On December 26, 2024, Beijing time, before the US stock market opened, $ HWORLD-S.HK and $ H World.US released their Q3 2024 financial report. Overall, the biggest issue is that profits are no longer growing due to the mismatch between the industry's declining prosperity and the company's increasing investments. Specifically:

1. The underlying operating data indicates a significant decline in the domestic hotel and travel industry's prosperity. In Q3, the average room revenue of Huazhu's domestic hotels was 256 yuan/night, a year-on-year decrease of 8.2%, which is a significant increase from the previous quarter's decline of -2.4%. Both driving factors, average spending per guest and occupancy rate, have decreased year-on-year. Under the dual pressure of last year's peak summer travel prosperity and this year's weak macroeconomic environment in Q3, the revenue-generating ability of hotel businesses has significantly weakened.

The hotel and travel industry in Europe, driven by the Paris Olympics, maintains a relatively high level of prosperity. The average room revenue (RevPAR) still reaches 110% of the same period in 2019. However, the scale of overseas business is too small to have a significant impact on the overall group. Additionally, it remains to be seen whether the "peak period" caused by the European Cup and the Olympics in the previous two quarters can be sustained.

2. Although the domestic hotel and travel industry's prosperity has declined and revenue growth has further slowed, Huazhu's pace of opening new stores has not slowed down. This season, a total of 559 new hotels were opened, an increase of 90 compared to the previous quarter.

However, in terms of structure, the pace of closing self-operated stores for Huazhu is accelerating, with a net closure of 32 stores this quarter, which we understand is the highest net closure in a single quarter in history. Correspondingly, the opening speed of franchised stores has also reached a historical high, indicating Huazhu's increasing platformization and asset-light model.

3. This quarter, Huazhu's overall operating growth rate continued to slow to only 2%, at the bottom of the company's previous guidance range of 2% to 5%, and lower than the market expectation of 4.6% growth. At first glance, this seems poor, but there is an exaggerated impact from the self-operated business within the revenue metrics. Huazhu's self-operated business, due to a record high net closure of stores, has fallen into a 5% year-on-year revenue decline. The franchised business, driven by the historically high number of new openings, still saw a year-on-year revenue growth of 15% (though this is also a noticeable slowdown compared to the previous quarter).

Compared to revenue, the total hotel revenue of Huazhu Group this season increased by 11% year-on-year, which more accurately reflects the real operating conditions.

4. In terms of gross profit, cost items are also relatively more affected by self-operated businesses and are relatively inflexible. This quarter, Huazhu's total hotel operating costs were approximately 3.8 billion, a slight increase from 3.73 billion in the previous quarter. The growth rate of gross profit is basically consistent with revenue.

However, considering that Huazhu net closed more than 30 self-operated stores this quarter, it logically saves considerable costs such as rent, labor, and materials. Therefore, the market expects gross profit to significantly improve on a year-on-year and quarter-on-quarter basis, with gross profit expected to be over 2.7 billion. In reality, gross profit actually decreased by 1.6% year-on-year, as the decline in average revenue per customer outweighed the benefits of the increased proportion of light-asset franchise businesses.

5. With revenue growth of only 2%+, and a slight year-on-year decline in gross profit, Huazhu's selling expenses increased by approximately 5% year-on-year, while management expenses surged by 26%, mainly due to the increase in the number of employees and stock incentives. In the context of slowing revenue-generating capacity, expenses are growing rapidly.

As a result, Huazhu's adjusted EBITDA is 2.1 billion, compared to about 2.3 billion in the same period last year, which is a decrease rather than an increase, and lower than the sell-side expectation of 2.3 billion. By segment, whether in Huazhu's domestic or overseas DH, although revenue has increased, profits have declined year-on-year.

Dolphin Investment Research Opinion:

Huazhu's quarterly financial report shows that revenue, gross profit, and profit all fell short of market expectations. Even setting aside the expectation gap, the trend of revenue growth continues to decline, with gross profit and profit showing a year-on-year decrease. Taken together, the performance is undoubtedly negative due to being below expectations and a worsening trend.

Looking ahead to the fourth quarter, the company guides total revenue to grow by 1%-5% year-on-year, which is a further decline from the previous quarter's range of 2%-5%, and lower than the market's previous expectation of 6% revenue growth. In other words, the performance in the financial report for the next quarter is also unlikely to be good. Another piece of negative news.

The comprehensive decline in Huazhu's RevPAR, average revenue per customer, and occupancy rate this quarter also basically confirms the ongoing decline in the domestic hotel and travel industry's prosperity. This is not good news for the entire domestic hotel and travel-related companies, not just Huazhu.

However, the poor financial performance is partly influenced by Huazhu's aggressive closure of self-operated stores being "exaggerated." On the other hand, it is due to Huazhu's increased efforts to expand the number of franchise stores against the industry trend, leading to a mismatch between investment and industry prosperity & revenue growth, which is currently the biggest issue affecting Huazhu's performance. But from a long-term perspective, how to view the strategy of opening stores against the trend to seize market share is left for investors to consider.

The following is a detailed interpretation:

1. How much hotter was last year, and how much more desolate is this year?

As usual, before interpreting the financial data, we first observe Huazhu's performance in the third quarter from a more fundamental operational data perspective

1.1 Domestic hotel and travel sentiment has significantly weakened

In the third quarter, Huazhu's average room revenue for domestic hotels was 256 yuan/night, a year-on-year decrease of 8.2%, a significant increase from the previous quarter's -2.4% decline. Under the pressure of last year's peak summer travel sentiment and this year's weak macroeconomic environment in the third quarter, the revenue-generating ability of hotels has clearly weakened.

From the perspective of price and volume drivers, the average nightly price decreased by 7.1% year-on-year this quarter, which also significantly widened from the previous quarter's -3%. The occupancy rate was 84.9%, down about 1 percentage point from last year. It is evident that under last year's high base during the summer, Huazhu's domestic business is experiencing a simultaneous decline in both "volume" and price, reflecting a truly weak industry demand trend.

1.2 Under the Olympic festivities, overseas remains good, at least for now

In contrast, the hotel and travel industry in Europe, driven by the Paris Olympics, maintains a relatively high level of sentiment. The average room revenue (RevPAR) still reaches 110% of the same period in 2019, although it has slightly decreased compared to the previous quarter.

Specifically, this season's occupancy rate reached 69.8%, showing improvements both year-on-year and quarter-on-quarter, marking a new high since 2023. The average daily rate (ADR) reached 119% of 2019, although it has slightly declined from the previous quarter's 120%, it remains at a high level. However, whether the hotel and travel sentiment in Europe can continue to maintain a high level after the dual events of the European Cup and the Olympics remains to be seen.

1.3 Self-operated closures continue, franchising continues to expand

Although the domestic hotel and travel sentiment has declined and revenue growth has further slowed, Huazhu's pace of opening new hotels has not slowed down. This quarter, a total of 559 new hotels were opened, accelerating by 90 compared to the previous quarter.

However, in terms of structure, the pace of closures for Huazhu's self-operated stores has accelerated, with a net closure of 32 stores this quarter, which we understand is the highest net closure in a single quarter in history. Correspondingly, the opening speed of franchise stores has also reached a historical high.

1.4 With store growth, revenue growth is not as poor as revenue shows

In combination, the rapidly growing number of stores offset the year-on-year decline in RevPAR. Huazhu Group's total hotel revenue this season increased by 11% year-on-year, a further slowdown from last quarter's 15%. Compared to revenue, which is unreasonably inflated due to the different recognition criteria of self-operated and franchised businesses, the revenue metric more accurately reflects the true operating conditions.

2. Has growth really "stagnated"? Yes and no

1.1 There is no "growth stagnation," but the slowdown is still a bitter reality

Due to the year-on-year decline in RevPAR, ADR, and occupancy rate, Huazhu's overall operating growth rate continued to slow to only 2% this quarter, at the bottom of the company's previous guidance range of 2% to 5%, and lower than the market expectation of 4.6% growth.

However, the impact of self-operated business has been exaggerated at the revenue level (self-operated hotels account for only 5%, but revenue accounts for nearly 60%). Huazhu's self-operated business has seen its revenue shrink by 5% year-on-year due to a record high number of store closures this season.

But the franchised business, driven by a historical high number of new openings, still saw revenue grow by 15% year-on-year. Of course, this is a significant slowdown compared to last season's 26%.

1.2 Growth in "other expenses" drags down gross profit, focus on management's explanation

In terms of gross profit, since the franchised business is accounted for based on net income, the cost items in the financial report are also relatively more affected by the self-operated business and are relatively less flexible. As can be seen from the chart below, Huazhu's total hotel operating costs this season were approximately 3.8 billion, slightly up from 3.73 billion last season. With revenue increasing by nearly 200 million quarter-on-quarter, the gross profit also increased by about 200 million quarter-on-quarter, which is quite good from this perspective

However, considering that Huazhu has net closed more than 30 self-operated stores this quarter, it logically should save a considerable amount on rent, labor, and material costs. The market therefore expects a significant improvement in gross profit quarter-on-quarter, with gross profit expected to exceed 2.7 billion. But in reality, gross profit has decreased by 1.6% year-on-year, indicating that the decline in average transaction value has outweighed the benefits of the increased proportion of light-asset franchise business.

Specifically, compared to the same period last year, the proportion of expenses such as rent, utilities, labor costs, depreciation, and materials relative to direct operating income has remained basically flat. Only the proportion of other expenses relative to income has increased by nearly 2 percentage points, dragging down gross profit. Attention should be paid to whether there is an explanation in the conference call regarding the significant increase in "other costs," which has affected the group's gross profit more than expected.

3. Expenses "grow against the trend," profits fall instead of rise

With revenue growth of only 2%+, and a slight year-on-year decline in gross profit, Ctrip's selling expenses have increased by about 5% year-on-year, while management expenses have surged by 26%, mainly due to the increase in the number of employees and stock incentives. In the context of slowing revenue-generating capacity, expenses are growing rapidly.

As expenses grow faster than revenue and gross profit, Huazhu's adjusted EBITDA is 2.1 billion, compared to about 2.3 billion in the same period last year, showing a decrease instead of an increase, while the sell-side expectation is also 2.3 billion. By segment, whether in Huazhu's domestic or overseas DH, although revenue has increased, profits have declined year-on-year, indicating that there has been some "loss of control" in expense spending.

Dolphin Investment Research "Huazhu" Past Analysis:

Financial Report Commentary

Conference call on August 21, 2024 《 Huazhu: How do you view demand and store opening pace in the second half of the year 》

Financial report commentary on August 21, 2024 Domestic hotel and travel continue to cool down, but Huazhu wants to accelerate store openings?

May 20, 2024 Conference Call 《 Huazhu: Grasping Both the Lower-tier Market and High-end 》

May 20, 2024 Earnings Report Commentary 《 The Noisy Holiday, the Quiet Huazhu 》

March 20, 2024 Earnings Report Commentary 《 Huazhu: Profits Fluctuating, Too Dependent on External Factors? 》

November 24, 2023 Earnings Report Commentary 《 Huazhu: A False Alarm, Still the Industry Leader 》

April 25, 2023 Earnings Report Commentary 《 Huazhu: Housing Prices "Soaring," Business Climate Rebounding 》

March 28, 2023 Conference Call 《 Lean Growth is Key (Huazhu Q4 2022 Conference Call Summary) 》

March 28, 2023 Earnings Report Commentary 《 Huazhu: Volume and Price Rising Together, Ready to Take Off 》

In-depth Analysis

December 23, 2022 《 Can Huazhu, Priced at $43, Sprint to the Peak? 》

December 14, 2022 《 Surging 75%, How Was Huazhu's Faith Cultivated? (Part 1) 》

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

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