Huazhu: Faster Recovery, Review of 4Q22 Operating Data

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On January 31, 2023, after the Hong Kong market and before the US market, Huazhu Group ($Hyatt Hotels.USyatt Hotels.USuazhu Group-S.HK/$Hyatt Hotels.USyatt Hotels.USuazhu Hotel.US) released its operating data for the fourth quarter of 2022, the main points are as follows:

1. The recovery rate has significantly accelerated: In the fourth quarter, the domestic RevPAR (revenue per available room) recovered well, gradually recovering to 90% before the epidemic by the end of the year, and to 95% of the pre-epidemic level during the Spring Festival holiday. Among them, ADR (average daily rate) contributed the most, with a single-digit increase, while the occupancy rate is still in the process of recovery. The Dolphin Analyst thinks that this is very ideal for China's achievement.

2. The overseas business recovered to normal in the fourth quarter, and the World Cup further drove up RevPAR. The reason is that the ADR price increase is better, but the occupancy rate is still lower than before the epidemic.

3. Hotel quantity: The contraction speed of self-operated hotels is normal, and the expansion of franchise hotels in the fourth quarter is low (affected by the epidemic), but the number of hotels to be opened has improved significantly. The Dolphin Analyst believes that this is mainly due to the impact of the epidemic and the increase in the infection rate after opening. The progress has been delayed, but the impact on the hotels to be opened is not significant.

Dolphin Analyst's opinion:

Overall, among the existing stores, Huazhu's operating recovery is already very ideal. Although the number of new stores in the fourth quarter seems to be lower than in the past 12 quarters, the number of hotels to be opened has improved significantly. Under the background of the good RevPAR recovery, the contribution of the hotels to be opened to the company's performance is only a matter of time, and the market can withstand the wait.

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Interpretation of this season's performance announcement

1. Domestic RevPAR: Spring Festival recovery to 95%

Although Huazhu's domestic RevPAR in the fourth quarter alone still fell by 16% compared to before the epidemic, the relatively optimistic situation is that the company has recovered to 70%, 80%, and 90% of the pre-epidemic level in October, November, and December 2022 respectively, especially During this year's Spring Festival, it has already recovered to 95% of the pre-epidemic level.

However, the company did not further analyze the occupancy rate and ADR level during the Spring Festival period, so it needs to be further monitored. If this recovery is only formed by price increases (which is easier to operate during the Spring Festival), rather than through the improvement of occupancy rates, the quality of this recovery will be slightly worse.

However, overall, the trend of improvement month by month is very obvious, and it is faster than the same industry (competitor's recovery level is about 70%), which indicates that Huazhu's products are more recognized by consumers and have a stronger pricing power.

According to the Dolphin Analyst's understanding, areas with earlier epidemic relief indeed had faster recovery rates. The Spring Festival holiday has ended, the return-to-home crowd is gradually returning to work, and it is believed that future improvements will be more significant. We can see that the occupancy rate in the fourth quarter is still between 60-70%, which is very close to our previous expectations. As Dolphin Analyst explained before in the report, the occupancy rate is a more important indicator of the hotel industry, and ADR adjustments often follow the occupancy rate. Currently, ADR has stabilized for several quarters and with the gradual recovery of the occupancy rate, there is likely to be further room for improvement in ADR.

To supplement some information about the industry, during this year's Spring Festival holiday, domestic tourist numbers have returned to 90% of the same period in 2019, and domestic tourism revenue has returned to 70% of the same period in 2019. In terms of hotel operations, first-tier cities have basically returned to the same level as during the epidemic period, with pricing being the main contributor; second-tier cities, on the other hand, have a relatively lower recovery rate of occupancy, but the increase of pricing is not too high.

II. Steady Progress in Overseas Business

Compared to domestic business, overseas business is relatively more promising, although the proportion is still very small. From a data perspective, RevPAR has been maintained very well, relying on the soaring ADR on the one hand, and the relatively mediocre occupancy rate on the other.

The company has mentioned that driven by events such as the World Cup, RevPAR has returned to 1.1 times the same period in 2019. Excluding all kinds of local activities, it has basically returned to the same level as before the epidemic.

III. Slow Store Openings, But Adequate Reserves

In terms of store openings, the fourth quarter was indeed slow. As of the end of the fourth quarter, the company had a total of more than 8500 stores, with a gap of 200 stores from our previous neutral expectations. However, the market expectations for store openings were already very low before, but there were still nearly 150 new stores added in the fourth quarter, which investors should be able to understand.

The number of stores to be opened in the future has also exceeded 2500, which is quite impressive. Last year's fourth quarter was indeed impacted by the rapid increase in infection rates due to the outbreak and subsequent relaxation of the epidemic situation in China, and new store openings did not complete the planned targets for the entire year. But basically from the second half of last year, major hotel groups have put their annual targets on hold and focused more on improving quality and efficiency, and how to increase RevPAR.

Overall, Longbridge still has many strengths considering various indicators such as RevPAR and the situation of store openings and overseas businesses. The issue of the number of store openings in the fourth quarter can be complemented by an increase in the number of stores to be opened, which is a minor flaw. Judging from the overall recovery of the industry during the Spring Festival, the industry is starting to turn towards optimism, and the confidence of franchisees is gradually increasing. **

Apart from brief business data, the company has no further updates for now. Dolphin Analyst will provide some comments. For those who want to have a deeper understanding of Huazhu Group, please refer to the previous Huazhu in-depth report "How did Huazhu develop its faith? (Part 1)" and "Can Huazhu still reach its peak at $43?"

Dolphin Investment Research "Huazhu Group-S" historical articles:

Earnings Season

November 29, 2022 Telephone Conference "Reducing Costs and Increasing Efficiency, Insisting on Business Growth (Huazhu Q3 2022 Telephone Conference Summary)"

November 29, 2022 "Growing Against the Sun in the Crack of the Epidemic"

March 24, 2022 Telephone Conference "Huazhu Group Q4 Telephone Conference Summary: Focusing on Lean Growth"

March 23, 2022 "Huazhu: The Path to Recovery in the Ups and Downs of the Epidemic"

November 25, 2021 Telephone Conference "How Does Huazhu Reform in the Ups and Downs of the Epidemic? (Huazhu Telephone Conference Summary)"

November 25, 2021 "Huazhu: Hard Life, Faith Relies on "Toughness""

In-depth

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

December 14, 2022 "How did Huazhu develop its faith? (Part 1)"

October 19, 2021 "Valuation 'Stubbornly' High, Is Huazhu reliable?"

October 11, 2021 "Huazhu Group (Part 1): The Rise of Domestic Brands in the Hotel Industry" This article's risk disclosure and statement: Dolphin Research's Disclaimer and General Disclosure