Huazhu: Grasping both the sinking market and the high-end market

The following is a summary of Huazhu's first quarter 2024 financial report conference call. For financial report analysis, please refer to " 喧嚣的假期，冷清的华住 》

I. Review of Key Financial Information:

II. Detailed Content of the Financial Report Conference Call

2.1. Key Points from Management's Statements:

1. Business Highlights:

Operational Performance: The comprehensive RevPAR of Huazhu's traditional business reached RMB 216, a year-on-year increase of 3.1%. ADR increased by 1% to reach RMB 280, with an occupancy rate increase of 1.6 percentage points to 77.2%.

Hotel Network Expansion: In the first quarter, 569 new hotels were opened, 148 hotels were closed, a decrease of 61 compared to the same period last year. Excluding low-quality economy hotels, 72 were actually closed, 15 fewer than the same period last year.

Product Upgrades: The Triangle Brand (Hanting, Ji Hotel, Orange Hotel) enhanced brand and product strength through continuous product upgrades.

New Brand Launch: Introduced a new version of Huazhu Hotels, positioned as a supplementary brand in the economy segment market, especially targeting lower-tier cities and the younger generation. Huazhu 2.0 integrates traditional Chinese elements with contemporary aesthetics, provides value-added services, and caters to the consumption concepts of young consumers.

Geographical Expansion: As of the first quarter of 2024, 40% of operating hotels are located in third-tier and below cities, an increase of 1 percentage point year-on-year. Among hotels under construction, 54% are in third-tier and below cities. The number of cities covered reached 1,290, an increase of 158 new cities compared to the same period last year.

Development in the Mid-to-High-End Market: The number of mid-to-high-end hotels in operation increased by 28% year-on-year, and the number of hotels under construction increased by 81% year-on-year.

Business Travel: Despite a slow recovery in business travel, direct B2B business grew rapidly, with room nights in the first quarter of 2024 increasing by 34% year-on-year, and the number of active corporate clients increasing by 57% year-on-year.

Overseas Business: Edge's comprehensive RevPAR in the first quarter of 2024 increased by 4.5% year-on-year to 58 euros. ADR increased by 0.2% to 104 euros, and occupancy rate increased by 2.3 percentage points to 55.8%.

2.2. Q&A Analyst Q&A

Q: What is management's expectation for the growth of RevPAR in the domestic Chinese business in the second quarter?

A: In the second quarter of last year, especially after the May Day holiday, the surge in travel demand due to the first long holiday after the epidemic, coupled with slow supply recovery, led to a high base. This year, due to the impact of the high base, RevPAR is expected to remain stable or slightly decrease in the second quarter. Nevertheless, the growth in holiday activities and tourist numbers in the second quarter indicates that leisure travel demand is sustainable in the long term and has become a rigid demand for Chinese consumersEven if RevPAR may slightly decline in the second quarter, it is expected to achieve an annual revenue growth of 7% to 11% through the expansion of the hotel network.

Q: The DH management plans to gradually sell off heavy asset businesses. What is the current progress? Is there a clear timeline?

A: The asset slimming strategy of DH business is our long-term goal, aiming to build DH into an international hotel brand and management company. The transformation from heavy assets to light assets takes time and involves complex negotiations with potential partners. The long-term strategy remains unchanged, and the current progress is in line with expectations. Once key milestones are reached, we will promptly announce to the market.

Q: How does the management team improve the occupancy rate and ADR of leased and owned hotels, and ensure their sustainability? Can these measures be applied to franchised hotel management?

A: The performance of leased and owned hotels is better than that of the group's franchisees. Over the past two years, we have invested a lot of management resources in leased and owned hotels because the operation and management of these hotels are more complex. From the initial investment to the operational stage, we have invested a lot of management capabilities throughout the entire hotel business cycle, such as assigning excellent hotel managers. The improvement in these management capabilities has been reflected in leased and owned hotels and is believed to be replicable in franchise or managed hotels.

Q: In the franchise hotel business, the F&M commission rate has increased by 7%, about 0.5 percentage points. Is this growth sustainable? Are there other factors affecting this growth?

A: The main reasons for the increase in the commission rate are threefold: first, continuous enhancement of direct sales capabilities, improving CRS through the Edge application; second, rising employee costs at the hotel level, including salary increases for hotel managers in leased, owned, and franchised hotels; third, more detailed management of managed hotels to reduce the discount rate for management fees and one-time franchise fees. The increase in the commission rate is the result of the comprehensive effect of multiple factors, and the increase in employee costs is due to market trends and is inevitable.

Q: Considering that the hotel additions in the first quarter have exceeded the full-year target by 30%, and with the expected decline in RevPAR in the second quarter, will the management adjust the full-year hotel additions and the revenue guidance of 8% to 12%?

A: Since two years ago, we have implemented a sustainable high-quality expansion strategy, focusing on flagship hotels and high-quality expansion. Last quarter, we also launched the strategy of excellent service, further emphasizing the improvement of product and service quality. Therefore, despite the good performance of hotel openings in the first quarter, we will maintain the total annual opening target unchanged, continue to focus on quality and service, rather than simply pursuing scale expansion.

Q: In view of the current softness in business travel, what is the management's expectation for the trend in the second half of the year? Also, considering the significant growth in customer numbers achieved in the B2B strategy, how does the management view the long-term growth opportunities in business travel or the B2B sector?

A: Regarding the B2B business, the recovery of the business travel market is slow, mainly affected by the slower-than-expected macroeconomic development. Nevertheless, we have made significant investments in B2B direct sales business over the past two years, actively expanding new scenarios such as MICE and conferences, continuously enhancing our capabilities in these areas, and attracting new customers through strengthened B2B sales capabilitiesIn addition, we focus on strengthening offline sales capabilities with hotels at the center, using hotels as offline channels to attract more local small business customers to stabilize the volatility of the business travel market.

Q: How does management evaluate the current industry supply situation with the accelerated expansion of stores in the first quarter? Can you also provide background information on new franchisees, as well as their proportionate relationship with existing franchisees?

A: In recent years, the turnover rate in the Chinese hotel industry has significantly improved, exceeding 40% for the first time at the end of last year. Thanks to digitalization and industry integration capabilities, the rate of improvement in turnover is expected to accelerate, with the potential to surpass the mature U.S. market in the future. Among different market segments, the improvement in turnover rate for mid-range hotels is particularly prominent, while economy hotels need to further enhance operational efficiency to match the improvement in turnover rate.

Regarding franchisees, the current situation is diverse. On one hand, we focus on the repeat purchase rate of existing franchisees to ensure their profitability when opening new hotels; on the other hand, when expanding to lower-tier cities and new markets, we have attracted new types of franchisees including local governments and real estate developers. The company is committed to balancing and serving these two types of franchisees.

Q: With the significant increase in sales expenses in the first quarter, what is management's view on the expense trend for the full year 2024? Additionally, what are the profit margin trends forecasted for 2024?

A: The increase in sales and marketing expenses this quarter is due to two main reasons: first, as we are entering new markets and new market segments, and launching new products, we temporarily need to rely on OTA resources and support for the initial opening of new hotels in new markets. We expect this to be a short-term impact as we will focus long-term on enhancing direct sales capabilities through our own channels. Secondly, we consciously increased the marketing budget for new brands and new market segments to enhance their market visibility and recognition to attract more customers and franchisees.

Q: How is the progress regarding the goal of further penetrating lower-tier cities and low-density areas? Can you share the operational data of these markets? How is the progress on upgrading the supply chain and improving service quality, key strategies? Are there any metrics to prove this progress?

A: We have made good progress in areas with less penetration and weaker market segments. The overall improvements and progress are in line with management's expectations.

Previously, we maintained a leading position by relying on efficiency, low cost, and scale, but in the future, if we want to further strengthen or consolidate our leading position in China and even globally, we definitely need to focus more on services, user experience, and customer-centric management capabilities. I will give a few examples to illustrate our work in service excellence, focusing on whether customer satisfaction has improved, and we will share more detailed information soon.

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