Huazhu: Focusing on both upgrading and rural markets

Here is the summary of Huazhu's 3Q3 conference call. For a detailed analysis, please refer to the article "A False Alarm, Huazhu Still Leads the Industry".

1. Management Remarks:

In the third quarter, our RevPAR recovered to 129% of the 2019 level. The recovery of average revenue per available room (RevPAR) continues to be supported by ADR growth, mainly driven by changes in our product structure. At the same time, the occupancy rate rebounded and improved compared to the previous quarter. In terms of specific numbers, our RevPAR in July, August, and September recovered to 132%, 128%, and 128% of the corresponding levels in 2019, respectively. This is due to strong demand for leisure travel during the summer vacation and the continued recovery of our business.

After a strong summer vacation, our RevPAR recovered to 130% of the 2019 level during the Golden Week holiday. In October, our RevPAR recovered to 120% of the 2019 level for the entire month. In the short term, despite the possible macroeconomic volatility and uncertainty, we will continue to execute the company's long-term strategy, focusing on building and enhancing our product, brand, management, and execution capabilities. We will continue to expand our hotel network and market share to achieve long-term sustainable quality growth.

As of the end of September, the total number of hotels in operation was 9,028, with 40% located in lower-tier cities. Among our 2,935 hotels under construction, 55% are located in third- and fourth-tier cities. Thanks to the economic recovery this year, the proportion of hotels in first- and second-tier cities has slightly increased. Nevertheless, we will continue to advance our penetration strategy in lower-tier cities, with the number of hotels in lower-tier cities increasing by 6% to nearly 3,600, and the number of hotels under construction growing by about 20% YoY to over 1,600.

Huazhu's long-term sustainable RevPAR growth in China is driven by several factors: 1) continuous penetration in economically resilient lower-tier cities, helping Huazhu achieve relatively robust performance in a volatile macroeconomic environment; 2) organizational adjustments and optimization (establishment of regional branches), making Huazhu's localized operations more refined and efficient, further enhancing regional penetration capabilities; 3) continuous product upgrades and service improvements, helping Huazhu hotels achieve higher premiums and solidify its leading position in the limited-service market through high-quality products; 4) the development of mid-to-high-end brands, optimizing and improving the company's hotel structure, and increasing market share in the mid-to-high-end hotel market.

In the mid-to-high-end market, our two main brands are Intercity and Crystal Orange. Both brands have achieved good new signings this year. Last year, we launched the DHS Intercity brand in China and opened several new city rental hotels in Wuhan, Shanghai, and Zhengzhou. The number of new signings for Intercity has significantly increased in the past three quarters, with 41 Intercity hotels under construction as of the end of September, while the number of Crystal Orange hotels under construction has reached 108. We are currently repositioning our hotel product design to reflect the needs of modern travelers. We are also working hard to strengthen our influence in the Middle East and explore new international markets such as the Asia-Pacific region.

Q&A:

Q1: I would like to know if the company can share more details about the dividend payment, such as the timing, expected results, the scale of the dividend, and whether it is a regular dividend or a special dividend.

A1: Our board of directors is considering cash dividends. Once we obtain the board's approval, we will announce the exact policy and dividend rate to the market. I would like to add that our business will become more asset-light. We definitely aim to maintain good management in terms of cash and net profit.

If our cash flow performance is very strong, we will resume a stable basic dividend policy as well as a special dividend policy. We still have a few days before the board's decision. As for the possible dividend payment timing, it is expected to be in early next year.

Q2: Regarding the outlook for 2024, what are the management's preliminary forecasts for growth? And what do you think is the company's optimal capital structure in terms of the balance sheet?

A2: As for the RevPAR of our hotels next year, we will provide guidance when we release the fourth-quarter earnings report. We still hold a relatively optimistic view on the cost of our business in China. Given that we believe we have the best product/market-leading position and we continue to benefit from further market consolidation, we maintain a relatively optimistic view on costs.

As part of our efforts to reward investors, we have announced a dividend policy, and this policy will continue. We also do not rule out the possibility of some share repurchases at the appropriate time. In terms of debt and equity positions, we currently have $500 million in convertible bonds, and we will continue to utilize some bank loans as short-term working capital due to the very low interest rates in China. So please rest assured about H World's financial management situation. We will continue to manage our overall debt position in the lower interest rate environment in China and believe that we will not encounter any potential financial problems.

Q3: The company's speed of opening new stores is faster than other companies. What is the reason for this? How is the situation in the South China region?

A: The reasons for the fast speed of opening new stores are: 1) Benefiting from the continuous construction of top-tier brands in niche markets in the past few years, such as Hanting and Qianji, which have a good reputation and have achieved sustained high growth after the epidemic; 2) Continuously cultivating mid-range second growth brands, such as Orange, Orange 3.0, which has performed very well since its launch in the first quarter of this year; 3) Strengthening expansion in underserved and relatively weak markets, such as the southern, central, and western regions, where the proportion of signings in these three regions exceeds 40%; 4) Continued incubation of the mid-to-high-end market, such as intercity and Orange Crystal 2.0, which will continue to grow in terms of signings and market coverage in the future.

Q4: There was a certain decline in RevPAR in October. What is the reason for this? What are the expectations for RevPAR in November and December? A: Regarding the RevPAR trend. Seasonality is very normal, as the post-Golden Week holiday period is usually a low season. So this is a normal phenomenon influenced by analogy. And it is affordable before the end of the quarter. We expect the recovery of RevPAR to be between 115% and 120%.

Q5: Management's view on market opportunities in lower-tier cities in China. Are there any other strategies specifically targeting the lower-tier city market?

A: Despite the urbanization rate exceeding 65% this year, we still see an increase in population in lower-tier cities. In addition, the expansion of high-speed rail and highway networks has further increased the number of passengers we see. And there is higher market elasticity in lower-tier cities with a population of over 1 billion.

Q6: Can you share the operational data of the intercity hotels that have been opened? What are the characteristics of the city distribution and franchisee profile of the Intercity brand?

A: We believe it is not appropriate to release the ADR or RevPAR of Intercity hotels to the market at this time because we only have a few intercity hotels in operation. However, all ADRs and RevPARs have performed better than our competitors. Based on current feedback, the operational performance and GOP profit margin of Intercity are far superior to the performance of traditional international brands in China, achieving parallel substitution of international brands in China.

Regarding changes in franchisees: 1) Many industry-leading franchisees who previously invested in other brands have joined, as the investment in Intercity is significant, ranging from 30 to 50 million RMB; 2) There is also participation from developers and professional asset holders.