H World Group Q3 2023 Earnings Call Transcript

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November 26, 2023

There are 7 speakers on the call.

Operator

Thank you for standing by, and welcome to the H World Q3 2023 Earnings Conference Call. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. Followed by the number 1 on your telephone keypad. I would now like to hand the conference over to Mr.

Operator

Jason Chen, Senior IR Director. Please go ahead.

Speaker 1

Thank you. Good morning and good evening everyone. Thanks for joining us today. Welcome to the Edgewood Group 2023 Third Quarter Earnings Conference Call. Joining us today is our Chairman, Mr.

Speaker 1

Ji Qi our CEO, Mr. Jin Hui our CFO, Mr. Hejihong and our President, Ms. Liu Xinxing. Following their prepared remarks, management will be available to answer your questions.

Speaker 1

Before we continue, Please note that the discussion today will include forward looking statements made under the Safe Harbor provision of the United States Private Securities Litigation Reform Act of 1995. Forward looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of Potential risks and uncertainties are outlined in our public filings with the SEC. Edgewood Group does not undertake any obligations to update any forward looking statements except as required and applicable laws.

Speaker 1

On the call today, We will also mention adjusted financial measures during the discussion of our performance. Reconciliations of Those measures to comparable GAAP information can be found in our earnings release that was distributed last Friday. As a reminder, this conference call is being recorded. The webcast of this conference call as well as supplementary slide presentation is available at ir. Edgeward.com.

Speaker 1

With that, now I will hand over the call to our CFO, Ms.

Speaker 2

Good morning and good evening, ladies and gentlemen. Thank you for joining hworld's Q1 2023 earnings call today. We are delighted to report that hworld delivered Another strong quarterly financial results, reflecting the continuous healthy recovery of lodging market in China. In today's call, H. Ward Group CEO, Jing Hui, will first elaborate on the business performance and highlight our achievements.

Speaker 2

I will then go through the key financial numbers. As usual, we will have a Q and A session after management presentation. With this, I will hand over to Mr. Jinhui.

Speaker 1

Thank you, Jihong. Please turn to page 3. As usual, let's go through legacy Huazhu's RevPAR recovery in the recent months. In the Q3, we maintained our market leading performance since the year beginning. Our RevPAR recovered to 100 and 29% of the 2019 level, the RevPAR recovery continued to be supported by ADR growth, which was mainly driven by our product mix change.

Speaker 1

Meanwhile, occupancy rate recovery also improved sequentially in this quarter. Breaking down into monthly numbers, our RevPAR in July, August September recovered to 132%, 128% and 128% of the 2019 levels in the corresponding months, respectively. This strong set off number was benefited from the strong leisure travel demand during the summer holiday season, as well as the continuous business traveling recovery. In addition, our RevPAR performance reflected our hotel's Superior product quality and brand power. We should continue to support our industry leading position in operational performance.

Speaker 1

This year, the rebound of China's leisure traveling demand was better than our previously expected in the year beginning. Nevertheless, we keep our cautiously optimistic view on the market outlook unchanged. We certainly saw some pent up leisure travel demand during some of the peak seasons such as the Chinese New Year, May holidays and the summer holiday. But the structural changes in Chinese consumers' consumption structure post COVID should not be ignored. Especially the demand for Peer rent related activities were growing rapidly with government efforts on stimulating the domestic demand.

Speaker 1

After the strong summer holiday season, our RevPAR recovered to 123% of the 2019 level during the Golden Week holiday. For the entire month of October, our RevPAR still recovered 220% of debt in 2019. In the short term, although the macro conditions could possibly remain volatile and uncertain, we will continue We will continue to expand our hotel networks and further gain market share to achieve a long term sustainable quality growth. Please turn to page 4. With the current macro uncertainties, we want to ramp emphasize below 4 key points to drive our RevPAR to achieve long term sustainable growth.

Speaker 1

Firstly, further penetrating into lower tier cities. It could help us to deliver relatively stable and solid performance with macro volatility and uncertainties, given lower tier cities markets are more resilient. Secondly, the organizational restructuring and optimization enable us to achieve more efficient localized operations. We have accomplished some initial success since the establishment of our regional headquarters. We believe those regional headquarters will continue to support the company's hotel network's expansion and to further penetration into regions that were previously weak.

Speaker 1

Thirdly, the continuous upgrade and improvement of our products and services to achieve better RevPAR premium. No matter in economic segment or middle scale segment, we are committed to keep enhancing our products and services In order to further strengthen our dominant market position in the limited service hotel segment. Lastly, Further breakthrough in the upper mid segment to increase our market share and optimize our overall hotel network portfolio. This year, our Ultimate Skills segment achieved encouraging progress in operational performance, mainly supported by our 3 key brands. Please turn to page 5.

Speaker 1

At the end of September, out of total 9,028 hotels in operation, There were 40% were located in the lower tier cities and 55% of our 2,935 hotels in pipeline On a year over year basis, we see a small increase in hotel Our proportion in the Tier 1 and Tier 2 cities, thanks to the economic recovery post COVID in those top tier cities. Nonetheless, we continue to push forward our lower tier cities penetration strategy. In terms of absolute hotel number increase In the lower tier cities, our number of hotels in operation increased by 6% year over year to reach close to 3,600 hotels and the number of hotels in the pipeline grew around 20% year over year to over 1600 hotels And the number of cities that we covered reached to 1217. Please turn to Page 6. We continued implementing our sustainable quality growth strategies and to expand our hotel networks by opening high quality hotels, Supported by strong new signings and hotels in pipeline, our hotel openings in the 3rd quarter increased Both year over year and quarter over quarter.

Speaker 1

In the Q3, we opened 5 45 hotels, up 28% year over year, We closed 139 hotels, which mainly included 94 HanTing 1.0 version and soft economic hotels. Under our sustainable quality growth strategy, we have been continuously cleaning up those unqualified hotels, which can help improve the overall quality of our hotel portfolios. Please turn to Page 7. The proportion of HanTing 1.0 version Soft economic hotels decreased from 26% at the end of 2020 to only 8% as the end of September this year. And over the same period, the proportion of HanTing 2.7% version and above Increased from 14% to 27%.

Speaker 1

Please turn to Page 8. We emphasized that economic and midscale hotels will always be our core products. As we strive to better serve Chinese mass consumer market, As of the end of September, 55% of our hotels in operation were economic hotels and 37% were midscale hotels. The proportion of midscale hotels was up 3 percentage points on a year over year basis. For hotels in pipeline, around 37% were economic hotels and 48% were midscale.

Speaker 1

Proportion of midscale hotels were up 5 percentage points year over year. In the Q3, 91% of the new hotel openings We are economic and midscale hotels. As you can see, while we are optimizing and enhancing our overall hotel product quality, Our limited service hotel segments, which comprise economic and midscale segments, are always our key focus to continue improving in order to better meet the travel and accommodation needs for Chinese mass market. It is worth noting that within the limited service segment, We are seeing the proportion of Ms. Gio is increasing, which perfectly matches with consumers' rising demand or better quality of accommodation products.

Speaker 1

Please turn to page 9. This year, we achieved encouraging breakthrough in the upper mid segment. At the end of September, We had 605 hotels in operation, which represented a year over year and quarter over quarter increase of 18% and 8%, respectively, and we had 357 hotels in pipeline, which grew 35% year over year and 13% quarter over quarter. The strong pipeline growth Reflect the rising brand awareness of our upper mid scale hotels and provide solid support for the future development. Please turn to Page 10.

Speaker 1

Within the upper midscale segment, our 2 key brands, including Intercity and Crystal Orange, Both have achieved remarkable new signings this year. Last year, we launched DS's intercity brands in China and opened several new leased Intercity Hotels in Wuhan, Zhengzhou, Shenzhen, Shanghai and so on. Over the past 3 quarters, The new signings of Intercity grow meaningfully. At the end of September, we have 41 Intercity Hotels in the pipeline, And the number of pipeline for Crystal Orange brand reached 108. The fast growing pipeline demonstrates That our Intercity and Crystal Orange products and brands are getting more recognized and accepted by our franchisees.

Speaker 1

Here concludes our business review and updates for the Q3 of 2023. With that, I will now turn the call over to our CFO, Ms. Keohong to discuss DH's operational update and our group's financial performance. Jihong, please.

Speaker 2

Thank you, Jing Hui. I will now elaborate the DH's activities so far this year. Please turn to Page 11. Despite Germany's slow economic recovery post COVID, RevPAR of the age portfolio out Performed overall German market using relevant RGI data. In Q3 2023, Year over year cost growth is in line with revenue growth despite inflationary pressure in Europe after excluding one off adjustment and restructuring costs.

Speaker 2

Our priority remains to control And reduce cost through business restructuring as well as leveraging on technology. At the same time, we are repositioning the current hotel product design to reflect demand of the modern travelers. We are also spending effort in strengthening our presence in Middle East and exploring new international markets, such as Asia Pacific. I'm now going to highlight the financial performance in the next section. Please turn to page 13.

Speaker 2

Our hotel network continues to expand in the Q3 2023. Total number of rooms in our operation increased 11% year over year and reached 885,756. Hotel turnover Increased 55% year over year and reached RMB23.5 billion. Please turn to page 14. Legacy Huazhu blended RevPAR recovered to 129% of 2019 and achieved renminbi.

Speaker 2

This was primarily driven by ADR increase, which was 33% over Q3 twenty nineteen and 27.7% of Q3 2022. Occupancy still lacks Q3 2019 by 1.8 percentage point. Nevertheless, the occupancy of 86% is quite a high benchmark for the size of our total portfolio. Please turn to Page 15. Legacy DH Blended RevPAR Increased 4.5% year over year and achieved €79.

Speaker 2

ADR remained flat compared to Q3 2022, but occupancy increased by 2.9 percentage point. Please turn to Page 16. Total revenue of hworld increased 54% year over year, Achieving RMB6.3 billion. Legacy Huazhu revenue increased 62% year over year, Achieving RMB 5,100,000,000. This achievement was possible through first, Strong domestic travel demand, especially during the summer holiday second, Continued product upgrades and improvement of product mix and the third, market penetration and synergy through regional offices.

Speaker 2

Revenue from Legacy DH also improved 26% year over year, driven by higher RevPAR and higher hotel turnover. Please turn to page 17. Legacy Huazhu operating income achieved RMB1.9 billion in Q3 2023. Compared to Q3 2022 and Q2 2023, this is a significant improvement. This is achieved through revenue increase and at the same time cost management effort for both hotel costs and SG and A expenses.

Speaker 2

On legacy BH side, Operating costs increased in line with the revenue increase. On SG and A side, There are some one off effects and restructuring costs booked in Q3 2023. Taking these efforts out, The SG and A cost also increased proportionally with the revenue increase compared to Q3 2022. Please turn to Page 18. Legacy Huazhu adjusted EBITDA Achieved RMB2.1 billion in Q3 2023 and adjusted net income achieved RMB1.4 billion.

Speaker 2

Legacy DH adjusted EBITDA was RMB65 1,000,000 in Q3 2023. Adjusted net income fell into negative territory of minus RMB37 1,000,000. On the group level, operating cash flow was RMB1.2 billion. The fluctuation Compared to Q2 2023, it's due to a short term change of timing of franchisee fee payment at the end of September. Please turn to Page 19.

Speaker 2

The group is in a net cash position as of end of September. There's a net cash of RMB 3,900,000,000 and unutilized bank facility of RMB 2,700,000,000. Please turn to page 20. We estimate the revenue in Q3 Q4 2023 Will be a growth of 41% to 45% compared to Q4 2022. Excluding DH, legacy Huazhu revenue is estimated to grow 48% to 52% compared to Q3 2022.

Speaker 2

This ends the management presentation. I hand over to Mr. Chen Yibo.

Speaker 1

Hi, operator. We can start Q and A session, please.

Operator

Thank Your first question comes from Mr. Dan Qi from Morgan Stanley. Please go ahead.

Speaker 3

Good morning, management. First of all, congratulations on a very strong quarter result. I have a question regarding the recent announcement of Board resolution on Cash dividend. I'm wondering if the company can share a bit more details on this dividend payment. For example, timing, What to expect, size of the dividend that is proposed and whether is it regular or special dividend?

Speaker 1

Let me ask you a question first. Yes, our Board is considering a cash dividend And once we get approval from the Board of Resolution, we will immediately release to the market in terms of the exact policy and the payout And I want to add another point is as the Edge Ward business is going to be more asset light, We definitely want to be well management on the cash and net profit going forward.

Speaker 2

Just a little bit add to Mr. Jinhui's comment. Huazhu, especially Huazhu China, has recovered very well. We are very confident that especially Chinese lodging market We'll continue to recover. So we expect a very stable cash flow in our future operations.

Speaker 2

And with this kind of stable cash flow and net earnings, we would like to return some of our earnings back to our investors. So we will resume our continuous stable base dividend policy As well as special dividend policy from time to time if our cash flow shows a very strong performance. And please just be patient. We have a couple of days until the Board resolution is decided, and we will announce it in time. As for the cash payment, we will expect it around early next year.

Operator

Your next question comes from Ronald Leung from Bank of America. Please go

Speaker 4

ahead. Let me ask my questions in English. My first question is about the outlook for 2024. So would management have any preliminary forecast for the RevPAR growth and hotel openings for 2022? My second question is about balance sheet.

Speaker 4

So right now the company has a very strong balance sheet and cash flow. So

Speaker 1

What do

Speaker 4

we think is the optimal capital structure for the company? Thank you very much.

Speaker 1

Let me translate the first answer. So in terms of the Expectation for next year in terms of the RevPAR and the new openings, we will be giving the guidance to the market when we release our 4th quarter Earnings probably next year. But I just want to add, we are still Keeping our conservatively optimistic view for the China business, given we think we are still having the best Product is a market leading position and we are still getting benefits from the continuously churn ratio improvements and further consolidation of the market. So again, we keep our conservatively optimistic view and chance. Thank you.

Speaker 2

Okay. I will take over the question about the capital structure. As you can see, Ronald, from our balance sheet For the Q3, we have a very strong cash net cash position. And I'm very confident that with the business improving Quarter by quarter, year by year, our cash position will remain very strong. So as a part of the effort to reward our investors, We already announced our dividend payout policy, and this policy will continue.

Speaker 2

And we also do not exclude the possibility To do some share buyback at appropriate time as well. From our debt and equity position, You can see that we still have US500 million dollars Convertible bonds at this moment. This will still take some time to mature, and we will continue to leverage Some of the bank facilities for our short term working capital because the Chinese interest rate is very low. So please be assured that the financial management team of Hworld We'll look into our cash position very diligently, manage our cash and manage our reward program to our investors At the same time, also leverage the lower interest environment in China, and we will also continue to manage the overall debt position

Operator

Your next question comes from Simon Cheng from Goldman Sachs. Please go ahead.

Speaker 5

So I have two questions. The first question is in relation to the hotel opening. I've noticed that HUL actually been able to Achieved a much faster hotel opening than a lot of the peers. Wondering what are the reasons and whether Management could share with us what's the latest update with the Southern China Strategies. And then the second question is relation to the Q4 RevPAR, we have noticed quite a bit of a meaningful downward trend in October.

Speaker 5

Wondering whether it's cyclical or Structural, what is the outlook going into November December? And whether it's any reasons in relation to business versus leisure traveling? Thanks a lot.

Speaker 1

Okay. To answer your first questions, post COVID, since this year, we achieved quite Good progress in terms of the new signings and the pipeline increase. This was mainly attributed to several reasons. Firstly, it's for our market leading brands, especially in the limited service segment, including Hanqing and JI Hotel. Over the last several years, we keep enhancing our product quality and doing a lot of product upgrades and further enhance Our brand reputation and awareness that definitely benefits us For the increase in the new signings and also especially in the middle skill segment, last year, We try to use the Orange to become our 2nd main brand in this particular segment.

Speaker 1

And since the Q1 when we launched Orange 3.0 version, the product itself has been very much well accepted Certainly, it's because of the lower tier cities penetration as well as further enhance our presence in our previously weak market, including the southern part of China, western part of China and the middle part of China. This is the benefit from our organizational restructuring and further strengthening our business development capability on the ground. Currently, these 3 previously weak regions Contributed more than 40% of our new signings year to date. Lastly, it is further Breaking through into the upper mid segment and mainly because of the Intercity brand as well as the Crystal Orange brand, As I mentioned previously in our prepared remarks and also presentation, we are strongly confident on the Further breakthrough and increased market share for this particular segment. In terms of the second question on the RevPAR trend, So for the October, this is pretty normal seasonality because normally post the Golden Week holiday there was a low season following.

Speaker 1

So this is a normal seasonality impact. And for the entire Q4, we are expecting the RevPAR recovery

Operator

Your next question comes from C. G. Lin from CIC. Go ahead.

Speaker 2

So thank you, management. You have been to some low tier cities to do some field research. Sir, could you please share with us your main observations, which make you feel that there are lots of opportunities in low tier cities? And in order to seize the low tier market opportunity, we have established regional headquarters. And is there any other capability that we need to strengthen?

Speaker 2

Thank you.

Speaker 1

Okay. So Clearly, despite the urbanization rate have already achieved over 65% this year, we're still seeing that there's further urbanization Progress in the lower tier cities and we are also seeing the population actually is also increasing in the lower tier cities. Addition to that, The high speed railway trend further development as well as the Highway networks further expanding and we were seeing the number of passengers Transported by the high speed railway trend this year achieved a historical high. This is mainly supported by a lot of government Efforts are stimulating the domestic demand, which increased a lot of population mobility demand. And for the lower tier cities, we also observed that it is really a high resilient market.

Speaker 1

And more importantly, the lower tier cities contains over 1,000,000,000 population. We think still there is a lot of huge Opportunities to further discover. And as a leading company, X4 is striving to Further providing good products and service to match the demand for better accommodations Okay. So the organizational restructuring is definitely creating some of the benefits And in line with our lower tier cities penetration strategy, so basically we want to be more close to our customers and more close to our Franchisees and to be more localized because especially for the franchisees side, we are seeing a lot of New type of franchisees, basically some of them are self owned properties, some of them are local, small and middle Property developers as well as some of the business owners, we want to be close enough to them and understanding their demand as well as our customers.

Operator

Your next question comes from Zhui Liu from Citix. Please go ahead.

Speaker 6

Let me translate my question in English. We noticed in the city it's gaining traction among franchisees. So could you tell us more about the store's current business situation such as ADR, RailPark? And besides, can you share what cities are the

Speaker 1

Okay. Thank you. Just to answer your questions, thanks for Focusing on our intercity brands, since we launched last year and opened several leased intercity hotels in several cities. So for this already opened given the scale is relatively small, We don't think it is suitable for now to compare or to release The ADR or RevPAR to the market at this moment because it is quite selective and we have only several indoor cities Hotels are in operation, but if you really want to talk about these hotels' operational data, so all the ADRs and the RevPAR has been already Doing better than our competitors. But we are very confident to see the brand is getting more accepted and aware by our franchisees and the market.

Speaker 1

For the franchisees, we are seeing different types of franchisees compared to our limited service segment. There are 2 types of franchisees. 1 is definitely the industry leading franchisee, Because the intercity hotel requires relatively big amount of CapEx investment, so a single Interest City Hotel requires around RMB30 1,000,000 to RMB50 1,000,000 CapEx. So only those very much leading Position leading franchises can afford that much car parts. And second, we also see a lot of property Developers or local property developers and property owners, which used to doing business with those international Brands are now finding us as Intercity to be a substitute because we are definitely leading in terms of the operational

Operator

There are no further questions at this time. I will now hand back to Mr. Chen for closing remarks.

Speaker 1

Thank you everyone for taking your time with us today and we look forward to see you in upcoming quarter. Thank you. Bye bye.

Operator

That does conclude our conference for today. Thank you for participating. You may now disconnect.

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