Atour Lifestyle Holdings Limited (ATAT) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to Atour Lifestyle Holdings Second Quarter 2023 Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Alison Zhang, Director of Investor Relations. Please go ahead, ma'am.

Thank you, operator. Good morning and good evening, everyone. Welcome to our second quarter 2023 earnings call. Joining us today are our Founder, Chairman and CEO, Mr. Wang Haijun; and our Co-Chief Financial Officers, Mr. Wang Shoudong; and Mr. Wu Jianfeng. Before we continue, please be aware that today's discussion will include forward-looking statements under federal securities laws. These statements are subject to various risks and uncertainties, and actual results may differ significantly from what is stated or implied in our comments today. The company is not obligated to update any forward-looking statements except as required by applicable laws. Additionally, during this call, our management will discuss certain non-GAAP financial measures solely for comparison purposes. For a clear understanding of these measures and the reconciliation of GAAP to non-GAAP financial results, please refer to earnings release issued earlier today. Furthermore, a webcast replay of this conference call will be available on our website at ir.yaduo.com. Now I will turn the call over to Mr. Wang, our CEO.

[Foreign Language] Thank you, Alison. Hello, everyone, and thank you for joining Atour's second Quarter 2023 earnings call today. [Foreign Language] We are thrilled to report another strong quarter, benefiting from the robust ongoing recovery trend since the beginning of this year. During the second quarter, we achieved a remarkable growth and breakthroughs in both our hotel and retail businesses. Our passion for programs and the dedication to providing customers with exceptional experiences continue to differentiate Atour and magnify our vintages, further enhancing our brand awareness and influence. As we look ahead to 2023, we are confident that our core value proposition and commitment to establishing the Chinese experience as the industry benchmark will continue to drive our sustainable growth. Additionally, we are steadily executing a plan to grow our portfolio to 2,000 premium hotels nationwide by 2025, which will propel further prosperity across our business. [Foreign Language] Now I would like to discuss our performance in detail across our business lines. [Foreign Language] Let's begin with our hotel business. In the second quarter, the continued recovery in both business and leisure travel stimulated a rapid increase in accommodation demand. Leveraging our optimized customer channel and strong operational capabilities, we achieved a robust growth in our hotel business during the quarter. Our RevPAR recovered to 115% of 2019's level with April, May and June, reaching 120%, 180% and 117%, respectively. Both ADR and OCC fully recovered and continued to surpass 2019's level this quarter. Furthermore, our mature hotels in operation for more than 18 months continues to outperform with same-hotel RevPAR recovering to 114% of 2019's level in the second quarter. This was largely in line with the overall performance of our hotel business, illustrating our products enduring competitiveness over a longer life cycle compared with that of the broader industry. [Foreign Language] Thanks to our signature experience combining warmth, comfort and ease, we garnered wide recognition from business travelers, who have always been highly engaged with Atour. Meanwhile, we were pleased to see that our exceptional experience continues to attract the attention and the price of more leisure travelers. In July, our ADR exceeded RMB 500, and OCC surpassed 84%, each reaching a monthly all-time record high and together driving RevPAR up to 122% of this level in the same period of 2019. The comprehensive recovery in room rate and occupancy further underpins our ability to drive high-quality sustainable growth over the long run. And we are confident of delivering strong results in the upcoming third quarter. [Foreign Language] We also made solid progress with respect to network expansion during the second quarter as market demand trended positively, enhancing franchisees' confidence and encouraging them to engage more deeply with us. During the quarter, we celebrated 70 new openings and signed a quarterly record high of over 180 new hotels. As of June 30, we had 523 hotels in our pipeline, representing a year-over-year increase of over 50%, and forming a solid foundation to support our mid-term goal of having 2,000 premium hotels by 2025. [Foreign Language] With respect to our hotel product offerings, we initiated an upgrade plan for our mid-scale brand and launched Atour Light 3.0 version in February this year. Atour Light 3.0 is uniquely positioned to cater to young urban business travelers, who seek quality services and exceptional experiences. With the stylish fashionable and trendy design as well as its differentiated market positioning and competitive investment return, Atour Light 3.0 attracted franchisees recognition shortly after its launch. We signed 30 Atour Light 3.0 projects in the second quarter, accounting for over 15% of the quarter's total signings. Following the gradual openings of our first batch of Atour Light 3.0 hotels since late June, the hotel brand made a comprehensive breakthrough across the mid-scale market, as they quickly gained popularity among young customers and realized rapid operational growth. Atour Light 3.0 precisely captures young customers' aesthetic preferences and caters to their demand for high-quality experiences, creating a brand-new experience for the Gen Z+ demographic in the mid-scale hotel market, while enhancing its brand recognition and value proposition. We believe Atour Light has great potential to become our second brand to reach the 1,000-hotel milestone given its strong product competitiveness and widespread market recognition. [Foreign Language] Following Atour Light 3.0 successful debut, we are proactively developing the next-generation product for our flagship Atour brand in Shanghai. We expect to introduce this product to the market by the end of this year. [Foreign Language] Before I move on from hotels, I would like to touch on our APLUS offerings for A-Card loyalty members. At Atour, customer experience has always been the core competitive advantage that sets us apart from our competitors. We continue to redefine the ultimate in customer experiences through our APLUS offerings, which in turn promotes healthy and sustainable growth in our member base. For example, if a customer chooses the pillow selection service from the APLUS menu at the time of booking, they will receive a cozy, superior sleep experience with our self-developed deep sleep pillow. To date, we have carefully selected and designed over 20 APLUS services for our A-Card members, and we are witnessing an increasing adoption rate. Going forward, we will advance our APLUS product development with practical warm and congenial experiences in mind as we identify customers' real demand and provide them with innovative offerings, which are standardized, yet personalized to ensure an exceptional experience during their stay at Atour properties and beyond. [Foreign Language] Our commitment to continuous innovation and consistent delivery of elevated experiences resulted in healthy growth across our membership base. By the end of the second quarter, over 44 million individual members have joined the A-Card membership program. Our ongoing efforts to optimize customer channels alongside a rising number of both individual and corporate members propelled an increase in the percentage of room nights sold through our CRS, which reached 63% in the second quarter. [Foreign Language] Moving to our scenario-based retail business. We achieved another strong quarter with GMV increasing almost 3x year-over-year to RMB 267 million. Our sleep brand, our aTOUR Planet in particular, demonstrated extraordinary performance, contributing nearly 90% of our total GMV in the second quarter. Total GMV, including both online and off-line sales during the June 18th shopping festival surpassed RMB 130 million. [Foreign Language] Today, we have more than 1,000 hotels encompassing 120,000 rooms within our hotel network. Each hotel represents an exhibition hall for our retail products, while each room functions as an immersive shopping destination for our hotel customers. Their feedback enables us to continuously and organically explore customers' ever-evolving demands and expand our retail product categories accordingly. This, in turn, empowers us to extend our exceptional lifestyle experience beyond accommodation to serve more people. Our commitment to continuous product refinement in pursuit of a truly superior sleep experience has made the aTOUR Planet deep sleep pillow, a blockbuster product. During the June 18th shopping festival, aTOUR Planet topped the best-selling pillow brand with total sales of 220,000 units across multiple mainstream e-commerce platforms. Furthermore, in March 2023, we launched aTOUR Planet new products the Summer Cool Quilt, which has already demonstrated promising growth momentum. [Foreign Language] Going forward, we will invest further and expand our penetration in the field of deep sleep as we continue to leverage big data and customer feedback to advance product development and broaden our offering categories. [Foreign Language] 2023 is a special year for Atour as it not only marks the commencement of the post-pandemic era, but also the 10th anniversary of our company. When we first set foot in Yaduo village 10 years ago, we were instantly capsulated by its natural beauty, piece, warmth and purity, which subsequently inspired us to choose the name Atour. Over the past 10 years, our focus has been on providing more than just a comfortable place to stay. We generally care about each and every one of our customers, and we strive to ensure that every aspect of their stay with us is exceptional. We are committed to incorporating the essence of the Chinese experience into all of our services. From the moment customers check-in through the moment they depart in each of our 1,000-plus hotels. Our faith in the vision of Yaduo Village has guided us throughout our journey as we extended our footprint across 176 cities nationwide. While we provide customers with premium offerings and exceptional experiences, we also share Yaduo Village's fragrance special tea as well as its warmth and piece with travelers, creating an intimate ambience where people can warmly connect. [Foreign Language] Before I wrap up, I would like to take this opportunity to welcome our new Co-CFO, Mr. Wu Jianfeng. He will mainly be responsible for overseeing the company's capital market matters, including investor relations and financing management as well as providing administrative and other support to the Board and assisting in daily operations. I believe his distinguished leadership skills and extensive experience in the capital markets will play an essential role in the company's long-term sustainable growth as we progress towards our next phase of development. [Foreign Language] Now I'll turn the call over to our Co-CFO, Mr. Wu Jianfeng, to discuss our financial results.

Thank you, Haijun. Good evening, and good morning, everyone. Now I would like to present the company's financial performance for the second quarter of 2023. 2023 -- our net revenue for the second quarter of 2023 grew by 112.3% year-over-year and 41.2% quarter-over-quarter to RMB 1,093 million. The strong increase in the second quarter was driven by the robust growth in both our hotel and scenario-based retail businesses. Revenues from our manachised hotels for the second quarter of 2023 were RMB 626 million, up by 112.3% year-over-year and 40.2% quarter-over-quarter. This increase was primarily driven by the ongoing expansion of our hotel network and the increase in RevPAR. The total number of manachised hotels increased to 1,001 as of June 30, 2023, up by 25.0% year-over-year and 7.1% quarter-over-quarter, while RevPAR recovered to RMB 377 for the second quarter. Revenues contributed by our leased hotels for the second quarter of 2023 were RMB 220 million, representing an increase of 53.6% year-over-year and 17.2% quarter-over-quarter. The increase was primarily due to the rebound in RevPAR, driven by recovering customer traffic and stronger customer sentiment since the beginning of 2023. RevPAR of our leased hotels recovered to RMB 537 for the second quarter. Revenues from retail and others for the second quarter of 2023 increased by 222.2% year-over-year and 76.4% quarter-over-quarter to RMB 247 million, with scenario-based retail revenues growing by 297.8% year-over-year to RMB 212 million. These increases were attributable to ongoing efforts to tap into ever-changing customer needs as well as data-driven product development, which enables us to consistently launch sleep products favored by users. In addition, we continue to leverage both online and off-line channels, expanding our customer base and enhancing our brand recognition. Now let's move to costs and expenses. Our hotel operating costs for the second quarter of 2023 increased by 56.7% year-over-year to RMB 510 million, mainly due to the increase in variable costs, such as supply chain costs associated with the ongoing expansion of our hotel network. Hotel operating costs accounted for 60.2% of total hotel revenues for the second quarter of 2023 compared with 74% -- 74.2% for the same period of 2022. The decrease was due to the robust recovery of RevPAR and the economics of scale brought by our rapid network expansion, which led to a significant increase in the gross profit margin of the hotel business. Other operating costs for the second quarter of 2023 were RMB 121 million, representing an increase of 189.9% year-over-year, driven by increased costs in line with the rapid growth of our scenario-based retail business. Other operating costs accounted for 49.0% of retail revenues and others for the second quarter of 2023 compared with 54.4% for the same period of 2022. The decrease was attributable to the improving profitability of our retail business. Selling and marketing expenses for the second quarter of 2023 increased by 197.3% year-over-year to RMB 94 million. Selling and marketing expenses accounted for 8.6% of net revenues from the second -- for the second quarter of 2023 compared with 6.2% for the same period of 2022, primarily driven by the increased investment in branding initiatives and rapid growth of the scenario-based retail business through online channels. General and administrative expenses for the second quarter of 2023 were RMB 73 million. Excluding share-based compensation expenses of RMB 9 million, adjusted general and administrative expenses increased by 54% year-over-year to RMB 64 million for the second quarter. General and administrative expenses excluding the impact from share-based compensation expenses accounted for 5.9% of net revenues for the second quarter of 2023 compared with 8.1% for the same period of 2022. Our technology and development expenses for the second quarter of 2023 were RMB 18 million compared with RMB 16 million for the same period of 2022. And adjusted EBITDA for the second quarter of 2023 was RMB 344 million, up by 232.4% year-over-year. Adjusted net income for the second quarter increased by 312.9% year-over-year to RMB 249 million. Adjusted profit margin for the second quarter of 2023 was 22.8%, increasing by 11 percentage points year-over-year. The significant increase in gross profit margin in both our hotel and scenario-based retail businesses, along with our optimized -- optimizing operating leverage led to an improvement in the group's overall net profit margin. Notably, we have maintained a healthy cash position with a stable growth momentum. As of June 30, 2023, our cash and cash equivalents totaled RMB 2.53 billion. Among them, net cash was RMB 2.46 billion, representing an increase of 39.4% quarter-over-quarter. Also, we declared a cash dividend of USD 0.05 per ordinary share today of USD 0.15 per ADS. The total amount of cash to be distributed for the dividend is expected to be across at USD 21 million. That concludes our financial highlights for the second quarter of 2023. With that, let's open for Q&A.

[Operator Instructions] Our first question comes from the line of Sijie Lin from CICC.

[Foreign Language] So I have a question on RevPAR. What's the trend of RevPAR recovery during the summer vacation, and then how do we expect the RevPAR recovery rate in Q3? Will we adjust full year guidance?

[Foreign Language] Thank you very much for your question, Ms. Lin. The demand in summer this year was very strong. The summer traffic started earlier when compared to previous years. Also, the increase in traffic this year was clearly visible even in the first week of July, while in previous years, those were more of a trend of gradual growth. In July, our ADR has exceeded RMB 500, and our OCC exceeded 84%, both of which were monthly all-time highs and the RevPAR rebounded 122% compared to the same period of 2019. This overall increase in both our ADR and OCC demonstrates our capacity to maintain long-term sustainable and high-quality growth. [Foreign Language] Based on this summer's good performance and Atour's advantages as we consolidate our foundation of our competitive advantage being the preferred brand for business travelers, we expect a good RevPAR performance for the full year. The full year RevPAR recovery is expected range of 113% to 117%. Thank you very much, Sijie, for your question.

Let's have our next question please.

Our next question comes from the line of Ronald Leung from Bank of America.

[Foreign Language] I will ask my question in English. Management just mentioned that the RevPAR guidance for fiscal year that has been uplifted to 113% to 117%. May I ask what is the latest expecting for the full year revenue and profit?

[Foreign Language] Thank you very much, Ronald, for your question. Just now, we said that our full year RevPAR recovery is expected to reach 113% to 117% and in terms of revenue, we expect a Y-o-Y growth, year-over-year growth of 72% to 76%, of which retail revenues are expected to be able to reach [ RMB 650 million ] to [ RMB 700 million ]. With our continued expansion of the hotel network, the gradual release of our scale effects and the continuous development of our retail business, we expect profitability to continue to improve. Thank you very much, Ronald.

Let's have next question please.

Our next question comes from the line of Lydia Ling from Citi.

[Foreign Language] So I want to ask about the expansion. So based on the year-to-date expansion, so are you going to adjust your full year opening target. And also, we saw very encouraging improvement in the new signs in the first half. So any guidance for the second half?

[Foreign Language] Thank you very much, Lydia, for your question. Our new hotel openings in the first quarter this year was affected by last year's epidemic and the Spring Festival holiday. We opened 70 new hotels in the second quarter, showing clear acceleration when compared with the first quarter. In the second half of the year, we will continue to maintain the rhythm of active new hotel, maintaining the annual opening target of 280. [Foreign Language] In first quarter this year, we signed 94 projects. And in our second quarter, we signed a record high of more than 180 projects. The record growth in signings reflected the restoration of the franchisees' confidence in us and also the recognition of Atour's 3 high strategy namely high-quality, high-value and high efficiency as well as our operational model. [Foreign Language] We expect the signings to continue to perform well in the second half of the year, while we would strive for better quality on the basis of the first half year's growing trend. This year, our pipeline can provide solid foundation for our goal of having 2,000 premium hotels by 2025. Thanks, Lydia.

Let's invite our next question.

Our next question comes from [indiscernible] from Citics.

[Foreign Language] I repeat my question. Could you tell us more about Atour Light 3.0 such as the brand provisioning and on the one page in the mid-scale hotel industry besides can you share the performance of the stores after opening?

[Foreign Language] Thank you very much, [ Tiwai ], for your question. Atour Light 3.0 was officially launched on February 22 and is our group's mid-scale brands, uniquely catering to young urban business travelers. We launched Atour Light 3.0 at this time, mainly due to 2 great opportunities we saw. One was that the significant mismatch between the existing hotel products in the mid-scale market and the customer demand. As we saw, the young business travelers have got increasing demand for high-quality accommodation experiences. And the other was the opportunity to upgrade those properties in the core business districts. There will be more properties in that kind of hot areas suitable for Atour Light in the future. [Foreign Language] Our Atour Light 3.0 with its fashionable stylish and trendy design and the quality service experience up to Atour standard has won a good user reputation upon its launch. Up to now, we have had 4 Atour Light 3.0 hotels open, in which 3 hotels had reached the full occupancy within a week of opening. With that significantly shortened ramping-up period, it was a very decent performance. [Foreign Language] Meanwhile, the leading RevPAR performance among others in the same business districts, greatly enhanced the investment confidence of those franchisees and has been proven to be a very competitive product in the current mid-scale hotel market. As of June 30, we have signed a total of 46 Atour Light 3.0 projects. And by 2025, we plan to open 250 to 300 Atour Light hotels. Thank you,[ Tiwai ].

Please invite next question.

Our next question comes from Kewei Chen from Haitong International.

[Foreign Language] I'm going to translate myself. We noticed the Retail segment booked rapid growth. Could you please can really share with us some advantages of the business? And what's the driver behind the growth? And also what's the current profitability of the Retail segment? And do you have any expectation on the scale of the Retail segment in the next few years?

[Foreign Language] Thank you, Kewei, for your question. Atour is positioned as a lodging-centric lifestyle brand, and our retail business is the first extension we explore to serve more people. Relying on our hotel teams and the real user experiences, the sleep products we developed have been led by a large number of customers and have gradually expanded from [ sleep ] users, who stayed in our hotels to a wider group of consumers, gradually winning consumers' minds when it comes to the concept of deep sleeps. And our products have achieved a very good sales results on multiple e-commerce platforms. [Foreign Language] Our continuously improving branding awareness, together with the product power growth based on our understanding of the consumers and our R&D innovation, plus they synchronize the drive of online and offline channels, and the interactive integration with our hotel business have jointly brought about the rapid development of our retail business and shaped towards unique advantages in that. [Foreign Language] We expect our retail business revenue to reach RMB 650 million to RMB 700 million in 2023, with a year-over-year growth of 150%, making it the second growth engine of our group, also demonstrating a further step towards Atour's vision of being a leading lifestyle brand group. Thank you.

Please have next question.

Our next question comes from Xin Chen from UBS.

[Foreign Language]

Thank you for your question. This is the first dividend declared in our history in the past 10 years, and also, this is the first dividend declared in -- after our IPO last year. So we have considered several factors to determine the amount of this dividend, including our cash position. You may notice that we have 2.5 billion cash as of 30, 2023, and the amount of this dividend accounts for approximately 6% of our cash position. And we also take into account a consideration of our accumulated profit in the previous year, and the overall business situation and our future demand in capital. So we hope to express our gratitude to the shareholders for their long-term support. So going forward, in terms of our future dividend plan, we also consider various factors, including our cash position, our future capital needs. We will also make reference to the market practice or the industry practice and also can study market condition to determine our future dividend. Thank you.

And that concludes the question-and-answer session. I would like to turn the conference back to Alison Zhang for any additional or closing comments.

Thank you once again for joining us today. If you have any further questions, please feel free to contact our Investor Relations team. We look forward to speaking with you again next quarter. Thank you, and goodbye.

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