H World Group Q1 2023 Earnings Call Transcript

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May 29, 2023

There are 6 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to H. Waugh First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded.

Operator

I'd now like to hand the conference over to the IR Director, Mr. Jason Chen. Please go ahead, sir.

Speaker 1

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

Speaker 1

Ji Ji our CEO, Mr. Jin Hui our CFO, Ms. He Zhihong 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 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 by 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 Two comparable GAAP information can be found in our earnings release that was distributed yesterday. 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.@ward.com. With that, now I will hand over the call to our CFO, Ms.

Speaker 1

He Jihong for opening speech. Ms. Huo, please.

Speaker 2

Good morning and good evening, ladies and gentlemen. Thank you for joining our Q1 2023 earnings call today. With the reopening in China, we have experienced a very positive growth in the Q1 2023. Our franchisees are rebuilding their confidence and accelerated investment in new hotels. After COVID, We observed people in China are willing to spend more experience related activities like travel, similar to what happened in the rest of the world.

Speaker 2

In a nutshell, we had a very good start in this year and we're very happy to report a strong performance in the Q1 2023. Mr. Jin Hui, CEO of H. Ward Group, will highlight the key achievements in this quarter, followed by elaboration of financial performance. As always, we will have a Q and A session after management's presentation.

Speaker 2

With this, I now hand over to Mr. Jing Hui.

Speaker 1

Thank you, Jihong. Let's firstly turn to Page 3 to review our RevPAR recovery in the recent months. Overall, RevPAR has been trending up Since the reopening in November last year, our legacy Huazhu's blended RevPAR in January, February, March April recovered to 96%, 140%, 120% and 127% of 2019 level respectively. The RevPAR recovery in the Q1 and especially in February was largely driven by the pent up demand. While we are glad to see the strong rebound in traveling demand leading to a faster RevPAR recovery, We believe it is more important for us to continue enhancing our core competencies

Speaker 3

Please turn to Page 4.

Speaker 1

We believe our sustainable long term RevPAR growth will be driven by 3 key aspects. Firstly, Our organizational restructuring and optimizations, the establishment of our regional headquarters Enables more localized and efficient operations as well as achieving further market penetration and synergies in each region. Secondly, lower tier cities in China still appear plenty of growth opportunities, especially considering the local residents' Rising spending power supported by high economic resilience. Thirdly, we will continue our efforts As we discussed in our last quarter's earnings call, sustainable quality growth is our 4th Strategic focus in 2023. Under this core strategy, we will focus on 3 key areas.

Speaker 1

First is on our high quality hotel network expansion. Please turn to Page 5. In the Q1, Excluding the soft economic hotels, we signed up 6172 new hotels During the quarter, up 26% year over year, which reflects our franchisees' confidence level Gradually improving in the Q1. During the same period, we opened 2 62 new hotels, which was slightly down year over year, mainly due to COVID impact. On the hotel closure front, We closed a total of 209 hotels in the Q1, including 122 inferior economic softer brands and Hanqing 1.0 version hotels to further improve the quality of our entire hotel portfolios.

Speaker 1

In addition, As we mentioned in the last quarter, some hotel closure processes were uncompleted in the Q4 2022 Please turn to Page 6. We continued implementing our lower tier cities penetration strategy. As of March 2023, we have a total of 8,464 hotels in operation, of which 39% were in the lower tier cities, up 2 percentage points year over year. And we have 2,304 hotels in the pipeline with lower tier cities contributing around 56%, up 1 percentage points year over year. The number of city coverage for both hotels in operations and in pipeline increased to 1132 cities compared to 1089 cities a year ago.

Speaker 1

Our second strategy is to further break During the midscale and upper midscale segment, please turn to Page 7 and Page 8. For our midscale segment, We launched Orange Hotel 3.0 version with the orange as the theme color, emphasizing the concept of lohas, meaning lifestyle of health and sustainability. Orange 3.0 version brings together the healthy, Vitality and environmental sustainability, every detail in the hotel conveys The idea of an environmental friendly and sustainable lifestyle. For example, every kind of material we used in Hotel renovation and the consumable products we provided to our guests in the hotel room are all degradable and renewable. In summary, our new Orange Hotel 3.0 version expressed a positive and happy lifestyle and persuaded the concept of green and environmental friendly.

Speaker 1

It provides a more inelastic, Sunny and fresh accommodation experiences to our customers, we believe our New Orleans Hotel is well positioned to meet younger customers' And we believe the Orange brand should further enhance its world's competitiveness in the middle scale hotel segment. Please turn to Page 910. For our upper midscale segment, we successfully introduced the Zedge's intercity brands to China. We recently opened 4 new Intercity Hotels in Wuhan, Zhengzhou, Shenzhen and Shanghai. These grand openings are very important steps for Intercity's future scalable development in China.

Speaker 1

Intercity hotels in Germany mainly targets and service business traveler Who frequently travel between cities. The hotel development is closely aligned with the railway development Processing Europe, covering major transportation hubs in Europe. Indaps development in China market As always, our key focus in introducing intercity brand in China market will reflect well reflected. As our Chairman, Mr. Ji Ji once said, we are not simply introduced the German brands to China, instead We are interpreting the German brands in China.

Speaker 1

Therefore, industry brands in China not only integrate the European features, but also conduct the local brand evolutions and observation on consumer behavior to refine the intercity brand DNA, which is offering In China, inner city hotels will be mainly located in major commercial centers and the transportation hubs. The theme color of the hotel room is black and white and gray, and the design is very simple, but highly functional. With the Intercity brand, we aim to provide Chinese new generation business travelers a better experience Our first strategy is to further upgrade and strengthen our organizational and digitalized operational capability. Please turn to Page 11. We have always put great emphasis on membership program development and the direct sales capabilities.

Speaker 1

We are very pleased to see our Edgewood app and Edgewood mini programs daily active users In the Q1 of 2023 increased by 2x and 3x compared to the Q1 of 2019, respectively. In addition, our direct booking through our CIS system reached a Record high of 62%, up 15 percentage points compared to the Q1 of 2019. It is worth noting that our CRS contribution includes bookings through our own channels only And excluding contribution from OTAs and other third party distribution platforms, Here concludes our business review and update for the Q1 of 2023. With that, I will now turn the call over to our CFO,

Speaker 2

I'm now going to elaborate a key financial achievement in this quarter. Please turn to Page 13. Our hotel network continues to expand. In Q1 2023, the number of rooms achieved 7% growth compared to the same period last year and stands at 820,000 99 rooms. Hotel turnover achieved 71% growth compared to Q1 2022 and a stat at more than RMB16 1,000,000,000.

Speaker 2

Please turn to Page 14. Legacy Huazhu blended revenue recovered to RMB210. This is an 18% increase compared to Q1 2019 and 58% compared to Q1 2022. The revenue growth, the RevPAR growth is largely driven by ADR increase, which shows a 25% compared to the Q1 2019 and 24% compared to Q1 2022. Our average occupancy rate stands at 76% in this quarter.

Speaker 2

Please turn to Page 15. Legacy DH blended revenue recovered to €55. This is an increase of 66% compared to Q1 2022. The recovery is driven by both ADR and occupancy As Q1 2022, we still face a quite heavy COVID impact in many countries where DH operates. Please turn to Page 16.

Speaker 2

Hworld revenue grew to RMB4.48 billion in Q1 2023. This is an increase of 67% compared to Q1 2022, slightly above our guidance. Legacy Huazhu revenue grew 58% year on year to RMB3.59 billion The legacy DH revenue grew 8 18% in the same period, achieving RMB886 1,000,000. This reflects RevPAR recovery trajectory, thanks to the reopening of China and the rest of the world, Continued product upgrade as well as the market penetration and synergy achieved through regional offices in China. Please turn to Page 17.

Speaker 2

Our operating income in the Q1 2023 grew to RMB664 1,000,000 Compared to a loss of RMB708 1,000,000 in Q1 2022, Legacy Huazhu achieved RMB822 1,000,000, Turning into positive territory compared to a loss of rmb416 1,000,000 in the Q1 2022. Legacy DH still made a loss in the Q1 2023, but narrowed its loss by RMB140 1,000,000 compared to same period last year. As a group, we maintained total SG and A cost at 13.8% of our total revenue, With China at only about 12% in the Q1, we are very disciplined about our SG and A cost as a percentage of our revenue and it is under our close monitoring constantly. In Germany and the European countries, We need to cope with cost in an inflationary environment, which has some impact on our profitability. Please turn to page 18.

Speaker 2

In the Q1 2023, our adjusted EBITDA recovered to RMB1.65 billion. This is a significant increase from a negative RMB333 in the first This adjusted EBITDA included around RMB500 1,000,000 gains from sales in our core shares in the first quarter. Adjusted net income was RMB1 1,000,000,000 in this quarter compared to negative RMB662,000,000 in the same period last year. The strong EBITDA and the net income performance are mainly contributed by recovery of Chinese business. Operating cash flow stands at RMB1.84 billion, A strong increase compared to cash outflow in the same period last year.

Speaker 2

Please turn to Page 19. Our liquidity position is quite strong. As of 31st March, 2023, we have a net cash of RMB957 1,000,000. Our cash balance stands at RMB10.4 billion and we have an unutilized bank facility at RMB2 1,000,000,000. Please turn to next page.

Speaker 2

Our revenue guidance for Q2 2023 It's 51% to 55% growth compared to Q2 2022. Excluding TH, the revenue of the legacy Huazhu is projected at a growth rate of 64% to 68%. This implies our RevPAR guidance announced early this year remains unchanged. We are confident about the market recovery and the performance for the rest of this year.

Speaker 1

Yes, thanks,

Operator

Our first question comes from the line of Ronald Leung from Bank of America. Please go ahead, Ronald.

Speaker 3

Hello. Good morning, management. Thank you for taking my question. Hi, good morning management. Let me ask my questions in English.

Speaker 3

My first question is what is management expectation for RAVTA recovery in the second quarter? The second question is about the supply outlook for the hotel industry. The RevPAR recovery has been solid. Some franchisees or hotel owners are planning to reopen their hotels in the upcoming year. So do we expect the increase in the hotel supply will hurt the RevPAR recovery?

Speaker 3

Thank you very much.

Speaker 1

Okay. So thank you. So firstly, I will answer the first question. So for the revenue guidance for the Q2 of this year, so it implies the RevPAR Blended RevPAR recovery compared to the same period of 2019, which is in the range of 110% to 115%, Which is in line with our annual guidance in terms of the RevPAR recovery. And for the second questions, Yes.

Speaker 1

For the Q1, we are observing some of the supply gradually increase, But in a relatively slower basis. But given the recent macro conditions as well as the property market cyclical issues, We are not seeing a large increase in the supply at least in the short term. Secondly, Even though we are seeing some of the supply is gradually coming back into the market, but the clear trend is the branded We'll see our penetration or the churn ratio continuously improved and this is actually keep the main And thirdly, in terms of the competition, we think the competition is always there No matter before or post COVID, but for us, we will continuously emphasize on Building up our core competencies through improved branding products and service as well as our organizational capability to increase our entire competitiveness in the market. Thank you.

Speaker 3

Thank you very much.

Operator

Thank you. Our next question comes from the line of

Speaker 4

So I'll translate my questions into English. So my first question is a follow-up question on RevPAR recovery. So do we think the current ADR driven recovery is healthy and sustainable? And will the gap in OCC recovery, especially for business demand Exist for long. And my second question is that, what's the pace of hotel new signings and franchisees' sentiment in Q2 after the 4Q1's recovery?

Speaker 4

Thank you.

Speaker 1

Okay. Now I will answer the first question in terms of the RevPAR. So Clearly RevPAR is a combination of the ADR and the OCC. In terms of the ADR, undeniably, in the Q1, I think the RevPAR recovery was mainly driven by the ADR and this is actually very much in line with the Intel Global Laundry Markets recovery post COVID and this is somewhere reflects The higher spending capability as well as the impact of the inflation. But I think well, relatively, I think the ADR growth at this moment is But again, we observed that especially in the leisure market, people You know, becoming more willing to pay a premium for a good quality product and good services And this will support the ADR growth.

Speaker 1

In terms of the business traveling, yes, The demand for the business traveling still have some gap compared to pre COVID. And according to some of the Public study, we are expecting the business recovery business traveling will be fully recovered to the pre COVID level In around 2024, therefore, as a group, we will be planning according to this trend. Okay. In terms of the franchisees' confidence, so after the 3 years of COVID, we think our existing franchisees are more stable and more matured and they have better knowledge in terms of the volatility and uncertainties. So we think they are very stable at this moment and the confidence is gradually improving as well.

Speaker 1

But we are also very happy to see, Especially in the lower tier cities market, we have a lot of new franchisees joining us and those franchisees might not be Previously in the hotel industry, some of them are the local property developers or some of them are from some other industries who are willing to join us. Thank you.

Speaker 4

Thank you, management.

Operator

Thank you. Our next question comes from the line of Lydia Lin from Citi. Please go ahead, Lydia.

Speaker 5

Thank you. Hi, management. I'm Lydia from Citi. So here I have two questions. The first one is on your overseas business.

Speaker 5

So DH Business actually is doing some loss making in Q1. So I want to check with management your view on the and outlook for full year and also how to further narrow the routes and also any updates on the integration of the DH business? And my second question is on the RevPAR growth. So what's your view on your sustainable long term RevPAR growth looking forward? Thank you.

Speaker 2

Okay. Thank you, Lydia. This is Jihong. I'm going to answer your question first about the DH business. First quarter, you see a loss.

Speaker 2

It's Because of the seasonality, we all understand that, especially European countries, the seasonality is quite strong and volatile. So in the Q1, the revenue was lower due to the seasonality And at the same time, the cost, because also of the energy cost and inflationary environment increased our cost. For the whole year, we are very confident that we will continue to increase our performance on the revenue side and continue to control our cost. And we are confident that for the whole year, our EBITDA will come back to the positive territory. And the second question regarding the RevPAR.

Speaker 2

You can observe from the history of Huazhu, We have been improving RevPAR year by year. This is not only the same store, but also the product Upgrade and the product mix as well. And typically, companies' RevPAR will grow with the economic growth as well. So for the past several years and we are confident that In the future, our RevPAR will continue to grow with the bigger economic environment.

Speaker 5

Thank you.

Operator

Thank you. Our next question comes from the line of Lina Yan from HSBC. Please ask your question, Lina.

Speaker 1

Hi, Lina. Can you translate yourself?

Speaker 5

Yes, yes, yes. I will translate my question myself. So first question is on the RevPAR drivers, especially on the pricing power for the ADR. So we have seen very strong ADR increase in Q1 driven by inelastic demand. But going forward, we will see the supply demand gap to narrow and also the Funding power is not as strong as the economy has shown.

Speaker 5

So also management guided RevPAR in the 2nd quarter will be 110% 115% of 2019 level. Does that imply management also see like a weakening trend in ADR? Or what kind of change in the mentality of the ADR trend like going forward? And second question is on the impact of portfolio upgrade on RevPAR. Management mentioned it's like a key driver for RevPAR as well.

Speaker 5

So can you quantify the impact, for example, Like the percentage of like hotels upgraded in our portfolio versus 2019 and what is the impact to the RevPAR growth versus 2019? 3rd question is you commented the business travel hasn't recovered to 2019 level, But can you give us more details on the like recovery in business travel, like even year on year or versus 2019? Yes, that's my question. Thank you.

Speaker 1

Okay. Thanks for your questions. So yes, we understand that quite a lot of you are Concerning about the RevPAR and the ADR, so that's why I would like to elaborate a bit more details and express And emphasize on our views again by taking these opportunities. So for us, since the year beginning, During our budgeting process and during our first during our annual last year earnings conference call, so Our views keeps with the cautiously optimistic, unchanged, and I hope You can understand this. So our view has been no change since then.

Speaker 1

And in terms of the RevPAR and ADR, I think it is quite a complex combination, especially for us. And talking about the China market, We have the lower tier cities. We have the leisure markets. We have the upper scale. We have the upper mid and the middle scale.

Speaker 1

It's very diversified markets. Undeniably, talking about the business traveling, given the impact of the economic cycle and some of the business traveling demand are not Fully coming back yet, but we do see a lot of local demand, especially from the leisure traveling demand side is quite Strong since the year beginning to now. And you can also realize that a lot of Activities happened in here and there such as the barbecue events in Zhibo City and the festival in Xichuan Bana, Which is also supported by the government on the leisure traveling activities. And another front is, if you're looking at Until our recovery in the April, we observed that airline business actually is not fully recovered. But if you're looking at the railway, I think they are very much well recovered or even exceeded the 2019 level, Supporting quite strong traveling demand as well.

Speaker 1

And for us, again, In terms of the long term sustainable RevPAR growth, we're still concentrating on building our core competencies through branding products and services. And we have different product mix and we also not only the upper midscale, but also the lower tier cities penetration. It is a very complex combination for us. So if you remember like maybe 2 years ago, you asked us Whether your lower tier cities penetration will negatively affect our RevPAR growth in the future. So that's why given we are doing a lot of developments in China, not only the lower tier cities, but also the upper mid and upscale.

Speaker 1

So I think this quite very complicated and it's very difficult to us to predict So because China experienced 3 years of COVID, so obviously, at the initial reopening, especially in the Q1, Definitely, there are some a lot of kind of demand that people are keen to traveling and keen to go outside and business Men and the franchisees are keen to resume the business as quick as possible. So definitely, the confidence And the consumption power at this moment was quite strong. And the reasons basically, some of the gap or some of the Slides slowed down recently. We think it's quite normal if you compare to the global market because we traveled quite a lot To Europe, if you see the Europe recovery currently, it's not as strong As before, and especially considering China experienced the 3 years of COVID, but I think Europe market experienced only 1.5 years. So we think we should give the market a bit patience in terms of the sustainable recovery going forward.

Speaker 1

As Jin Ping mentioned before, so we observed actually the airline, the occupancy rates For the airline, it's not recovering to the pre COVID level, but the railway station is performing very railway business is Recovering very well, and we're still seeing a lot of traveling demands here and there. And we didn't See any statistic on the self driving traveling activities, but we strongly believe it should be quite strong. So therefore, no matter during the COVID or post COVID, we're still seeing that people are keen to traveling around no matter on the leisure or business side. And in the longer term, we think The hotels with relatively lower price will be more resilient, no matter during COVID or financial crisis or any other crisis condition. So basically talking about like for example the economic segments will be more resilient compared to the upscale And the recent consumption trend was very interesting, taking the barbecue events in Tubbo as an example.

Speaker 1

We observed that people are generally wants to spending a little bit money and to buy a big happiness And people who are willing to spend a big chunk of money at this condition and that this condition are not Very, very high. And therefore, we think the upscale segments We'll be taking even longer time to recover. For us, we are not only caring about ADR, We care more on building up core competencies and the entire ecosystem And we want to provide the benefits to all our partners, no matter our customers and the franchisees in our Ecosystem and everyone will be getting benefited. So we think we should be a little bit patient for the long term growth potential for the And we are not only striving to increase the ADR And because it is also very difficult to expect ADR or predict ADR Trends in the future because there's a lot of factors going to affect the ADR movements. Thank you.

Operator

Right. Thank you. Our next question comes from the line of Sing Mei from Wai Taik. Please go ahead, Sing.

Speaker 2

Thanks for the opportunity. Can you explain how the organization structure supports the development of the new brands such as Orange 3.0 of Orange Crystal Intercity. Are there any problems in the operation of this organizational structure and how can the management solve them? Thank you.

Speaker 1

Thanks for your questions. I'm very glad you asked About our organizational restructuring. So firstly, I would like to clarify our It is just 1 year since we conducted our organizational restructuring since last year. So I would elaborate more on the purpose of building up this 6 original headquarters. So as you may know that one of our core strategy is to Fully penetrating in China market in the limited service segment together with our sustainable quality growth strategy.

Speaker 1

So by doing this by setting up these 6 regional headquarters, we are very happy to see a very initial good outcomes Over the last year, the regional headquarters are more close to our franchisees and customers and achieving a higher operational Optimization as well as the synergy. And in talking about the upper mid segment, So basically the Up Mid segments or Up Mid brands are still using the vertical Organizational structure, but the regional headquarters will help or support the upper mid segment In terms of the development, but the management will be remain within each of the brands and in the headquarter. If you're talking about some of the challenges or and talking about some challenges, Currently, we still think, I think in terms of the talent reserve, it's not still enough, but we think it's going to take some to further building it up. Thank you.

Operator

Thank you. I'm showing no further questions. I'll now turn the conference back to the management team 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

This concludes today's conference call. Thank you for participating. You may now disconnect.

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