H World Group Q1 2024 Earnings Call Transcript

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May 19, 2024

There are 7 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to H World Q1 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Jason Chin, Senior Investor Director.

Operator

Please go ahead.

Speaker 1

Thank you, Maggie. Good morning and good evening, everyone. Thanks for joining us today. Welcome to Edgewood Group 2024 First Quarter Earnings Conference Call. Joining us today is our Chairman, Mr.

Speaker 1

Ji Qi our CEO, Mr. Jing Hui and our CFO, Mr. Zou Jun. Following their prepared remarks, management will be available to answer your questions. 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.

Speaker 1

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 under applicable laws. On the call today, we will also mention adjusted financial measures during the discussion of our performance.

Speaker 1

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. With that, now I will hand over the call to our CEO, Mr.

Speaker 1

Jin Hui to discuss our business performance in the Q1 of 2024. Mr. Jin, please. We had a relatively good start for 2024. Let's firstly review our Lexi Huazhu's operational performance during the quarter.

Speaker 1

Please turn to Page 3. In the Q1 of 2024, Lexi Huazhu's blended RevPAR reached RMB216, representing a growth of 3.1% on a year over year basis. ADR grew by 1% to RMB280 and occupancy rates grew by 1.6 percentage points to 77.2%. The business performance was quite stable during the quarter and was within our expectation at the beginning of the year. In terms of hotel network expansion, we are happy to see that some important strategic adjustments and the changes we made in the past few years such as organizational upgrades, establishment of regional headquarters and a sustainable quality expansion strategy are rapidly achieving positive outcomes.

Speaker 1

Please turn to page 4. On hotel opening front, Lexi Huazhu opened 5 69 hotels in the Q1. The number of hotel closures was 148 in the Q1, a 61 hotels decline from the same period of last year. If excluding low quality economic software brand and HanTing 1.0, we closed only 72 hotels, 15 hotels less than the same period of last year. Our future hotel closure should gradually reach a more normalized level after rapid cleanup and upgrade process over the last few years and our sustainable quality growth strategy.

Speaker 1

More importantly, our pipeline further grew to a record high of 3,138 at the quarter end despite our 569 new openings during the quarter. It further demonstrated our strong brand power and increasing attractiveness to franchisees. Our limited service segment, which serves the mass market, remains our key strategic focuses. Our economic and the middle scale products continuously to be the key driver for our rapid network expansion. Breaking down our hotels in operation, hotels in pipeline and hotel openings in the Q1 of 2024, the proportion of economic and middle scale hotels were 92%, 84% and 92% respectively.

Speaker 1

It is critical to constantly upgrade products in a timely manner in order to better meet and satisfy customers' needs as we are seeing our customers' consumption behavior, preference and the tastes are changing rapidly and frequently nowadays. It is also one of the most important building blocks to enhance the competitiveness of our brand and gain attractions from franchisees. In the past years, we constantly introduced new upgraded versions of our major brands using our Iron Triangle brands in the limited service segments as examples. Please turn to page 6. The proportion of HanTing 3.5 and above steadily increased from 11.8% as of 2020 to 29.8% as of 2023 and further to 33.2% as of the Q1 of 2024.

Speaker 1

Please turn to page 7. For our JI Hotels in operation, the proportion of JI Hotel 4.0 and above products increased from 30% as of 2020 to 65.7% as of 2023 and further rose to 69% in the Q1 of 2024. Please turn to Page 8. As of the Q1 of 2024, the latest low high versions of Orange Brands accounted for 75.7% in its pipeline, increased from 58.4% as of 2023. In conclusion, our Iron Triangle brands including Hanjin, Jihotel and Orange has been further strengthening their brand and product power through consistent product upgrades.

Speaker 1

As we continued penetrating into lower tier cities and new markets, some new demand and a new group of customers emerged. Therefore, in addition to our iron triangle brand as we mentioned above, we are also constantly developing new products to better meet the needs of different customer groups and the market conditions. In the Q1 of 2024, based on our very mature and successful experiences of Hanqing, we launched a new version of Nihao Hotel. The new Nihao is positioned as a complementary brand for HanTing in the economic segment, especially in the lower tier cities and it is also positioned to cater to the accommodation needs of the younger generations. Please turn to page 9.

Speaker 1

The brand new Nihao 2.0 integrates traditional Chinese color and textured symbols with contemporary aesthetic showcasing the Chinese ethnic confidence and providing consumers with additional choice for different aesthetics. At the same time, through reinvention of new service scenarios, Nihao Hotel has integrated many value added services such as health preservation concept, popular modern Chinese tea and snacks into the self-service modulus at the hotel lobby. This is in line with the current consumption philosophy of young customers who seek good value for money products, but with good experiences. The new Nihao will strongly align with our flagship brand Hanqing to further solidify our leading position in the economic hotel market. In terms of our geographic expansion, we keep penetrating to lower tier cities in China.

Speaker 1

Please turn to page 10. As of the Q1 of 2024, 40% of our hotels in operation were located in Tier 3 and the below cities, representing a 1 percentage point increase year over year. At the same time, 54% of the hotel in pipeline were located in Tier 3 and the below cities. The proportion of Tier 3 and the below cities in pipeline was a bit lower compared to the same period of last year, while the proportion of the Tier 1 cities was a bit higher year over year. It was mainly due to a much faster new signings in upper mid segment as well as in the southern regions.

Speaker 1

In fact, the pipeline in Tier 3 and below cities was still growing in absolutely lumber term. As of the Q1 of 2024, the number of city coverage was 1290 with 158 new cities added compared to the same period of last year. Please turn to Page 11. Our upper mid scale segment development is continuously progressing. As of the Q1 of 2024, there were 686 upper mid hotels in operation, representing a 28% year over year increase and a 6% quarter over quarter increase.

Speaker 1

And there were 430 upper mid hotels in pipeline, representing an 81% year over year increase and an 11% quarter over quarter increase. The fast growing pipeline further demonstrated that our upper mid brand, especially our key brands including Intercity and Crystal Orange were increasingly gaining recognitions and popularity among customers and the franchisees. Since last year, the business traveling has been recovering relatively slower due to weaker than expected macroeconomic. Nonetheless, our direct B2B business was growing quickly, which partially offset some recovery gaps from individual business travelers. Please turn to page 12.

Speaker 1

In the Q1 of 2024, the number of room nights booked directly via our B2B platform was more than 5,000,000 representing a 34% year over year increase. The number of active corporate clients surpassed 2,700 representing a 57% year over year increase. We believe that by continuing strengthening our direct B2B sales capability, we could better cope with the potential volatility of business traveling and achieve a more sustainable business development in the long run. Moving to our overseas business, please turn to Page 13. The Edge blended RevPAR grew 4.5% year over year to €58 in the Q1 of 2024, which was driven by 0.2% increase in ADR to €104 and a 2.3 percentage point increase in occupancy rate to 55.8%.

Speaker 1

Last quarter, we mentioned that one of our DH's strategic focus in 2024 is to seek growth opportunities internationally. We are pleased to see that DH has made some initial progresses. Please turn to page 14. As of the Q1 of 2024, 53% of hotels in operation were located in Germany. However, only 38% of pipeline hotels were located in Germany and the remaining hotel were located in other European countries, APAC regions and Africa, which accounted for 41%, 15% and 6% respectively.

Speaker 1

All above conclude our Q1 2024 business update. Now, I will hand over the call to our CFO, Mr. Zoujun to discuss our operational and financial performance during the quarter.

Speaker 2

Thank you, Jing Hui. Good morning and good evening to everyone. Let's go through our operational and financial review for the Q1 of 2024. Please turn to page 16. In the Q1, we continued to expand our hotel network.

Speaker 2

Our overall number of rooms increased 17% year over year to over 955,000 rooms as of the first quarter, compared to over 820,000 rooms as of Q1 last year. Our hotel turnover for the Q1 of 2024 was RMB19.7 1,000,000,000, representing a 21% increase compared to Q1 last year. Excluding DH, Legacy Huazhu's hotel turnover grew 22% year over year to RMB18.1 billion. Now please turn to Page 17. In Q1 2024, our total revenue for the group increased 18% year over year to RMB5.3 billion, exceeding our previous guidance of 12% to 16% year over year growth.

Speaker 2

Legacy Huazhu achieved 18% year over year revenue growth to RMB4.2 billion and DH grew 17% year over year to RMB1 1,000,000,000. The revenue growth of Legacy Huazhu surpassed the high end of our guidance, mainly driven by higher than expected hotel openings. For DH, its revenue growth was attributable to market recovery and a favorable exchange rate. Please turn to Page 18. Hotel operating costs were RMB3.6 billion in the Q1 of 2024.

Speaker 2

The year over year increase was primarily attributable to increase of staff costs from our continued network expansion and reduced rental reliefs in China. The increase of hotel operating costs was slower than our revenue growth, reflecting operating leverage of our business. Pre opening expenses remained at a low level as we continue to focus on our asset light expansion strategy and become more selective on opening leased and owned hotels. SG and A expenses were RMB769 1,000,000 in the Q1 of 2024 and accounted for 14.6% of total revenue. The year over year increase in both absolute number and percentage of revenue of SG and A expenses were primarily due to continued business growth as well as return to a normal level of selling and marketing expenses, headcount number and compensation from the relatively low base of the same period of 2023, especially for our legacy Huazhu business.

Speaker 2

As a result, our income from operations in the quarter achieved RMB1.0 billion representing a 51% year over year growth increase. Now please turn to Page 19. In terms of our profitability and cash flow during the quarter, I'd like to firstly highlight that we have redefined our non GAAP measure of adjusted EBITDA and adjusted net income in the quarter in order to better reflect profitability from our core business operation. The new adjusted EBITDA and net income now excluded share based compensation expenses gain or loss from fair value exchange of equity securities, foreign exchange gain or loss, net and gain loss on disposable of investments. Finally, we also have restated our adjusted EBITDA and adjusted net income for the first and Q4 of 2023 to provide a comparable basis.

Speaker 2

Under the new definition, in the Q1 of 2024, Legacy Huazhu adjusted EBITDA achieved a 32% year over year increase to RMB1.5 billion, thanks to continued business growth and our asset line strategy. Our DH business reported a loss of adjusted EBITDA of RMB66 1,000,000, which narrowed down from a loss of RMB98 1,000,000 in the Q1 of last year. Adjusted EBITDA margin for the group and legacy Huazhu achieved 27% 35% level, representing 4% and 3.5% year over year improvement, respectively. Our group adjusted net income were RMB771 1,000,000 in the Q1 of 2024, representing a 101% year over year increase. Our Q1 operating cash flow decreased year over year mainly due to increase in payable to franchisees in Q1 of last year post reopening.

Speaker 2

And the quarter over quarter decrease was due to timing difference of compensation and franchisee fee payment. Now please turn to Page 20 on liquidity position. As of Q1 2024, the group had RMB8.9 billion cash, cash equivalents or restricted cash and time deposits. Net was in a solid net cash position with RMB3.1 billion, including time deposits. Our cash balance and net cash decreased compared to the previous quarter, which was primarily driven by payments of dividends in the Q1 2024.

Speaker 2

We also had RMB 2.4 billion unutilized bank facility as of Q1 2024. Now let's turn to Page 21. During Q1 2024, we paid roughly RMB300 1,000,000 cash dividend and repurchased roughly 75,000,000 worth of shares from the market. As we become more asset light and cash rich, we'll continue to reward our shareholders through dividend and buybacks. Finally, please turn to Page 22 on our guidance.

Speaker 2

For the Q2 of 2024, we expect our revenue to grow between 7% to 11% compared to Q2 of last year or 7% to 11% excluding DH. With that, we're ready to take your questions. Operator, please open the line for Q and A.

Operator

Thank you. We will now conduct the Q and A session. Our first question comes from Roland Leung of Bank of America. Please go ahead.

Speaker 3

Let me translate my questions in English. I have two questions. My first question is about RevPAR. So what is management expectations for RevPAR growth for domestic China business in 2Q? My second question is on DH.

Speaker 3

For DH, management targets to adjust the business to asset light business and target to sell the asset heavy business gradually. So how's the progress of the disposal? Does management have a timeline for the disposal? Thank you very much.

Speaker 1

Okay. Let me answer your first question. As you may know that last year, the Q2 actually was a bit high base, especially during the May holiday. As you may know that the May holiday last year was the 1st long holidays post to the recovery or post to the reopening from the COVID. So there's a lot of revenge, traveling, pent up demand in the Q2.

Speaker 1

And also on the supply side, the supply recovery was a bit slower at that time in the Q2 of last year. Therefore, given the high basis of last year Q2, we are facing a little bit challenges for the RevPAR in the Q2 of this year. Therefore, we are expecting the RevPAR for this quarter will be flattish to slightly negative as of now. However, given the traveling activities, especially the number of travelers during the holiday, we are still quite confident because the population number of travelers are still growing quite healthily during the holiday and in the Q2 as well, which give us more confidence that the leisure traveling demand is actually sustainable in a longer term perspective and are becoming inelastic demand for the Chinese consumers. And even though the RevPAR might have slightly negative in the Q2, but through the hotel network expansions, we still could achieve a 7% to 11% year over year revenue growth.

Speaker 1

The asset line strategy for our DH business, which we mentioned in last quarter, is our long term target because DH, we want the DH become some more international brands and hotel brand and the management company. But as you may know that transforming from asset heavy to asset light takes a bit longer time and a lot of complicated and complex negotiation with the potential counterparties, but the long term strategy won't change. So far, the progress is still within our expectation. So in terms of the closure time, so as long as there is a milestone, then we will just release to the market on time.

Operator

Thank you. Our next question comes from Dan Chee of Morgan Stanley. Please go ahead.

Speaker 3

Now please allow me to do the translation. Thank you, management, for the opportunity and congratulations on Q1's results. I have two questions. First question is about leased and operated hotels. We saw the L and O hotels operating performance outperformed franchise business.

Speaker 3

L and O RevPAR growth rate year on year was faster than the group's RevPAR growth rate by 6 percentage points. The same is happening to same store RevPAR growth, also outperformed franchise hotel and also the group's overall performance. We're wondering what has management done to improve both occupancy and ADR, especially occupancy for lease and own hotel and its sustainability? And is it replicable towards the Franchise Hotel Management? My second question is about Franchise Hotel Business.

Speaker 3

We saw that take rate for F and M increased by 7%, which is about 0.5 percentage point. We know that take rate sometimes get impacted by seasonality. We're wondering is this take rate increase sustainable? Any other reasons such as recurring franchise fees or CIS? That's all for my questions.

Speaker 1

Okay. In terms of the leased and owned hotels, their performance actually is better than the group franchisees. That was because over the last 2 years, we have been investing quite a lot of management resources into the leased and owned hotels because running a leased and owned in terms of the operation and the management is quite complicated. Therefore, from the initial investment period to the operational period for the entire lifecycle of this hotel business, we have been investing a lot of unit management capability. For example, we have assigned a good staff, hotel manager, for example.

Speaker 1

This is basically in conclusion is the improvement of our management's capability for running a hotel. And we believe that this kind of capability, which has been demonstrated from the leased and owned, can be replicated to other hotels, which is, as you mentioned, in the franchised or manachised hotel. In terms of the increasing take rate, there were mainly three reasons. Firstly, it's continuously increasing the CRIS as we continuously focus on our direct sales capability through our Eduard app. That's just one of the reasons.

Speaker 1

Secondly, it's because of the wage increase or the staff cost increase, especially at the hotel level for both our leased and owned and the franchise hotel, which is the hotel managers. And thirdly is we are doing a more deep diving and going to more details in terms of the management for our management monetized hotel, which we reduced the discount rate for our management fee as well as one time franchise fee, which has also contributed a little bit to the improvement of the take rate. So the take rate increase is a result from many factors, but the staff cost increase is kind of not able to avoid because the salary increase is a general trend in the market. Thank you.

Speaker 3

Thank you, Mr. Shing and Jason.

Operator

Thank you. Our next question comes from Simon Chu of Goldman Sachs. Please go ahead.

Speaker 4

Let me translate into English. So my first question is in relation to the stronger than expected hotel addition, 569 hotel adds in the Q1 already representing over 30% of their original guidance of 1800 for the full year originally. On top of that, we have a RevPAR according to management in the Q2, it would be likely going to be softer. So wondering whether they would have any revised guidance for both the hotel ads as well as the 8% to 12% full year revenue guidance. And my second question is for the business travel.

Speaker 4

We've been hearing from other operator sharing that business travel so far still being quite weak. What is the trends they expect looking into second half? And because they've obviously been doing quite well on the B2B strategies with 2,700 clients up 60% almost. How did they think about the long term opportunity on the business travel or B2B segment in general? Thank you.

Speaker 1

So in terms of the hotel openings before answering these questions, we want to remind you guys that since 2 years ago, we started our sustainable high quality expansion strategy. So our hotel network expansion will be only focusing on flagship hotels as well as the high quality expansions. And this year, as you remember, last quarter, we also introduced a service excellence strategy further up stepped from the quality high quality expansion and to be more focused on both products quality and service quality improvements. So for Edgewood, in terms of the network expansion, we again, we will focus more on the quality and better services instead of only focus on the scale. So therefore, even though we have a pretty good hotel openings in the Q1, we still maintain our full year gross opening target unchanged.

Speaker 1

Thank you.

Speaker 2

Okay.

Speaker 1

In terms of the B2B business, so firstly, if you're talking about an trial business traveling market, we have to say the business traveling market is a bit slower in terms of the recovery. This is mainly due to the impacts from the weaker than expected macroeconomic development since the reopening last year. However, over the last 2 years, we have been putting a lot of efforts on the B2B direct sale business and catching up some of the new demands, new scenarios such as the mice and the conferences, which we were not very good at previously. We have been continuously improve our capability in this front and trying to grab as much as new customers through our continuously enhanced B2B sales capability. Secondly, it's hotel centric on the ground, the sales capability enhancement.

Speaker 1

We will use the hotel itself as an offline channel to attract more and more local small business clients just to over as we mentioned to cope the volatility of the Intel business traveling market. Thank you.

Operator

Thank you. Our next question comes from Lydia Ling of CICT. Please go ahead. Lydia, please go ahead.

Speaker 5

My first question is on the opening and we see actually accelerate of expansion in the Q1. So how actually the management look at the supply industry supply as a whole? And also what's actually like the background for the new franchisees and what could be the mix of the new franchisees versus the existing franchisees? A little bit more color would be very helpful. And my second question is on expense.

Speaker 5

And we saw that actually the selling expense increased a lot in the first quarter and as my CFO just explained during the presentation. So how do management look at like the full year expense trend and also what could be the margin trend for 2024? Thank you.

Speaker 1

Okay. Let me answer your first question. Over the last several years, the churn ratio in China has been rapidly improving in China. At the end of last year, the churn ratio firstly exceeded 40% in China. And we believe that the churn ratio improvement would be even faster in the future because of the digitalization capability, the integration of the industrial capability in China was very outstanding.

Speaker 1

It has the potential to even higher than the very matured U. S. Market in the near future. So a lot of China hotel groups has been gaining benefits from this trend but continuously generation improvement. However, in different segments, we are seeing some of the differences.

Speaker 1

For example, the middle scale is much faster in terms of the generation improvement compared to the NTL market. But for the economics, it might be need for further efficiency operational efficiency improvements to further catch up the generation improvements. So this is the first part. The second part in terms of the background of the franchisees, in conclusion, it is quite diversified at this moment. We focus on 2 aspects.

Speaker 1

1 is for our old franchisees, we also focus on the repurchase rate for our older franchises. We want our franchises to be profitable whenever they open the old hotel. They used to open hotel and they are opening the new hotels. But at the same time, when we are penetrating into the lower tier cities, some new market and new segment, we are seeing a lot of new franchises, new type of franchises, for example, the local government, for example, the property developers. So on both sides, from the company's perspective, we take care of both parts of the franchisees.

Speaker 1

Thank you. In terms of the increase in sales and marketing expenses in the quarter, so firstly, because we are penetrating to the new market and we are penetrating to the new segment and introduce a lot of new products. So especially when we open a new hotel in new markets, we at the very initial period, we need the resources and the support from the OTA. However, that should be a temporary impact because on a longer term perspective, we will continuously focus on our direct sales capability through our own channels. This is one.

Speaker 1

Secondly, we purposely added some of the budget on the marketing expenses, especially for some the new brands and new segments that we want to further improve the brand awareness and the recognitions for these particular brands into the market in order to get more attraction from the customers and the franchisees as well. Thank you.

Operator

Thank you. Our last question comes from C. G. Lin from CICC. Please go ahead.

Speaker 6

So thank you, management. I have two questions. The first is that we mentioned before we aim to penetrate more into low tier cities and regions with low density. So how's the progress? And is there any operating data in these markets you could share with us?

Speaker 6

And my second question is that we also mentioned before that one of our key strategy is to upgrade supply chain and to improve service quality. So how's the progress? And is there any indicator that can improve this progress, maybe such as per room CapEx or RevPAR? Thank you.

Speaker 1

Okay. In terms of your first questions, I'm very happy to let you know that we have been progressing pretty good into those previously less penetrated area as well as the weak segments previously. The entire improvements and the process are satisfying are meeting the management's expectation. Okay. In terms of the sales excellence we mentioned last quarter, so previously, Edgeworth used high efficiency, low cost as well as scale to maintain the leading position.

Speaker 1

But in the future, if we want to further enhance or strengthen our leading positions in China or even in the world, definitely we need to focus on more service, more user experiences and management customer centric management capability enhancement as well. So just give you several examples because of the time limits. For the service excellence, we are focusing on the customer satisfaction rate and whether it is improved or not, but more details we will be sharing in near future. Thank you.

Operator

Thank you. This concludes the Q and A session. I will now hand back to Jason 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 and bye bye.

Operator

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

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