H World Group Limited (HTHT) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to H World First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to the IR Director, Mr. Jason Chen. Please go ahead, sir.

Thank you. Good morning, and good evening, everyone. Thanks for joining us today. Welcome to H World Group 2023 First Quarter Earnings Conference Call. Joining us today is our Founder and Chairman, Mr. Qi Ji, our CEO, Mr. Jin Hui; our CFO, Ms. He Jihong; and our President, Mr. Liu Xinxin. Following their prepared remarks, management will be available to answer your questions. Before we continue, please note that 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 filings 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. Reconciliations 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, Ms. He Jihong for opening speech. Ms. He, please.

Good morning, and good evening, ladies and gentlemen. Thank you for joining our first quarter 2023 earnings call today. With the reopening in China, we have experienced a very positive growth in the first quarter 2023. Our franchisees are rebuilding their confidence and accelerated investment in new hotels. After COVID, we observed people in China are willing to spend more experience-related activities like travel, similar to what happened in the Rest of the World. In a nutshell, we had a very good start in this year, and we are very happy to report a strong performance in the first quarter 2023. Mr. Jin Hui, CEO of H World Group will highlight the key achievements in this quarter, followed by elaboration of financial performance. As always, we will have a Q&A session after management's presentation. With this, I now hand over to Mr. Jin Hui.

[Interpreted] Thank you, Jihong. Let's firstly turn to Page 3 to review our RevPAR recovery in the recent months. Overall, RevPAR has been trending up since the reopening in November last year. Our Legacy-Huazhu's blended RevPAR in January, February, March and April recovered to 96%, 140%, 120% and 127% of 2019 levels, respectively. The RevPAR recovery in the first quarter and especially in February was largely driven by the pent-up demand. While we are glad to see the strong rebound in traveling demand leading to a faster RevPAR recovery, we believe it is more important for us to continue enhancing our core competencies in order to achieve sustainable long-term RevPAR growth. Please turn to Page 4. We believe our sustainable long-term RevPAR growth will be driven by 3 key aspects. Firstly, our organizational restructuring and optimization. The establishment of our original headquarters enables more localized and efficient operations as well as achieving further market penetration and synergies in each region. Secondly, lower-tier cities in China still appear a plenty of growth opportunities, especially considering the local residents, rising spending power supported by high economic resilience. Thirdly, we will continue our efforts on further product and service upgrades and improvements in order to achieve a higher price premium. As we discussed in our last quarter's earnings call, the sustainable quality growth is our core strategic focus in 2023. Under this core strategy, we will focus on 3 key areas. First is on our high-quality hotel network expansion. Please turn to Page 5. In the first quarter, excluding the soft economic hotels, we signed up 672 new hotels during the quarter, up 26% year-over-year, which reflects our franchisees' confidence level is gradually improving in the first quarter. During the same period, we opened 262 new hotels, which was slightly down year-over-year mainly due to COVID impact. On the hotel closure front, we closed a total of 209 hotels in the first quarter including 122 inferior economic softer brands and hunting 1.0 version hotels to further improve the quality of our entire hotel portfolios. In addition, as we mentioned in our -- in the last quarter, some hotel closure processes were uncompleted in the fourth quarter 2022 due to COVID impact and therefore, were delayed to this year. Please turn to Page 6. We continued implementing our lower-tier cities' penetration strategy. As of March 2023, we have a total of 8,464 hotels in operation, of which 39% were in the lower-tier cities, up 2 percentage points year-over-year. And we have 2,304 hotels in the pipeline with lower-tier cities contributing around 56%, up 1 percentage point year-over-year. The number of city coverage for both hotels in operations and in pipeline increased to 1,132 cities compared to 1,089 cities 1 year ago. Our second strategy is to further breakthrough in the mid-scale and upper mid-scale segment. Please turn to Page 7 and Page 8. For our mid-scale segment, we launched Orange Hotel 3.0 version with the Orange color emphasizing the concept of Lojas, meaning lifestyle of health and sustainability. Orange 3.0 version brings together the healthy vitality and environmental sustainability. Every detail in the hotel conveys the idea of an environmental friendly and sustainable lifestyle. For example, every kind of material we used in hotel renovation and the consumable products we provided to our guests in the hotel room are all degradable and renewables. In summary, our new Orange Hotels 3.0 version expressed a positive and happy lifestyle and pursue the concept of green and environmental friendly. It provides a more energetic, sunny and fresh accommodation experiences to our customers. We believe our new Orange hotel is well positioned to meet younger customers demand on nice design, experiences and vitality and becomes a good complementary product to our Gee Hotel, and we believe the Orange brand should further enhance H World's competitiveness in the middle-scale hotel segment. Please turn to Page 9 and 10. For our upper mid-scale segment, we successfully introduced the Intercity brands to China. We recently opened 4 new Intercity hotels in Wuhan, Zhengzhou, Shenzhen and Shanghai. These brand openings are very important steps for Intercity's future scalable development in China. Intercity hotels in Germany, mainly target service business traveler who frequently travel between cities. The hotel development is closely aligned with the railway development process in Europe, covering major transportation hubs in Europe. In depth development in China market is always our key focus and introducing Intercity brands in China market well reflect -- well reflected. As our Chairman, Mr. Qi Ji once said, we are not simply to introduce the German brands to China instead we are interpreting the German brands in China. Therefore, Intercity brands in China not only integrate the European features but also conduct the local brand evolutions and observation on consumer behavior to refine the Intercity brand DNA, which is offering the ultimate business travel experiences from German features of efficiency, quality and effectiveness. In China, Intercity hotels will be mainly located in major commercial centers and transportation hubs. The theme color of the hotel room is black and white and gray. And the design is very simple but highly functional. With the Intercity brands, we aim to provide Chinese new generation business travelers a better experience with high-quality stay, workspace, service and food. Our third strategy is to further upgrade and strengthen our organizational and digitalized operational capability. Please turn to Page 11. We have always put great emphasis on membership program development and direct sales capabilities. We are very pleased to see our H World app and H World mini-program's daily active users in the first quarter of 2023 increased by 2x and 3x compared to the first quarter of 2019, respectively. In addition, our direct booking through our CRS system reached a record high of 62%, up 15 percentage points compared to the first quarter of 2019. It is worth noting that our CRS contribution includes booking through our own channels only and executing contribution from OTAs and other third-party distribution platforms. Here concludes our business review and update for the first quarter of 2023. With that, I will now turn the call over to our CFO, Ms. He Jihong, to discuss our financial performance for the quarter.

Thank you, Jin Hui. I'm now going to elaborate the key financial achievement in this quarter. Please turn to Page 13. Our hotel network continues to expand. In first quarter 2023, the number of rooms achieved 7% growth compared to the same period last year and stands at 820,099. Hotel turnover achieved a 71% growth compared to first quarter 2022 and stands at more than CNY 16 billion. Please turn to Page 14. Legacy-Huazhu blended revenue recovered to CNY 210. This is an 18% increase compared to the first quarter 2019 and 58% compared to first quarter 2022. The revenue growth, the RevPAR growth is largely driven by ADR increase, which shows a 25% compared to the first quarter 2019 and 24% compared to first quarter 2022. Our average occupancy rate stands at 76% in this quarter. Please turn to Page 15. The Legacy-DH blended revenue recovered to EUR 55. This is an increase of 66% compared to the first quarter 2022. The recovery is driven by both ADR and occupancy. As first quarter 2022, we still faced a quite heavy COVID impact in many countries where DH operates. Please turn to Page 16. H World revenue grew to CNY 4.48 billion in first quarter 2023. This is an increase of 67% compared to first quarter 2022, slightly above our guidance. Legacy-Huazhu revenue grew 58% year-on-year to CNY 3.59 billion, and the Legacy DH revenue grew 18% in the same period, achieving RMB 886 million. This reflects the RevPAR recovery trajectory, thanks to the reopening of China and the Rest of the World. Continued product upgrade as well as market penetration and synergy achieved through regional offices in China. Please turn to Page 17. Our operating income in the first quarter 2023 grew to CNY 664 million, compared to a loss of CNY 708 million in the first quarter 2022. Legacy-Huazhu achieved CNY 822 million, turning into positive territory compared to a loss of CNY 416 million in the first quarter 2022. Legacy-DH still made a loss in the first quarter 2023, but narrowed its loss by CNY 140 million compared to same period last year. As a group, we maintained total SG&A cost at 13.8% of our total revenue, with China at only about 12% in the first quarter. We are very disciplined about our SG&A cost as a percentage of our revenue, and it is under our close monitoring constantly. In Germany and European countries, we need to cope with costs in inflationary environment, which has some impact on our profitability. Please turn to Page 18. In the first quarter 2023, our adjusted EBITDA recovered to CNY 1.65 billion. This is a significant increase from negative CNY 333 in the first quarter 2022. This adjusted EBITDA includes around CNY 500 million gains from sales in Accor’'s shares in the first quarter. Adjusted net income was CNY 1 billion in this quarter compared to negative CNY 662 million in the same period last year. The strong EBITDA and the net income performance are mainly contributed by recovery of the Chinese business. Operating cash flow stands at CNY 1.84 billion, a strong increase compared to cash outflow in the same period last year. Please turn to Page 19. Our liquidity position is quite strong. As of 31st March 2023, we have a net cash of CNY 957 million. Our cash balance stands at CNY 10.4 billion, and we have unutilized the bank facility at CNY 2 billion. Please turn to next page. Our revenue guidance for second quarter 2023 is 51% to 55% growth compared to second quarter 2022. Excluding DH, the revenue of Legacy-Huazhu is projected at a growth rate of 64% to 68%. This implies our RevPAR guidance announced early this year remains unchanged. We are confident about the market recovery and the performance for the rest of this year.

Yes. Thanks, He Jihong. So now we can open for the Q&A session. Operator, please?

[Operator Instructions] Our first question comes from the line of Ronald Leung from Bank of America.

[Foreign Language] Let me ask my questions in English. My first question is what is management's expectation for RevPAR recovery in the second quarter? The second question is about the supply outlook for the hotel industry. The RevPAR recovery has been solid. Some franchisees, hotel owners are tending to reopen their hotels in the upcoming year. So do you expect the increase in the hotel supply will hurt the RevPAR recovery?

[Interpreted] Okay. So thank you. So firstly, I will answer the first question. So for the revenue guidance for the second quarter of this year, so it implies the RevPAR -- blended RevPAR recovery compared to the same period of 2019, which is in the range of 110% to 115%, which is in line with our annual guidance in terms of the RevPAR recovery. And for the second question, yes, for the first quarter, we are observing some of the supply gradually increase, but in a relatively slower paces. But given the recent macro conditions as well as the property market cyclical issues, we are not seeing a large increase in the supply, at least in the short term. Secondly, even though we are seeing some of the supply is gradually coming back into the market. But the clear trend is the branded hotel penetration or the churn ratio continuously improved and this has actually kept the main pieces of the market unchanged. And thirdly, in terms of the competition, we think the competition is always there, no matter before or post-COVID. But for us, we will continuously emphasize on building up our core competencies through improved branding products and service as well as our organizational capability to increase our entire competitiveness in the market. Thank you.

Our next question comes from the line of Sijie Lin from CICC.

[Foreign Language] So I'll translate my questions into English. So my first question is a follow-up question on RevPAR recovery. So do we think the current ADR-driven recovery is healthy and sustainable. And will the gap in OCC recovery, especially for business demand exists for long. And my second question is that what's the pace of hotel new signings and the franchisee sentiment in Q2 after they saw Q1's recovery.

[Interpreted] Okay. Now I will answer the first question in terms of the RevPAR. So clearly, RevPAR is a combination of the ADR and OCC. In terms of ADR undeniably in the first quarter, I think the RevPAR recovery was mainly driven by the ADR. And this is actually very much in line with the entire global launching market recovery post the COVID. And this somewhere reflects the higher spending capability as well as the impact of the inflation. But I think -- well, relatively, I think the ADR growth at this moment is still quite healthy. But again, we observed that, especially in the leisure market people are becoming more willing to pay a premium for good quality products and good services and this will support the ADR growth. In terms of the business traveling, yes, the demand for the business traveling still have some gap compared to pre-COVID. And according to some of the public study, we are expecting the business recovery -- business traveling will be fully recovered to the pre-COVID level in and around 2024. Therefore, as a group, we will be planning according to this trend. In terms of the franchisees' confidence, so after the 3 years of COVID, we think our existing franchisees are becoming more stable and more mature, and they have better knowledge in terms of the volatility and uncertainties. So we think they are very stable at this moment and the confidence is gradually improving as well. But we are also very happy to see, especially in the lower-tier cities market we have a lot of new franchisees joining us and those franchises might not be previously in the hotel industry. Some of them are the local property developers or some of them are from some other industries who are willing to join us.

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

[Foreign Language] I'm Lydia from Citi. So here, I have 2 questions. The first 1 is on your overseas business. So DH business actually is doing loss-making in first quarter. So I wanted to check with management your view on the DH earnings outlook for full year and also how to further narrow the loss and also any update on the integration of DH business? And my second question is on the RevPAR growth. So what's your view on your sustainable long-term RevPAR growth looking forward?

Okay. Thank you, This is Jihong. I'm going to answer your question. First about the DH business. First quarter, you see a loss is because of the seasonality we all understand that, especially European countries, the seasonality is quite strong and volatile. So in the first quarter, the revenue was lower due to the seasonality. And at the same time, the cost because also of the energy cost and an inflationary environment increased our cost. For the whole year, we are very confident that we will continue to increase our performance on the revenue side and continue to control our cost. And we are confident that for the whole year, our EBITDA will come back to the positive territory. And the second question regarding the RevPAR you can observe from the history of [indiscernible], we have been improving RevPAR year by year. This is not only the same store, but also the product upgrade and the product mix as well. And typically, companies RevPAR will grow with the economy -- economic growth as well. So for the past several years, and we are confident that with -- in the future, our RevPAR will continue to grow with the bigger economic environment.

Our next question comes from the line of Lina Yan from HSBC.

[Foreign Language] Yes, I will translate my question myself. So first question is on the RevPAR drivers especially on the pricing power for the ADR. So we have seen very strong ADR increase in first quarter driven by inelastic demand. But going forward, we will see the supply-demand gap to narrow. And also the spending power is not as strong as the economy has shown. So also management guided RevPAR in the second quarter will be 110% and 115% of 2019 level. Does that imply management also see like a weakening trend in ADR? Or what kind of change in the mentality of the ADR trend going forward? And second question is on the impact of portfolio upgrade on RevPAR. Management mentioned it like a key driver for RevPAR as well. So can you quantify the impact, for example, like the percentage of like hotels upgraded in our portfolio versus 2019. And what is the impact to the RevPAR growth versus 2019? Third question is you commented the business travel hasn't recovered to 2019 level. But can you give us more details on the like a recovery in business travel, like even year-on-year or versus 2019? Yes, that's my question.

[Interpreted] Okay. Thanks for your questions. So yes, we understand that quite a lot of you are concerning about the RevPAR and the ADR. So that's why I would like to elaborate a bit more details and express and emphasize on our views again by taking these opportunities. So for us, since the year beginning, during our budgeting process and during our first -- during our annual -- last year earnings conference call. So our views keeps with the cautiously optimistic, unchanged. And I hope you can understand this. So our view has been no change since then. And in terms of the RevPAR and ADR, I think it is a quite complex combination, especially for us. And talking about the China market, we have the lower-tier cities, we have the leisure market. We have the upper scale, we have the upper mid and middle scale. It's a very diversified market. Undeniably talking about the business traveling given the impact of the economic cycle and some of the business traveling demand are not fully coming back yet, but we do see a lot of local demand, especially from the leisure traveling demand side. It's quite strong since the year beginning to now. And you can also realize that a lot of activities happen in here and there, such as the barbecue events in Zibo city and the [indiscernible] which is also supported by the government on the leisure traveling activities. And another front is, if you're looking at until recovery in April, we observed that online business actually is not fully recovered. But if you're looking at the railway I think they very much well recovered or even exceeded the 2019 level, supporting quite strong traveling demand as well. And for us, again, in terms of the long-term sustainable RevPAR growth, we are still concentrating on building our core competencies through branding products and services. And we have different product mix, and we also not only the upper mid-scale, but also the lower-tier cities penetration. And it's a very complex combination for us. So if you remember like maybe 2 years ago, you asked us whether your lower-tier cities penetration will negatively affected our RevPAR growth in the future. So that's why given we are doing a lot of developments in China, not only the lower-tier cities, but also the upper, mid and upscale. So I think that's quite very complicated and it's very difficult to us to predict give a very accurate guidance at this moment. Yes. So because China experienced 3 years of COVID, so obviously, at the initial reopening, especially in the first quarter, definitely, there are some -- a lot of pending demand. People are keen to traveling and keen to go outside and the businessmen and the franchisees are keen to resume the business as quick as possible. So definitely, the confidence and the consumption power at this moment was quite strong. And the recent basically the some of the gap or some of the slight slowdown recently. We think it's quite normal if you compare it to the global market. Because we traveled quite a lot to Europe. If you see the Europe recovery currently, it's not as strong as before, and especially considering China experienced the 3 years of COVID, but I think Europe market experienced only 1.5 years. So we think we should give the market a bit patient -- patience in terms of the sustainable recovery going forward. As Jin Hui mentioned before, so we observed actually the airline -- the occupancy rates for the airline is not recovering to the pre-COVID level, but the railway station is performing very -- railway business is recovering very well, and we're still seeing a lot of traveling demand here and there. And we didn't see any statistic on the self-driving traveling activities, but we strongly believe it should be quite strong. So therefore, no matter during the COVID or post-COVID, we're still seeing the people are keen to traveling around no matter on the leisure or business side. And in longer term, we think the hotels with relatively lower price will be more resilient no matter during COVID or financial crisis or any other crisis conditions. So basically, talking about the, like, for example, the economic segment will be more resilient compared to the upscale. And the recent consumption trend was very interesting taking the barbecue events in Zibo as an example. We observed that people are generally wants to spend a little bit of money and to buy a big happiness and people who are willing to spend big chunk of money at this condition -- under this condition are not very, very high. And therefore, we think the upscale segment will be taking even longer time to recover. For us, we are not only caring about ADR, we care more on building up core competencies and the entire ecosystem, and we want to provide the benefit to all our partners, no matter our customers and franchisees in our ecosystem and everyone will be getting benefited. So we think we should be a little bit patient for the long-term growth potential for the entire launching market. And we are not only striving to increased ADR and -- because it is also a very difficult expect ADR or predict the ADR trends in the future because there is a lot of factors kind of affected ADR movements.

Our next question comes from the line of from Xin Mei Huatai.

[Foreign Language] Can you explain how the organization structure support the development of the new brands such as Orange 3.0, Orange Crystal, Intercity. Are there any problems in the operation of these organizational structure and how can the management fulfill.

[Interpreted] Thanks for your questions. I'm very glad you asked about our organizational restructuring. So firstly, I would like to classify -- clarify our -- it is just 1 year since we conducted our organizational restructuring since last year. So I would elaborate more on the purpose of building up the 6 regional headquarters. So as you may know that 1 of our core strategy is to fully penetrating in China market in the limited service segment together with our sustainable quality growth strategy. So by doing this -- by setting up these 6 regional headquarters, we are very happy to see a very initial good outcomes over the last year. The regional headquarters are more close to our franchisees and customers and achieving a higher operational optimization as well as the synergy. And in talking about the upper mid segment, so basically the up mid segment or up mid brand are still using the vertical organizational structure. But the regional headquarters will help or support the upper mid segment in terms of the development but the management will be remained within each of the brands and in the headquarter. If you're talking about some of the challenges or -- and talking about some challenges, currently, we still think -- I think in terms of the talent reserve, it's not still enough, but we think it's going to take some to further building it up.

Thank you. I'm showing no further questions. I'll now turn the conference back to the management team for closing remarks.

Thank you, everyone, for taking your time with us today, and we look forward to see you in the upcoming quarter. Thank you. Bye-bye.

This concludes today's conference call. Thank you for participating. You may now disconnect. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]