Financial Statements

   
F-7
 

F-1



CHINA LODGING GROUP, LIMITED

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(Renminbi in thousands, except share and per share data, unless otherwise stated)

 
  As of  
 
  December 31,
2016
  June 30, 2017  
 
  RMB
  RMB
  US$'000
 

ASSETS

                   

Current assets:

                   

Cash and cash equivalents

    3,235,007     2,980,375     439,629  

Restricted cash

    500     467,500     68,960  

Accounts receivable, net of allowance of RMB11,424 and RMB10,122 as of December 31, 2016 and June 30, 2017, respectively

    141,649     163,737     24,152  

Loan receivables

    22,410     65,885     9,719  

Amounts due from related parties

    98,453     124,301     18,335  

Prepaid rent

    446,127     502,447     74,115  

Inventories

    21,606     33,239     4,903  

Other current assets

    208,929     240,112     35,418  

Total current assets

    4,174,681     4,577,596     675,231  

Property and equipment, net

    3,710,468     4,462,948     658,320  

Intangible assets, net

    342,694     1,806,383     266,456  

Land use rights

    145,521     142,826     21,068  

Long-term investments, including marketable securities measured at fair value of RMB204,945 and RMB146,633 as of December 31, 2016 and June 30, 2017, respectively

    1,064,321     1,282,714     189,210  

Goodwill

    171,504     2,136,710     315,181  

Loan receivables

    7,269     6,856     1,011  

Other assets

    200,492     345,655     50,988  

Deferred tax assets

    176,414     241,795     35,667  

Total assets

    9,993,364     15,003,483     2,213,132  

   

The accompanying notes are an integral part of these unaudited condensed consolidated
financial statements.

F-2



CHINA LODGING GROUP, LIMITED

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

(Renminbi in thousands, except share and per share data, unless otherwise stated)

 
  As of  
 
  December 31,
2016
  June 30, 2017  
 
  RMB
  RMB
  US$'000
 

LIABILITIES AND EQUITY

                   

Current liabilities:

                   

Short-term debt

    298,291     162,586     23,983  

Long-term debt, current portion

        135     20  

Accounts payable

    584,731     600,330     88,553  

Amounts due to related parties

    11,058     9,606     1,417  

Salary and welfare payables

    274,259     246,335     36,336  

Deferred revenue

    749,793     799,238     117,894  

Accrued expenses and other current liabilities

    895,837     1,065,785     157,212  

Income tax payable

    152,112     195,137     28,784  

Total current liabilities

    2,966,081     3,079,152     454,199  

Long-term debt

        3,658,041     539,590  

Deferred rent

    1,023,843     1,242,292     183,248  

Deferred revenue

    166,963     167,241     24,669  

Other long-term liabilities

    323,991     350,273     51,668  

Deferred tax liabilities

    96,329     458,760     67,671  

Total liabilities

    4,577,207     8,955,759     1,321,045  

Commitment and contingencies (Note 13)

                   

Equity:

                   

Ordinary shares (US$0.0001 par value per share; 8,000,000,000 shares authorized; 281,379,130 and 282,323,910 shares issued as of December 31, 2016 and June 30, 2017, and 278,282,366 and 279,227,146 shares outstanding as of December 31, 2016 and June 30, 2017, respectively)

    204     204     30  

Treasury shares (3,096,764 and 3,096,764 shares as of December 31 2016 and June 30, 2017, respectively)

    (107,331 )   (107,331 )   (15,832 )

Additional paid-in capital

    3,699,056     3,753,504     553,671  

Retained earnings

    1,812,174     2,349,896     346,628  

Accumulated other comprehensive (loss) income

    (4,503 )   32,743     4,830  

Total China Lodging Group, Limited shareholders' equity

    5,399,600     6,029,016     889,327  

Noncontrolling interest

    16,557     18,708     2,760  

Total equity

    5,416,157     6,047,724     892,087  

Total liabilities and equity

    9,993,364     15,003,483     2,213,132  

   

The accompanying notes are an integral part of these unaudited condensed consolidated
financial statements.

F-3



CHINA LODGING GROUP, LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Renminbi in thousands, except share and per share data, unless otherwise stated)

 
  Six-month Period Ended June 30,  
 
  2016   2017  
 
  RMB
  RMB
  US$'000
 

Revenues:

                   

Leased and owned hotels

    2,531,497     2,766,593     408,094  

Manachised and franchised hotels

    669,934     796,914     117,551  

Others

    9,622     18,780     2,770  

Total revenues

    3,211,053     3,582,287     528,415  

Less: Business tax and related taxes

    116,149          

Net revenues

    3,094,904     3,582,287     528,415  

Operating costs and expenses:

                   

Hotel operating costs

    2,417,871     2,547,232     375,737  

Other operating costs

    3,029     5,672     837  

Selling and marketing expenses

    69,119     79,530     11,731  

General and administrative expenses

    225,475     301,032     44,405  

Pre-opening expenses

    35,390     67,246     9,919  

Total operating costs and expenses

    2,750,884     3,000,712     442,629  

Other operating (expenses) income, net

    (9,878 )   28,474     4,200  

Income from operations

    334,142     610,049     89,986  

Interest income

    25,273     40,124     5,919  

Interest expense

    (6,608 )   (18,228 )   (2,689 )

Other income, net

    125,385     101,361     14,952  

Foreign exchange gain (loss)

    4,340     (9,955 )   (1,468 )

Income before income taxes

    482,532     723,351     106,700  

Income tax expense

    (105,170 )   (182,526 )   (26,924 )

Income (loss) from equity method investments

    145     (5,632 )   (831 )

Net income

    377,507     535,193     78,945  

Less: net (loss) attributable to noncontrolling interest

    (7,381 )   (2,529 )   (373 )

Net income attributable to China Lodging Group, Limited

    384,888     537,722     79,318  

Other comprehensive income

                   

Unrealized securities holding gains (loss), net of tax of (6,173) and (3,168) for six-month period ended June 30, 2016 and 2017

    2,776     (4,775 )   (704 )

Reclassification of realized gains to net income, net of tax

    (67,921 )   (5,282 )   (779 )

Foreign currency translation adjustments, net of tax of nil for six-month period ended June 30, 2016 and 2017

    (4,169 )   47,303     6,978  

Comprehensive income

    308,193     572,439     84,440  

Comprehensive (loss) attributable to the noncontrolling interest

    (7,381 )   (2,529 )   (373 )

Comprehensive income attributable to China Lodging Group, Limited

    315,574     574,968     84,813  

Earnings per share:

                   

Basic

    1.41     1.93     0.28  

Diluted

    1.37     1.87     0.28  

Earnings per ADS:

                   

Basic

    5.64     7.72     1.14  

Diluted

    5.50     7.47     1.10  

Weighted average number of shares used in computation:

                   

Basic

    272,932,730     278,785,660     278,785,660  

Diluted

    280,097,957     287,813,552     287,813,552  

   

The accompanying notes are an integral part of these unaudited condensed consolidated
financial statements.

F-4



CHINA LODGING GROUP, LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Renminbi in thousands)

 
  Six-month Period Ended June 30,  
 
  2016   2017  
 
  RMB
  RMB
  US$'000
 

Operating activities:

                   

Net income

    377,507     535,193     78,945  

Adjustments to reconcile net income to net cash provided by operating activities:

                   

Share-based compensation

    31,095     31,820     4,694  

Depreciation and amortization

    345,430     362,414     53,459  

Deferred taxes

    (3,789 )   2,039     301  

Bad debt expenses

    846     1,014     150  

Deferred rent

    52,635     63,322     9,340  

Loss from disposal of property and equipment

    6,841     15,679     2,313  

Impairment loss

    39,615     44,439     6,555  

(Income) Loss from equity method investments

    (145 )   5,632     831  

Investment gain

    (118,752 )   (64,789 )   (9,557 )

Excess tax benefit from share-based compensation

    (3,519 )   (15,725 )   (2,320 )

Changes in operating assets and liabilities net of effect of acquisitions:

                   

Accounts receivable

    (43,020 )   1,270     187  

Prepaid rent

    40,077     (31,127 )   (4,591 )

Inventories

    4,321     (6,445 )   (951 )

Amounts due from related parties

    (4,778 )   (718 )   (106 )

Other current assets

    (7,330 )   (2,772 )   (409 )

Other assets

    (3,958 )   (35,405 )   (5,223 )

Accounts payable

    20,546     (38,390 )   (5,664 )

Amounts due to related parties

    3,929     (1,452 )   (214 )

Salary and welfare payables

    (23,185 )   (47,463 )   (7,001 )

Deferred revenue

    151,748     (33,280 )   (4,909 )

Accrued expenses and other current liabilities

    71,716     142,146     20,968  

Income tax payable

    20,755     36,647     5,406  

Other long-term liabilities

    26,414     20,469     3,019  

Net cash provided by operating activities

    984,999     984,518     145,223  

Investing activities:

                   

Purchases of property and equipment

    (285,187 )   (341,956 )   (50,441 )

Purchases of intangibles

    (4,917 )   (1,073 )   (158 )

Amount received as a result of government zoning

    2,099          

Acquisitions net of cash received

    136,110     (3,745,259 )   (552,455 )

Proceeds from disposal of subsidiary and branch net of cash disposed          

    (20,667 )        

Purchase of long-term investments

    (123,674 )   (295,526 )   (43,593 )

Proceeds from maturity/sale of long-term investments

    10,289     126,206     18,616  

Payment for shareholder loan to joint venture

    (38,092 )   (76,755 )   (11,322 )

Collection of shareholder loan from joint venture

        48,500     7,154  

Purchase of short-term investments

             

Proceeds from maturity/sale of short-term investments

    526,443          

Payment for the origination of loan receivables

    (33,400 )   (50,400 )   (7,434 )

Proceeds from collection of loan receivables

    14,862     10,338     1,525  

Increase in restricted cash

        (467,000 )   (68,886 )

Net cash provided by (used in) investing activities

    183,866     (4,792,925 )   (706,994 )

   

The accompanying notes are an integral part of these unaudited condensed consolidated
financial statements.

F-5



CHINA LODGING GROUP, LIMITED

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Renminbi in thousands)

 
  Six-month Period Ended June 30,  
 
  2016   2017  
 
  RMB
  RMB
  US$'000
 

Financing activities:

                   

Net proceeds from issuance of ordinary shares upon exercise of options

    5,241     6,618     976  

Proceeds from short-term debt

    281,719     136,488     20,133  

Repayment of short-term debt

        (267,764 )   (39,497 )

Proceeds from long-term debt

        3,633,174     535,922  

Funds advanced from noncontrolling interest holders

    4,000     36,689     5,412  

Repayment of funds advanced from noncontrolling interest holders

    (200 )   (1,677 )   (247 )

Acquisition of noncontrolling interest

        (3,750 )   (553 )

Contribution from noncontrolling interest holders

    34,304     6,941     1,024  

Dividends paid to noncontrolling interest holders

    (1,130 )   (2,330 )   (344 )

Dividend paid

    (276,262 )        

Excess tax benefit from share-based compensation

    3,519     15,725     2,320  

Net cash provided by financing activities

    51,191     3,560,114     525,146  

Effect of exchange rate changes on cash and cash equivalents

    8,458     (6,339 )   (935 )

Net increase (decrease) in cash and cash equivalents

    1,228,514     (254,632 )   (37,560 )

Cash and cash equivalents at the beginning of the period

    1,237,838     3,235,007     477,189  

Cash and cash equivalents at the end of the period

    2,466,352     2,980,375     439,629  

Supplemental disclosure of cash flow information:

                   

Interest paid, net of amounts capitalized

    5,091     6,673     984  

Income taxes paid

    88,204     144,237     21,276  

Supplemental schedule of non-cash investing and financing activities:

                   

Purchases of property and equipment included in payables

    409,560     503,727     74,304  

Consideration payable for business acquisition

    59,490     118,459     17,474  

Purchase of intangible assets included in payables

    10,110     6,655     982  

Reimbursement of government zoning included in receivables

        2,700     398  

Issuance of ordinary shares for acquisition

    1,143,521          

   

The accompanying notes are an integral part of these unaudited condensed consolidated
financial statements.

F-6



CHINA LODGING GROUP, LIMITED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2016 AND 2017

(Renminbi in thousands, except share data and per share data, unless otherwise stated)

1. ORGANIZATION AND PRINCIPAL ACTIVITIES

        China Lodging Group, Limited (the "Company") was incorporated in the Cayman Islands under the laws of the Cayman Islands on January 4, 2007. The principal business activities of the Company and its subsidiaries (the "Group") are to develop leased and owned, manachised and franchised hotels under the "Joya Hotel", "Manxin Hotel", "JI Hotel", "Starway Hotel", "HanTing Hotel", "Elan Hotel", "Hi Inn", "VUE Hotel", "Crystal Orange Hotel", "Orange Hotel Select", and "Orange Hotel" brands in the People's Republic of China ("PRC"). The Group also has the rights as master franchisee for Mercure, Ibis and Ibis Styles, and co-development rights for Grand Mercure and Novotel, in Pan-China region.

Leased and owned hotels

        The Group leases hotel properties from property owners or purchases properties directly and is responsible for all aspects of hotel operations and management, including hiring, training and supervising the managers and employees required to operate the hotels. In addition, the Group is responsible for hotel development and customization to conform to the standards of the Group brands at the beginning of the lease or the construction, as well as repairs and maintenance, operating expenses and management of properties over the term of the lease or the land and building certificate.

        Under the lease arrangements, the Group typically receives rental holidays of two to six months and pays rent on a quarterly or biannual basis. Rent is typically subject to the fixed escalations of three to five percent every three to five years. The Group recognizes rental expense on a straight-line basis over the lease term.

        As of December 31, 2016 and June 30, 2017, the Group had 624 and 686 leased and owned hotels in operation, respectively.

Manachised and franchised hotels

        Typically the Group enters into certain franchise and management arrangements with franchisees for which the Group is responsible for providing branding, quality assurance, training, reservation, hiring and appointing of the hotel general manager and various other support services relating to the hotel renovation and operation. Those hotels are classified as manachised hotels. Under typical franchise and management agreements, the franchisee is required to pay an initial franchise fee and ongoing franchise and management service fees, the majority of which are equal to a certain percentage of the revenues of the hotel. The franchisee is responsible for the costs of hotel development, renovation and the costs of its operations. The term of the franchise and management agreements are typically eight to ten years and are renewable upon mutual agreement between the Group and the franchisee. The Group also has some franchised hotels in which cases the Group does not provide a hotel general manager. As of December 31, 2016 and June 30, 2017, the Group had 2,471 and 2,654 manachised hotels in operation and 174 and 201 franchised hotels in operation, respectively.

F-7



CHINA LODGING GROUP, LIMITED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2016 AND 2017

(Renminbi in thousands, except share data and per share data, unless otherwise stated)

2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

Basis of presentation

        The accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("US GAAP") and applicable rules and regulations of the Securities and Exchange Commission, regarding financial reporting, and include all normal and recurring adjustments that management of the Group considers necessary for a fair presentation of its financial position and operation results. Certain information and footnote disclosures normally included in financial statements prepared in conformity with US GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these statements should be read in conjunction with the Group's consolidated financial statements as of and for the year ended December 31, 2016 included in the Group's 2016 20-F.

Basis of consolidation

        The unaudited condensed consolidated financial statements include the financial statements of the Company and its majority-owned subsidiaries. All intercompany transactions and balances are eliminated on consolidation.

        The Group evaluates the need to consolidate certain variable interest entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support.

        The Group is deemed as the primary beneficiary of and consolidates variable interest entities when the Group has the power to direct the activities that most significantly impact the economic success of the entities and effectively assumes the obligation to absorb losses and has the rights to receive benefits that are potentially significant to the entities.

        The Group evaluates its business activities and arrangements with the entities that operate the manachised and franchised hotels to identify potential variable interest entities. Generally, these entities qualify for the business scope exception, therefore consolidation is not appropriate under the variable interest entity consolidation guidance.

Impairment of long-lived assets

        The Group evaluates its 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, the Group measures 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, the Group recognizes an impairment loss equal to the difference between the carrying amount and fair value of these assets.

        The Group performed a recoverability test of its long-lived assets associated with certain hotels due to the continued underperformance relative to the projected operating results, of which the carrying amount of the property and equipment exceed the future undiscounted net cash flows, and

F-8



CHINA LODGING GROUP, LIMITED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2016 AND 2017

(Renminbi in thousands, except share data and per share data, unless otherwise stated)

2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)

recognized an impairment loss of RMB39,615 and RMB44,439 for the six-month period ended June 30, 2016 and 2017, respectively.

        Fair value of the property and equipment was determined by the Group based on the income approach using the discounted cash flow associated with the underlying assets, which incorporated certain assumptions including projected hotels' revenue, growth rates and projected operating costs based on current economic condition, expectation of management and projected trends of current operating results.

Revenue recognition

        Revenue from leased and owned hotels is derived from hotel operations, mainly including the rental of rooms, food and beverage sales and souvenir sales. Revenue is recognized when rooms are occupied and food and beverages and souvenirs are sold.

        Revenues from manachised and franchised hotels are derived from franchise agreements where the franchisees are primarily required to pay (i) an initial one-time franchise fee, and (ii) continuing franchise fees, which mainly consist of (a) on-going management and service fees mainly based on a certain percentage of the room revenues of the franchised hotels, and (b) system maintenance, support fees and central reservation system usage fees. The one-time franchise fee is recognized when the manachised and franchised hotel opens for business, the fee becomes non-refundable, and the Group has fulfilled all its commitments and obligations, including the assistance to the franchisees in property design, leasehold improvement construction project management, systems installation and personnel recruiting and training. The ongoing management and service fees are recognized when the underlying service revenue is recognized by the franchisees' operations. The system maintenance, support fee and central reservation system usage fee is recognized over the period when services are provided.

        In addition, the Group accounts for hotel manager fees related to the manachised hotels under the franchise program as revenues. Pursuant to the franchise agreements, the Group charges the franchisees fixed hotel manager fees to cover the manachised hotel managers' payroll, social welfare benefits and certain other out-of-pocket expenses that the Group incurs on behalf of the manachised hotels. The hotel manager fee is recognized as revenue monthly. During the six-month period ended June 30, 2016 and 2017, the hotel manager fees that were recognized as revenue were RMB 155,633 and RMB176,517, respectively

        Membership fees from the Group's customer loyalty program are earned and recognized on a straight-line basis over the expected membership duration of the different membership levels. Such duration is estimated based on the Group's and management's experience and is adjusted on a periodic basis to reflect changes in membership retention. The membership duration is estimated to be two to five years which reflects the expected membership retention. Revenues recognized from the customer loyalty program were RMB70,815, and RMB77,376 for the six-month period ended June 30, 2016 and 2017, respectively.

        Other revenues are derived from activities other than the operation of hotel businesses, which mainly include revenues from Hua Zhu mall and the provision of IT products and services to hotels.

F-9



CHINA LODGING GROUP, LIMITED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2016 AND 2017

(Renminbi in thousands, except share data and per share data, unless otherwise stated)

2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)

Revenues from Hua Zhu mall are commissions charged from suppliers for goods sold through the platform and are recognized upon delivery of goods to end customers when its suppliers' obligation is fulfilled and collectability is reasonably assured. Revenues from IT products are recognized when goods are delivered and revenues from IT services are recognized when services are rendered.

Leases

        A lease of which substantially all the benefits and risks incidental to ownership remain with the lessor is classified as an operating lease. All leases of the Group are currently classified as operating leases. When a lease contains rent holidays or requires fixed escalations of the minimum lease payments, the Group records the total rental expense on a straight-line basis over the initial lease term and the difference between the straight-line rental expense and cash payment under the lease is recorded as deferred rent. As of December 31, 2016 and June 30, 2017, deferred rent of RMB37,648 and RMB41,595 were recorded as other current liabilities and RMB1,023,843 and RMB1,242,292 were recorded as long-term liabilities, respectively.

Fair value

        The Group defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

        The established fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs may be used to measure fair value include:

        The estimated fair value of the Group's financial instruments of which the inputs used to value are classified as Level 2 and are not reported at fair value, including cash, restricted cash, loan receivables, receivables, payables and accruals, approximates their carrying value due to their short-term nature or

F-10



CHINA LODGING GROUP, LIMITED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2016 AND 2017

(Renminbi in thousands, except share data and per share data, unless otherwise stated)

2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)

because the interest rate approximates market rate. Cost-method investments are presented at cost unless impaired based on the result of impairment assessment, as the investees are all private entities and their fair values are not practicable to obtain without undue cost. As of December 31, 2016 and June 30, 2017, cost-method investments were RMB172,571 and RMB246,971 respectively.

        When available, the Group uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Group measures fair value using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as interest rates.

        As of December 31, 2016 and June 30, 2017, information about inputs into the fair value measurements of the Group's assets and liabilities that are measured at fair value on a recurring basis in periods subsequent to their initial recognition is as follows:

 
   
   
  Fair Value Measurements at Reporting Date Using  
Date
  Description   Fair
Value
  Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
  Significant Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
 

Year Ended December 31, 2016

  Long-term available-for-sale securities     247,085     204,945     42,140                   

Six-month Period Ended June 30, 2017

  Long-term available-for-sale securities     373,163     146,633     226,530                   

        The following table presents the Group's assets measured at fair value on a non-recurring basis for the year ended December 31, 2016 and six-month period ended June 30, 2017:

 
   
   
  Fair Value Measurements at Reporting Date
Using
   
 
Date
  Description   Fair
Value
  Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
  Significant
Other
Observable
Inputs
(Level 2)
  Significant
Unobservable
Inputs
(Level 3)
  Total
Loss
for the
Period
 

Year Ended December 31, 2016

  Property and equipment     20,706                 20,706     150,533  

Year Ended December 31, 2016

  Long-term investments                         3,208  

Six-month Period Ended June 30, 2017

  Property and equipment     12,423                 12,423     44,439  

        As a result of reduced expectations of future cash flows from certain leased hotels, the Group determined that the hotels property and equipment with a carrying amount of RMB171,239 and RMB56,862 was not fully recoverable and consequently recorded an impairment charge of

F-11



CHINA LODGING GROUP, LIMITED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2016 AND 2017

(Renminbi in thousands, except share data and per share data, unless otherwise stated)

2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES (Continued)

RMB150,533, and RMB44,439 for the year ended December 31, 2016, and the six-month period ended June 30, 2017 respectively. As a result of the impairment assessment, the Group determined that the long term investment with a carrying amount of RMB3,208 was impaired for the year ended December 31, 2016.

        Fair value of the property and equipment as well as the reporting units was determined by the Group based on the income approach using the discounted cash flow associated with the underlying assets, which incorporated certain assumptions including projected hotels' revenue, growth rates and projected operating costs based on current economic condition, expectation of management and projected trends of current operating results. As a result, the Group has determined that the majority of the inputs used to value its long-lived assets held and used and its reporting units are unobservable inputs that fall within Level 3 of the fair value hierarchy. The revenue growth rate and the discount rate were the significant unobservable input used in the fair value measurement, which are 4% and 20%, respectively, for the year ended December 31, 2016 and the six-month period ended June 30, 2017.

Translation into United States Dollars

        The financial statements of the Group are stated in RMB. Translations of amounts from RMB into United States dollars are solely for the convenience of the reader and were calculated at the rate of US$1.00 = RMB6.7793, on June 30, 2017, as set forth in H.10 statistical release of the Federal Reserve Board. The translation is not intended to imply that the RMB amounts could have been, or could be, converted, realized or settled into United States dollars at that rate on June 30, 2017, or at any other rate.

Recently issued accounting pronouncements

        In May 2017, the FASB issued ASU 2017-09, Compensation—Stock Compensation (Topic 718): "Scope of Modification Accounting". This update provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718, Compensation—Stock Compensation, to a change to the terms or conditions of a share-based payment award. The amendments affect any entity that changes the terms or conditions of a share-based payment award. The amendments are effective for fiscal years beginning after December 15, 2017. For the Group, the amendments are effective January 1, 2018. The Group has not made any changes to the terms or conditions of share-based payment awards but will refer to the guidance in ASU 2017-09 should that occur. The Group is currently evaluating the impact of this ASU on its consolidated financial statements.

3. ACQUISITIONS

        (i) In January 2016, the Group completed the transaction of strategic alliance with AccorHotels ("Accor"). Pursuant to the master purchase agreement, the Group acquired 100% equity interest of certain wholly-owned subsidiaries of Accor engaged in the business of owning, leasing franchising, operating and managing hotels under Accor brands in the midscale and economy market in the PRC,

F-12



CHINA LODGING GROUP, LIMITED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2016 AND 2017

(Renminbi in thousands, except share data and per share data, unless otherwise stated)

3. ACQUISITIONS (Continued)

Taiwan and Mongolia, as well as a non-controlling stake of 28% for Accor Luxury and Upscale hotel operating platform, held by AAPC Hotel Management Limited ("AAPC LUB") in Greater China. The total consideration consists of cash consideration of RMB120,439 and consideration amounted to RMB1,143,521 which was measured at the market price of the 24,895,543 ordinary shares on the issuance date.

        The net revenue and net income of the acquirees included in the consolidated statements of comprehensive income for the year ended December 31, 2016 were RMB152,595, and RMB64,047, respectively.

        The following table summarizes unaudited pro forma results of operation for the year ended December 31, 2016 assuming that the acquisition occurred as of January 1, 2016. The pro forma results have been prepared for comparative purpose only based on management's best estimate and do not purport to be indicative of the results of operations which actually would have resulted had the acquisition occurred as of January 1, 2016.

 
  Year Ended
December 31, 2016
 

Pro forma net revenue

    6,548,083  

Pro forma net income

    806,921  

        The following is a summary of the fair values of the assets acquired and liabilities assumed:

 
  2016   Amortization Period

Current assets

    207,396    

Property and equipment

    311,045   5 - 30 years

Favorable leases

    3,009   remaining lease terms

Master brand agreement

    192,000   Indefinite

Land use rights

    149,668   remaining contracts terms

Long-term investments

    417,604    

Goodwill

    63,160    

Other noncurrent assets

    1,664    

Current liabilities

    (38,634 )  

Deferred tax liabilities

    (42,952 )  

Total

    1,263,960    

        (ii) The Group acquired 100% of the equity interest of Crystal Orange Hotel Holdings Limited (the "Crystal Orange") on May 25, 2017.

F-13



CHINA LODGING GROUP, LIMITED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2016 AND 2017

(Renminbi in thousands, except share data and per share data, unless otherwise stated)

3. ACQUISITIONS (Continued)

        The total purchase price consisted of the following:

 
  Amount(RMB'000)  

Initial Consideration

    3,718,673  

Pre-combination compensation cost

    50,000  

Closing Adjustment

                 *

Total purchase price

    3,768,673  

*
Closing adjustment is determined by several complex adjustment clauses relating net cash, net working capital amount and income tax payable amount of Crystal Orange as of closing date, which were defined in the share purchase agreement. The closing adjustment amount is immaterial based on the preliminary result, while not finalized till this report date.

        Under the acquisition method of accounting, the net assets of Crystal Orange acquired pursuant to the acquisition were recorded at their fair values as of the date of the closing of the acquisition based on a preliminary purchase price allocation report prepared by a third-party appraiser. The following is a summary of the fair values of the assets acquired and liabilities assumed based on the preliminary purchase price allocation report:

 
  May 25, 2017   Amortization Period

Current assets

    137,314    

Property and equipment

    842,102   3 - 20 years

Favorable leases

    97,480   remaining lease terms

Franchise agreement

    63,000   remaining contract terms

Brand Name

    1,305,699   indefinite life

Goodwill

    1,965,206    

Other noncurrent assets

    130,813    

Current liabilities

    (222,205 )  

Noncurrent liabilities

    (179,985 )  

Deferred tax liabilities

    (366,545 )  

Noncontrolling interest

    (4,206 )  

Total

    3,768,673    

        Goodwill was recognized as a result of expected synergies from combining operations of the Group and acquired business and other intangible assets that don't qualify for separate recognition. Goodwill is not amortized and is not deductible for tax purposes.

        The net revenue and net income of the acquirees included in the consolidated statements of operations for the six-month period ended June 30, 2017 were RMB 119,050, and RMB 14,029 respectively.

F-14



CHINA LODGING GROUP, LIMITED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2016 AND 2017

(Renminbi in thousands, except share data and per share data, unless otherwise stated)

3. ACQUISITIONS (Continued)

        The following table summarizes unaudited pro forma results of operation for the year ended December 31, 2016 and six-month period ended June 30, 2017 assuming that the acquisition occurred as of January 1, 2016. The pro forma results have been prepared for comparative purpose only based on management's best estimate and do not purport to be indicative of the results of operations which actually would have resulted had the acquisition occurred as of January 1, 2016.

 
  Year Ended
December 31,
2016
  Six-month
Period
Ended June 30,
2017
 

Pro forma net revenue

    7,473,851     3,983,463  

Pro forma net income

    857,213     577,878  

        As the total cost incurred by Crystal Orange directly attributable to the business combination includes RMB256.3 million related to the consultation services agreements and option cancellation agreement and transaction cost of RMB 46 million are non-recurring in nature, they were eliminated from the calculation of pro forma net income.

4. PROPERTY AND EQUIPMENT, NET

        Property and equipment, net consist of the following:

 
  December 31, 2016   June 30, 2017  

Cost:

             

Buildings

    255,646     255,646  

Leasehold improvements

    5,563,815     6,319,366  

Furniture, fixtures and equipment

    925,174     1,036,578  

Motor vehicles

    820     820  

    6,745,455     7,612,410  

Less: Accumulated depreciation

    (3,196,496 )   (3,427,329 )

    3,548,959     4,185,081  

Construction in progress

    161,509     277,867  

Property and equipment, net

    3,710,468     4,462,948  

        Depreciation expense was RMB334,735 and RMB349,008 for the six-month periods ended June 30, 2016 and 2017, respectively.

        The Group occasionally demolishes certain leased hotels due to local government zoning requirements, which typically results in receiving compensation from the government.

        In 2016, the Group demolished two leased hotels due to local government zoning requirements. As a result, the Group wrote off property and equipment of RMB9,905 associated with these hotels and recognized loss of RMB7,205 as other operating loss, which is net of RMB2,700 has been recorded as a receivable in other current assets as of December 31, 2016.

F-15



CHINA LODGING GROUP, LIMITED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2016 AND 2017

(Renminbi in thousands, except share data and per share data, unless otherwise stated)

4. PROPERTY AND EQUIPMENT, NET (Continued)

        As of June 30, 2017, the Group has been formally notified by local government authorities that four additional leased hotels of the Group will likely be demolished due to local government zoning requirements. The aggregate carrying amount of property and equipment at the associated hotels was RMB 14,605 as of June 30, 2017. Neither of the associated hotels has recorded intangible assets or goodwill. The Group has not recognized any impairment as expected cash flows from the hotels' operations prior to demolition and expected amounts to be received as a result of the demolition will likely exceed the carrying value of such assets. The Group estimated amounts to be received based on the relevant PRC laws and regulations, terms of the lease agreements, and the prevailing market practice.

5. INTANGIBLE ASSETS, NET AND UNFAVORABLE LEASE

        Intangible assets, net consist of the following:

 
  As of  
 
  December 31,
2016
  June 30,
2017
 

Intangible assets with indefinite life:

             

Brand name

    28,600     1,334,299  

Master brand agreement (Note 3)

    192,000     192,000  

Intangible assets with definite life:

             

Manachised & Franchise hotel agreements

    11,000     74,000  

Non-compete agreement

    400     400  

Favorable lease agreements

    135,874     239,569  

Purchased software

    55,101     57,218  

Total

    422,975     1,897,486  

Less: Accumulated amortization

    (80,281 )   (91,103 )

Total

    342,694     1,806,383  

 

 
  As of  
 
  December 31,
2016
  June 30,
2017
 

Unfavorable lease agreements

    3,924     3,924  

Less: Accumulated amortization

    (3,102 )   (3,167 )

Unfavorable lease agreements, net

    822     757  

        The values of favorable lease agreements were determined based on the estimated present value of the amount the Group has avoided paying as a result of entering into the lease agreements. Unfavorable lease agreements were determined based on the estimated present value of the acquired lease that exceeded market prices and are recognized as other long-term liabilities. The value of favorable and unfavorable lease agreements is amortized using the straight-line method over the remaining lease term.

        Amortization expense of intangible assets for the six-month period ended June 30, 2016 and 2017 amounted to RMB8,575 and RMB10,776, respectively.

F-16



CHINA LODGING GROUP, LIMITED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2016 AND 2017

(Renminbi in thousands, except share data and per share data, unless otherwise stated)

6. LONG-TERM INVESTMENTS

        The long-term investments as of December 31, 2016 and June 30, 2017 were as follows:

 
  As of  
 
  December 31,
2016
  June 30,
2017
 

Available-for-sale securities:

             

Quanjude

    159,305     146,633  

Tang Palace

    18,856      

Banyan Tree

    26,784      

Cjia

    42,140     226,530  

Cost-method investments:

             

UBOX/BJ UBOX

    48,220     33,822  

BJ GOOAGOO/GOOAGOO

    60,000     60,000  

Founder Service

    45,000     45,000  

Qingpu

    17,143     17,143  

Mobike

        69,009  

Blossomhill

        15,194  

Other investments

    2,208     6,803  

Equity-method investments:

             

Sheen Star

    20,862     20,862  

Distrii

    28,562     30,750  

AAPC LUB

    446,100     462,667  

China Young

    43,054     40,957  

CREATER

    100,000     101,154  

Other investments

    6,087     6,190  

Total

    1,064,321     1,282,714  

Available-for-sale securities

        In June 2014, the Group purchased 7,241,131 ordinary shares of China Quanjude (Group) Co., Ltd. ("Quanjude"), a top restaurant brand listed in Shenzhen Stock Exchange in China, through a private placement. The purchase price was set at RMB13.81 per ordinary share and the total purchase cost was RMB100 million. Upon the closing of the transaction described above, the Group holds approximately 2% of Quanjude's total outstanding shares.

        In 2016, the Group purchased 8,430,000 ordinary shares of Hong Kong Tang Palace Food & Beverage Group ("Tang Palace"), a top restaurant brand listed in Hong Kong Stock Exchange in China, from open market for consideration of RMB16,887. As of December 31, 2016, the Group holds approximately 2% of Tang Palace's total outstanding shares. In the six-month period ended June 30, 2017, the Group sold all the 8,430,000 ordinary shares and reclassified the accumulated unrealized gain of RMB3,813 from other comprehensive income to other income accordingly.

F-17



CHINA LODGING GROUP, LIMITED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2016 AND 2017

(Renminbi in thousands, except share data and per share data, unless otherwise stated)

6. LONG-TERM INVESTMENTS (Continued)

        In December 2016, the Group purchased 11,635,400 ordinary shares of Banyan Tree Holdings Limited ("Banyan Tree"), a leading, international hospitality brand that manages and develops premium resorts, hotels and spas listed in Singapore Stock Exchange in Singapore, from open market for consideration of RMB27,328. As of December 31, 2016, the Group holds approximately 2% of Banyan Tree's total outstanding shares. In January 2017, the Group purchased 3,000,000 ordinary shares of Banyan Tree from open market for consideration of RMB7,020. In April 2017, the Group sold all the 14,635,400 ordinary shares and reclassified the accumulated unrealized gain of RMB1,469 from other comprehensive income to other income accordingly.

        Given the level of investments, the Group accounts for its investments in Quanjude, Tang Palace, and Banyan Tree as "available-for-sale" and measured the fair value at every period end. The unrealized holding gains and losses for available-for-sale securities are reported in other comprehensive income until realized.

        In 2016, the Group sold its subsidiary- Chengjia Hotel Management Co., Ltd. to Chengjia (Shanghai) Apartment Management Co., Limited ("Cjia"), the Group's equity investee. As a result, the Group recognized a gain of RMB49,630 in other income. As of December 31, 2016, the Group had approximately 23% equity interest of Cjia and convertible note with original value of RMB51,200. In the six-month period ended June 30, 2017, the Group invested in Cjia for another two set of convertible notes totaled RMB200,300. As of June 30, 2017, the Group had approximately 23% equity interest of Cjia and convertible notes with original value of RMB251,500. The convertible notes are recorded as available-for-sale investments. The Group recognized its share of loss in Cjia of RMB15,737 in income (loss) from equity method investments for the six-month period ended June 30, 2017, which reduced the cost of equity-method investment to zero and further adjusted the carrying amount of convertible notes balance to RMB226,530 as of June 30, 2017. The remaining carrying amount of the convertible notes approximated its fair value as of June 30, 2017.

Cost-method investments:

        From 2012 to 2013, the Group invested in preferred shares and convertible promissory notes of UBOX International Holdings Co., Limited ("UBOX"), a privately-held company, with the total consideration of RMB40,517. The convertible notes were subsequently converted to ordinary shares of UBOX in 2013 and 2014. As a result of restructuring of UBOX group, the investment in UBOX has been converted to the investment of ordinary shares of Beijing UBOX On-line Technology Co., Ltd. ("BJ UBOX"). The Group has additionally injected RMB7,703 to BJ UBOX in 2015. In April 2017, the Group sold 4,810,000 shares of BJ UBOX and recognized gain of RMB35,545 in other income. As of December 31, 2016 and June 30, 2017, the Group had approximately 3% and 2% equity interest of BJ UBOX, respectively. The investments were accounted for using the cost method since the Group does not have the ability to exert significant influence over the operating and financing activities of UBOX or BJ UBOX.

        In January 2017, the Group purchased 1,316,205 preferred shares for consideration of US$5.0 million (equivalently RMB34,294) and invested in convertible notes with principal amount of US$5.0 million (equivalently RMB34,294) and interest rate of 8% of Mobike Ltd. ("Mobike"), a

F-18



CHINA LODGING GROUP, LIMITED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2016 AND 2017

(Renminbi in thousands, except share data and per share data, unless otherwise stated)

6. LONG-TERM INVESTMENTS (Continued)

Chinese bike-sharing company. In May 2017, the Group converted the entire outstanding principal amount and accrued interest of the convertible notes into 648,559 preferred shares. As of June 30, 2017, the Group had less than 1% equity interest of Mobike. The Group accounted the investment under cost method since the Group does not have the ability to exert significant influence over Mobike.

        In May 2017, the Group purchased approximately 4% equity interest of Blossom Hill Hotel Investment & Management (Kunshan) Co., Ltd ("Blossom Hill"), a Chinese hospitality brand that manages and develops premium resorts and hotels with strong features of traditional Chinese culture, for the consideration of RMB15,194. The Group accounted the investment under cost method since the Group does not have the ability to exert significant influence over Blossom Hill.

        Other investments included several insignificant cost method investments in certain privately-held companies.

Equity-method investments:

        In January 2016, the Group set up Shanghai Distrii Technology Development Co., Ltd. ("Distrii") together with another founder. Distrii is an office rental service company in which the Group contributed RMB35,000 and owned equity interest of 39%. In January 2017, another unrelated investor injected in Distrii which diluted the Group's share of equity interest to 32%, and afterwards the Group sold 6% of Distrii's equity interest for consideration of RMB18,000 and recognized gain of RMB22,682 in other income. As of June 30, 2017, the Group had approximately 26% equity interest of Distrii. The Group accounted for the investment in Distrii under equity-method as the Group has the ability to exert significant influence.

        Other investments included several insignificant equity investments in certain privately-held companies.

7. GOODWILL

        The changes in the carrying amount of goodwill for the year ended December 31, 2016 and June 30, 2017 were as follows:

 
  Gross
Amount
  Accumulated
Impairment
Loss
  Net
Amount
 

Balance at December 31, 2015

    112,785     (4,441 )   108,344  

Increase in goodwill related to acquisitions

    63,160         63,160  

Balance at December 31, 2016

    175,945     (4,441 )   171,504  

Increase in goodwill related to acquisitions (Note 3)

    1,965,206         1,965,206  

Balance at June 30, 2017

    2,141,151     (4,441 )   2,136,710  

F-19



CHINA LODGING GROUP, LIMITED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2016 AND 2017

(Renminbi in thousands, except share data and per share data, unless otherwise stated)

8. DEBT

        In April 2017, the Group entered into a three-year bank loan contract, under which the Group can borrow up to US$40 million (equivalently RMB270,976) for the period ended September 30, 2017, and the Group had a RMB307,000 deposit pledged accordingly. The interest rate of this borrowing is based on the three-month Libor on draw-down date plus 1.4%. In the six-month period ended June 30, 2017, the Group had drawn down US$40 million (equivalently RMB270,976) under this contract and repaid nil. As of June 30, 2017, a portion of loan of US$0.02 million (equivalently RMB135) was recorded under "short-term debt" and the carrying amount of the remaining long term loan was US$39.98 million (equivalently RMB270,841). The weighted average interest rate for borrowings drawn under such credit facility was 2.57% for the six-month period ended June 30, 2017.

        In May 2017, the Group entered into an US$250 million (equivalently RMB1,693,600) term facility and US$250 million (equivalently RMB1,693,600) revolving credit facility agreement with several banks. The US$250 million (equivalently RMB1,693,600) revolving credit facility is available for 35 months after the date of the agreement. The interest rate on the loan is Libor plus 1.75%. There are some financial covenants including interest cover, leverage and tangible net worth related to this facility. In the six-month period ended June 30, 2017, the Group had drawn down US$500 million (equivalently RMB3,387,200) under this contract and repaid nil. As of June 30, 2017, the carrying amount of this long term loan was US$500 million (equivalently RMB3,387,200). The weighted average interest rate for the loan was 2.94% for the six-month period ended June 30, 2017. The Group is in compliance with all the financial covenants as of June 30, 2017.

9. INCOME TAXES

        The effective tax rate is based on expected income and statutory tax rates. For interim financial reporting, the Group estimates the annual tax rate based on projected taxable income for the full year and records a quarterly income tax provision in accordance with ASC No. 740-270 "Income tax—Interim reporting". As the year progresses, the Group refines the estimates of the year's taxable income as new information becomes available. This continual estimation process often results in a change to the expected effective tax rate for the year. When this occurs, the Group adjusts the income tax provision (benefit) during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected annual tax rate.

        The Group considers positive and negative evidence to determine whether some portion or all of the deferred tax assets will more likely than not be realized. This assessment considers, among other matters, the nature, frequency and severity of recent losses, forecasts of future profitability, the duration of statutory carryforward periods, the Group's experience with tax attributes expiring unused and tax planning alternatives. Valuation allowances have been established for deferred tax assets based on a more-likely-than-not threshold. The Group's ability to realize deferred tax assets depends on its ability to generate sufficient taxable income within the carryforward periods provided for in the tax law.

        The Group's effective tax rate for the six months periods ended June 30, 2016 and 2017 was 21.8% and 25.2% respectively.

F-20



CHINA LODGING GROUP, LIMITED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2016 AND 2017

(Renminbi in thousands, except share data and per share data, unless otherwise stated)

10. SHARE-BASED COMPENSATION

        The Group measures share-based compensation in the consolidated statements of comprehensive income based on the fair value of equity awards on the date of the grant, with compensation expenses recognized typically on a straight-line basis over the period in which the grantee is required to provide service to the Group in exchange for the equity award. The Group estimates the fair value of stock options using the binomial option pricing model. The fair value of nonvested restricted stock with service conditions or performance conditions is based on the fair market value of the underlying ordinary shares on the date of grant.

        The share-based compensation expenses have been categorized as either hotel operating costs, general and administrative expenses or selling and marketing expenses, depending on the job functions of the grantees. For the six month period ended June 30, 2016 and 2017, the Group recognized share-based compensation expenses of RMB31,095 and RMB31,820, respectively, which was classified as follows:

 
  Six-month Period
Ended June 30,
 
 
  2016   2017  

Hotel operating costs

    5,998     9,174  

Selling and marketing expenses

    515     658  

General and administrative expenses

    24,582     21,988  

Total

    31,095     31,820  

        During the six months period ended June 30, 2016 and 2017, the Group granted the following share-based compensation:

 
  Six-month Period Ended June 30,  
 
  2016   2017  
 
  Number of
Restricted Stocks
  Weighted Average
Grant Date Fair Value
  Number of
Restricted Stocks
  Weighted Average
Grant Date Fair Value
 
 
   
  US$
   
  US$
 

Restricted stocks

    1,176,834     6.50     214,099     15.26  

F-21



CHINA LODGING GROUP, LIMITED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2016 AND 2017

(Renminbi in thousands, except share data and per share data, unless otherwise stated)

11. EARNINGS PER SHARE

        The following table sets forth the computation of basic and diluted earnings per share for the periods indicated:

 
  Six-month Period
Ended June 30,
 
 
  2016   2017  

Net income attributable to ordinary shareholders—basic

    384,888     537,722  

Net income attributable to ordinary shareholders—diluted

    384,888     537,722  

Weighted average ordinary shares outstanding—basic

    272,932,730     278,785,660  

Incremental weighted-average ordinary shares from assumed exercise of share options and nonvested restricted stocks using the treasury stock method

    7,165,227     9,027,892  

Weighted average ordinary shares outstanding—diluted

    280,097,957     287,813,552  

Basic earnings per share

    1.41     1.93  

Diluted earnings per share

    1.37     1.87  

        For the six month period ended June 30, 2016 and 2017, the Group had securities which could potentially dilute basic earnings per share in the future, but which were excluded from the computation of diluted earnings per share as their effects would have been anti-dilutive. Such outstanding securities consist of the following:

 
  Six-month
Period Ended
June 30,
 
 
  2016   2017  

Outstanding employee options and nonvested restricted stocks

    35,171      

12. RELATED PARTY TRANSACTIONS AND BALANCES

        Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant influence over the other party in making financial and operational decisions. Parties are also considered to be related if they are subject to common control or common significant influence. Related parties may be individuals or corporate entities.

        The following entities are considered to be related parties to the Group. The related parties only act as service providers and service recipients to the Group and there is no other relationship wherein the Group has the ability to exercise significant influence over the operating and financial policies of

F-22



CHINA LODGING GROUP, LIMITED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2016 AND 2017

(Renminbi in thousands, except share data and per share data, unless otherwise stated)

12. RELATED PARTY TRANSACTIONS AND BALANCES (Continued)

these parties. The Group is not obligated to provide any type of financial support to these related parties.

Related Party
  Nature of the Party   Relationship with the Group

Ctrip.com International, Ltd. ("Ctrip")

  Online travel services provider   Mr. Qi Ji is a director

Lijiang Yibang Changchunteng Hotel Co Limited ("Yibang")*

 

Hotel

 

Equity method investee of the Group

Sheen Star Group Limited ("Sheen Star")

  Investment holding company   Equity method investee of the Group, controlled by Mr. Qi Ji

Shanghai Qianya Hotel Management Co., Ltd ("Qianya")

  Hotels management   Investee of the Group

Accor Hotels ("Accor")

 

Hotel Group

 

Shareholder of the Group

Chengjia (Shanghai) Apartment Management Co., Ltd. ("Cjia")

  Apartment Management Group   Equity method investee of the Group

Jiyuan Zhongzhou Express Hotel Co., Ltd. ("Jiyuan")

  Hotel   Equity method investee of the Group

Shanghai Yechun Catering Co., Ltd. ("Yechun")

  Catering Management Company   Equity method investee of the Group

*
In June 2016, the Group disposed the equity investment in Yibang, subsequent to which Yibang is no longer a related party of the Group.

F-23



CHINA LODGING GROUP, LIMITED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2016 AND 2017

(Renminbi in thousands, except share data and per share data, unless otherwise stated)

12. RELATED PARTY TRANSACTIONS AND BALANCES (Continued)

(a)   Related party balances

        Amounts due from related parties were comprised of shareholder loans to Sheen Star, Cjia, Jiyuan and Yechun, which are short-term in nature and payable on demand, and receivable for service fee from Accor and room charges withheld by Ctrip.

 
  As of  
 
  December 31,
2016
  June 30,
2017
 

Sheen Star

    37,060     37,060  

Accor

    4,052     4,771  

Cjia

    50,365     81,772  

Jiyuan

    3,398     665  

Yechun

    375     33  

Ctrip

    3,203      

Total

    98,453     124,301  

        Amounts due to related parties were comprised of the following. These payables were interest free and payable upon demand.

 
  As of  
 
  December 31,
2016
  June 30,
2017
 

Ctrip

             

—Payables for hotel reservation services

    3,291     5,041  

Qianya

             

—Payables for service fee

    164     141  

Accor

             

—Payables for brand use fee, reservation fee and other related service fee

    6,019     3,004  

Jiyuan

             

—Payables for cash collected on behalf

    59     66  

Yechun

             

—Payables for cash collected on behalf

    1,525     1,354  

Total

    11,058     9,606  

F-24



CHINA LODGING GROUP, LIMITED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2016 AND 2017

(Renminbi in thousands, except share data and per share data, unless otherwise stated)

12. RELATED PARTY TRANSACTIONS AND BALANCES (Continued)

(b)   Related party transactions

        During the six-month period ended June 30, 2016 and 2017, related party transactions consisted of the following:

 
  Six-month Period
Ended June 30,
 
 
  2016   2017  

Commission expenses to Ctrip

    19,815     24,682  

Service fee from Yibang

    292      

Service fee to Qianya

    487      

Brand use fee, reservation fee and other related service fee to Accor

    2,688     4,695  

Marketing and training fee from Ctrip

    3,167     6,333  

Service fee from Accor

    2,718     5,907  

Goods sold and service provided to Cjia

        702  

Interest income from Sheen Star

    2,060      

Rental income from Cjia

        1,450  

        In 2016, the Group sold its subsidiary Chengjia Hotel Management Co., Ltd. to Cjia for consideration of RMB10,000.

13. COMMITMENTS AND CONTINGENCIES

(a)   Operating lease commitments

        The Group has entered into lease agreements for certain hotels which it operates. Such leases are classified as operating leases.

        The Group generally is able to terminate these lease agreements by paying penalties to the lessors, in most cases up to six months of rental pursuant to the terms of the lease agreements or based on the

F-25



CHINA LODGING GROUP, LIMITED

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2016 AND 2017

(Renminbi in thousands, except share data and per share data, unless otherwise stated)

13. COMMITMENTS AND CONTINGENCIES (Continued)

group's past experience. Future minimum lease payments under operating lease agreements at June 30, 2017 were as follows:

Remaining of 2017

    1,236,599  

2018

    2,393,534  

2019

    2,373,897  

2020

    2,313,127  

2021

    2,191,614  

2022

    2,060,981  

2023

    1,909,230  

2024

    1,783,423  

2025

    1,612,346  

2026

    1,409,048  

Thereafter

    5,091,718  

Total

    24,375,517  

(b)   Purchase Commitments

        As of June 30, 2017, the Group's commitments related to leasehold improvements and installation of equipment for hotel operations was RMB120,481, which is expected to be incurred within one year.

(c)   Contingencies

        The Group is subject to periodic legal or administrative proceedings in the ordinary course of our business. As of December 31, 2016, the Group had several cases outstanding, including lease contract terminations and disputes, and construction contract disputes. The Group believed it is probable that settlement liabilities will be involved, and therefore accrued contingencies of RMB66,234 in other operating expense based on the terms of contract, laws and regulations and latest negotiation result. In May and June 2017, the Group had settled several cases and therefore reversed contingencies of RMB32,230 based on latest negotiation or arbitration result with the remaining accrued contingencies of RMB34,004. The Group does not believe that any other currently pending legal or administrative proceeding to which the Group is a party will have a material adverse effect on the financial statements.

14. SUBSEQUENT EVENTS

        On September 8, 2017 the Group entered into a five-year Memorandum of Understanding ("MoU") with Oravel Stays Private Ltd. ("OYO"), India's leading hospitality company, to facilitate and strengthen collaboration to build a global market leading hospitality business. As part of this collaboration, the Group has agreed to make an approximately US$10.0 million (equivalently RMB67,744) investment in preferred stock of OYO to become a minority shareholder (less than 5%). The Group and OYO will also discuss collaboration in a variety of other areas of mutual interests pursuant to the MoU.

        On September 28, 2017, the Group's board of directors approved to pay dividends of around RMB300,000 to the shareholders. As of the report date, the Group has not paid any such dividends.

F-26




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Exhibit 99.2

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 our audited consolidated financial statements as of December 31, 2015 and 2016 and for the years ended December 31, 2014, 2015 and 2016 and the notes thereto and the section headed "Item 5. Operating and Financial Review and Prospects" in our 2016 20-F, as well as our unaudited condensed consolidated financial statements as of June 30, 2017 and for the six months ended June 30, 2016 and 2017 and the notes thereto included in our current report on Form 6-K furnished to the SEC on October 26, 2017. This discussion may contain forward-looking statements based upon our current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors.

Specific Factors Affecting Our Results of Operations

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


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.

Non-financial Key Performance Indicators

        Our non-financial key performance indicators consist of (i) change in the total number of hotels and hotel rooms in our hotel group, (ii) RevPAR, especially RevPAR achieved by our leased and owned hotels and (iii) same-hotel RevPAR change.

        Change in the total number of hotels and hotel rooms.    We track the change in the total number of hotels and hotel rooms in operation to monitor our business expansion. Our total hotels in operation increased from 1,995 as of December 31, 2014 to 3,541 as of June 30, 2017. Our total hotel room-nights available for sale increased from 65.3 million in 2014 to 112.9 million in 2016 and was 61.1 million in the six months ended June 30, 2017. The following table sets forth various measures of changes in the total number of hotels and hotel rooms as of and for the dates and periods indicated.

 
  As of and for the Year Ended December 31,    
 
 
  As of and for the
Six Months Ended
June 30, 2017
 
 
  2014   2015   2016  

Total hotels in operation

    1,995     2,763     3,269     3,541  

Leased and owned hotels

    611     616     624     686  

Manachised hotels

    1,376     2,067     2,471     2,654  

Franchised hotels

    8     80     174     201  

Total hotel rooms in operation

    209,955     278,843     331,347     359,530  

Leased and owned hotels

    72,335     75,436     78,160     86,232  

Manachised hotels

    136,689     196,737     237,094     253,469  

Franchised hotels

    931     6,670     16,093     19,829  

Total hotel room-nights available for sale

    65,321,955     88,384,653     112,937,662     61,101,259  

Leased and owned hotels

    25,286,195     27,093,439     28,346,421     14,396,873  

Manachised hotels

    39,542,356     60,244,011     80,161,362     43,991,260  

Franchised hotels

    493,404     1,047,203     4,429,879     2,713,126  

Number of cities

    300     352     367     369  

         (ii)  RevPAR.    RevPAR is a commonly used operating measure in the lodging 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. From year to year, occupancy of our portfolio may fluctuate as a result of change in the mix of mature and ramp-up hotels, as well as special event such as the Shanghai Expo in 2010. We set the room rates of our hotels primarily based on the location of a hotel, room rates charged by our competitors within the same locality, and our relative brand and product strength in the city or city cluster. From year to year, average daily rate of our portfolio may change due to our yield management practice, city mix change and special events such as Shanghai Expo in 2010. The following table sets forth our RevPAR, average daily room rate and occupancy rate for our leased and owned and

2


manachised hotels for the periods indicated. We did not track the RevPAR, average daily room rate or occupancy rate for our franchised hotels before 2015.

 
  Year Ended
December 31,
  Six Months
Ended
June 30,
 
 
  2014   2015   2016   2016   2017  

RevPAR(1) (in RMB)

                               

Leased and owned hotels

    169     172     179     171     193  

Manachised hotels

    153     145     151     142     159  

Franchised hotels

    N/A     124     125     117     136  

Total hotels in operation

    159     153     157     148     166  

Average daily room rate(1) (in RMB)

                               

Leased and owned hotels

    190     198     208     202     219  

Manachised hotels

    172     170     177     170     181  

Franchised hotels

    N/A     177     182     176     193  

Total hotels in operation

    179     179     185     179     191  

Occupancy rate (as a percentage)

                               

Leased and owned hotels

    89     87     86     84     88  

Manachised hotels

    89     85     85     83     88  

Franchised hotels

    N/A     70     69     66     70  

Total hotels in operation

    89     85     85     83     87  

Weight of hotel room-nights available for sale contributed by leased and owned hotels less than 6 months (as a percentage)

    7     3     3     4     3  
                                 

(1)
Value-added tax has been implemented for hospitality industry to replace business tax in China effective May 1, 2016. Our room rates quoted and received from customers are tax-inclusive (business tax or value-added tax) before and after the implementation of value-added tax. For comparison purposes, the RevPAR and average daily room rates disclosed herein are based on the tax-inclusive room rates.

        RevPAR may change from period to period due to (i) the change in the mix of our leased and owned hotels in the ramp-up and mature phases, (ii) the change in the mix of our hotels in different cities and locations, (iii) the change in the mix of our hotels of different brands, and (iv) the change in same-hotel RevPAR. The total hotel RevPAR in the six months ended June 30, 2017 was higher than that in the same period of 2016, mainly due to the improvement of the quality of economy hotels and the expansion of midscale and upscale hotels. The total hotel RevPAR in 2016 was higher than that in 2015, mainly as a result of the upgrade of Hanting 2.0 and the growing demand for our midscale hotels. The total hotel RevPAR in 2015 was lower than that in 2014, mainly as a result of the relatively soft overall market and the city mix shifting toward lower-tier cities.

        The seasonality of our business may cause fluctuations in our quarterly RevPAR. We typically have the lowest RevPAR in the first quarter due to reduced travel activities in the winter and during the Spring Festival holidays, and the highest RevPAR in the third quarter due to increased travel during

3


the summer. National and regional special events that attract large numbers of people to travel may also cause fluctuations in our RevPAR.

 
  Three Months Ended  
 
  March 31,
2015
  June 30,
2015
  September 30,
2015
  December 31,
2015
  March 31,
2016
  June 30,
2016
  September 30,
2016
  December 31,
2016
  March 31,
2017
  June 30,
2017
 

RevPAR (in RMB):

                                                             

Leased and owned hotels

    150     176     188     172     159     182     195     181     174     211  

Manachised hotels

    131     146     159     141     133     150     166     152     147     171  

Franchised hotels

    115     126     137     116     105     128     144     123     118     151  

Total hotels in operation

    137     156     167     149     139     157     173     158     152     179  

        (iii)  Same-hotel RevPAR change.    Our overall RevPAR trend does not reflect the trend of a stable and mature portfolio, because it may fluctuate when city mix and mix of mature and ramp-up hotels change. We track same-hotel year-over-year RevPAR change for hotels in operation for at least 18 months to monitor RevPAR trend for our mature hotels on a comparable basis. The following table sets forth our same-hotel RevPAR for hotels in operation for at least 18 months for the periods indicated.

 
  For the Three Months Ended  
 
  March 31,
2015
  June 30,
2015
  September 30,
2015
  December 31,
2015
  March 31,
2016
  June 30,
2016
  September 30,
2016
  December 31,
2016
  March 31,
2017
  June 30,
2017
 

Same-hotel RevPAR change (as a percentage)

    –5     –4     –3     –3     0     –1     1     2     6     8  

Financial Key Performance Indicators

        Our financial key performance indicators consist of (i) revenues, (ii) operating costs and expenses, (iii) EBITDA and Adjusted EBITDA, and (iv) net cash provided by operating activities.

          (i)  Revenues.    We primarily derive our revenues from operations of our leased and owned hotels and franchise and service fees from our manachised and franchised hotels. Our revenues are subject to business tax of 5% (before May 1, 2016) and other related taxes. The following table sets forth the revenues generated by our leased and owned and manachised and franchised hotels and other revenues, each in absolute amount and as a percentage of total revenues for the periods indicated.

 
  Year Ended December 31,  
 
  2014   2015   2016  
 
  (RMB)
  %
  (RMB)
  %
  (RMB)
  (US$)
  %
 
 
  (In thousands except percentages)
 

Revenues:

                                           

Leased and owned hotels

    4,522,431     85.9     4,986,872     81.6     5,212,405     768,871     78.3  

Manachised and franchised hotels

    742,797     14.1     1,123,979     18.4     1,411,156     208,156     21.2  

Others

                    31,219     4,605     0.5  

Total revenues

    5,265,228     100.0     6,110,851     100.0     6,654,780     981,632     100.0  

Less: Business tax and related taxes(1)

    300,500     5.7     336,227     5.5     116,149     17,133     1.7  

Net revenues

    4,964,728     94.3     5,774,624     94.5     6,538,631     964,499     98.3  

4



 
  Six Months Ended June 30,  
 
  2016   2017  
 
  (RMB)
  %
  (RMB)
  (US$)
  %
 
 
  (In thousands except percentages)
 

Revenues:

                               

Leased and owned hotels

    2,531,497     78.8     2,766,593     408,094     77.2  

Manachised and franchised hotels

    669,934     20.9     796,914     117,551     22.3  

Others

    9,622     0.3     18,780     2,770     0.5  

Total revenues

    3,211,053     100.0     3,582,287     528,415     100.0  

Less: Business tax and related taxes(1)

    116,149     3.6              

Net revenues

    3,094,904     96.4     3,582,287     528,415     100.0  
                                 

(1)
Value-added tax has been implemented for hospitality industry to replace business tax in China effective May 1, 2016.

5


6


         (ii)  Operating Costs and Expenses.    Our operating costs and expenses consist of costs for hotel operation, selling and marketing expenses, general and administrative expenses and pre-opening expenses. The following table sets forth the components of our operating costs and expenses, both in absolute amount and as a percentage of net revenues for the periods indicated.

 
  Year Ended December 31,  
 
  2014   2015   2016  
 
  (RMB)
  %
  (RMB)
  %
  (RMB)
  (US$)
  %
 
 
  (In thousands except percentages)
 

Net revenues

    4,964,728     100.0     5,774,624     100.0     6,538,631     964,499     100.0  

Operating costs and expenses

                                           

Hotel operating costs:

                                           

Rents

    1,543,651     31.1     1,804,532     31.2     1,870,879     275,969     28.6  

Utilities

    323,837     6.5     341,620     5.9     345,615     50,981     5.3  

Personnel costs

    788,973     15.9     919,555     15.9     1,088,380     160,545     16.6  

Depreciation and amortization

    558,833     11.3     645,058     11.2     676,996     99,862     10.3  

Consumables, food and beverage

    454,795     9.2     485,099     8.4     494,764     72,982     7.6  

Others

    207,938     4.1     316,283     5.5     455,539     67,195     7.0  

Total hotel operating costs

    3,878,027     78.1     4,512,147     78.1     4,932,173     727,534     75.4  

Other operating costs

                    7,606     1,122     0.1  

Selling and marketing expenses

    187,435     3.8     179,568     3.1     146,525     21,613     2.2  

General and administrative expenses

    342,128     6.9     403,008     7.0     492,141     72,595     7.5  

Pre-opening expenses

    186,325     3.8     110,011     1.9     71,847     10,598     1.1  

Total operating costs and expenses

    4,593,915     92.6     5,204,734     90.1     5,650,292     833,462     86.3  

 

 
  Six Months Ended June 30,  
 
  2016   2017  
 
  (RMB)
  %
  (RMB)
  (US$)
  %
 
 
  (In thousands except percentages)
 

Net revenues

    3,094,904     100.0     3,582,287     528,415     100.0  

Operating costs and expenses

                               

Hotel operating costs:

                               

Rents

    950,820     30.7     965,491     142,417     26.9  

Utilities

    181,212     5.9     171,792     25,341     4.8  

Personnel costs

    532,762     17.2     609,341     89,883     17.0  

Depreciation and amortization

    336,558     10.9     354,986     52,363     9.9  

Consumables, food and beverage

    244,829     7.9     245,741     36,249     6.9  

Others

    171,690     5.5     199,881     29,484     5.6  

Total hotel operating costs

    2,417,871     78.1     2,547,232     375,737     71.1  

Other operating costs

    3,029     0.1     5,672     837     0.2  

Selling and marketing expenses

    69,119     2.2     79,530     11,731     2.2  

General and administrative expenses

    225,475     7.4     301,032     44,405     8.4  

Pre-opening expenses

    35,390     1.1     67,246     9,919     1.9  

Total operating costs and expenses

    2,750,884     88.9     3,000,712     442,629     83.8  

7


 
  Year Ended December 31,   Six Months
Ended June 30,
 
 
  2014   2015   2016   2016   2017  
 
  (RMB)
  (RMB)
  (RMB)
  (US$)
  (RMB)
  (RMB)
  (US$)
 
 
  (In thousands)
 

Rents

    163,155     95,977     67,277     9,924     33,383     59,712     8,807  

Personnel cost

    7,217     5,903     1,560     230     517     1,103     163  

Others

    15,953     8,131     3,010     444     1,490     6,431     949  

Total pre-opening expenses

    186,325     110,011     71,847     10,598     35,390     67,246     9,919  

        Our hotel operating costs, selling and marketing expenses and general and administrative expenses include share-based compensation expenses. The following tables set forth the allocation of our share-

8


based compensation expenses, both in absolute amount and as a percentage of total share-based compensation expenses, among the cost and expense items for the periods indicated.

 
  Year Ended December 31,  
 
  2014   2015   2016  
 
  (RMB)
  %
  (RMB)
  %
  (RMB)
  (US$)
  %
 
 
  (In thousands except percentages)
 

Hotel operating costs

    6,830     21.4     8,835     16.8     13,603     2,006     24.5  

Selling and marketing expenses

    939     2.9     907     1.7     811     120     1.5  

General and administrative expenses

    24,168     75.7     42,793     81.5     41,022     6,051     74.0  

Total share-based compensation expenses

    31,937     100.0     52,535     100.0     55,436     8,177     100.0  

 

 
  Six Months Ended June 30,  
 
  2016   2017  
 
  (RMB)
  %
  (RMB)
  (US$)
  %
 
 
  (In thousands except percentages)
 

Hotel operating costs

    5,998     19.3     9,174     1,353     28.8  

Selling and marketing expenses

    515     1.7     658     97     2.1  

General and administrative expenses

    24,582     79.0     21,988     3,244     69.1  

Total share-based compensation expenses

    31,095     100.0     31,820     4,694     100.0  

        We adopted our 2007 Global Share Plan and 2008 Global Share Plan in February and June 2007, respectively, expanded the 2008 Global Share Plan in October 2008, adopted the 2009 Share Incentive Plan in September 2009, and expanded the 2009 Share Incentive Plan in October 2009, August 2010 and March 2015. We have granted options to purchase 319,480, 118,348, nil and nil of our ordinary shares in 2014, 2015, 2016 and the six months ended June 30, 2017, respectively. We granted 1,167,100, 13,931,961, 1,919,791 and 214,099 shares of restricted stock in 2014, 2015, 2016 and the six months ended June 30, 2017, respectively. We recognized share-based compensation as compensation expenses in the statement of comprehensive income based on the fair value of equity awards on the date of the grant, with the compensation expenses recognized over the period in which the recipient is required to provide service to us in exchange for the equity award. Share-based compensation expenses have been categorized as hotel operating costs, general and administrative expenses, or selling and marketing expenses, depending on the job functions of the grantees.

        (iii)  EBITDA and Adjusted EBITDA.    We use earnings before interest income, interest expense, income tax expense (benefit) and depreciation and amortization, or EBITDA, a non-GAAP financial measure, to assess our results of operations before the impact of investing and financing transactions and income taxes. Given the significant investments that we have made in leasehold improvements, depreciation and amortization expense comprises a significant portion of our cost structure. We believe that EBITDA is widely used by other companies in the lodging industry and may be used by investors as a measure of our financial performance. We also use Adjusted EBITDA, another non-GAAP measure, which is defined as EBITDA before share-based compensation expenses. We present Adjusted EBITDA because it is used by our management to evaluate our operating performance. We also believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our consolidated results of operations in the same manner as our management and in comparing financial results across accounting periods and to those of our peer companies.

9


        The following tables present certain unaudited financial data and selected operating data for the periods indicated.

 
  Year Ended December 31,   Six Months Ended June 30,  
 
  2014   2015   2016   2016   2017  
 
  (RMB)
  (RMB)
  (RMB)
  (US$)
  (RMB)
  (RMB)
  (US$)
 
 
  (In thousands)
 

Non-GAAP Financial Data

                                           

EBITDA(1)

    969,546     1,271,675     1,730,319     255,236     816,823     1,060,766     156,471  

Adjusted EBITDA(1)

    1,001,483     1,324,210     1,785,755     263,413     847,918     1,092,586     161,165  

(1)
We believe that EBITDA is a useful financial metric to assess our operating and financial performance before the impact of investing and financing transactions and income taxes. Given the significant investments that we have made in leasehold improvements, depreciation and amortization expense comprises a significant portion of our cost structure. In addition, we believe that EBITDA is widely used by other companies in the lodging industry and may be used by investors as a measure of our financial performance. We believe that EBITDA will provide investors with a useful tool for comparability between periods because it eliminates depreciation and amortization expense attributable to capital expenditures. We also use Adjusted EBITDA, which is defined as EBITDA before share-based compensation expenses. We present Adjusted EBITDA because it is used by our management to evaluate our operating performance. We also believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our consolidated results of operations in the same manner as our management and in comparing financial results across accounting periods and to those of our peer companies. Our calculation of EBITDA and Adjusted EBITDA does not deduct foreign exchange loss, which was RMB0.2 million in 2014, and foreign exchange gain, which was RMB7.8 million and RMB16.5 million (US$2.4 million) in 2015 and 2016, respectively. Our calculation of EBITDA and Adjusted EBITDA does not deduct foreign exchange gain of RMB4.3 million in the six months ended June 30, 2016 and foreign exchange loss of RMB10.0 million (US$1.5 million) in the six months ended June 30, 2017. The presentation of EBITDA and 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 EBITDA and Adjusted EBITDA has certain limitations. Depreciation and amortization expense for various long-term assets, income tax, interest income and interest expense have been and will be incurred and are not reflected in the presentation of EBITDA. Share-based compensation expenses 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, EBITDA or 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 income, interest expense, income tax expense, share-based compensation expenses, capital expenditures and other relevant items both in our reconciliations to the U.S. GAAP financial measures and in our consolidated financial statements, all of which should be considered when evaluating our performance.



The terms EBITDA and Adjusted EBITDA are not defined under U.S. GAAP, and neither EBITDA nor Adjusted EBITDA is 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 EBITDA or Adjusted EBITDA may not be comparable to EBITDA or Adjusted EBITDA or similarly titled measures utilized by other companies since such other companies may not calculate EBITDA or Adjusted EBITDA in the same manner as we do.

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

 
  Year Ended December 31,   Six Months Ended June 30,  
 
  2014   2015   2016   2016   2017  
 
  (RMB)
  (RMB)
  (RMB)
  (US$)
  (RMB)
  (RMB)
  (US$)
 
 
  (In thousands)
 

Net income attributable to our company

    307,348     436,600     804,615     118,687     384,888     537,722     79,318  

Interest income

    (23,162 )   (26,712 )   (67,366 )   (9,937 )   (25,273 )   (40,124 )   (5,919 )

Interest expense

    1,533     3,854     11,056     1,631     6,608     18,228     2,689  

Income tax expense

    113,105     196,529     287,120     42,352     105,170     182,526     26,924  

Depreciation and amortization

    570,722     661,404     694,894     102,503     345,430     362,414     53,459  

EBITDA (Non-GAAP)

    969,546     1,271,675     1,730,319     255,236     816,823     1,060,766     156,471  

Share-based compensation expenses

    31,937     52,535     55,436     8,177     31,095     31,820     4,694  

Adjusted EBITDA (Non-GAAP)

    1,001,483     1,324,210     1,785,755     263,413     847,918     1,092,586     161,165  

        (iv)  Net Cash Provided by Operating Activities.    Our net cash provided by operating activities is primarily attributable to our net income, add-backs from share-based compensation expenses, depreciation and amortization and deferred rent and changes in deferred revenue and prepaid rent. We use net cash provided by operating activities to assess the cash generation capability and return profile of our business. Compared with EBITDA, net cash provided by operating activities neutralizes the impact of straight-line based rental accounting and timing difference in certain areas of revenue recognition when assessing the return profile and profitability of our business. We had net cash provided by operating activities of RMB1,454.0 million, RMB1,749.7 million and RMB2,047.7 million (US$302.1 million) in 2014, 2015 and 2016, respectively. The year-over-year increase was mainly due to the expansion of our hotel network. Our net cash provided by operating activities was RMB984.5 million (US$145.2 million) in the six months ended June 30, 2017. We expect that our net cash provided by operating activities will continue to increase as we further expand our hotel network.

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 net revenues for the periods indicated. This information should be read together with our consolidated financial statements and related notes for the relevant periods.

        We have grown rapidly since we began our current business of operating and managing a multi-brand hotel group in 2007. Our relatively limited operating history makes it difficult to predict our

11


future operating results. 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,  
 
  2014   2015   2016  
 
  (RMB)
  %
  (RMB)
  %
  (RMB)
  (US$)
  %
 
 
  (In thousands except percentages)
 

Consolidated Statement of Comprehensive Income Data:

                                           

Revenues:

                                           

Leased and owned hotels

    4,522,431     91.1     4,986,872     86.3     5,212,405     768,871     79.7  

Manachised and franchised hotels

    742,797     15.0     1,123,979     19.5     1,411,156     208,156     21.6  

Others

                    31,219     4,605     0.5  

Total revenues

    5,265,228     106.1     6,110,851     105.8     6,654,780     981,632     101.8  

Less: Business tax and related taxes

    300,500     6.1     336,227     5.8     116,149     17,133     1.8  

Net revenues

    4,964,728     100.0     5,774,624     100.0     6,538,631     964,499     100.0  

Operating costs and expenses(1):

                                           

Hotel operating costs

    3,878,027     78.1     4,512,147     78.1     4,932,173     727,534     75.4  

Other operating costs

                    7,606     1,122     0.1  

Selling and marketing expenses

    187,435     3.8     179,568     3.1     146,525     21,613     2.2  

General and administrative expenses

    342,128     6.9  <