H World Group Limited (NASDAQ:HTHT) Q2 2023 Earnings Call Transcript

H World Group Limited (NASDAQ:HTHT) Q2 2023 Earnings Call Transcript August 25, 2023

Operator: Good day and thank you for standing by. Welcome to the H World Quarter 2, 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today’s conference is being recorded. I’d now like to hand the conference over to your host today, Mr. Jason Chen. Please go ahead sir.

Jason Chen: Thank you. Good morning and good evening, everyone. Thanks for joining us today. Welcome to H World Group 2023 second quarter earnings conference call. Joining us today is our Chairman, Mr. JI Qi, our CEO, Mr. JIN Hui; our CFO, Ms. HE Jihong; and our President, Ms. LIU Xinxin. 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. 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 findings with the SEC. H World Group does not undertake any obligations to update any forward-looking statements except as required by applicable laws. On the call today, we will also mention adjusted financial measures during the discussion of our performance. 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.hworld.com. With that, now I will hand over the call to our CFO, Mr. HE Jihong for opening speech. Ms. HE, please.

HE Jihong: Thank you, Jason. Good morning and good evening, ladies and gentlemen. Welcome to H World Group’s second quarter 2023 earnings call. We are very happy to report that with a strong recovery of domestic China travel activities and continuous global travel improvement, our overall financial performance in this quarter and the first half year 2023 exceeded the guidance we announced earlier this year. In today’s presentation, Group CEO, Mr. JIN Hui, will first highlight our business performance and the key initiatives we undertook to further improve our operations. I will then discuss the financial performance in more detail. Now, I will hand over to Mr. JIN Hui.

JIN Hui: [Interpreted] Thank you, HE Jihong. As usual, let’s quickly review our RevPAR recovery in Q2, 2023. Please turn to page three. Let’s look at the reasons. Thanks to robust travel demands, in 2023, Q2, H World maintained sound business rebound since the economic reopening of last year and the RevPAR for Q2 recorded 121% of that of Q2, 2019. In April, May, June, respectively, H World’s blended RevPAR has reached to 127% of April, 115% of May, and 123% of June in 2019. With the reopening of the Chinese economy, rebound of our economy, coupled with the stimulus policies and travel activities resumption from everywhere, we have seen very strong rebound of the overall travel activities and willingness. We have also found that the consumer’s travel willingness increased after the reopening.

Therefore in Q2 we have seen explosive and concentrated travels around major exhibitions and holidays. Entering the peak season in the beginning of this year, we have seen the RevPAR resumed to 132% of Q2 of 2019. It is a recovery much better than our forecast in the beginning of this year, yet still we have to be consciously optimistic about the outlook. We must realize that it has been less than one year of opening. The macro-economy is still in gradual recovery, during which period we will see turbulences and changes. This means uncertainty for our hospitality industry. However, H World is still confident in the prospect of the Chinese economy in the longer term, and that’s exactly why we are and will continue to enhance our core competitiveness and seek for certainty out of the uncertainty in order to sustain our business development.

Thank you. Page four, please. I must stress here the driving forces of our sustainable RevPAR. Firstly, higher premium through conscious product and services upgrade. Secondly, uncovering opportunities in lower tier cities with high resilience as the travel infrastructure and travel willingness, both improve. Thirdly, operate our business more intensively and effectively by setting up the regional offices and headquarters, increasing the regional penetration and organizational restructuring. Fourthly, improve our market share in the upper mid-scale market and further optimize our product mix. We will further execute the lean development strategy set upon by the management. Page five, please. The H World Group will continue to expand our hotel’s network based on the Quality Development Strategy.

In Q2 this year, we have a total of 1,054 new signings. That is a 88% increase year-on-year, making it a historic high. Naturally, this is a high growth contributed by the low baseline in Q2 last year, as well as the backlog signings from the COVID period. Undeniably, we see the confidence of the franchises boosted by the strong rebound in the hospitality sector after the reopening. In terms of the number of hotel openings, it increased much faster than Q1 with a total of 374 hotel openings, up by 41% year-on-year. In terms of the store closure, there are 216 hotels closed, mostly the deferred and backlog COVID-related closure from last year. The closure aims to streamline the economic soft brands of lower quality and Hanting 1.0 and further optimize our network quality.

There are a total of 130 Hanting 1.0 and economic soft branded hotels closure. Please move on to page six. As we continue to streamline the lower quality hotels to enhance our overall performance and quality, the percentage of Hanting 1.0 and economic soft brands account now for less than 10% out of our overall hotels, down from the 26% at the end of 2020. Meanwhile the percentage of the Hanting 2.7 and above accounts for 26% at the end of June this year, up from the 14% of the end of 2020. So the H World Group will continue to focus on the economy and the mid-scale hotels to serve the mass market. Page seven, please. At the end of June, we have a total of 8,622 hotels in operation, among which 56% economy hotels, 36% mid-scale hotels, and a percentage of mid-scale increased by 3% year-on-year.

There are a total of 2,808 hotels in pipeline, among which 38% are economy, 48% are mid-scale, and the percentage of mid-scale up by 5% year-on-year. Of all the hotel openings in Q2 this year, among which 90% are economy and mid-scale hotels. This is proof that as we optimize our overall hotels’ quality, we continue to focus on economy and mid-scale segments to serve the mass market consumers. The H World continued to increase our penetration in the lower-tier cities and weaker regions. Page eight, please. Out of the hotels in operation, 39% is located in the lower-tier cities, up by 2% year-on-year. Out of the hotels in pipeline, 55% is located in lower-tier cities, and our city coverage now increased to 1,196. Page nine, please. We continue to grow our upper mid-scale hotels segment.

By the end of June this year, we have a total of 562 upper mid-scale hotels in operation, up by 18% year-on-year. We have a total of 317 upper mid-scale hotels in the pipeline, up by 29% year-on-year. The fast growth of mid-scale hotels in our pipeline will support our future opening and market development in this segment. Please turn to page 10. We value membership development. We have upgraded our H World brand image and market position. In terms of the H World Members App, we have added more location related elements. We have increased our member offerings, such as location channel, content channel 2.0, and member-exclusive services. We hope that the H World Group membership is more than just a hotel reservation platform, without transitioning it from a single business scenario-only reservation platform to a diverse business and travel activities scenario service platform.

That’s all for Q2 earnings overview. Now, I will hand over to our CFO, Madam HE Jihong, to walk you through our operational and financial results. Thank you.

HE Jihong: Thank you, JIN Hui. I will now highlight the key financial metrics in this quarter. Please turn to Page 12. Our hotel network continues to expand in this quarter. Our number of rooms in operation increased 9% to 844,417. According to the research published by Hotels Magazine, we rank No. 6 worldwide in terms of rooms and operation. Our hotel turnover increased 72% compared to Q2, 2022, totaling to more than RMB20 billion. Please turn to page 13. Legacy-Huazhu blended RevPAR in the second quarter stands at RMB250, improved 21.4% compared to the same period in 2019 and 77% over 2022. This recovery is largely driven by ADR improvement. The average ADR of RMB305 is 28.9% over second quarter 2019 and 39.8% over 2022. Occupancy of 82% in the second quarter is slightly lower than second quarter 2019 of 87%, but it is a 17.2 percentage point improvement over 2022.

Please turn to page 14. RevPAR of our international business Deutsche Hospitality also improved by 18.5% over the same period in 2022. Blended RevPAR stands at EUR78 this quarter. This is driven both, by ADR improvement, which is 5.6% over 2022, as well as occupancy improvement, which is 7.3% percentage point over 2022. Please turn to page 15. Our total Group revenue in this quarter was RMB5.53 billion, including RMB4.35 billion from Legacy-Huazhu and RMB1.18 billion from DH. This is an improvement of 64% compared to 2022, higher than our guidance set up earlier this year. Our China business delivered a 76.6% revenue improvement. This strong performance is due to, first, strong recovery of travel demand, especially domestic Chinese market. Secondly, continued product upgrade and product mix change.

And thirdly, market penetration and synergies achieved through our regional offices. In first half year 2023, we opened 638 hotels Group-wide. We expected the hotel opening to accelerate in the second half of this year due to faster pickup of construction activities and supply chain recovery. We stayed with our guidance of 1,400 hotel opening this year. European market further recovered this year as well, and our DH business delivered 28.4% revenue improvement over 2022. Please turn to page 16. Hotel operating cost was 17.2% higher than the same quarter 2022, driven by business recovery. We continue to spend serious efforts to improve operational efficiencies and manage costs on the hotel level. SG&A cost was 45% higher than 2022 due to higher marketing and sales expense to drive the business.

I would like to highlight that Legacy-Huazhu SG&A cost was 11.6% of revenue in this quarter. Operating income of Legacy-Huazhu in the second quarter stands at RMB1.35 billion, which represents a 31% operating profit margin. This is a significant improvement over 2022 when China was under serious COVID control. Income from operations at DH also turned positive in this quarter compared to the loss situation, both in second quarter last year and the previous quarter. Please turn to page 17. Adjusted EBITDA in second quarter stands at RMB1.77 billion. Legacy-Huazhu delivered RMB1.66 billion adjusted EBITDA, which represents a 38% EBITDA margin. This quarter we did not have special effect like our core shares divestment gains as in the last quarter.

Adjusted net income stands at RMB1.07 billion. Legacy-Huazhu delivered RMB1.05 billion adjusted net income, which represents a 24% net income profit margin. This improved EBITDA and net income margin as a result of business recovery as well as cost management. As we continue to move towards asset-light business model and add hotels through our franchisees and partners, we expect our profit margin to continue to improve. DH business turned positive in this quarter with RMB112 million adjusted EBITDA and RMB21 million adjusted net income. This is a result of conscious improvement of sales effort and continued cost management of our European team. Our operating cash flow at group level remains strong at RMB2.2 billion in this quarter. Please turn to page 18.

Our net cash at second quarter 2023 is RMB2 billion. Our cash balance is RMB7.8 billion and we have RMB2.8 billion unutilized bank facility. Please turn to page 19. We expect our Group revenue in the third quarter 2023 to grow 43% to 47% over third quarter 2022. Excluding DH, Legacy-Huazhu is expected to grow 49% to 53%. Based on a good recovery of travel demand and a better than expected performance compared to the estimation made at the beginning of this year, we raise our guidance for the full year 2023. We estimate the revenue in full year 2023 to grow 48% to 52% over 2022. Excluding DH, we estimate Legacy-Huazhu revenue in 2023 to grow 54% to 58% over 2022. This concludes our management presentation. We can now start with Q&A session.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instruction]. The first question comes from the line of Ronald Leung from Bank of America. Your line is open.

Ronald Leung: [Foreign Language] I’ll ask my questions in English as well. My first question is about RevPAR expectations. Management has raised full year revenue guidance and also providers that got revenue guidance. May I ask, what is the implied RevPAR expectations in 3Q and for full year? The second question is about the expectations for hotel signings. We have seen very strong hotel signings in both, the first quarter and the second quarter. May I ask what’s management expectations for the hotel signings for the rest of the year? Thank you very much.

A – JIN Hui: [Interpreted] Thank you for your question. My name is JIN Hui. I will take over your question. Yes, as you said, given the overall economic development momentum, especially during the domestic circulation, consumption rebound and the recovery of the tourism and activities, we have seen very good growth. Especially in Q3 we believe that the RevPAR will be growing to 130% to 128%, and all year round the growth will reach 116% to 121% point. So a little bit add on your first question, we were talking about the RevPAR recovery. So I gave you a number of 130% to 128% for Q3 and all year around 116% to 121% recovery. While speaking of the new signings, yes in Q2 we are very happy to see we have achieved such great accomplishment.

I have a few points to make. Firstly, because of economic recovery and the overall hospitality recovery, we have seen strengthened confidence from the franchisers. Partly of course that achievement this quarter is because of the backlog, delayed signings from the previous period. So I hope you to understand that for H World Group, we have achieved such accomplishment because of several reasons. Firstly, because in the last few years, we continue to develop the lower-tier cities; and secondly, we continue to move towards the mid-scale and premium market.

Ronald Leung: Thank you management.

Operator: One moment for the next question. The next question comes from the line of Simon Chen from Goldman Sachs. Your line is now open.

Q – Simon Chen: I would just ask the question again in English. I have observed that the guidance hasn’t been revised up quite aggressively with I think first quarter 118%, second quarter 121%, and third quarter 125% at 2019 level. But based on your full-year guidance, that would imply the deceleration into the fourth quarter. Are you seeing any sign of weaknesses or any reason why you are expecting there is going to be a slowdown? And then the second one is in relation to potential use of the cash or cash flows, because your company is already in $2 billion net cash positions. How are you thinking about capital reallocation and whether you would consider paying dividends like one of your competitors does?

HE Jihong: Thank you, Simon, for the question. I will answer your question. For your first question about the RevPAR, yes, we are very happy and very grateful to see the very good recovery of Chinese domestic travel. The first quarter was really a revenge after COVID, and the second quarter we observed very high leisure travel demand in the summer holiday. And in the third quarter, we believe because of October golden week, we will also have some good effect from that. And in the fourth quarter, because of the lack of the summer holidays and those prolonged golden week effect, we expect the demand to come back to normal. We are still optimistic about the full year results. That’s why we still have 116% to 121% RevPAR improvement over 2019 for the full year.

The second question as to your cash allocation – capital allocation. Yes, we are also very, very happy to see that with the business recovery, our cash position improved significantly over 2022. So we will continue to monitor the business recovery speed and also the cash accumulation. In an appropriate time, we will also decide on a dividend policy as you mentioned.

Q – Simon Chen: [Foreign Language]

Operator: Thank you for the questions. One moment for the next question. Next question comes from the line of Dan Xi [ph] from Morgan Stanley. Your line is now open.

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

A – JIN Hui: [Interpreted] Yes, as I said in the previous statements, if you look at China’s economic reopening since then to now, it is less than one year’s time. And usually if you talk about the recovery of the global business travels, it takes a longer term. So I can say that the recovery of our RevPAR this year is really mostly attributable to the leisure travel market and the traditional summer holidays demand and the business and business related travel activities are still in gradual recovery.

Q – Unidentified Analyst: Thank you management for your answers.

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

Sijie Lin : So I have two questions. The first one is that we observed strong interest in becoming a hotel franchisee and where the supply of branded hotel grows fast, which leads to intensifying competition? And do we see the interest differentiate from different brands? So my second question is about the Southern China part. Among our new signings this year, how many of them are in Southern China and will we expect our penetration rates in the Southern China to see a significant increase? Thank you.

A – JIN Hui: [Interpreted] I will take the two questions. Yes, first on the ROI in the hospitality sector. Yes, because of the macroeconomic impacts, we can see that in the hospitality, the RevPAR recovery is now very good. Secondly, we can see that the real estate rental expenses are now in a very low position. So right now, it makes it a very good window to invest in the hospitality sector. But I must say, that for us to have such a very good signing, it is because the franchisors have seen the value of the H World brand has brought to them, which also of course underscores the brand premium, as well as our very strong market coverage. Second question on South China, I know that many of you are interested in our further penetration in the South China region, because this part of the region is a place with a very large population base and strong economic power.