H World Group Limited ($HTHT)

Good day, and thank you for standing by. Welcome to H World First Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'll now hand the conference over to your first speaker today, Ms. Ivy Luo, Head of Investor Relations. Please go ahead.

Thank you, operator. Good morning and good evening, everyone. Thanks for joining us today. Welcome to H World's First Quarter 2026 Earnings Conference Call. Joining us today is our Founder and Executive Chairman, Mr. Ji Qi; our CEO, Mr. Jin Hui; our CFO, Mr. Arthur Yu, our COO, Mr. Chen Hui; and our CFO, Ms. Junrui Yu. Following our 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 filings with the SEC. H World Group does not undertake any obligation 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. Reconciliation of those measures to comparable GAAP information can be found in our earnings release that was distributed early today. 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 CEO, Mr. Jin Hui to discuss our business performance in the first quarter of 2026. Mr. Jin, please.

[Interpreted] Dear investors and analysts, good day. Thank you for joining H World's First Quarter 2026 Earnings Call. In 2026, China's domestic traveled demand in the solid momentum. The overall railway in aviation cross-region traffic, number of trips as well as tourism spending rose steadily. We also saw several regions rolling out spring breaks this year. Those spring breaks right before or after Qingming Festival and May Day holidays enable Chinese consumers to enjoy 5 to 8 days of vacation, which effectively help balancing our passenger flows in between peak and off-peak periods. Meanwhile, a further step-up in the implementation of visa-free policy has fueled the continued growth of inbound tourism which serve as an additional growth engine of China's hospitality industry. We think structurally, there is still a mismatch between the hotel supply and the consumer demand in China. Therefore, pushing forward supply side reform and hotel network optimization will remain a key strategic world. This is closely aligned with the 15th Five-Year Plan guideline on deepening supply-side structural reform and revitalizing existing resources. Meanwhile, backed by our strong brand reputation, proven operational expertise and digitalization advantages, we aim to further expand our market share, deliver sustainable, high-quality growth and fulfill our mission of redo China's Hotel Industry. As we enter 2026, H World remains committed to brand-led quality development, and we achieved solid business results across network expansion, brand building, membership ecosystem development and profitability. By breaking through into new cities and regions and deepening penetration in the lower-tier cities, we delivered another quarter of strong network expansion, driven by a 14.1% year-over-year increase in the number of rooms in operations, our group hotel GMV grew 17.4% year-over-year to RMB 26.4 billion. Night booked by members increased 10.7% year-over-year to 60 million. Our asset-light monetized and franchise business registered another quarter of solid growth in its hotel network revenue as well as profit. Our first quarter '26 group M&F revenue rose 20.3% year-over-year to RMB 3.0 billion, and group M&F gross operating profit increased by 20.7% year-over-year to RMB 1.9 billion. As market competition became more rational and healthier, H World China achieved 4.5% year-over-year increase in ADR, which was also supported by our continuous product upgrades and revenue management optimization. The ADR expansion drove a 3.0% year-over-year growth in the blended RevPAR, which represents a sequential improvement from the fourth quarter 2025. We remain focused on serving the mass market using our economy and midscale hotels and solidifying the competencies of our core brands. The continuous upgrade of HanTing and JI Hotel, together with the launch of Hi Inn have further strengthened our competitiveness in the economy and midscale hotel market, reinforcing H World's absolute leadership in China's mass market hospitality segment. We steadily expect hotel network and enhancing geographic coverage. By the end of first quarter, HWC hotel operation totaled 13,095 and we have another 2,865 hotels in the pipeline. Our city coverage increased to 1,461 cities across China. We are moving steadily towards our strategic goal of 2,000 cities, 20,000 hotels. While expanding into lower-tier cities, we are also optimizing and refining our hotel portfolio in the Tier 1 and 2 cities especially in those core business districts in the top-tier cities. We believe our premium product quality and the strong brand power will enable us to recapture opportunities in the mature Tier 1, 2 cities market. Aside from strengthening our core mass market brands and optimizing hotel coverage, we are also making steady headway in the upper midscale segment. We are adopting our multi-brand strategy with clear brand positioning and value propositions, we are steadily pushing forward the development of our 4 key upper-midscale brands, namely Intercity, Grand Ji, Crystal and Mercure. At the end of first quarter, the number of our upper-midscale hotels in operation and in pipeline reached 1,658, up 14.4% year-over-year. We always insist on strengthening our direct sales capability through H-Reward membership program which we believe is vital to our sustainable long-term development. As our hotel network covers more cities, our membership base and room night booked by members also achieved robust growth. Going forward, we will further strengthen brand building, diversified customer acquisition scenarios and enhanced member benefits and member stickiness. To better and more accurately reflect our future development prospects, we have adopted the new HWC and HWI disclosure framework and terminology beginning this quarter, where the economy HWC refers to our operations inside China and HWI includes all overseas hotel business covering Legacy-DH as well as our APAC business. Now let's go over the operational performance of our HWI business. In the first quarter 2026, HWI achieved a 5.0% year-over-year increase in RevPAR driven by a 1.6% increase in ADR and 2.1% improvement in occupancy rate. As you may have noticed, aside from our DH business, H World International has also made initial progress and breakthroughs in the Asia Pacific market. Leveraging the development opportunities under the belt and road initiatives, that we are accelerating our strategic layout across APAC. With Singapore assets operational hub, HWI is expanding its footprint into key Southeast Asian market, including Vientiane, Laos, and Cambodia. To date, we have opened 6 hotels across Southeast Asia. By rolling out brand ranging from HanTing, JI Hotel, Intercity and MAXX, we have built covering economy, midscale and upper midscale segments, tapering to diverse get travel needs. We opened our first overseas HanTing Hotel in late 2025, featuring our latest HanTing 4.0 version, the hotel seems in the very prime center business district of Ho Chi Minh City, Vietnam. The hotel posted strong operational results with nearly RMB 500 RevPAR in the third quarter. It's also worth mentioning that this property was invested by one of our large domestic franchisees, which shows our franchisee acknowledgment and confidence in our brand power and operational capabilities. This quarter, our first overseas JI 5.0 officially opened in Vientiane, the capital of Laos, located in a prime area of the city, the hotel continues the signature design language rooted in Eastern culture, representing the overseas expansion of one of H World's Eastern culture brand. We believe our standardized branded hotel products, systematic and digitalized operation capabilities and supply chain advantages will enable us to empower our overseas hotels. Moving forward, we aim to build solid brand influence in Asia Pacific region, while accumulating local operational expertise in the Southeast Asian market. This concludes the business update for the first quarter of 2026. I will now hand over the call to our CFO, Ms. Arthur Yu for financial performance for the quarter.

Thank you, Jin Hui. Good evening and good morning to everyone. Before we get into the details of our quarterly financial performance, I'd like to quickly highlight one accounting update first. Starting this quarter, we have renamed our operating segments to HWC and HWI, replacing the previous Legacy-Huazhu and Legacy-DH segment. Additionally, we made a minor business realignment between HWC and HWI effective 2026. For consistency and comparability, we have restated prior period figures to align with our current segment presentation. Now let's walk through our quarter 1 financial highlights. Group revenue grew 11.1% year-over-year to RMB 6.0 billion. Within this, HWC revenue increased 12.4% year-over-year to RMB 5.0 billion, primarily driven by steady hotel network expansion and continued RevPAR recovery. HWI revenue rose 5.1% year-over-year in quarter 1, 2026, partially benefited by favorable foreign exchange rate. On profitability, group adjusted EBITDA was up 24.2% year-over-year to RMB 1.9 billion, with the margin expanding 3.3 percentage points year-over-year to 31.0%. The strong EBITDA growth and margin improvement were mainly attributable to a growing profit contribution from our asset-light business. Adjusted net income grew 38.6% year-over-year to RMB 1.1 billion with the adjusted net income margin improving 3.5 percentage points to 17.9%. Next, on our asset-light M&F business, supported by ongoing high-quality asset-light network expansion and improved RevPAR performance. Our M&F business revenue grew a solid 20.3% year-over-year, increased 20.7% year-over-year to RMB 1.9 billion with a growth operating margin of 63.3% for the quarter. Let's now turn to our cash flow and liquidity position. We generated RMB 233 million in operating cash flow during quarter 1. As of quarter end, the group holds RMB 15.8 billion in cash and cash equivalents, with a net cash position of RMB 9.6 billion on our balance sheet. Our healthy operating cash flow and strong balance sheet provides solid support for future shareholder return arrangements. This concludes our financial review for the first quarter of 2026.

We are ready to take your questions. Operator, please open the line for Q&A.

[Operator Instructions] We will now take our first question from the line of Dan Chee of Morgan Stanley.

[Interpreted] This is Dan from Morgan Stanley. Congratulations on another quarter of strong profit growth. My question is around recent demand and RevPAR trend. First quarter RevPAR for sequential improvement. And Mr. Jin mentioned about the demand balance during the Qingming and also May spring holiday, and several holidays in Q2. So can management share more color, especially on business demand and any impact from energy cost increase? Lastly, any comments on the occupancy stabilization?

[Interpreted] So after reopening, we actually see that for the leisure travel demand, it still has been growing steadily. A couple of reasons behind. I think one is that after reopening the leisure travel and exponential experience behavior is becoming a necessity to Chinese consumers. Secondly, we are also seeing government pushing our supportive policies such as the one that I mentioned during my prepared remarks, the spring breaks that was rolled out in multiple regions and cities this year. Certainly, we're also seeing a rising demand or an increase in the overall inbound tourism, which is an additional growth driver to overall leisure travel market. Overall, we are seeing that in terms of the number of trips, it is growing steadily after reopening. But probably because of the consumption power, we still see some fluctuations in the overall spending. But to conclude, we do believe that overall leisure travel is still growing steadily. The rising energy costs, we haven't been observing any impact on the overall travel demand because of the rising energy costs. We think partially, this is also because the popular new energy vehicle in China. So that is also why for the full-year 2026, we still maintain our full year RevPAR back half guidance of slightly. For H1, we will continue to focus on building our own core competencies, including our hotel brands, including our operational management capability as well as membership. So given that the overall industry supply increase has been slowing down and rationalizing, we maintain cautiously optimistic on our occupancy rate outlook.

We will now take our next question from the line of Ronald Leung of Bank of America.

[Interpreted] Let me translate my question into English. So my question is about the opening and closures outlook for the full year. So what is the latest outlook for the full-year opening and closures? And could management also comment about the city coverage in terms of the overall openings?

[Interpreted] I will answer the opening and the city coverage question separately. So on the hotel HWC, we grossly opened 537 hotels, which is at a relatively high low compared to historical performance. Of course, in the first quarter, our net opening is kind of impacted by the late spring festival holiday this year. Overall, the number of gross openings and net openings in the quarter was in line with our overall expectation. Our hotel opening strategies, we insist on the high-quality development of our hotel network. Since 2 years ago, we already shifted from purely focusing on quantity to focusing a high-quality growth of the hotel network. So under our brand-led high-quality growth strategy, we have high standards and high requirement on the new signings and new openings of the hotel. With that strategy, I'm happy to report that in the first quarter of overall new signings is still at housing high level. With our healthy signing pace, we maintain our opening guidance for the full year of 2026 unchanged. On the city coverage strategy, we have 2 legs of strategies, which we are implementing at the same time. So firstly, it's still the penetration into lower-tier cities. And secondly, given the current real estate market, the current supply cycle of the real estate market, we are also returning to the Tier 1 and Tier 2 cities. We are grabbing those our emerging opportunities of those high-quality properties in both core and premium district and premium locations. We will be developing our premium hotel product in those Tier 1 and Tier 2 cities. We are fully confident that H World will be delivering high-quality growth in both the lower tier cities as well as the Tier 1 and 2 cities.

We will now take our next question from the line of Sijie Lin of CICC.

[Interpreted] My question is about the upper midscale business development. For the first -- for the last several quarters, the upper-midscale, especially Intercity achieved quite impressive expansion speed, and we see that Grand Ji opened first hotel and has 12 new signings. So I want to know how the RevPAR performance of upper-midscale compared with economy and mid-scale? And additionally, could you please share the expansion targets and operational focus of the upper-midscale segment, especially the Intercity and Grand Ji in the coming period.

[Interpreted] The upper-midscale segment is a core strategic part of our overall H World strategy. We are actually very happy to see that in the first quarter, the overall RevPAR recovery in the upper-midscale segment is actually slightly better than our economy and midscale. This showcases our growing brand power and product quality in the upper-midscale segment. We adopt a multi-brand strategy in the upper-midscale segment. So namely, is the Intercity, Grand Ji, Mercure and Crystal. Overall, the total network growth in the upper-midscale is quite solid. But when we're breaking down into single brand, we do see that some of the brands still need further improvement in its overall brand power. With upper-midscale strategy, we are returning to and refocusing back to the Tier 1 and Tier 2 cities to opening flagship stores in those core districts. At the initial phase development, H World has been spending a lot of time setting the overall brand strategy as well as the design. So we have very clear value proposition for each of our upper-midscale product. Of course, at the initial phase, you are always going to face some of the challenges. But we are very confident that in the longer term, our H World upper-midscale brands will be leading in the upper-midscale segment.

We will now take our next question from [ Chi Wei ] Of Citic.

[Interpreted] I translate my question in English. I'm [ Chi Wei ] from Citic. Against the backdrop of fluctuating business and lateral gas mix and the increasing regulation across hotel industry, can you share the current breakdown of our customer source channels and your outlook going forward as well as the company's plans and strategies for membership marketing?

[Interpreted] Overall, our CRS as well as some of the other key metrics of our memberships have been performing quite stable. Even under the case that we've been expanding our overall network rapidly last year and opened over 500 new hotels this year. The overall CRS contribution to -- and the membership booking has been quite stable. But at the same time, we are also observing some of the emerging trends, including the leisure travel as well as the overall increase in the inbound tourism. So how to capture those emerging traffic and the new type of consumers is one of the very important topic for H Rewards and for our H Rewards membership. You may have noticed that at H World, we have been bringing in some of the new talents into the company. And we are also working with leading -- some of the leading AI companies to develop new selling marketing strategies as well as to some of the new strategy and initiatives in member conversion. And improving our capabilities in the corporate B2B channel, we are using our membership to leading corporate business travelers. We do believe that this is also showcased the improving membership capability of H World.

We will now take our next question from the line of Leah Pan of Goldman Sachs.

[Interpreted] So please allow me to translate my question into English. This is Leah from Goldman Sachs. I have a question on company's international strategy. And I think you mentioned on the business that in up in the Southeast Asia market, including the signing up JI Hotels in Malaysia and the entry into Cambodia with the brands of JI Hotel and Steigenberger. So could you please share with us more in your Southeast Asia market and the growing target over the next few years? And also, given company's business exposure in the Middle East market, how do you see the impact from the ongoing Middle East crisis to your current business and as well as the global expansion strategy?

[Interpreted] So you do see that as a first step, we successfully own hotels in Vietnam, in Laos and in Cambodia. This gives us very strong confidence that H World's products management, supply chain as well as members can actually empower the hotel operation in the overseas market. So going forward, we are going to step up in the overall investment in the Southeast Asia market in terms of the network expansion, the size as well as the pace of expansion. We do think that overall, the Southeast Asia is a brand-new market that provides new opportunities to H World. So this is also answer the second quarter related to the Middle East conflicts. Based on our first quarter results, we see very limited impact from the Middle East conflicts to our H World International. We -- in the Middle East, our HWI only have 10 manachised-franchise hotels, and it has manageable and nonmaterial contribution to the revenue as well as profit. And on the overall increase in the energy cost, we are taking efforts in controlling the increase and managing the increase in overall energy. So, so far, we think the impact of the rising energy costs are still manageable. But of course, there are still uncertainties in how the overall situation in the Middle East is going to evolve. So we will keep a close eye on the overall development there.

We will now take our next question from the line of Lydia Ling of Citi.

[Interpreted] Lydia from Citi. So my question would be on the profitability. So in first quarter, we continue to see the margin improvement and further optimization in the cost ratios. So what would be your outlook for the full year margin trend? If by region, in China, asset-light strategy continues to push forward, so what would be the upside from current high level. And we see the international part of the loss actually narrowed on year basis in first quarter. So what would be your target for the overseas profitability on a full-year basis?

[Interpreted] And first quarter EBITDA, there are several things that we are doing to improve the overall EBITDA performance. So firstly, it's our asset-light strategy. As we continue pushing forward asset-light strategy, we are confident that for our H World business, the adjusted EBITDA margin will continue to improve steadily. Secondly, also on the overall lease and owned business, we are also improving the performance of this segment by revenue management as well as cost control, including the negotiation of rental reduction. On the overseas business, HWI especially for DH, we continue to push forward the cost reduction initiatives. We are actually looking into each item in the overall cost structure to improve the overall efficiency. In the first quarter this year, and we will continue to pushing forward the cost reduction initiatives in DH. I would like to add that aside from the cost control and cost reduction, H World is also making some investments in key areas such as digitalization, technology and AI development as well as our overall H Rewards membership building the promotion and the marketing of our core brands. For example, in the first quarter, we launched our HanTing product. So based on the overall budget and overall planning, we do need to make necessary investment. But of course, we will be looking at the overall ROI of those investments. On a full-year basis, we will have control on the cost, but we also make necessary investment to -- for our long-term sustainable growth. We'll take the last question.

Certainly. Our last question today comes from the line of Xin Chen of UBS.

[Interpreted] Let me translate to English. This is Xin Chen from UBS. My question is on dividends. Could the management please share the 2026 shareholder return plan with us.

[Interpreted] Thank you, Xin Chen. So as you can see from our presentation, H World has a very strong balance sheet as well as stable cash flow. And going forward, as we continue pushing forward the asset-light strategy and those cost reduction initiatives, we will maintain our shareholder return plan in place. Going forward, if there's anything new, we will update with the market in time. But overall for the -- overall direction is that we will be using our own cash flow to return to the shareholders. Thank you.

That's the end of the question-and-answer session. I'd now like to turn the conference back to Ms. Ivy Luo for closing comments.

Thank you, everyone, for taking your time with us today. This will conclude today's call, and we look forward to seeing you in the upcoming quarters. Bye-bye.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect your lines. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]