Huazhu: Is there an improvement in the business climate in the fourth quarter?

The following is the $HWORLD-S(01179.HK)$H World(HTHT.US) Q3 2024 earnings conference call summary. For financial report interpretation, please refer to H World defies the trend as a "lone warrior," does crouching really lead to jumping? .

1. Core Financial Report Information Review:

2. Detailed Content of the Financial Report Conference Call

2.1. Executive Team Statement of Core Information:

Industry Performance and Strategic Adjustments

- Domestic tourism demand is steadily growing, but due to last year's high base effect, Q3 RevPAR decreased by 8.1% year-on-year to RMB 256, and ADR decreased by 7% year-on-year to RMB 301.

- The tourism demand in Shanghai and surrounding areas slowed down in September due to the impact of typhoons.

- Strategic optimization of sales channels has caused some short-term negative impact on performance but will contribute to long-term healthy growth.

Hotel Network Expansion

- A record 774 new hotels opened, while 217 hotels closed (excluding low-quality hotels, 123 closed).

- The total number of hotel projects under construction slightly decreased to 2,899, reflecting rapid openings and increased quality requirements.

- More than 800 new hotel contracts were signed, demonstrating a continued strong expansion momentum.

Market Penetration and Regional Strategy

- Economy and mid-range hotels account for 91% of operating hotels, 80% of hotels under construction, and 90% of newly opened hotels.

- The proportion of operating hotels in third-tier cities and below reached 42%, while the proportion of hotels under construction reached 53%.

- In Q3, 117 new cities were added, bringing the total number of covered cities to 1,324.

Direct Sales and Membership System

- Direct sales channels continue to be optimized, with the number of direct bookings through the B2B platform increasing by 41% year-on-year and 19% quarter-on-quarter, reaching 7.5 million room nights.

- The number of active corporate clients increased by 45% year-on-year and 23% quarter-on-quarter, exceeding 4,500.

- The total number of H World members is close to 260 million, with the CRS direct sales contribution rate increasing to 64.2%

Legacy-DH Hotel Operational Performance

Third quarter ADR increased from €114 to €117, a year-on-year growth of 2.5%.

Occupancy rate improved by 0.8 percentage points, with RevPAR rising from €79 to €82, a year-on-year increase of 3.7%.

Restructuring and Optimization

Exited the joint venture project with entrepreneur Peter Harbour and fully acquired the LEAP brand.

Divested 14 leased and owned hotels in Denmark as part of an asset-light strategy, with limited financial impact.

Reduced non-operational staff at headquarters by over 30%, cutting G&A non-personnel costs and optimizing hotel operations.

Restructuring Costs and Future Outlook

This quarter, one-time costs of RMB 81 million were incurred due to restructuring, impacting financial performance.

Annual cost savings from the restructuring are expected to materialize in 2025, with overseas operations already on a successful development track.

Overall Group Hotel Network Expansion:

Total number of hotel rooms increased by 20% year-on-year, reaching approximately 1.1 million (compared to 886,000 in the same period last year).

Total hotel transaction volume in the third quarter reached RMB 26 billion, a year-on-year increase of 11%.

Cash Flow and Shareholder Returns

Adjusted net profit for the third quarter was RMB 1.4 billion, with operating cash flow of RMB 1.7 billion.

As of the end of September 2024, total cash and cash equivalents amounted to RMB 9.3 billion, with a net cash position of RMB 4 billion.

Year-to-date, approximately $470 million has been returned to shareholders through stock buybacks and dividends, accounting for over 80% of free cash flow during the same period.

Fourth Quarter Guidance

Revenue Guidance: The group expects fourth quarter revenue to grow by 1%-5% year-on-year; excluding Legacy-DH, the growth rate is also expected to be 1%-5%.

Asset-Light Strategy: Due to the ongoing asset-light strategy, some leased and owned hotels will continue to be closed, which will have a certain negative impact on quarterly revenue.

2.2 Q&A Analyst Q&A

Q: Can you share the RevPAR performance trend for October and November 2024? What are the expectations for RevPAR growth in the fourth quarter?

A: This year's business travel activity remains weaker compared to leisure travel, which has put significant pressure on the average daily rate (ADR). Additionally, last year's high base effect and poor performance in the mid-to-high-end hotel market have further exacerbated the downward pressure on ADR, posing challenges for related market segments.

However, the positive aspect is that overall travel demand remains strong, allowing us to maintain a relatively healthy and high occupancy rate while rapidly expanding our hotel network. We will continue to adhere to a high-quality growth strategy.

For the fourth quarter, the company expects RevPAR to experience a mid-single-digit year-on-year decline due to ADR pressure.

Q: What strategies are planned to enhance member loyalty and increase direct sales proportion?

A: As we delve into different regions and explore new market segments, it takes time to combine the coverage of existing members with new areas and segments to create synergies. Additionally, the leisure market has brought about a significant amount of new demand. To this end, the company is actively optimizing its membership program by offering a more diverse range of products to different customer groups, further promoting the development of the membership system. The measures are as follows:

Optimization of Membership Benefits and Direct Sales Channels: The company is committed to enhancing membership benefits and providing the lowest prices through direct sales channels and membership programs, further improving offline member conversion rates and customer retention rates.

Cross-Industry Collaboration: We are collaborating with other industries, such as partnering with Lucky Air and TT Car Rental to expand diversified services and enhance member value.

Enhancement of B2B Direct Sales Capabilities: In recent years, the company has invested significant effort in B2B direct sales and corporate clients, and the enhancement of this capability will further support the optimization and development of the membership program in the future.

Q: With a high base, this year's RevPAR performance has been relatively weak, continuing this trend over the past few quarters, and is expected to continue in the fourth quarter. However, looking ahead to next year and the longer term, what is management's expectation for industry RevPAR?

A: This year's RevPAR performance has been impacted by last year's high base, particularly driven by last summer and the peak leisure travel season. The explosive growth in demand last year and the temporary shortage of supply were mainly due to the market reopening after the pandemic. Looking ahead to next year, RevPAR is expected to enter a more stable and growing cycle.

The outlook for China's leisure tourism market is promising, and the government has recently continued to introduce policies to support the development of the tourism industry aimed at stimulating domestic consumption. This includes visa facilitation policies for multiple countries, which not only promote domestic demand but are also expected to boost inbound tourism, bringing new incremental demand to China's leisure market. Therefore, management expects next year's RevPAR to remain stable and show an upward trend.

Q: Regarding investment and supply issues in the industry. According to Ctrip data, the number of hotel listings in the third quarter has significantly slowed down. How does management view the supply situation for next year and its impact on the industry?

A: The core issue in China's hotel market is not a lack of supply but rather a lack of high-quality supply. Management has observed the following trends: Traditional high-end hotels exiting the market: Due to fluctuations in the real estate market, some older five-star hotels are gradually exiting the market, such as the Great Wall Hotel in Beijing and the Shanghai Marriott Hotel Hongqiao, which has freed up space for high-quality supply; Low-quality small independent hotels exiting the market: Low-quality, small-scale independent hotels are gradually leaving the market, improving the overall quality of the industry.

Overall, the hotel market adjusts through supply and demand dynamics and is a mature, market-oriented industry. Management believes that the supply and demand in the future market will gradually reach a balance. Furthermore, from the perspective of investment and consumers, investments are becoming more rational: Investors are focusing more on long-term returns and reasonable investments driven by economic cycles; Consumers are pursuing high cost-effectiveness: Consumers are more inclined to choose high-quality, reasonably priced products. This trend is beneficial for the company to maintain high-quality growth through efficient operations and cost leadership while meeting consumer demand for high cost-effective products

Q: With the acceleration of store openings in the third quarter, can you share the latest expectations for the annual opening targets? How is the signing situation so far in the fourth quarter? At the same time, what are the plans for openings and store closures next year?

A: The number of signings and openings this year has reached a record high, with over 800 hotels signed in just the third quarter. It is expected that approximately 2,400 new hotels will open in 2024, higher than the previously guided target of 2,200. Looking ahead to 2025, the number of new hotels is expected to remain within a healthy range, thanks to the enhancement of brand influence and the advancement of regional penetration strategies, which further strengthen the brand recognition and acceptance among franchisees. Against the backdrop of pursuing high-quality growth and service excellence strategies, the company will continue to eliminate low-quality and unqualified hotels from its existing portfolio. However, due to continuous optimization in recent years, the pressure for closures in the future will be alleviated.

Q: In the mid-range and mid-to-high-end markets, with the increase in supply, is there an expectation of greater price pressure? Is there more intense competition in terms of property resource quality?

A: Mid-range market competition: In the mid-range hotel market, the company has established industry-leading brands such as Qianxi Hotel and Orange. These brands have strong brand recognition and market influence, making them highly competitive. Additionally, the company has achieved rapid growth in previously less penetrated areas (such as South China).

High-end market competition: The high-end market is experiencing a trend of consolidation, with consumers leaning towards value-for-money products. The company's core brands, such as Orange Crystal and Intercity Hotel, meet market demand with high-quality and cost-effective products. Meanwhile, changes in the real estate market have released some property resources, providing support for the company to further expand in this area.

Management believes that with the enhancement of brand influence and management capabilities, the company has achieved over 30% growth in the high-end market and is confident about the potential for rapid development in the future. From a medium to long-term perspective, the company hopes to become one of the leading brands in the mid-to-high-end hotel market.

Q: Can you elaborate on the company's strategy regarding leased and self-operated hotel businesses? The recent closure of 25 hotels, as well as the selective closure of underperforming leased and self-operated hotels, is this a one-time measure or part of a long-term plan? If it is the latter, how many leased and self-operated hotels in the current portfolio are expected to be affected?

A: First, the company is gradually shifting from an asset-intensive model to a more asset-light model. The 25 leased and self-operated hotels closed in the third quarter, as you mentioned, are indeed more than in the first half of the year. About 8 of these hotels were converted to a franchising model, while the remaining hotels were closed mainly due to lease contracts expiring or not meeting our operational performance requirements, with some unable to renew for other reasons.

Looking ahead to the fourth quarter and next year, we will continue to gradually close more leased and self-operated hotels. In terms of quantity, the expected number of closures will be higher than in the first half of the year but lower than the level in the third quarter.

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