H World Group Q3 2024 Earnings Call Transcript

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November 26, 2024

There are 8 speakers on the call.

Operator

Please be advised that today's conference is being recorded. It is now my pleasure to hand you over to the Senior IR Director of the company, Mr. Jason Chin. Please go ahead.

Speaker 1

Thank you, Amber. Good morning and good evening, everyone. Thanks for joining us today. Welcome to Edgewood Group 20 24 Q3 earnings conference call. Joining us today is our Chairman, Mr.

Speaker 1

Ji Qi our CEO, Mr. Jin Hui our CFO, Ms. Chen Hui and our CFO, Ms. Hejihong. 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 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. Edgeward.com.

Speaker 1

With that, now I will hand over the call to our CEO, Mr. Jin Hui to discuss our business performance in the Q3 of 2024. Mr. Jin, please. Hello, everyone.

Speaker 1

Thanks for joining Edgewood Group's Q3's 2024 Earnings Conference Call. In the Q3 of 2024, the domestic travel demand continued to demonstrate steady growth. The hotel industry saw some year over year pullback in RevPAR from high base ADR last year. In addition, Shanghai and its surrounding regions experienced 2 typhoons right before and after the mid autumn holidays, which affected travel demand in September. On top of this, in the quarter, we proactively adjusted our operational strategies, especially on optimization of our sales channels, which I will elaborate later.

Speaker 1

This proactive adjustment caused some negative impacts on the quarter's performance. However, it is strategically crucial to ensure the healthy sustainable growth of the company in the long term. Please turn to Page 3 on Lexi Huazhu's operational performance in the Q3. In the Q3, Lexi Huazhu's RevPAR decreased 8.1% year over year to RMB 256, of which ADR was down 7% year over year to RMB 301 from high base last year. Despite our rapid hotel network expansion, our occupancy rate still maintained at a healthy 84.9% declined only marginally by 1 percentage point.

Speaker 1

Please turn to Page 4. In the Q3, we continued our accelerated network expansion in China and the number of hotel openings reached a record high of 7 74 hotels in the quarter. At the same time, we uphold our philosophy of high quality growth, putting quality ahead of pure quantity increase and continuously raised the standard of our hotel. In the Q3, we closed 217 hotels. Excluding the low quality, soft economy brand and HanTing 1.0 version, we closed 123 hotels.

Speaker 1

Going forward, we will continue sorting out our existing hotels and phasing out low quality ones to ensure further enhancements of the product and service quality of our overall hotel portfolio. As of the end of Q3, the number of hotels in the pipeline decreased slightly year over year and quarter over quarter to 2,899, mainly due to the rapid opening pace in the Q3 as well as the cleanup of some of the pipelines given we continuously raise our quality standards for not only new opening so pipelines. Our financial interest level and the new signings momentum remained strong. In fact, new signings in this quarter still exceeded 800 hotels. We continue focusing on economy and the middle scale segment for mass market penetration and development.

Speaker 1

Please turn to page 5. As of the end of Q3 2024, economy and the middle scale hotels accounted for 91%, 80% and 90% of our hotels in operation, hotels in pipeline and hotel openings respectively. We believe the mass market remains the largest and the most promising market in China, and it is also the foundation of our business. Going forward, we will consistently roll out high quality and good value for money limited service hotels and products, expanding our coverage nationwide and solidify our leading position in the limited service segment. We keep penetrating in lower tier cities.

Speaker 1

Please turn to page 6. At the end of Q3 2024, around 42% of our hotels in operation were in tier 3 and below cities, up 2 percentage points year over year. In the pipeline, hotels in tier 3 and below cities accounted for 53%, 11 percentage points higher than that in operation. At the same time, as the new signings picked up in Southern China along with our regional strategy and as our upper mid segment segment grew, the proportion of pipeline hotels in Tier 1 cities increased 2 percentage points year over year. As of the end of Q3, the number of cities we covered reached 1324, around 117 more cities than a year ago.

Speaker 1

Our upper mid segment development continued in the Q3. Our key upper middle skilled brands have been gaining recognition and attractions among customers and franchisees. Please turn to page 7. As of the end of Q3 2024, the number of mid segment hotels in operation exceeded 800, up 33% year over year and the number of hotels in pipeline reached 487, up 36% year over year. 1 of our core brands in that segment, Intercity, had 125 hotels in operation and in the pipeline.

Speaker 1

Recently, Crystal Orange, the co brand for our upper mid segment launched its 2.5 version. Please turn to Page 8. Crystal Orange 2.5 version is an upper mid scale products that we designed and tailored for elite business travelers. The harmonious integration of lines and the colors, the usage of high quality bedding facilities and the special crystal designed fragrance diffuser offers a comfortable relaxing and high quality space for the busy business travelers working and living in the fast paced metropolis. The hotel also has launch space with special cocktail offerings, which is a public area that is suitable for guests either to enjoy their private time or to hang out with their friends.

Speaker 1

After several years of development, our Up midscale segment is starting to bear some fruit in this year. However, we think there are still more polishing and improvements needed in areas such as branding, product, customer insights, customers' experiences and services and so on, especially under the background of our service excellence strategy stated since the beginning of the year. Therefore, we will continue working and improving and we aim to become one of the leading brands in the upper midscale segment in the near future. Please turn to Page 9. Affected by the macro economy, the recovery of China's overall business travel demand is still relatively stagnant.

Speaker 1

To offset the impact from some missing demand from individual business travelers and to maintain a relatively stable occupancy rate during the low season of leisure travel, we have been improving our direct B2B capabilities. In the Q3 of 2024, the number of room nights booked directly via our B2B platform exceeded 7,500,000, up 41% year over year and 19% quarter over quarter. The number of active corporate clients exceeded 4,500, up 45% year over year and 23% quarter over quarter. We have always been emphasizing the importance of membership and direct sales. Please turn to page 10.

Speaker 1

The membership base of our ad rewards continued increasing. As of the end of Q3, ads rewards had close to 260,000,000 members as we rapidly expand our hotel networks, entering into new regions and breaking through in some new segments, it will naturally take some time for us to accumulate new members and improve the direct sales contribution for those new hotels. As a result, in the short term, we do need traffic support from other channels during the ramping up pace of the new hotels. Nevertheless, members and the direct sales remain the most important and the most sustainable sales channel for us. In the Q3, we rolled out a round of targeted optimization of our sales channel.

Speaker 1

We urged our hotel managers to improve their hotel level customer acquisition and sales capabilities, and we reemphasized the importance of membership and direct sales capability for the company's long term sustainable growth. In the Q3, our CRS contribution improved by 2.2 percentage points year over year and 4.3 percentage points quarter over quarter to 64.2%. All above conclude our Q3 2024 business update for Lexi Huazhu. Now I will hand over the call to our CFO, Ms. He Jihong to give an update on Lexi DH's business.

Speaker 2

Thank you, Jinhui. I'm happy to give everybody an overview on the overseas business for Edge World. Please turn to Page 11. We are very happy to report that the blended ADR from DH increased 2.5% from EUR 114 to EUR117 in the Q3 2024, With 0.8 percentage point increase in occupancy, RevPAR increased 3.7% from €79 to €82. Please turn to Page 12.

Speaker 2

We restructured our economy brand as LEAP business in this quarter as well. We exited a joint venture with entrepreneur Peter Haber and took over 100 percent ownership of the Sleep brand. As a part of the asset life strategy, we exited 14 leased and owned hotels in Denmark. This transaction has a minimum impact on our financial statement. Please turn to Page 13.

Speaker 2

In the Q3, we also started a major restructuring effort in DH business. First of all, we streamlined this headquarters and reduced at least 30% of the headquarter non operational staff. We stepped up our effort to reduce G and A non personnel cost. We continued to scrutinize hotel performance and optimize hotel operations. All these restructuring efforts incurred around rmb81,000,000 one off expense in this quarter.

Speaker 2

The negative impact on financial performance of Deutsche Hospitality in this quarter is largely due to this restructuring cost, which you will see later. We will start to observe full year saving in 2025 and we are confident that our overseas business is on a successful trajectory. With this, I conclude the overview of the international business and then hand over to our CFO, Chen Hui, for the financial performance review.

Speaker 3

Thank you, Jihong. Good morning and good evening, everyone. Let me talk you through our operational and financial review for the Q3 of 2024. Please turn to page 15. Our hotel network continues to expand.

Speaker 3

The overall number of rooms increased 20% YOY to close to 1,100,000 as of end Q3 this year, compared with 886,000 rooms a year ago. Hotel turnover for the Q3 of 2024 was RMB26 1,000,000,000, representing a 11% YOY increase, of which Lexi Huazhu's hotel turnover grew 11% YOY to RMB 24,000,000,000 and the laxative DH turnover grew 8% YOY to RMB 2,100,000,000. Page 16. In the Q3 of 2024, our hotel revenue for the group increased 2.4% YOY to RMB6.4 6,400,000,000 in line with our guidance. Revenue from Lexi Huazhu grew 1% YOY to RMB 5,200,000,000 of which revenue from Huazhu leased and owned hotels decreased 10.4% due to the closure of leased hotels.

Speaker 3

We net closed 22 leased hotels in the quarter and the number of leased and owned hotels decreased by 38 or 6.3% on a year over year basis. Revenue from Huazhu Managed and franchised grew 14.7 percent Y o Y driven primarily by our strong hotel opening, but was negatively affected by the decline in RevPAR from the high base last year. Next DH revenue rose 9% Y o Y to RMB1.3 billion, which was attributed to both business recovery and hotel network expansion. Please turn to Page 17. We have been committed to grow under asset line model expanding our hotel network using monetized and franchised hotels.

Speaker 3

As a result, revenue from our monetized and franchised hotels continued rising. In the Q3 of 2024, revenue contribution from Managed and Franchise Hotels reached 50% of our legacy Huazhu's revenue, up from 44% a year ago. We expect this trend to continue as we become more and more asset light. We believe this will drive a gradual and continuous margin expansion as well as help us to become more resilient when navigating through economic cycles. Please turn to Page 18.

Speaker 3

Hotel operating costs were RMB3.8 billion in the Q3 of 2024, up 5% Y o Y. The increase was due to rising personnel costs from our continued hotel network expansion. Pre opening costs remained at a low level as we continue moving towards the SLI model and staying selective on opening leased and owned hotels. SG and A expense were RMB975 1,000,000 in the Q3 of 2024, up 18% YOY, of which next quarter increased 9% YOY and the Lex DH rose 42% YOY. The 8% YOY increase in Lexi Huazhu's SG and A was mainly due to a high share based compensation to attract and return core employees who are key to our sustainable long term business growth.

Speaker 3

Excluding share based compensation, SG and A expense for Lexihua Zhu increased 2.5 percent Y o Y. The 42% Y o Y increase in Lexih DH SG and A was due primarily to RMB 81,000,000 one off restructuring costs. Excluding the non recurring restructuring costs, SG and A expense for legacy TH increased 7% YOY. As a result, our income from operations in the quarter was RMB1.7 billion which is representing a 10% Y o Y decline but a 10% Q2

Speaker 1

growth.

Speaker 3

Please turn to Page 19. For our profitability and cash flow during the quarter, In the Q3 of 2024, our adjusted EBITDA decreased 9.5 percent Y o Y to RMB2.1 billion. By segment, next quarter's adjusted EBITDA was down 7.5 percent Y o Y to RMB2.1 billion due to the RevPAR declines from the high base last year and SG and A normalization. Our DH business generated RMB21 1,000,000 adjusted EBITDA, which was down year over year due primarily to the non recurring restructuring costs mentioned previously. However, after this round of restructuring, we believe our DH business will be leaner and its profitability should see some improvement next year.

Speaker 3

In the quarter, our group generated RMB1.4 billion adjusted net income and RMB1.7 billion operating cash flow. Page 20 for our liquidity position. As of end September 2024, the group had RMB9.3 billion cash, cash equivalent, restricted cash and term deposits and was in a solid net cash position of RMB4 1,000,000,000, including term deposits. We also had RMB3.6 billion unutilized bank facilities as of end September. Next page please.

Speaker 3

As part of our total shareholder return plan, we continue to buy back shares. As of September year to date, we have bought back roughly US270 dollars 1,000,000 worth of shares from the market. In the 1st 9 months, we have returned around US470 $1,000,000 to the shareholders through both dividend and share repurchase, which accounted for more than 80% of our free cash flow generated in the same period. Lastly, Page 22, on guidance. For the Q4 of 2024, apart from the ongoing RevPAR pressure, we will continue closing some leased and owned hotels as we are committed to our asset light strategy.

Speaker 3

The closure of more leased and owned hotels will definitely bring some negative impact on our revenue in the quarter. Therefore, we expect our group revenue to grow between 1% to 5% compared to Q4 2023 and also 1% to 5% if excluding DH in the 4th quarter. With that, we are ready to take your questions. Operator, please open the line for Q and A.

Operator

Thank you. We will now begin the question and answer session. We will now take our first question from the line of Ronald Leung from Bank of America. Please ask your question.

Speaker 4

Let me translate the questions in English. My first question is about RevPAR. May I ask what how's the RevPAR trends in October November? And what is your expectation for the RevPAR growth in 4Q? My second question is about the management of the membership system.

Speaker 4

May I ask what is the company's strategy to enhance the membership's loyalty so as to increase the direct sales ratio? Thank you very much.

Speaker 1

Okay. Let me answer your first question regarding to the RevPAR. So clearly, as you may see from the market, so this year, the business traveling activity remained a bit weak compared to the leisure's and that caused a major ADR impact and the pressures for this year on a year over year basis as well as the high base from the last year. And also we are seeing the up mid and upscale segment was underperforming and the ADR has even higher pressures, which also are going to have some of the pressures to our segments in terms of the ADR. However, on the positive side, we still see a pretty good demand for the overall traveling.

Speaker 1

And therefore, we still can maintain a relatively healthy and high occupancy rate despite our fast pace of hotel network expansion. Therefore, we remain committed to ensure our high quality growth strategy. And for the Q4, according to our estimate, mainly due to the ADR pressure, the RevPAR for the Q4 will be around middle single digit year over year decline. Thank you. So in regarding to your second question about membership, so as we are penetrating into different regions as well as break through some of the new segments, so it takes some of the time to creating some of the synergy from our existing membership and the new regions and segment coverage from our membership program.

Speaker 1

And also, there's a lot of new demands from the leisure market as well. So, we are doing we are putting a lot of efforts to enhance our membership program to provide more variety in terms of the products to different group of customers and to ensure the membership program further growth. Okay. We are also working on improving the membership benefits and ensure the lowest pricing through our direct sales channel and the membership program. And therefore, we can further improve the offline membership conversion as well as improve the retention rate.

Speaker 1

We are also seeking some more cooperation with cross different segments such as working with the airline company, such as Jumiau online as well as the car hailing companies, which is Didi to seeking more cooperation among different industries. We have been putting a lot of efforts over the last several years in terms of the B2B direct sales and corporate customers. And we believe a stronger capability on the B2B direct sales and corporate customers will further help us to improve the membership program. Thank you.

Operator

Thank you. Our next question comes from the line of Simon Cheung from Goldman Sachs. Please ask your question, Simon.

Speaker 5

So let me translate into English. So two questions. 1, given the high base on the RevPAR this year, we have seen quite a weak performance in the last several quarters continuing into Q4. But looking into next year, what is your expectation? And maybe in the longer run, what is your RevPAR expectations for the industry?

Speaker 5

And then secondly, just related to that, there's a lot of you must asking about investments or the supply situation in China. And we have here from TCOM that their listing numbers in the Q3 has actually seen quite a noticeable deceleration. So wondering what management are thinking in terms of the supply situation going into next year.

Speaker 1

Let me answer your first questions. In regards to the next year RevPAR expectation, I think looking to this year's RevPAR performance, clearly, that was there was a high base from last year, especially during the summer holiday season as we are at some of the peak leisure seasons. There were some big softer reasons for the last year, either from the pent up demand and the temporary shortage of the supply due to the reopening from the COVID. And overall, we think the RevPAR should gradually enter in a more stabilized and growth cycle starting from next year. And we think China overall, the leisure market is going to have very good potentials going forward.

Speaker 1

And we are clearly seeing a very strong government support on the leisure traveling to boost and stimulus domestic consumption, not only domestically, but also recently gave a lot of visa free policies to a lot of foreign countries, which both not only drive the domestic demand, but also the inbound, which is incremental value or volume for us to further develop the leisure marketing in China. So, therefore, overall, we think the RevPAR should go into the stabilized and upward trends starting from next year. So, we think the RevPAR for next year for us should at least remain stable. And to answer your second question in terms of the supply, clearly, as we always mentioned, China launching market never lack of supply, it lacks of high quality supply. And we observed several clear trends happening in the market.

Speaker 1

One is those historically driven by the property booming. A lot of traditional old 5 star hotels has been gradually existing market. For example, the Great Wall Hotels in Beijing and the Marriott Green Tong Hotels in Shanghai, which is showing a good example. And secondly, we think those low quality, small scale and independent hotels are gradually going out of the market in the near future. But overall, the hotel market is a very market driven, very mature market and always adjust by demand and supply dynamics.

Speaker 1

And we think there was in the near future, the demand and supply will reach some of the equivalent and that's our views on the demand and supplies going forward. Let me add one more point. Through the economic cycle and over the last several years, clearly, we are seeing another 2 trends. One is for the investments becoming more rational. And from the customer side, they are seeking for better value for many products.

Speaker 1

I think these two changes actually helped us to leverage our cost, very high efficiency in terms of the operational capability as well as the cost leadership capability to remain high quality growth and further providing some of the good quality products, but for value for money seeking customers. Thank you.

Operator

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

Speaker 6

Hi management, this is Adi from Citi. So I have two questions. And so first one is on the store opening and like you actually accelerated store opening in the Q3. So could you share your latest target for your full year opening for this year? And how about the selling momentum in the Q4 to date?

Speaker 6

And could you also share your plan for the opening and store closure for the next year? And my second question is on the competition landscape in the midscale and also the upper midscale segment. As we see why the supply in this segment also increased due to some wider pricing pressure looking ahead? And also do you face actually more competition on the quality of property resources for this segment? Thank you.

Speaker 1

Let me answer your questions in regarding to the opening and closures. For this year, as you may see, the new signings as well as the new openings have both reached record high year. And also, as I mentioned previously in my prepared remarks, in the Q3, we also signed up over 800 new hotels during the quarter. Therefore, for the full year, the new opening for the 2024 should be somewhere around 2,400, which is slightly higher than our previous guided 2,200 new openings. And going into 2025, we think that the overall new openings should remain within a relatively healthy range and that was benefited from our branding as well as our strategy on the regional penetration, which is to further increase the brand recognitions and awareness among the franchisees.

Speaker 1

And in terms of the closures, under the background of high quality growth as well as the service excellence strategy, So now we're going to continue to clean up some of the low quality unqualified hotels in our existing portfolio. However, over the last several years, we have been doing this already. So, the total closures pressure should last going forward. Thank you. In regarding to the competition, firstly, I would like to discuss in the middle skill segment.

Speaker 1

In this particular segment, we have been established our very industry leading brand, which is JI Hotel and Orange, which have been gained a very strong brand recognition as well as the wellness, which we are very confident to compete in this segment. Especially, we are seeing that we are previously less penetrated areas such as Southern China as well as some of other regions have been growing very rapidly. In terms of the upper mid segment, we are thinking this industry is also doing a consolidation and especially under the trend that the customers are seeking more value for money products. And our key brands like Crystal Orange and Intercity actually are providing a very high quality product, which is offering a very, very good value for money products to the customers. And together with the property market changes and some of the traditional upscale and some of the property driven 5 star hotels.

Speaker 1

Some of the property has been released to the market, which is going to help us to which is going to be benefiting us for further developing this segment. Leveraging our improvement on the branding as well as the management capability, we have been achieving over 30% of the 30% growth in terms in that particular segment. And we believe we are very confident that we can further develop this market in a relatively rapid speed. From a mid- to long term perspective, we are also hoping to be one of the leading brands in this opportunity segment. Thank you.

Operator

Thank you. Our next question comes from the line of Dan Chi from Morgan Stanley. Please ask your question, Dan.

Speaker 7

Thank you, management. This is Dan from Morgan Stanley. My question is about legacy Arto's lease and operated businesses. We saw 25 hotel closures and selected closure of underperforming lease and owned hotels. Can management share more insights on the lease and owned business strategy?

Speaker 7

Is this proactive closing one off or is a longer term plan strategy? If this is the latter, how many lease and own hotels in our current portfolio will get impacted? Thank you so

Speaker 3

much.

Speaker 1

Okay. Let me answer your questions. First of all, our company is a little transportation from QUE asset, more asset light model. And also you're right, in the Q3, we closed the 20 5 leased and owned hotels, which is more than the first half of this year. Out of these 25 leased and owned hotels closures, around 8 of them are transferred to a leased transferred to a managed hotel and the remaining are basically closed due to the lease contract expired.

Speaker 1

Some of them are not meeting us in terms of the operational performance or some other issues that we are not able to renew the contract. In the Q4 and the next year, we're going to continuously to close more leased and owned hotels. But in terms of the quantity, it should be higher than first half, but less than the Q3. Thank you.

Operator

Thank you. We have reached the end of the question and answer session. Thank you all very much for your questions. I'll now turn the conference back to the management team for closing comments.

Speaker 1

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

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

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