The bustling holiday, the quiet Huazhu

After the Hong Kong market closed on May 17, 2024 Beijing time, Huazhu Group (1179.HK/HTHT.O) released its financial report for the first quarter of 2024. In summary, under a stable hotel and travel market, revenue growth returned to normal, without surprises. However, the expansion costs led to slightly lower-than-expected profits, with a lackluster performance. Specifically:

1. In terms of underlying operating data, the average revenue per room for Huazhu's domestic hotels this quarter was 216 yuan/night, equivalent to 121% of the same period in 2019, and close to 120% of the previous quarter. The demand for hotel and travel remained stable at a high level, neither strengthening nor weakening.

In terms of price and volume drivers, the average room rate reached 127% of the same period in 2019, showing a significant increase. However, the occupancy rate was 77.2%, a decrease of 3.4 percentage points compared to the same period in 2019. This reflects that growth is mainly driven by price increases, but with the increase in supply, the supply-demand imbalance of "rooms in short supply" has passed.

In terms of opening new hotels, after a slight pause in the previous quarter, the pace accelerated again this quarter, with a net increase of 423 new hotels opened, bringing the total number of hotels awaiting opening to about 70 more than the previous quarter, totaling 3172 hotels. The accelerated opening of new hotels seems to confirm the trend towards a balanced supply and demand.

1. After passing the explosive recovery period, the overall operating growth of Huazhu Group this quarter also slowed to 18%, almost completely in line with market expectations, without surprises. Due to the stable revenue per room in directly operated businesses and a net decrease of 9 self-operated hotels, the revenue growth rate has dropped significantly to 8%. On the other hand, due to a 16% increase in the number of franchised hotels, the revenue growth rate remains at a high level of 33%.

Excluding the different calibers of self-operated and franchised businesses, the overall hotel revenue growth this quarter was 22%, which more accurately reflects Huazhu's actual growth this quarter.

On the cost side, although this quarter saw a decrease of about 350 million in self-operated revenue compared to the previous quarter, costs decreased by 400 million, resulting in a gross profit increase of 120 million. Specifically, relatively fixed leasing expenses/human costs remained relatively stable, while relatively elastic material costs and other costs decreased by a total of 400 million compared to the previous quarter. This reflects that Huazhu has been able to offset income fluctuations by controlling costs excellently through variable costs.

However, with the increase in supply and the decrease in occupancy rates, sales expenses increased by 0.6 billion (about 30%) year-on-year, reflecting the increasing difficulty in acquiring customers. In addition, administrative expenses also increased by 18% year-on-year, higher than expected. The increase in expenses led to Huazhu's cost contribution not being sustained, with the adjusted EBITDA at 1.33 billion, 90 million (6.2%) less than the seller's forecast, and the profit performance was not satisfactory Looking ahead to the second quarter, the company's guidance indicates that total revenue will increase by 7%-11% year-on-year, returning to the normal growth rate . This guidance is also in line with the company's previous guidance of 8%-12% growth for the full year of 2024. The guidance for 2Q, as the first long holiday of the year - the May Day holiday performance, roughly indicates that domestic travel demand is unlikely to show a particularly significant increase compared to last year.

Dolphin Research Opinion:

From Huazhu's performance this quarter and the guidance for the next quarter, it can be seen that the prosperity of domestic travel demand has generally entered a stable state, without worrying about a decline in demand, but it also seems unlikely to continue to outperform expectations like last year. A growth of around 10% should be a reasonable expectation.

On the other hand, from the performance of the past two quarters, we increasingly feel that after a year of recovery in 2023, the supply of the hotel and travel industry has been significantly restored. The situation of supply shortage from last year has clearly improved. This means that the seller's market of hotels and travel (strong bargaining power and the resulting "windfall profits") has basically come to an end, so the explosive profit growth is also likely to have come to a halt. In the future, more will depend on Huazhu's "internal strength" in cost control and the further improvement of profit margins through light-asset franchise business.

The following is a detailed analysis:

I. The stability of the hotel and travel industry, neither strengthening nor weakening

As usual, before interpreting the financial data, let's first review the more fundamental operating data to more realistically and comprehensively grasp Huazhu's operating performance this quarter.

1.1 Overall stability of domestic hotel and travel demand, but a slight decrease in occupancy rate

In the first quarter, the average single room revenue of Huazhu Hotels was 216 yuan/night, equivalent to 121% of the same period in 2019, a slight increase of 2.9% year-on-year , indicating that the prosperity of hotel and travel demand is stable at a high level, not showing further significant strength, but also not weakening.

From the perspective of price and volume driving, this quarter the ADR reached 127% of the same period in 2019, a significant increase. While the occupancy rate was 77.2%, a decrease of 3.4pct compared to the same period in 2019. Therefore, it can be seen that the current growth is mainly driven by price increases, and with the gradual recovery of supply, the scarcity of rooms has decreased.

From the rising ADR, it can be inferred that the gross profit per room should have increased, but the lower occupancy rate also prompts the company to spend more on attracting and retaining customers

1.2 Overseas hotel and travel demand does seem to be declining

Compared to domestic trends, overseas hotel and travel demand does appear to be weakening in the first quarter, with average room revenue (RevPAR) already below the level of the same period in 2019 (at 98%), showing a significant decline from the previous quarter.

Specifically, due to post-pandemic DH hotel occupancy rates consistently lower than pre-pandemic levels (6.1pct lower than the same period in 2019 this quarter), growth is entirely being driven by a significant increase in average daily rate (ADR). However, this quarter's ADR is only at 109% of 2019, a substantial decrease from 119% in the previous quarter, leading to a decrease in RevPAR.

Furthermore, both overseas and domestic RevPAR income growth is mainly driven by price increases, while occupancy rates are showing a declining trend, which still applies this quarter.

1.3 Store openings are picking up speed again, supply is increasing

In terms of store opening pace, after a slight pause in the previous quarter, store openings have accelerated again this quarter. A total of 423 net new hotels opened this quarter, and the number of hotels awaiting opening has increased by about 70 to 3172 compared to the previous quarter. The accelerated increase in the number of hotels may also be a reason for the decline in occupancy rates.

In terms of structure, this quarter saw a net decrease of 9 self-operated hotels compared to the previous quarter, with growth in store numbers being entirely driven by franchised stores.

2. Returning to normal growth, cost control remains excellent

1.1 Moving past the explosive recovery period, Huazhu Group's growth returns to normal

After passing through the explosive recovery period, Huazhu Group's overall business growth rate this quarter has slowed to 18%, which is almost entirely in line with market expectations, without any surprises.

Looking ahead to the second quarter, the company expects total revenue to grow by 7%-11% year-on-year, returning to a normal growth rate after completely passing through the low base period The guidance of 8%-12% revenue growth for the full year of 24 matches the performance of 2Q, which reflects the performance of this year's May Day holiday. It can be roughly inferred that the domestic hotel and travel demand is unlikely to see a significant increase compared to last year.

In terms of revenue, Huazhu's directly operated hotels have seen a significant decrease in growth to 8% as single-store revenue can no longer increase significantly, while the number of hotels has decreased. On the other hand, revenue growth for franchised hotels remains high at 33% due to a 16% increase in the number of hotels compared to the same period last year.

However, since the revenue calculation for self-operated and franchised hotels is different, with franchised hotels accounting for over 90% of the number but less than 1/3 of the revenue, the revenue data does not fully reflect Huazhu's actual operating conditions. From the perspective of hotel turnover, Huazhu's growth this quarter is 22%, which is the most accurate reflection of the company's actual growth this quarter.

Domestic hotel and travel sentiment has slightly declined, while costs have increased. As franchise business net income is included in the financial report, the cost reflected in the financial report mainly represents self-operated business. With a decrease of approximately 3.5 billion in self-operated revenue this quarter, hotel operating costs have decreased by about 4 billion. Therefore, despite the absolute decrease in revenue, this quarter's gross profit has increased by 120 million, which is reasonable and reflects Huazhu's excellent control over operating costs.

Specifically, while fixed lease expenses and labor costs have remained relatively stable, flexible material costs and other operating costs have decreased by a total of 4 billion compared to the previous quarter, showing Huazhu's ability to offset fluctuations (declines) in self-operated revenue with variable costs

Three, Is it getting harder to acquire customers? Increased expenses, not so good profits

Although Huazhu Group has the ability to reduce costs and increase revenue through internal operational efficiency, its operating and management expenses have increased significantly, exceeding expectations. Among them, sales expenses increased by 0.6 billion (about 30%) year-on-year, reflecting the increasing difficulty in acquiring customers. Management expenses also increased by 18%, although to a lesser extent, still higher than expected.

Due to the growth in expenses, despite exceeding expectations at the gross profit level, the adjusted EBITDA for this quarter for Huazhu Group was 1.33 billion, which was actually below expectations, 0.09 billion less than the sell-side forecast (6.2%). The final profit performance was not considered good.

Dolphin Research on "Huazhu Group":

Financial Report Reviews

March 20, 2024 Financial Report Review "Huazhu Group: Profits Fluctuating, Relying Too Much on Luck?"

November 24, 2023 Financial Report Review "Huazhu Group: False Alarm, Still a Top Player in the Industry"

April 25, 2023 Financial Report Review "Huazhu Group: Soaring Room Rates, Significant Recovery in Business Climate"

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

March 28, 2023 Financial Report Review "Huazhu Group: Rise in Volume and Price, Ready to Surge"

November 29, 2022 Conference Call "Reducing Costs, Increasing Efficiency, Upholding Operational Growth (Huazhu Group 22Q3 Conference Call Summary)" November 29, 2022 "Growing in the Cracks of the Epidemic, Huazhu Strives for Growth"

In-depth

December 23, 2022 "Can Huazhu, priced at $43, still reach its peak?"

December 14, 2022 "Surging by 75%, how did Huazhu build its faith? (Part 1)"

Risk disclosure and statement of this article: Dolphin Investment Research Disclaimer and General Disclosure