Huazhu: How to consider the demand and store opening pace in the second half of the year?

The following is the summary of the HTHT 2024 second quarter earnings conference call. For financial report analysis, please refer to " Domestic travel continues to decline, while Huazhu accelerates store openings? 》

I. Review of Core Financial Information:

II. Detailed Content of the Earnings Conference Call

2.1. Key Points from Management's Statements:

1) Business Progress

① Important Milestone: Huazhu opened its 10,000th hotel in Motuo County, Tibet, China, demonstrating significant progress in the company's penetration strategy in lower-tier cities.

② Market Trends and Demand:

• Growth in air and high-speed rail passengers: Significant growth in domestic airline and high-speed rail passengers indicates the overall vibrancy of the tourism market.
• Domestic tourism: Data from the Ministry of Culture and Tourism shows a 14.3% year-on-year increase in domestic tourists, demonstrating strong demand for leisure travel.

③ Drivers of RevPAR:

• Product upgrades: Continuously upgrading core brands, renovating old hotels to meet customer demands.
• Excellent service: Creating a win-win ecosystem by enhancing customer experience and returns for franchisees.
• Membership program: Enhancing member stickiness and repurchase rate through updates to the Edge rewards app and expansion of the B2B booking platform.

④ Network Expansion: Added 567 hotels this quarter, closed 101, mainly removing low-quality economy soft brand hotels to improve the overall quality of the hotel portfolio. The number of hotel reserves reached a record high of 3,266.

⑤ Strategy for Segmented Markets: Continuously driving the development of economy and mid-range hotels, with operating proportions of 92% and 82%, respectively. Significant growth in the number and reserves of high-end hotels.

⑥ Overseas Business:

• DH hotel RevPAR in the second quarter was 82 euros, a year-on-year increase of 4.5%, especially in Germany, the host of the European Championship.
• The company is actively expanding its business in Europe, Asia, and Africa, with a significant increase in hotel reserves in the Asian market, in line with the strategic goals set at the beginning of the year.

2) Financial Highlights:

① Shareholder Returns: The company announced a 3-year shareholder return plan totaling up to $2 billion, including at least 60% of net income in semi-annual ordinary dividends, special dividends, and share repurchases. The board also approved a 5-year share repurchase plan totaling up to $1 billion, effective from August 21, 2024. In the first half of the year, the company repurchased approximately $143 million worth of shares.

② Guidance:

• Q3 Revenue Outlook: Revenue for the third quarter of 2024 is expected to increase by 2% to 5% year-on-year, or excluding DH, by 1% to 4%
• Full-year hotel opening target: The company has raised its full-year new hotel opening target to over 2,200, higher than the previous guidance of 1,800 hotels.

2.2 Analyst Q&A

Q: Can you share some insights on the RevPAR expectations for the third quarter and full year of 2024?

A: According to STR data, RevPAR declined by about 10% year-on-year in July and August, reflecting macroeconomic weakness and sluggish consumer spending. Despite a high base in the third quarter of last year due to the post-pandemic recovery, our RevPAR performance still outperformed the industry average. We expect a mid-single-digit year-on-year decline in the third quarter, but remain optimistic about the continued healthy development of RevPAR for the full year.

This year, there has been an increase in supply, especially in eastern China, but market performance varies by region. Demand for tourism remains strong in the western and central regions, while the eastern region may show slightly weaker performance due to temporary oversupply or softness in business travel demand. We are focused on the mass market in the long term and are confident in the stable development of the market through high-quality growth strategies.

Q: Can management comment on the current investment enthusiasm of franchisees? Have you observed any signs that franchisees' sentiment may slow down due to the decline in RevPAR?

A: Regarding franchisees, despite the rapid pace of new hotel openings, our project pipeline continues to grow, thanks to our deep strategies in lower-tier cities and the mid-to-high-end market. Looking ahead, we will continue to focus on these two areas and believe that franchisees' confidence will remain healthy and sustainable with the help of quality products and brand image. Since 2022, we have been committed to high-quality development and launched the Service Excellence Plan this year to strengthen our core competitiveness and industry competitiveness.

Q: Can management provide an update on our progress in hotel openings? We have raised the opening target from 1,800 to over 2,200, with annual signings exceeding this number and the current project pipeline exceeding 3,200. With further development of the supply chain, can we expect a continued increase in annual openings? Is there a limit to the annual number of openings?

A: The supply chain is crucial for us to achieve high-quality growth of 10,000 hotels in 1,000 cities. We will focus on cost-effectiveness, quality, and efficiency. In the second half of the year, we plan to enhance supply chain capabilities by introducing higher-quality suppliers to improve cost efficiency and increase efficiency to support the rapid expansion of hotels.

This year, we expect to open over 2,200 hotels, which will strengthen our regional strategy and optimize the supply chain. However, I want to emphasize that the expansion of the hotel network will always prioritize quality over scale. We will continue to develop flagship hotels, implement high-quality, sustainable growth strategies, especially in lower-tier cities. Please note that with the increase in flagship hotels, the growth in the total number of hotel rooms actually exceeds the growth in the number of hotels. Therefore, we will focus on quality rather than scale and adhere to the implementation of our high-quality growth strategy.

Q: The industry is concerned about the growth of hotel supply, especially when the hotel supply has returned to the level of 2019 and exceeded the expectations at the beginning of the year. How do you view the impact of this supply growth on industry RevPAR in the mid-term? Also, what are your expectations for H1 RevPAR performance? The guidance for RevPAR growth in the second half of the year seems to have weakened, how will this affect profit margins? Involving the DH brand, given its strong performance in the second quarter and accelerated growth in the number of hotels, do you have any long-term development plans, especially in the Asian market?

A: The Chinese hotel market has matured, and supply and demand will tend to balance. While new suppliers continue to emerge, what the market truly needs is high-quality supply. We focus on providing high-quality services and growth to maintain competitiveness. In the long term, the growth of RevPAR in the United States is positively correlated with GDP and inflation, influenced by macroeconomic factors. With strong brands, products, and organizational capabilities, we are confident in our long-term market competitiveness.

Our strategy includes three points: first, asset-light transformation to reduce leased and owned hotels; second, continuous cost control and efficiency improvement to ensure profitability and cash flow; third, leveraging the DH brand for development in the Middle East and Asia-Pacific regions.

In the short term, market RevPAR may fluctuate, but in the long term, we expect good growth and aim to lead the market through product upgrades and membership programs. The transformation of the business model will lead to long-term profit margin improvement. We have also implemented flexible budgets and rolling forecasts to respond quickly to market changes, optimize expenses through precise measurement of return on investment, and achieve better long-term profit margin performance.

Risk Disclosure and Disclaimer of this Article: Dolphin Research Disclaimer and General Disclosure