Huazhu: Rising in both quantity and price, building up momentum.
Hello everyone, I'm Changqiao Dolphin!
On March 27, 2023, after the Hong Kong market and before the US market, Huazhu Group (1179.HK/HTHT.O) released its financial results for the fourth quarter of 2022.
As Huazhu had already released its preliminary performance report for the fourth quarter of last year in January, with disclosure on important operating indicators such as hotel numbers, occupancy rates, ADR, and RevPAR (for detailed comments, please refer to "Huazhu: Accelerating Recovery, Commentary on 22Q4 Operational Data"). Therefore, the focus of this period's financial report is on the company's business plan for 23 years.
The core points are as follows:
1. Strong Confidence, Guiding Beyond Expectations:
Looking ahead, the most eye-catching part of this performance report is the performance guidance:
1) The growth rate of revenue guidance is amazing: the company expects revenue to grow by 61-65% in the first quarter of 2023 (excluding DH's expected revenue growth of 53-57%). For the whole year of 2023, the expected revenue growth rate is 42%-46% (excluding DH's expected revenue growth of 46-50%).
Considering that we are already at the end of the first quarter, the guidance is highly reliable, which basically indicates that the revenue in the first quarter will reach RMB 4.4 billion, which is already the highest level in history for a single quarter. The expected 44% growth rate for the whole year will push annual revenue to exceed RMB 20 billion.
In the past six months, Dolphin has been tracking the recovery level of RevPAR in the industry and key companies, and Huazhu's performance has also been remarkable. As a leader in the hotel industry, despite the very unfriendly operating environment for the entire hotel sector in the fourth quarter, the company's performance was very resilient.
Not only did it seize the opportunity in the third quarter of last year when the mini peak season arrived, its performance was also improving month by month in the fourth quarter (surpassing 70%, 80%, and 90% of the same period in 2019 respectively in October, November, and December, while the industry generally stayed at around 60%), and it even achieved 95% of the same period in 2019 during this year's Spring Festival.
From the recent tracking data, Huazhu's RevPAR level in January-February has at least recovered to 120% of the same period in 2019, and in February it has even recovered to 140% of the same period. Based on this, the recovery situation in March will be even stronger. Moreover, as we gradually enter the peak season of the hotel industry, business activities become more frequent, and the low base in the fourth quarter, such a recovery situation can be maintained until the end of the year at least.
2) The new store opening plan is moderate, but does not affect the overall situation: In comparison, the company is relatively conservative in its expectations for the number of new store openings this year, which differs slightly from its aggressive attitude in previous years.
The company expects to open 1,400 new hotels and close 600-650 hotels for the whole year of 2023, which means a net increase of 750-800 hotels. The number of stores opened is not particularly high, even in 2022, there are only 713 new stores added.
Dolphin's understanding is that, unlike the catering industry, the hotel industry has benefited from the “supply-side” clearing over the past two years, with the market share of leading companies continuing to increase, enabling them to recover quickly after the epidemic in terms of customer traffic. Under this logic, leading companies may not take big steps in the short term, but focus on improving profitability.
2. Confidence comes from improved single-store operations:
When the operating data was released, Dolphin analyzed that although the reopening of the hotel industry has provided a great deal of benefits, business conditions in the final quarter of the year may not immediately improve due to rising infection rates and the added pressure of the New Year and the Spring Festival (which is earlier this year).
However, Huazhu's directly-operated business still showed relatively good resilience, with single-room and single-store revenue maintaining a good growth trend. Compared with this, the operating conditions of franchised stores are slightly weaker, but they can also maintain stability. Overall, in an environment where the growth rate of stores has slowed down, it provides a guarantee of good income growth.
Dolphin's viewpoint:
Overall, the company's operating conditions in the last quarter of last year were still reasonable, and the number of future openings can sustain incremental support for some time. Although the number of store openings in the fourth quarter was not particularly outstanding compared to historical standards, there are quite a few stores still waiting to be opened, so it is only a matter of time before they continue to contribute to performance in the future.
As an industry that can grow against the trend in the context of the epidemic, the hotel industry has a relatively rare market value. In the face of a significant decline in customer traffic, although revenue has suffered significant damage, the survival advantage brought by chain operation has given leading brands an opportunity to expand against the trend. With the current situation of having already stepped onto the "quantity-price increase" rise, including Huazhu, the performance of leading companies is very certain and what needs to be considered now is only the company's valuation.
If you are interested in following the management communication situation through the financial report conference call, Dolphin will share the conference call summary through the Changqiao App community platform or investment research group. Users who are interested are welcome to add the WeChat account "dolphinR123" to join the Changqiao Dolphin Investment Research Group and get it as soon as possible.
The following is a detailed interpretation of the financial report:
I. Overall Performance: Good Operation, No Weakness
1.1 Revenue recovery, the hotel is stable in operation:
Huazhu Group's total revenue for the fourth quarter of 2022 was 3.7 billion yuan, a year-on-year increase of 11%, which is very consistent with market expectations (because the operating data has been announced in January). The main performance contribution comes from the increase in hotel revenue. Whether it is directly operated business or franchised business, they have not fallen behind. However, relatively speaking, the growth rate of directly operated business is better (the proportion of franchise revenue has dropped by 1 percentage point compared to the previous month, but the change is not significant).
But this does not mean that the operation of franchised stores is relatively backward. From the perspective of hotel revenue, the performance of franchised stores is not inferior to that of the whole, with growth reaching 9%. The difference in income is mainly due to the commission rate of franchised stores, which decreased by 0.3 pct compared with the same period last year (which does not necessarily mean a decrease in management commissions, and there may be other interfering factors such as one-time franchise income, with little change).
Overall, the hotel's revenue has been relatively stable in the past few quarters, except for a few quarters that were affected by operating environment (limited operating hours) and were lower, most of the time maintained a relatively reasonable recovery trend.
1.2 Impairment affects operating costs
The hotel industry has relatively rigid costs, and the fluctuation of gross profit margin is very large. It is not very meaningful to directly calculate the gross profit margin index. What is more important is to look at the absolute amount of costs. Basically, the absolute value of income improvement can be directly transmitted to the profit end. According to Huazhu's current hotel size (mainly the number of directly operated stores), about 30 billion yuan of revenue is subtracted from each quarter's cost, and the rest is profit.
Therefore, during the off-season (November-March), the hotel industry's operating test will be relatively large. In the harsh operating environment in the fourth quarter of last year, Huazhu was still able to maintain a positive gross profit margin, which was already very difficult.
However, it is true that the cost pressure in the fourth quarter was relatively heavy, reaching 3.4 billion yuan, the highest value in a single quarter in history. Considering that the number of directly-operated stores has not changed much, the rise in operating costs is particularly evident. With slightly lower revenue than the third quarter (busy season), the growth rate of operating costs on a month-on-month basis reached 13%.
The main reason here is that the Legacy-Huazhu's self-operated hotel has a depreciation loss of about 200 million yuan, and the Legacy-DH has a depreciation loss of 170 million yuan. Excluding the impact of impairment, the change in the company's operating costs on a month-on-month basis is not significant, and it is more in line with the actual operating performance when combined with the change in the number of directly operated stores.
Second, single-store revenue increase promotes the improvement of direct sales business
The performance of the directly-operated business in the fourth quarter was relatively good, reaching a growth rate of 17%, which was faster than the overall performance of the company and slightly higher than market expectations.
Since the revenue of directly-operated stores is calculated on a full-calibre basis of hotel revenue, the revenue proportion is also an absolute major head in the entire group, reaching 66% with only 7% proportion of directly-operated stores. And, the cost of direct retail business is also the main component of the cost structure, basically determining the company's profit level. Therefore, the improvement of direct retail business determines the profit elasticity of the company in the past two years.
From the performance of individual stores in direct retail stores, the single-room and single-store performance in the fourth quarter are quite good, and the single-room revenue can maintain a growth trend for four consecutive quarters. Especially in the fourth quarter, the growth rate of single-room revenue reached 17%, even exceeding the level before the epidemic, directly pushing the quarterly revenue of the store to a stable level of around 3.5 million.
The cost is squeezed in the fourth quarter due to the hotel impairment mentioned earlier.
From the cost breakdown in the figure below, the several rigid costs (rent and depreciation) of direct retail hotels account for the majority and have not changed significantly.
The proportion of labor costs is not low, but the company has not separated it into direct retail and franchise labor costs and is not included in the figure. However, according to the general industry rules, it is basically maintained at around 14-16% of revenue. Considering Huazhu's relatively well-known low ratio of staff to rooms, it is unlikely for Huazhu to overturn on the project in its field of expertise.
Third, the performance of franchising is stable.
In contrast, the performance of franchising is slightly inferior, with a growth rate of only 5%, but it still maintains the basic position. As we mentioned earlier, the growth in turnover is actually quite good, reaching 9%. The main difference here is that the calculated commission ratio is slightly lower by 0.3%.
Considering that there are more items involved in the income composition of franchising, the company has not conducted a more detailed breakdown, so it cannot be concluded idiotically that the commission ratio has decreased. Related to opening stores in recent years, Dolphin guessed that the more likely reason was that the one-time franchise fee did not increase significantly, which pulled down the growth rate of income (the growth rate of new stores is lower than in previous years). From the perspective of franchisee revenue, it was a good performance at that time, with slightly different performance from direct-owned stores. In terms of franchise business, the increase in revenue was mainly due to the addition of new stores. However, if we only evaluate from the perspective of single-store or single-room revenue, both the performance of single stores and single rooms were slightly inferior to the same period of the previous year and also lower than the level before the epidemic.
You may be wondering why the direct-owned store revenue and franchise store revenue in a single quarter are so much higher (347vs137, a 150% increase)?
1) The difference in the number of rooms is the main influencing factor
From the selection of stores, direct-owned stores have a demonstration effect, and generally select larger types of properties, with an average number of rooms almost at 140-150. Franchised stores need to consider the actual situation of franchisees and penetrate into the sinking market. Therefore, the standard requirements for properties will be appropriately relaxed, affecting the average number of rooms in franchised stores, which is about 90 rooms. Therefore, there is a gap of 65-70% in the average number of rooms.
2) ADR difference also has a certain impact
Considering the unit price, the proportion of middle and high-end direct-owned stores is higher, while franchised stores are affected by sinking, and the proportion of economic type will be higher. Therefore, the average listing price of franchised stores will be slightly lower, roughly at 80-85% of direct-owned stores, and the difference in listing price is not too big.
From the current trend of the proportion of middle and high-end hotels in the group, there is still room for improvement in the company's ADR.
3) The impact on occupancy rate is almost negligible
As the most critical indicator determining the profit and loss of hotels, the occupancy rate has almost no difference between direct-owned and franchised stores. Therefore, it will not give franchisees a bad impression of the deviation between the operating indicators of direct-owned stores and the actual operation.
Four, store expansion slowed down
Looking at the situation of new store openings, the company's performance in the fourth quarter of last year was relatively mediocre, with net additions ranking relatively low among several quarters in the past. And looking at the opening situation throughout the year, it was not ideal. The original plan was to open 1,500 new stores, with a net increase of 950-1,000 stores, but actually only reached more than 700 stores. Of course, in the third quarter of last year, the company stated that due to external factors, the original goal of opening stores was no longer the primary task, and more emphasis was placed on improving quality and efficiency.
Now that the operating situation has clearly improved, many investors speculate that hotel leaders may increase their expansion plans. However, looking at Huazhu's current guidance, the company has not yet done so. The new store opening guidelines for 2023 are to open 1400 stores, which is significantly slower than the company's and previous year's plans.
It can be understood that, as the same business environment, the damage to the operating income of the hotel and catering sectors is huge, but the stock price trend of the hotel sector is completely different from that of the catering sector. The difference is that in the counter-trend environment, the leading hotels still have the logic of increasing market share. And more importantly, after the "supply-side reform" of the hotels during the epidemic, they quickly returned to the pre-epidemic level during the recovery process.
V. Volume and price increase is an effective support for high growth expectations
From the regional performance, after the company's operations returned to a relatively normal level in China, the proportion of overseas business fluctuated between 15-20%, which is not too large. However, there is still a certain difference in the pace of recovery between China and abroad.
5.1 Good recovery in China, the logic of simultaneous increase in volume and price is beginning to be demonstrated
In the environment of last year, unlike Huazhu's ability to maintain a certain growth trend, the overall performance of hotels nationwide was relatively poor. The year-on-year comparison was basically in a state of decline, and the difference was more significant compared to 2019. The main problem was the significant decline in overall occupancy rate. While ADR has gradually approached the previous level in the past two years.
Data source: Ministry of Culture and Tourism
Even Huazhu is in a similar situation. From the perspective of the three major operating indicators, Huazhu's main driving force for domestic business recovery in 2022 comes from the stability of unit price (only stability, not significant improvement), rather than occupancy rate. Both the ADR of directly-operated stores and that of franchised stores remained stable or slightly increased, but the occupancy rate has not yet recovered to the best state (as of the fourth quarter of last year). The ideal situation in Huazhu's history is an occupancy rate of 80% or even 90%.
Dolphin has mentioned before that occupancy rate is the most important index in hotel management, and very few hotels are willing to leave rooms vacant just to maintain a certain price level. If the occupancy rate is not at a certain level, it is difficult to raise prices. However, when the occupancy rate gradually increases, price hikes are almost inevitable. This is the logic of "rising volume and price" in the hotel industry.
However, from the recent performance of hotels in the past two months, the time for "rising volume and price" has come. This year, OCC has risen rapidly, surpassing the level of 2019, and ADR's efforts are not yet significant, but have given a great boost to RevPAR.
Overall RevPAR (yuan) of China's hotel industry, data source: STR
Overall OCC (%) of China's hotel industry, data source: STR
Overall ADR (yuan) of China's hotel industry, data source: STR
5.2 Overseas Recovery Earlier
In contrast, overseas hotels have already raised their ADR to pre-epidemic levels in 2021 (in addition to recovery, there is also cost pressure transmission), and they have also grown in step with the trend last year. The recovery in occupancy rates is also faster than that in China, and it was very close to the pre-epidemic period last year (with a much smaller gap than in China), thus pushing RevPAR to a new height.
VI. Profit Elasticity Depends on the Restoration of Occupancy Rates
Due to the current dominance of direct sales (in terms of revenue), excluding the disturbances of individual quarters with relatively abnormal revenues, the overall change in expense ratio is not significant. The company's performance elasticity is more reflected in the surplus after covering the rigid costs when the occupancy rate exceeds 60-70%. Therefore, in the foreseeable future, Huazhu will gradually restore the occupancy rate to the level in the first half of 2019 (above 80%), which will reflect greater elasticity in terms of profit.
Long Bridge Dolphin Investment Research "Huazhu Group-S" historical articles:
In-depth analysis
December 23, 2022 "Can Huazhu, worth 43 USD, make a final leap?"
December 14, 2022 "How did Huazhu, up 75%, build its faith? (Part 1)"
October 11, 2021 "Huazhu Group (Part 1): "Made in China" Rises in the Hotel Industry"
October 19, 2021 "With a "stubborn" high valuation, is Huazhu really reliable?"
Earnings season
January 31, 2023 operational data review "Huazhu: Accelerated recovery, Q4 22 operation data review"
November 29, 2022 conference call "Reducing costs and increasing efficiency, insisting on business growth (Huazhu Q3 22 conference call minutes)"
November 29, 2022 earnings analysis "In the midst of the epidemic, Huazhu is striving for growth"
March 24, 2022 conference call "Huazhu Group Q4 conference call minutes: Focusing on lean growth"
March 23, 2022 earnings analysis "Huazhu: Long road to recovery amid epidemic fluctuations"
November 25, 2021 conference call "Under the epidemic fluctuations, how did Huazhu transform? (Huazhu conference call minutes) invite-code=032064)
Financial Report Review on November 25, 2021: "Huazhu: Difficult Lives, Faith Relies on "Being Strong"" (https://longbridgeapp.com/topics/1376237?invite-code=032064)
Risk Disclosure and Disclaimer for this article: Dolphin Investment Research Disclaimer and General Disclosures (https://support.longbridge.global/topics/misc/dolphin-disclaimer)
