H World Group Q2 2024 Earnings Call Transcript

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August 20, 2024

There are 5 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to H World Second Quarter 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 answer session. Please be advised that today's conference is being recorded.

Operator

It is now my pleasure to hand you over to the Senior IR Director of the company, Mr. Jason Chen. 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 Second Quarter Earnings Conference Call. Joining us today is our Founder and Chairman, Mr.

Speaker 1

Ji Qi our CEO, Mr. Jing Hui and our CFO, Mr. Zhe 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. Asphalt 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

Reconciliation 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. Hwar.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 Q2 of 2024. Mr. Jin, please. Hello, everyone. Before presenting our Q2 operating performance, please allow me to share a good news with you all.

Speaker 1

In May, we opened our 10,000 hotels in China. As you can see, this HanTing Hotel is located in Motto County, Lingzhi, Tibet, which is the last county in China to have access to highways. After more than 4 years of hard work since we proposed the goal of 10,000 hotels in 1,000 cities in the end of 2019, we have finally achieved this milestone. More importantly, as our lower tier cities penetration strategy continuously progresses, we not only recognize that there are still huge opportunities and growth potentials in the Chinese market, but also accumulated a large amount of practical expertise and organizational capabilities. Therefore, we will continue to focus on our service excellence centric sustainable quality growth strategy and move towards the next goal of 20,000 hotels in 2,000 cities.

Speaker 1

Next, let's go through our Q2 operating performance. Please turn to Page 4. Lexi Huazhu's RevPAR in the Q2 was RMB244, down 2% year over year. ADR was RMB296, down 2.9 percent year over year, while occupancy rate was 82.6%, up 0.7 percentage points year over year. Despite the relatively weak macro and consumption, the overall travel demand in China remained resilient in the first half of twenty twenty four.

Speaker 1

Data released from airlines, high speed railways and the Ministry of Cultural and Tourism all confirmed this trend. For example, the domestic airline transported 320,000,000 passengers in the first half of this year, up 16.4% year over year and 12.4% compared to the same period in 2019. The high speed railways transported 2,100,000,000 passengers in the first half, which was a record high and represented 18.4% year over year increase. In addition, based on the data from the Ministry of Cultural and Tourism, the number of domestic tourists was 2,700,000,000 in the first half, up 14.3% year over year, showing a relatively strong leisure traveling demand. As for our own operating result in the quarter, the total number of room nights sold in China increased by approximately 21% year over year during the quarter.

Speaker 1

While our hotel network expanded rapidly, our occupancy rates still increased by 0.7 percentage points year over year. This was in line with the occupancy rate improvement target set by the company at the beginning of the year and it also reflected the stability of the overall traveling demand. In terms of the ADR, the panda demand and the temporary supply shortage right after the reopening last year definitely led to a very high base of ADR, especially in the second and third quarter. We believe that both occupancy rates and ADR should gradually return to a relatively healthy and sustainable growth trend this year and onward. Of course, we are also proactively taking various measures to improve our ADR and to ensure that we can continuously outperform the industry as well as bringing long term RevPAR growth potential.

Speaker 1

Please turn to Page 5. We focus on 3 key areas to achieve RevPAR improvement. Firstly, product upgrade. We continuously upgrade our main brand with introduction of new versions to meet customers' changing demand. At the same time, upgrading and renovating old hotels and old products to improve hotel quality.

Speaker 1

Secondly, the service excellence. With the principle of customer centric, we intend to provide best accommodation experiences for our guests and create bad value and return for our franchisees, which could lead to a win win ecosystem. And lastly, our membership program. We continuously focus on improvements of our member stickiness and repurchase through constant updating of our Edge Rewards app. At the same time, we further strengthened our capabilities on direct B2B booking and corporate client customers to capture more business traveling demand.

Speaker 1

We believe that these three aspects could continuously strengthen our core competitive advantages and drive our long term sustainable growth. Please turn to Page 6. In the Q2, we continued to expand our network. During the quarter, we maintained a strong hotel opening momentum since last quarter and opened 567 new hotels. The number of hotel closures in the Q2 was 101.

Speaker 1

If excluding low quality economic soft brands and Hanqing 1.0 version, we closed only 58 hotels, 28 fewer than the same period last year. Going forward, we would stick to our high quality growth strategy and continuously remove low quality hotels from our network to ensure a better quality of our hotel portfolio. While we maintain high speed of new hotel openings, the number of hotels in the pipeline at the end of second quarter reached a record high of 3,266, continuously demonstrating our strong brand power and attractiveness to our franchisees. Our strategic focus on economy and the middle scale hotels for serving the mass market continuously to be the key driver of our hotel network expansion. Please turn to Page 7.

Speaker 1

As of the Q2 2024, economy and the middle scale hotels accounted for 92%, 82% and 89% of our hotels in operation, hotels in pipeline and hotel openings respectively. As we mentioned earlier, consistent product upgrades is one of the important drivers of our continued RevPAR outperformance compared to the industry. And it is also the key factors for us to achieve industry leading high quality growth. Taking our core brands in limited service segment as an example, Please turn to Page 8. The proportion of HanTing 3.5 and above version in operation continue increasing, reached 36.3% in the Q2 of 2024, representing an increase of 6.5 percentage points compared to the end of last year.

Speaker 1

Please turn to Page 9. For our JI Hotels in operation, the proportion of JI Hotel 4.0 and above increased from 30% in 2020 to 65.7% in the end of 2023 and further increased to 71.2% in the Q2 of

Speaker 2

this year.

Speaker 1

Please turn to Page 10. The proportion of our latest low five version rapidly increased from 58.4% of the Orange Hotel in pipeline in 2023 to more than 90% in the Q2 of this year. In conclusion, the products and brand power of each of our key brands have been further strengthening through the continuously product upgrade. In terms of our regional expansion, we keep penetrating into lower tier cities. Please turn to Page 11.

Speaker 1

At the end of Q2 2024, 41% of the hotel in operation were located in Tier 3 and below cities, up 2 percentage points year over year. The proportion of pipeline hotels in 3rd tier and below cities reached 54%. Although the proportion was slightly lower than the same period in 2023, the absolute numbers still recorded double digit growth year over year. The increase in the proportion of pipeline in 1st tier cities is mainly due to acceleration of new signings of our upper middle segment as well as faster penetration in Southern China. The number of cities coverage reached to 1328 cities at the end of this quarter, about 132 cities added compared to the same period last year.

Speaker 1

With company's continuous penetration into the lower tier cities and the consumption trends of the customers continuously seeking for more value for money products, we further explore and develop the economy and budget hotel market. Please turn to page 12. In the Q2, we repositioned our HaiYing brand and redesigned its product. The new HaiYing 6.0 version is positioned as ultimate value for money with brand core value of sleep well and spend less. It focuses on customers' core accommodation needs of good sleeping and showering.

Speaker 1

It offers customers a global standard of accommodation experiences by providing standardized hotel rooms and convenient and high efficient self-service with automatically good value for money pricing. In order to achieve high operational efficiency in the hotel and achieve its brand positioning of ultimate value for money, HaiIn innovatively created a 3 in 1 digital operational system, which combines guest self-service, digital front desk and mobile staff. All in all, Edge High In will become a strong supplement to our HanTing and Niho brand to further help our lower tier cities penetration strategy and strengthen and solidify our leading position in the economy and budget hotel market. Additionally, our upper mid segment development continued progressing in the Q2. Please turn to Page 13.

Speaker 1

At the end of Q2 2024, the number of upper mid hotels in operation reached 738 hotels, up 31% year over year and 8% quarter over quarter. And the number of hotels in pipeline reached 50 9 hotels, up 61% year over year and 18% quarter over quarter. In the Q2, the sequential growth rate of both the number of hotels in operation and hotels in pipeline accelerated compared to the previous quarter, demonstrating that our upper mid brands are increasingly gaining recognition among customers and franchisees. Affected by the macro economy, the overall business travel market is still recovering relatively slowly. Nevertheless, we managed to offset some shortages from the individual business traveling demand by rapidly growing our direct B2B business.

Speaker 1

It is also the key factors for us to achieve resilient occupancy rate. Please turn to page 14. In the Q2 of 2024, the number of room nights booked directly via our B2B platform exceeded 6,000,000, up 31% year over year and 26% quarter over quarter. The number of active corporate clients exceeded 3,600, up 47% year over year and 36% quarter over quarter. Now, we are moving to our overseas business.

Speaker 1

Please turn to Page 15. The Edge RevPAR in the Q2 was €82, up 4.5% year over year, driven by 2.7% increase in ADR to €120 and 1.2 percentage points increase in occupancy rate to 68.3%. In June, our DSHS Hotel in Germany performed well, benefited from the Euro

Speaker 2

Cup.

Speaker 1

Please turn to Page 16 for our globalization strategy. As of the Q2 2024, about 53% of the hotels in operation were located in Germany. In terms of the hotels in pipeline, only 39% of the hotels are in Germany and the remainings are in other European countries, Asia and Africa, each accounted for 36%, 18% and 7%, respectively. Among them, the proportion of pipeline hotels in Asia has increased meaningfully compared to the proportion of hotels in operation, achieved some periodic results and was in line with our strategy that was set at the year beginning. Concludes our Q2 2024 business update.

Speaker 1

Now I will hand over the call to our CFO, Mr. Zhe Jun to discuss our operational and financial performance during the quarter.

Speaker 2

Thank you, Jinhui. Good morning and good evening to everyone. Let's go through our operational and financial review for the Q2 of 2024. Now please turn to Page 18. As Mr.

Speaker 2

Jinhui mentioned, we reached a remarkable milestone during the Q2 of 2024. The number of hotels in operation for both the group and the legacy Huazhu surpassed 10,000. And the overall number of rooms increased 19% year over year to over 1,000,000 as of the end of Q2 this year compared with over 840,000 rooms a year ago. Hotel turnover for the Q2 of 2024 was RMB 23,400,000,000, representing a 15% year over year increase, of which Lexi Huazhu's hotel turnover grew 16% year over year to RMB 21,300,000,000. Now please turn to Page 19.

Speaker 2

In the Q2 of 2024, our total revenue for the group increased 11% year over year to RMB 6,100,000,000 at the high end of our previously announced guidance of 7% to 11% year over year growth. Revenue from Lexi Huazhu grew 11% year over year to RMB 4,800,000,000, also reaching a high end of our guidance for the segment. And the growth was driven primarily by our strong new hotel openings. Legacy TH's revenue rose 5% year over year to RMB 1,300,000,000, attributable to both business recovery and hotel network expansion. Next page, please.

Speaker 2

We are committed to grow under the FLI model, expanding our hotel network using Manichais and franchised hotels. As a result, revenue from our Manichised and Franchise Hotels continued rising. In the Q2 of 2024, Manichised and the Franchise Hotels contributed to 48% or nearly half of our legacy Huazhu revenue, up from 42% a year ago. We expect this trend to continue as we become more and more asset light. This should lead to a gradual margin expansion for the business as well as to help us to become more resilient when facing economy and industry headwinds.

Speaker 2

Now please turn to Page 21. Hotel operating costs was RMB3.7 billion in the Q2 of 2024, up 7% year over year. The increase was primarily driven by rising staff costs from our continued network expansion. The year over year increase in hotel operating costs was meaningfully lower than our revenue growth, thanks to our satellite strategy. Preopening costs maintained at a low level as we continue moving toward satellite model and stay selective on opening leased and owned hotels.

Speaker 2

SG and A expenses were RMB 919 1,000,000 in the Q2 of 2024, up 24% year over year. The year over year increase was attributable to headcount normalization as well as a rise in share based compensation to secure and reward our core employees for sustainable long term business growth. Income from operation in the quarter reached RMB1.6 billion, representing a 14% year over year increase, driven primarily by the strong network expansion of our Managed Ice and Franchise Hotels as well as further business recovery of The Edge. Now please turn to Page 22 for our profitability and cash flow during the quarter. In the Q2 of 2024, our adjusted EBITDA increased 15% year over year to RMB 2,000,000,000 and by segment, Legacy Huazhu's adjusted EBITDA grew 14% year over year to RMB 1,900,000,000 with adjusted EBITDA margin expanded 1% to 39.5 percent, thanks to our continued business growth at SLI strategy as well as our cost saving initiatives on non personnel related expenses.

Speaker 2

Our DH business generated RMB131 1,000,000 adjusted EBITDA, turning profitable from a loss position in the previous quarter and representing a year over year growth of 35%. Our Group's adjusted net income was RMB1.3 billion in the Q2 of 2024, up 17% year over year. Operating cash flow for the quarter was flattish year over year at RMB 2.2 billion. Now turn to Page 23 for our liquidity position. As of end of June 2024, the group had RMB 9,900,000,000 cash, cash equivalent, restricted cash and time deposits and was in a solid net cash position of RMB 4,300,000,000.

Speaker 2

Including time deposits, we also had RMB 3,100,000,000 unutilized bank facility as of end of our second quarter. Please turn to Page 24 now for shareholder return. As we become more asset light and cash rich, we are committed to reward our shareholders through dividend and buybacks. Last month, we announced a 3 year shareholder return plan with an aggregate amount of up to US2 $1,000,000,000 This includes semi annual ordinary dividends of no less than 60% of the net income each year as well as special dividend and share buybacks. Concurrently, the Board approved a 5 year share repurchase program with an aggregate amount of up to $1,000,000,000 effective from August 21, which is today.

Speaker 2

Next page, please. Under the new shareholder return plan, the Board declared US200 $1,000,000 interim cash dividend for the first half of twenty twenty four. We also continued to buy back shares and have bought back roughly US143 million dollars worth of shares from the market as of July year to date. Lastly, Page 26, on guidance. For the Q3 of 2024, we expect our revenue to grow between 2% to 5 percent compared to Q3 of last year or 1% to 4%, excluding DH.

Speaker 2

To reflect our strong hotel opening momentum, we revised up our full year gross hotel opening target to over 2,200 hotels, up from the previous guidance of around 1800 hotels. 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. Our first question comes from the line of Ronald Leung from Bank of America. Please go ahead, Ronald.

Speaker 3

Ron Oza from Bank of America. I have two questions. So my first question is about the rough for the full year 2020. Okay, this is my first question. My second question is about the investment appetite for franchisees.

Speaker 3

Could management comment on the current investment appetite for the franchisees? Do you see any signs that the franchisee sentiment may slow down because of the rough part decline? So let me translate my questions.

Speaker 1

Okay. Let me answer your questions. Firstly, in regards to the RevPAR. So as you may see from the industry number released from this TR that in the July and the several weeks of the August, actually on a year over year basis, the RevPAR was around 10% decline on a year over year basis. Clearly, that we also observed that the macro condition and the Intel consumption, especially the high end consumption was relatively weak.

Speaker 1

But also, last year, Q3 was a very high base because that was a peak season right after the reopening post COVID. But as you may know from the data itself, you can see that our RevPAR performance is always at the outpaced the industry number. So for the Q3, we expect that the RevPAR could may decline around mid single digit year over year. But I think this year, the RevPAR should gradually return to a more healthier and sustainable development trend as we mentioned previously. And also another factor is the supply was increased year over year for this year, especially for certain regions, for example, the eastern part of China.

Speaker 1

But some of the performance, we also see a different performance in different regions, like for example, the west part, the central part of China was still quite performing well. We still see a very strong issue of traveling demand in particular regions. But in eastern part of China, maybe some of the temporary oversupply or some of the weak business traveling demand, which could be a bit underperforming. But for us, in a longer term perspective, we remain focused on the mass market and we think through our strategy in high quality growth, we remain confident in the longer term perspectives. And for the second question in terms of the franchisees, as you can see our pipeline continuously grow despite our high speed new hotel opening, because we insist our key strategy on lower tier cities penetrations and also the upper mid segment penetration as well.

Speaker 1

For next year, we will remain focused on these two areas and also through the better product and the better branding that we are confident that the entire franchisees' confidence should remain at the healthier and sustainable level. Thank you. I want to add one more point. Since 2022, we started our high quality growth and this year, we started the service excellence. So, for both parts, we want to further strengthen our core competitiveness and to maintain a strong competitive advantage in the industry.

Speaker 1

So hopefully that our shareholders or analysts could understand our strategy and our planning. Thank you.

Operator

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

Speaker 3

Please allow me to translate my question. This is Ben from Morgan Stanley. My question is regarding hotel opening and pipeline and also supply chain building. The management continues to mention about the pipeline increase on top of the rapid network expansion. My question is about the company's annual opening capacity.

Speaker 3

Can the management update us on the progress you have made regarding hotel opening, especially we increased the gross opening target from 1800 hotels to 2,200 hotels. I assume we are signing more than that number in a year, and the pipeline right now is over 3,200 hotels. So with more progress made on the supply chain, can we assume this annual opening number to continue to go up? And is there a limit to the number per year? Thank you.

Speaker 1

Okay. Let me translate in terms of the supply chain. So supply chain is very important factors for us to maintain our high quality growth and achieve the 10,000 hotels in 1,000 cities. There are 3 key areas that the supply chain needs to look at. 1 is the cost leadership, 2 is the high quality, 3rd is the efficiency.

Speaker 1

In the second half, we will continuously improve our supply chain capability by replacing higher quality suppliers and further improve our efficiency and lower the cost. So that won't be supply chain could help us to further accelerate the hotel network expansion and with relatively lower cost and high efficiency. So we are very happy to see that we can open more than 2,200 hotels in this year. This is to support our localized strategy in our regional offices and further improvements on the supply chain capability. However, I want to emphasize one more time that we in the future in terms of the hotel network expansion, we will remain insisting on that higher quality is more important than the scale.

Speaker 1

Okay. That's we will further develop the flagship hotels and continuously implement our high quality sustainable growth strategy, especially in the lower tier cities. As you may see that given that we are doing a lot of flagship hotels that number of rooms per hotel actually increased. And in other words, the total number of hotel rooms growth is higher than number of hotel growth itself. So all in all, we will remain focused on more quality than scale and implement our high quality sustainable growth strategy.

Speaker 1

Thank you.

Operator

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

Speaker 4

Let me translate the question. So I think there are a lot of concern about hotel supply in the industry. Particularly, we have seen the hotel supply has fully recovered to 2019, therefore, actually exceeded year to date. Wondering how you're seeing the hotel supply in the medium term and how that would impact the industry RevPAR? And correspondingly, how HUL will think about your RevPAR performance?

Speaker 4

And then the second question I have. So the second question is related to the impact of the RevPAR now that the guidance seemingly is a bit softer in the second half of the year. How would that impact the margins? So my first question is related to DH. We have seen quite a healthy performance in the second quarter and have seen the hotel additions actually accelerated a bit.

Speaker 4

Wondering what is some sort of whether you have some sort of a long term target in particular in Asia where you have been you have done quite well.

Speaker 1

Let me translate the first answer. So in terms of the market supply, so basically the hotel market in China is quite relatively matured and there is also a market driven business. So basically we believe the supply and demand will always come back to equilibrium and also the supply will also affected by the demand movement. Historically, the Intel industry has benefited from the channel ratio improvements, the economic development and the demand rapid demand increasing. Therefore, there is a lot of new supplies coming into the market.

Speaker 1

But again, for us, our observation is very clear that there is no lack of the supply, but there is a lack of the high quality supply. So that's the reason why we continuously emphasize on the high quality sustainable growth together with the service excellence. So by doing so, we want to maintain our core competitiveness and provide good supplies and high quality supplies to the market to gain competitive edge. So this is our views on the demand supply dynamic for the Intel launching market in China. And in terms of the long term RevPAR development trends, we refer to what has been developing in the U.

Speaker 1

S. Market for last 40 years. It shows a clear trend that the RevPAR in the U. S. Is very positively correlated to the GDP growth and inflation.

Speaker 1

It is very positively correlated. So it's affected by the macro indications and macro performance. So for us, we are some perspective and given we have been established a very strong brand, we have been established a very good product and organizational capability as well as our traffic sources membership programs. Basically, we believe so we could be very competitive in the market in a longer term perspective. Okay.

Speaker 1

In terms of our deal strategy, there are 3 aspects. Firstly, it's very clear that it's the asset light transformation. As you may know that historically we had a lot of leased and owned hotels. Now we are doing the asset light transformation. And secondly, it's continuously on the cost control and efficiency improvements to maintain a healthier and sustainable profitability and cash flow.

Speaker 1

And thirdly, if we want to leverage on DH's good brand and products to develop in Middle East and Asia Pacific.

Speaker 2

So, yes, about margin, I think firstly, of course, you see that there are some short term RevPAR fluctuation in the market and in our business as well. But in the long term, we're confident that we'll have a very good RevPAR growth trend. And through, let's say, product upgrade, service excellence and membership program upgrade, as Jingping mentioned in his presentation. And we will continue to outperform the market. And secondly, with our business continuously transferred to a FLI model, the revenue structure, as I mentioned in my presentation, has changed and that will bring a natural, let's say, margin improvement in the long term.

Speaker 2

And thirdly, we started to implement flexible budget and rolling forecast, which will allow us to nimbly respond to market condition change and adjust our spending levels. And fortunately, we are also meticulously measuring our ROI for each big spending. And with all those efforts, we believe in the long term, we will have a better margin profile. Thank you. Thank

Operator

you. We have now 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 quarter. 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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