H World Group Q2 2023 Earnings Call Transcript

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August 24, 2023

There are 9 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to H World Quarter 2 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 session. You will then hear an automated message advising your hand is raised.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the call over to your host today, Mr. Jason Chen, please go ahead.

Speaker 1

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

Speaker 1

Ji Ji our CEO, Mr. Jin Hui Our CFO, Ms. Hejihong and our President, Ms. Liu Xinxin. 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 except as required by applicable laws. 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 yesterday.

Speaker 1

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.xworld.com. With that, now I will hand over the call to our CFO, Ms. He Zhihong for opening speech. Ms.

Speaker 1

He, please.

Speaker 2

Thank you, Jason. Good morning and good evening, ladies and gentlemen. Welcome to HVord Group's 2nd Quarter 2023 Earnings Call. We are very happy to report that with a strong recovery of domestic China travel activities And continuous global travel improvement, our overall financial performance in this quarter and the first half year twenty twenty three exceeded the guidance we announced earlier this year. In today's presentation, Group CEO, Mr.

Speaker 2

Jing Hui, We'll first highlight our business performance and the key initiatives you undertook to further improve our operations. I will then discuss the financial performance in more detail. Now I will hand over to Mr. Jing Hui.

Speaker 3

Thank you, Jihong. As usual, let's quickly review our RevPAR In Q2 2023, please turn to Page 3. Let's look at the reasons. Thanks to robust travel demands. In 2023 Q2, each world maintained sound business rebound since the economic reopening of last year end.

Speaker 3

The RevPAR for Q2 recorded 121 percent of that of Q2 2019. In April, May, June, respectively, Hworld's blended RevPAR has reached to 127% of April, 115% of May and 123% of June in 2019. With the reopening of the Chinese economy, rebound of our economy, Decoupled with the stimulus policies and travel activities resumption from everywhere, we have seen very strong rebound of the overall travel activities and willingness. We have also found that the consumers' travel willingness increased after the reopening. Therefore, in Q2, we have seen explosive and concentrated travels around major exhibitions and holidays.

Speaker 3

Entering the peak season in the beginning of this year, we have seen the RevPAR resumed to 132% of Q2 of 2019. It is a recovery much better than our forecast in the beginning of this year, Yet still, we have to be cautiously optimistic about the outlook. We must realize That it has been less than 1 year of opening, the macro economy is still in gradual recovery during which period We will see turbulences and changes. This means uncertainties for our hospitality industry. However, Each world is still confident in the prospect of the Chinese economy in the longer term.

Speaker 3

And that's exactly why we are and will continue to enhance our Page 4, please. I must stress here the driving forces of our sustainable RevPAR. Firstly, Higher premium through conscious product and services upgrade secondly, uncovering opportunities in lower tier cities with high resilience as the travel infrastructure and travel willingness both improve. Thirdly, operate our business more intensively and effectively by setting up The regional offices and headquarters, increasing the regional penetration and organizational restructuring. Fourthly, improve our market share in the upper mid scale market and further optimize our product mix.

Speaker 3

We will further execute the lean development strategy set upon by the management. Page 5 please. The Ateworld Group will continue to expand our hotel's network based on the quality development strategy. In Q2 this year, we have a total of 10.54 new signings that is A 88% increase year on year, making it a historic high. Naturally, this is a high growth contributed by the low baseline in Q2 last year as well as the backlog signings from the COVID period.

Speaker 3

Undeniably, we see the confidence of the franchisees boosted by the strong rebound in the hospitality sector after the reopening. In terms of the number of hotel opening, it increased much faster than Q1 with a total of 3 74 up by 41% year on year. In terms of the store closure, There are 2 16 hotels closed, mostly the deferred and backlog COVID related closure from last year. The closure aims to streamline the economic soft brands of lower quality and HanTing 1.0 and further optimize our network quality. There are a total of 130 HanTing 1.0 and economic soft blended hotels Page 6 please.

Speaker 3

As we continue to streamline the lower quality hotels to enhance our overall performance and quality, The percentage of HanTing 1.0 and Economic Soft Brands account now for less than 10% out of our overall hotels, down from the 26% at the end of 2020. Meanwhile, the percentage of the HanTing 2.7% and above Accounts for 26% at the end of June this year, up from the 14% of the end of 2020. So the H World Group will continue to focus on the economy and the mid scale hotels To serve the mass market, Page 7 please. At the end of June, we have a total of 8 1622 Hotels in Operation, among which 56 percent Economy Hotels, 36% midscale hotels and the percentage of midscale increased by 3% year on year. There are a total of 2,808 hotels in pipeline, among which 38 are economy, 48% are mid scale and the percentage of mid scale, up by 5% year on year.

Speaker 3

Of all the hotel openings in Q2 this year, among which 90% are economy at mid scale hotels, This is a proof that as we optimize our overall hotels quality, we continue to focus The Age World continue to increase our penetration in the lower tier cities and weaker regions. Page 8 please. Out of the hotels in operation, 39% is located in the lower tier cities, Up by 2% year on year. Out of the hotels in pipeline, 55% is located in lower tier cities and our city coverage now increased to 1196. Page 9, please.

Speaker 3

We continue to grow our upper midscale hotels segment. By the end of June this year, we have A total of 562 upper mid scale hotels in operation, up by 18% year on year. We have a total of 317 upper midscale hotels in the pipeline, up by 29% year on year. The faster growth of mid scale hotels in our pipeline will support our future opening and market development in this segment. Please turn to page 10, we value membership development.

Speaker 3

We have upgraded our hworld brand image and market position. In terms of the hworld members app, We have added more vocation related element. We have increased our member offerings such as vocation channel, Content channel 2.0 and member exclusive services. We hope that the Age World Group membership is more than a just hotel Reservation platform without transitioning it from a single business scenario only reservation platform to a diverse Business and Travel Activities Scenario Service Platform. That's all for Q2 earnings overview.

Speaker 3

Now I will hand over to our CFO, Madam Hejihong to walk you through our operational and financial results. Thank you.

Speaker 2

Thank you, Jing Hui. I will now highlight the key financial metrics in this quarter. Please turn to Page 12. Our hotel network continues to expand in this quarter. Our number of rooms in operations increased 9% to 844,417.

Speaker 2

According to the research published by Hotels Magazine, We rank number 6 worldwide in terms of rooms in operation. Our hotel turnover increased 72% compared to Please turn to Page 13. Legacy Huazhu blended RevPAR in the 2nd quarter stands at RMB250, improved 21.4% Compared to the same period in 2019 and 77% over 2022. This recovery is largely driven by ADR improvement. The average ADR of RMB305 It's 28.9% over Q2 2019 and 39.8% over 2022.

Speaker 2

Occupancy of 82% in 2nd quarter is slightly lower than Q2 2019 of 87%, but it is a 17.2 percentage point improvement over 2022. Please turn to page 14. RevPAR about international business, Deutsche Hospitality, Also improved by 18.5% over the same period in 2022. Blended RevPAR stands at €0.78 this quarter. This is driven both by ADR improvement, which is 5.6% over 2022 as well as occupancy improvement, which is 7.3 Percentage point over 2022.

Speaker 2

Please turn to Page 15. Our total group revenue in this quarter was RMB5.53 billion, including RMB4.35 billion from legacy Huazhu and RMB1.18 billion from DH. This is an improvement of 64% compared to 2022, higher than our guidance set up earlier this year. Our China business delivered a 76.6 percent revenue improvement. This strong performance It's due to: 1st, strong recovery of travel demand, especially domestic Chinese market Secondly, continued product upgrade and the product mix change.

Speaker 2

And thirdly, Market penetration and synergies achieved through our regional offices. In first half year twenty twenty three, We opened 638 hotels group wide. We expect the hotel opening to accelerate In the second half of this year, due to a faster pickup of construction activities and a supply chain recovery, We stay with our guidance of 1400 hotel opening this year. European market further recovered this year as well, And our DH business delivered 28.4% revenue improvement over 2022. Please turn to Page 16.

Speaker 2

Hotel operating costs was 17.2% higher than the same quarter 2022, driven by business recovery. We continue to spend serious effort to improve operational efficiencies and manage cost on the hotel level. SG and A cost was 45% higher than 2022 due to higher marketing and sales expense To drive the business, I would like to highlight that legacy Huazhu SG and A cost was 11.6 Percent of revenue in this quarter. Operating income of legacy Huazhu in second quarter Stands at RMB1.35 billion, which represents a 31% operating profit margin. This is a significant improvement over 2022 when China was under serious COVID control.

Speaker 2

Income from operations at DH also turned positive in this quarter compared to the loss situation both in Q2 last year and the previous quarter. Please turn to Page 17. Adjusted EBITDA in the 2nd quarter stands at RMB1.77 billion. Legacy Huazhu delivered RMB1.66 billion adjusted EBITDA, which represents 38% EBITDA margin. This quarter, we did not have special effect like our core shares divestment gains as in the last quarter.

Speaker 2

Adjusted net income stands at RMB1.07 billion. Legacy Huazhu delivered RMB1.05 billion adjusted net income, which represents 24% net income profit margin. This improved EBITDA and net income margin is a result of business recovery as well as cost management. As we continue to move towards asset light business model and add hotels through our franchisees and partners, We expect our profit margin to continue to improve. DH business turned positive in this quarter with RMB112 1,000,000 adjusted EBITDA and RMB21 1,000,000 adjusted net income.

Speaker 2

This is a result of conscious improvement of the sales effort and the continued cost management of our European team. Our operating cash flow at group level remains strong at RMB2.2 billion in this quarter. Please turn to page 18. Our net cash at the Q2 2023 It's RMB2 1,000,000,000. Our cash balance is RMB7.8 billion and we have RMB2.8 billion unutilized Please turn to Page 19.

Speaker 2

We expect our group revenue in the 3rd quarter 2023 to grow 43% to 47% over Q3 2022. Exceeding DH, Legacy Huazhu is expected to grow 49% to 53%. Based on the good recovery of travel demand and a better than expected performance compared to the estimation made at the beginning of this year, We raised our guidance for the full year 2023. We estimate the revenue in full year 2023 to grow 48% to 52% over 2022. Excluding TH, We estimate legacy Huazhu revenue in 2023 to grow 54% to 58% over 2022.

Speaker 2

This concludes our management presentation. We can now start with Q and A session.

Operator

Thank you. We will now begin the question and answer session. And wait for a name to be announced. The first question comes from the line of Ronald Leung from Bank of America. Your line is open.

Speaker 4

I will ask my questions in English as well. My first question is about the RevPAR expectations. Management has raised the full year revenue guidance and also provide the Q3 revenue guidance. May I ask what is the implied rough part expectations in 3Q and for full year? My second question is about the So we have seen very strong hotel signings in both Q1 and the second quarter.

Speaker 4

May I ask what's management's expectations for the hotel signings for the rest of the year? Thank you very much.

Speaker 3

Thank you for your question. My name is Jing Hui. I will take over your question. Yes, as you said, Given the overall economic development momentum, especially during the domestic circulation, consumption rebound and the Recovery of the tourism and activities, we have seen very good growth, especially in Q3. We believe that the RevPAR will be growing to 130% to 128% And all year round, the growth will reach 116 percent points to 121 percent point.

Speaker 3

So, a little bit add on your first question. We're talking about the RevPAR recovery. So, I gave you a number of 130% to 128% for Q3 and all year round 160% to 121% recovery. Now speaking of the new signings, yes, in Q2, we are very happy to see we have achieved such great accomplishment. I have a few points to make.

Speaker 3

Firstly, because of economic recovery and the overall hospitality recovery, we have seen strengthened Confidence from the franchisers, partly of course that achievement this quarter It's because of the backlog delayed signings from the previous period. So I hope you to understand that For H World Group, we have achieved such accomplishments because of several reasons. Firstly, because in the last few years, we continue to develop the lower tier cities. And Secondly, we continue to move towards the mid scale and premium market.

Speaker 4

Thank you, management.

Operator

The questions, one moment for the next question. Next question comes from the line of Simon Cheung from Goldman Sachs. Your line is now open.

Speaker 5

I would just ask the question again in English. I've observed that the guidance having been revised up Quite aggressively with, I think, 1st quarter, 1% to 1% and 3rd quarter, 1% to 5% 2019 level. But based on your full year guidance that would imply the deceleration into Q4, are you seeing any sign of weaknesses or any reason why you are expecting There's going to be a slowdown. And then second one is in relation to potential use of the cash or cash flows Because your company already in a $2,000,000,000 net cash positions, how are you thinking about capital reallocation and whether you would

Speaker 2

Thank you, Simon, for the question. I will answer your question. For your first question about RevPAR, yes, we're very happy and very grateful to see the very good recovery of Chinese domestic travel. The Q1 was really a revenge after COVID and the Q2, we observed very high leisure travel demand in the summer holiday. And in the Q3, we believe because of October Golden Week, we will also have some good effect from that.

Speaker 2

And in the 4th quarter, Because of the lack of the summer holidays and then those prolonged Golden Week In fact, we expect the demand to come back to normal. We are still optimistic About the full year results, that's why we still have 116% to 121% RevPAR improvement over 2019 for the full year. The second question as to your cash capital allocation. Yes. We are also very, very happy to see that with the business recovery, our cash position improved significantly over 2022.

Speaker 2

So we will continue to monitor the business recovery speed and also the cash accumulation. In appropriate time, We will also decide on the dividend policy, as you mentioned.

Operator

Thank you for the questions. One moment for the next question. Next question comes from the line of Dan Chi from Morgan Stanley. Your line is now open.

Speaker 6

Thank you, management, for the opportunity to ask my question. This is Dan from Morgan Stanley. My question is related to business travel demand and the pace of its recovery. In the last earnings call, management mentioned about occupancy not yet fully recovered in terms of business travel demand. So I'm wondering if the management can share some recent pilots on business travel demand recovery, such as weekday and exhibition demand in Q2 and possibly Q3.

Speaker 6

Please. Thank you.

Speaker 3

Yes. As I said in the previous statements, if you look at China's economic reopening since Then to now, it is less than 1 year's time. And usually, if you talk about the recovery of the global business travels, It takes a longer term. So I can say that the recovery of our RevPAR this year It's really mostly attributable to the leisure travel market and the traditional summer holidays demands and the business and business related travel activities are still in gradual recovery.

Speaker 6

Thank you management for your answers. Thank you.

Operator

Thank you for the questions. Next question comes from the line of Sejie Lin from CICC. Please go ahead.

Speaker 7

So I have two questions. The first one is that we observed strong interest in becoming a hotel franchisee. And will the supply of branded hotels grow fast, which leads to intensifying competition? And do we see the interest differentiate from different brands? So my second question is about the Southern China part.

Speaker 7

Among our new filings this year, how many of them are in Southern China? And when we expect our penetration rates in Southern China to see a significant increase? Thank you.

Speaker 3

I will take the two questions. Yes, First on the ROI in the hospitality sector. Yes, because of the macroeconomic Real estate rental expenses are now in a very low position. So right now, it makes it a very good Our window to invest in the hospitality sector. But I must say that for us To have such a very good signing, it is because the franchisers have seen the value of the Hworld Brand has bring to them, which also, of course, underscores the brand premium as well as our very strong market coverage.

Speaker 3

In our further penetration in South China region, because this part of the regions A place with very large population base and strong economic power. So yes, each world group attaches great importance to South China. And in the last 2 years, with our organizational optimization, with our lower tier city strategy, I'm very happy to report that our penetration in South China is more than doubled than the level of 2019. So that means we are very, very confident in the development of South China market and We will further improve our penetration in this region. Thank you.

Speaker 7

Thank you,

Speaker 3

I also would love to add that Not only do we see very good development for our own business, we also receive increasing recognition from the local consumers for our brand and that has been shown by our operational results

Operator

Thank you for the questions. One moment for the next question. Next from the line of Lydia Lin from Citi. Please ask your question.

Speaker 8

So, Jeff Management, this is Lydia from Citi. And I still have two questions. The first one is, Thanks for sharing your full year RevPAR guidance. So could you give us some color on your outlook for the next year RevPAR trend, especially given very high base This year and so ADR has showed a very strong performance this year. So do you think it's core sustain next year?

Speaker 8

And so my second question is on expansion. So closure stock closure looks more in the Q2 and so because of the COVID impact previously. So Could you share with the update on your July and also August net opening trend? And so, yes, the light closure almost done in the first half. Thank you.

Speaker 3

Let me first respond to your question regarding whether we are going to sustain such good performance for ADR and RevPAR. And then I think CFO can make some additions if necessary. I believe that each world always stay true to one point that is we must always shape our own core competitive edge in the China market and given the uncertainties we need to keep long term sustainable competitive market position. So facing the future uncertainties as the backdrop, I think for the overall Improvement and sustainable development of ADR and OCC, the management attach great importance to these issues. In the future, we are going to have more localized marketing covering multi scenarios.

Speaker 3

We will continue to leverage technologies To improve our overall conversion and our performance, this definitely is going to be something we stay true to in the long term. That's for your first question regarding whether it is sustainable development in the future. Now on your second question, I don't have any specific net opening numbers for July August, But I must say, if you pay attention to our hotels in the pipeline, you see that the improvement of the signings for the Higher quality premium hotels in the pipeline, which definitely will take place of more openings in the second half this year and next year, because usually, it takes us about half a year's time to prepare the pipeline hotels into official opening. So as we have more hotels in our pipeline with the specific high quality segment, It will definitely increase our next quarter openings. Speaking of the closure of the lower quality Hotels, over the last few years, even if we were stricken the hardest during the pandemic, we stayed true to this Operation strategy that is to improve our quality and to improve our products and services.

Speaker 3

This is a very important part of Hworld's strategic transformation. So we will continue to either transform or upgrade or repackage the lower quality 1.0 version and some other lower brands. This will continue to be our strategy. Thank you.

Speaker 2

Thank you. I just wanted to summarize here. We stay with our forecast this year or our guidance this year. We will open 1400 hotels and close plan to close 650 hotels.

Operator

Thank you for the questions. Our next question comes from the line of Li Na Yan from HSBC. Please go ahead.

Speaker 8

So I will translate my first question. So first question is to ask like management to help us to reconsider the steady state RevPAR for Huazhu. We got lots of new information on the upgrade of Huazhu Hotel portfolio over the COVID period. So if we think the overall hotel industry, the RevPAR probably will stabilize at 110% above 2019 level, Does that mean Huazhu's hotel RevPAR will stabilize at much higher level versus 2019, say, 120 or even above?

Speaker 2

Thank you for your question. I will take your Question about RevPAR. Yes, we are very happy to see that Huazhu's RevPAR recovery was higher than the average industry because, worthy, our product continued product upgrade, product mix change and our sales effective sales effort. For the full year, we gave our guidance of 116% to 121%, and we remain confident that we can deliver This number. For the further, how RevPAR will develop In the near future, beyond this year, RevPAR is always a result of the economic activity.

Speaker 2

I can only give you the confidence That Huazhu's hotel is really very well positioned, independent of economic cycle in the short term, Because our very large portfolio of our hotels are really affordable hotels. And we have observed that a lot of guests coming from different segments, really enjoying our hotels as well.

Speaker 8

My second question is on the peer comparison. So we see some like peers who focus on upper end limited service hotel delivered a very strong RevPAR growth and expansion growth likely from a low base. But meanwhile, we have commented the business related to travel has a more moderate and gradual recovery. So can management help me reconcile the discrepancy and the comments and the results from the two perspectives?

Speaker 3

Well, For your questions, I think that we have different definitions on business related travels with our some of our competitors. But if you look at the statistics issued by Ctrip and other industrial players, you notice such a common trend That is usually Q2 and summer holiday vacation are the peak seasons for China's travel and leisure market and that's Always true. And speaking of the good performance in this period, larger reason comes from the stimulus package The government has taken to stimulate the overall leisure and tourism travel market, the overall macro Culture and tourism market, right? For example, the barbecue festival in Zhibo, the Guizhou village basketball activities. The Chinese government has constantly been investing on promoting the culture and tourism sector.

Speaker 3

So overall, in the megatrend, we definitely sense that on basis of such a peak season growth, We have seen very good performance with the demand. But in the pure commercial and Travel related trips and travel, I think partially it is impacted by Chinese macroeconomic prospect And partly, it is because it usually delivers longer term recovery because if you look at the reopen openings since now, It is just 8 months. 8 months time is not long enough for the full recovery of this market. Yes, in the last several years, we have experienced some setbacks and it takes time to cure these and heal these That backs, I think it's very easy to understand. So I don't think there will be too much of a discrepancy for all the players in the industry.

Speaker 3

If you look at H World Group, we are a top player in the hospitality market. We have very wide covering market Coverage, we are much favored by the mass market. Yes, in some regional markets, there are some overpriced issues and we will continue to provide more products and services to cover these markets. So All in all, I don't think there will be too much of a discrepancy among all players. Thank you.

Operator

Thank you for the questions. With that, I would like to hand the call back to management for closing remarks.

Speaker 1

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

Operator

That concludes today's conference call. Thank you for your participation. You may now disconnect.

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