Huazhu: Housing Prices Soar, Business Confidence Rebounds Greatly.

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On April 25, 2023, after the close of the Hong Kong market and before the opening of the U.S. market, Huazhu Group (1179.HK/HTHT.O) released its first-quarter operating data for 2023, which are as follows:

1. Recovery continues to accelerate with price increases playing a significant role: The RevPAR recovery in China was very good in the first quarter of this year and had already recovered to 118% of the level during the same period in 2019. The RevPAR in January, February, and March had recovered to 96%, 140%, and 120% of the 2019 level, respectively.

ADR contribution was the most significant, increasing 24% compared to the previous quarter and 25% compared to the same period in 2019. Although the occupancy rate did not return to the pre-epidemic level, it saw significant improvements in year-on-year or sequential comparisons and is currently at around 75%. Huazhu's occupancy rate has always been among the industry's leaders, now only about 5pct away from the pre-epidemic level. Although it is not as difficult to book a room as some online rumors indicate, it is still a very good achievement.

2. Overseas business in the first quarter continued the trend from the end of last year, although there was an increase year-on-year, mainly affected by the low comparative base in the same period last year, and represents the gradual end of the recovery of overseas businesses (whether the occupancy rate can increase is the focus for the future, as prices have already been adjusted effectively).

3. Hotel net additions have slowed, and self-operated hotels have decreased: Existing hotel operating data is good. However, it is yet to bring about an expansion of stores, which may be due to the short period of time and reluctance among franchisees. As a result, the number of hotels to be opened has slightly declined.

Dolphin's opinion:

Overall, among existing hotels, Huazhu's operating performance has been quite ideal, and the pace of recovery has accelerated. However, it is not particularly impressive in terms of store expansion data and is at a medium level. Dolphin believes that the primary reason is related to the mood of franchisees being hesitant during the initial period of adjustments to epidemic prevention policies at the end of last year.

The industry has been in a downturn for the past two to three years, and as a result, property owners are more cautious about investing in heavy assets, hoping to observe for a period of time. The first-quarter operating data has already provided excellent recovery, and from the perspective of industry recovery, the second-quarter operating data will provide the market with more confidence. After the Qingming Festival, the hotel occupancy rate continued to rise, and the ADR increase was more evident.

From an operational standpoint, Huazhu has become the best in the industry, but from a valuation standpoint, due to its consistently outstanding performance, the market has also continued to offer a high valuation. The stock prices of the hotel industry have hardly retreated, so Huazhu is currently in a state of performance realization and not always exceeding expectations.

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Interpretation of this quarter's operating data:

1. Domestic RevPAR: Recovered to 118% of pre-epidemic level.

Currently, Huazhu Group's domestic RevPAR level has fully surpassed the pre-epidemic period. In the past three months, Huazhu's RevPAR recovery rates were 96%, 140%, and 120% of 2019 levels, respectively. From the upcoming "May Day" holiday's travel status, this trend seems to be continuing. Overall, the acceleration of recovery is very prominent.

Although the occupancy rate still has a slight gap compared to the peak period, ADR will rise with an increase in occupancy rate, meaning that RevPAR may have a better performance in Q2.

2. Gradually Stabilizing Overseas Business

Compared with the rapid recovery of the domestic business, the overseas business is gradually recovering. The situation of ADR price increases is slowing down, and the major focus in the future is on gradually recovering occupancy rates to a more reasonable profit level.

3. Net Increase in Stores Has Declined

Looking at the store-opening situation, after the net increase in stores declined in the fourth quarter of last year, it continued to decline in the first quarter of this year. Dolphin believes that this is mainly due to the wait-and-see attitude of franchisees. Initially, when the epidemic prevention policies changed, there was still some caution towards higher capital investments. However, stimulated by the continuous operating data in Q1 and Q2 of this year, at least the company's planned levels can be reached.

From the current self-operated structure, Q2 self-operated stores continued to decrease. This is mainly because many property leases expired during the epidemic period, but it was not suitable to negotiate cancellations with property owners at that time. Therefore, the problem has been gradually resolved and will continue into 2022.

In summary, from the perspective of operating indicators of existing hotels, the recovery is very good. However, the problem of low reserves may be criticized by the market due to the current high valuation. Dolphin believes that from the perspective of the continuous improvement of Q2 operations, the issue of low reserves will not be a long-term problem. With RevPAR in the past few months as a support, the confidence of franchisees should be a matter of time.

Long Bridge Dolphin Investment Research "Huazhu Group-S" Historical Articles:

Earnings Season

March 28, 2023 Conference Call "Lean Growth is Core (Huazhu 22Q4 Conference Call Summary)"

March 28, 2023 Earnings Review "Huazhu: Volume and Price Rise, Ready to Break Out"

November 29, 2022 Conference Call "Reduce Costs and Increase Efficiency, Stick to Business Growth (Huazhu 22Q3 Conference Call Summary)"

November 29, 2022 "In the Crack of the Epidemic, Huazhu is Striving for Growth"

March 24, 2022 Conference Call "Huazhu Group Q4 Conference Call Summary: Focusing on Lean Growth"

March 23, 2022 "Huazhu: With Repeated Epidemics, Recovery is a Long Way Off"

November 25, 2021 Conference Call "How will Huazhu Transform in the Face of Repeated Epidemics? (Huazhu Conference Call Summary)"

November 25, 2021 "Huazhu: Struggling to Make a Living, Faith Depends on 'Toughness'"

Depth

December 23, 2022 "Can Huazhu, Worth $43, Climb to the Top?"