Huazhu Group Limited (HTHT) on Q4 2022 Results - Earnings Call Transcript

Operator: Good day and thank you for standing by. Welcome to the H World Q4 2022 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. I'd now like to hand the conference over to your speaker today. Jason Chen, Investor Relations Director. Please go in. Jason Chen: Thank you. Good morning and good evening, everyone. Thanks for joining us today. Welcome to H World Group 2022 fourth quarter and full year earnings conference call. Joining us today is our Chairman, Mr. Qi Ji, our CEO, Mr. Hui Jin; our CFO, Ms. Ye Fei, our President, Ms. Hui Jin. 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 outlining in our public findings with the SEC. H World Group does not undertake any obligations to update any forward-looking statements except as required under applicable laws. On the call today, we'll 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 slides presentation is available @ir.HWorld.com. With that, now I will turn the call over to our Chairman, Mr. Qi Ji. Mr. Ji, please. Qi Ji: Good morning and good evening, everyone. Thank you for joining our call today. 2022 has been very challenging year for our business in China, these strict COVID policies in place for quite a long period of time across country. Our business has been thoroughly impacted as many people expected. However, we have shown strong resilience throughout difficult time and continue to expand new hotel network. I would like to use this opportunity to extend our serious appreciation to our customers, franchisees, employees and business partners for their support to go through this tough period together. No matter how difficult the business environment was, we did not stop developing our company filter. Last year, we transformed our Chinese operations through organizational restructuring and established a foreign grant in key regional markets with our six fully equipped regional companies in China, where now we are prepared for penetration in more regional markets. With China lifting the COVID restrictions and the few folk’s economic development, we are embracing a strong recovery in the hotel market. We believe we are well positioned to capture the growth opportunity. This year, we will focus on three key areas. First, we will continue the high quality changing of our hotel network. This will be largely driven by limited service hotels, especially in low tier city and less penetrated areas. Second, we will refuse to develop and establish firm grant in middle skill and upper scale multiple brand strategy. Last but not least, we'll continue to strengthen our organizational and operational capabilities to achieve high operational efficiency and provide a better protect services to our customers as well as franchisees. In our international business, we are very glad to report that, they achieved the improvements in many operational areas over the last year. Full year adjusted EBITDA before impairment turned positive for the first time since our acquisition. In addition, we have achieved significant breakthrough in loyalty program, direct sales, channel development and digitalization of operational process. In 2023, we will focus on future margin improvement, digitalization, and growth of direct sales and expansion of hotel network. This world is full of uncertainties as we cope with consequences, so in international monetary policies and continued regional conflicts. We refused strengths our core competence in operations and various platforms to build up our overall resilience. We are confident that with our continued innovation in model and a project, we can write us through different challenges and generators sustainable quality growth for our investors as well as entire ecosystem. With this, I'll turn the call to Jihong He Jihong He: Although the year of 2022 was full of challenges and the difficulties that what group as one of the leading company in the industry still cooked the difficulties and made several business progresses during the year. Let's firstly discuss our main achievements for for the year. Please turn to Page Three. First of all, we kept our sustainable quality growth strategy unchanged. During the year, we opened 1,244 hotels. Also, we continued to remove inferior hotels from our network and upgrade hotel products across all brands to improve customer's experiences. Secondly, we completed our organizational restructuring and established six regional offices to build up a solid foundation for further market penetration and high quality operations in the future. Certainly, we have conducted good cost control and achieved a rental reduction of around RMB300 million in 2022, as well as a 15% headcount reduced reduction in our headquarter during the year. Lastly, we waived around RMB300 million management fees for our franchisees during the tough period last year as we always treat our franchisees as our important business partners. We are very glad to see our RevPAR in China continue to perform well after reopening. Please turn to Page four. Since the official announcement of reopening in late November last year, our China RevPAR recovery was up trading months over months. RevPAR recovered to 74%, 87%, 91% and a 96% in last year, October, November, December and January this year, respectively. In February, 2023, RevPAR further recovered to 140% of 2019 level. The recovery rate in February was mainly impacted by the timing mismatch of Chinese New Year holiday period between 2023 and 2019. However, it also shows the impacts from product mix changes over past the years as contribution from midscale and upper midscale increased as well as our improving capabilities on ADR optimizations. Please turn to Page five; looking ahead in 2023, sustainable quality growth would still be our core strategy for Lexi business. Under this strategy, we'll focus on three key areas. Firstly, high quality hotel network expansion through our membranes and flagship hotel strategy to achieve further in-depth penetration in China market. Secondly, to achieve new breakthrough development of midscale and upper midscale segment, especially for those brands that we incubated in the last in past few years, such as orange, crystal orange, intercity and Blossom House. Thirdly, we'll further strengthen our organizational and the digitalized operation capability. We'll discuss each of these three focuses in details in the following. First of all, we will continue the high quality expansion of our hotel networks, especially in lower tier cities and less penetrated areas. Please turn to Page six. As the end of 2022, we have total 8,411 hotels in operations in China, with net addition of 705 hotels during the year. Hotels in operation in lower tier cities contributed 38% as of 2022 increased by one percentage points compared to last year. We have 2,544 hotels in pipeline with lower tier cities contributed roughly 57%, which was also increased by one percentage points compared to the last year. Number of cities coverage for both hotels in operations and pipeline increased to 1,126 cities compared to 1,062 cities last year. Our hotel network extension with high quality continued despite COVID impacts last year. Please turn to Page seven. In terms of new hotel signings, we signed up 2,141 new hotels in the last year. Obviously, that was than 2,849 hotels we signed in year of 2021, that was because the COVID impact and the lower franchisees confidence level . However, given that we are no longer doing the economic software brands since last year, therefore, if we exclude the impact of the economics of the brand hotels, we actually signed up 2,123 new hotels in 2022 compared to 2,477 hotels in the last year. The gap was narrowed. Similar to the new hotel signings for the new openings, if we exclude the economics of the brand hotel, we actually opened 1,236 new hotels in year of 2022, slightly lower than 1,293 hotels in 2021. On the hotel closure front, we totally closed around 539 hotels in 2022. In order to comply with our sustainable quality growth strategy, we continued to close more inferior economic software brand hotels and HantTing 1.0 version product. If we exclude this impact, our closure for the year of 2020 was 237 hotels compared to 175 hotels in year of 2021. At the same times, please note that our number of hotel closure was lower than our 600 closures we previously guided in last year, as some hotel closure process were uncompleted in December last year due to the impact of initial reopening from COVID. Therefore, those hotels affected our total number of hotel closes for this year. Along with our efforts on continuously improving our hotel quality, the proportion of low quality hotel were declining consistently. Please turn to Page eight. For example, number of economic software brand and HanTing 1.0 version hotels only contributed 13.4% by the end of 2022, significantly declined from 25.9% at the end of 2020. At the same times we continuously strengthen the metrics of our membrane. Please turn to Page nine. In the economic and the midscale segment, we formed Hanting and JI brand as our key core brand and the and Orange are complement brands. We will further enhance our core brands power in the future. Please turn to Page 10. In terms of our upper midscale segment development, we remain using our multibrand strategy to further penetrate the market. Through adjusting and resorting our brand metrics, we now have eight brands in this segment, which include Crystal Orange, Intercity, Manxin, CitiGO, Madison, Mercure and Novotel. At the end of 2022, we have total 523 hotels in operation and 287 hotels in pipeline for this segment. H World is also committed to continuously upgrading and strengthening our organizational and operational system, comprehensively improving on the front of talent reserve, digitalization, franchisees and -- franchisees and customer services, sales and loyalty programs, supply chain management and sustainable development, further improving organizational operational efficiency and creating more value to our franchisees and customers. Please turn to Page 11. In terms of our customer service improvement, we are seeing our customers rating on our hotels continuously improving. It demonstrated that our customers are getting more satisfied with our hotel products and services. At the same times, customer's negative rating rate is consistently declining, indicating our continuously efforts on improving customer's experiences through providing better services and products. Please turn to Page 12. We'll focus on three areas to reinforce ourselves and marketing and royalty programs. The first one is on the ADR optimization. After completing our organizational restructuring and establishing six regional offices, hotels, which located in each region can set up a more flexible pricing system based on the local market conditions. Also, the pricing synergy can be achieved among various brands in each region and the pricing range for different segments can becomes more reasonable. The second one is continuously enhancement and upgrade of H World loyalty program. By leveraging on the large number of members and traffic, we will further dig the potentials through consistent upgrading and improving our loyalty program such as the memberships privilege. Lastly, we will further improve our sales capabilities on corporate clients. We will continuously develop new top tier corporate customers and generating more revenue contribute from our corporate clients through group bookings, conference, banquet and activities by leveraging our digitalized direct connection capability and closer cooperation with them. The operational efficiency improvements for our leased and owned hotels is also very important for the group. Please turn to Page 13. Firstly, we will constantly optimize the current leased and owned hotel portfolios. Those lease and owned hotels, which are not meeting our requirements, will properly be early terminated. Secondly, we will further improve the operational efficiency of the hotel to reduce the operating cost and improve the profitability for leased and own hotels. Lastly, any new leased and owned hotels investment in the future will be mainly determined by the return and strategic considerations such as the flagship hotels. Please turn you Page 14. We will further strengthen our supply chain capability. We will provide full supply chain services and conduct in-depth operations to franchisees as well as continuously upgrading products to achieve better quality products and more standardized services with lower cost and higher efficiency. Last but not least, we'll pay more attention on ESG and the long term sustainable development. Please turn to Page 15. In addition to the continuously efforts on social welfare and employee care in the past, we will make more efforts on ESG this year with three key focuses. The first one is to continuously improve and optimize the company's ESG database. The second one is to improve the efficiency of energy and water usage. The third one is to launch more green projects, including green suppliers and great livings and so on all our business reviews for last year and strategic focus for this year. With that, now I will turn the call over to our CFO, Ms. Ms. Jihong He, to discuss our DH business and our 2022 full year financial performance. Thank you. Jihong He: Hello everyone. Thank you, Ye Fei and thank you, Jason. Please turn to Page 16. In our international front, we are very happy to report that DH business achieved robust recovery in 2022 and achieved RMB134 million adjusted EBITDA before special write-off impairment and unrealized loss. While we are very lucky to be able to capture the market recovery after COVID, this result would not have been possible without a disciplined cost reduction measures and the corporate restructuring effort. In addition, we carried out a series of activities to bring the DH business to a new level. We wrote out our proprietary digital infrastructure in our hotels. We upgraded our loyalty program H reward internationally with enhanced benefits. We refreshed the brand positioning and the products for InterCity and hotels and then last but not least, we implemented a new management system to attract the talent for our hotels and our headquarters. Please turn to Page 17. In 2023, DH will focus on four strategic areas. Most importantly, we'll continue our effort to improve margin. This includes both further improvement of our revenue as well as continued cost discipline. Number two, we'll continue to invest in direct sales channels. With our H rewards program, our reservation system, as well as mobile web booking platforms, we will continue to increase the ratio of direct bookings. Number three, we'll continue to grow our hotel network by leveraging our strong brands and number four; we will continue to carry out digitization of our core processes. Now I will turn to the financial section of today's call. Please turn to Page 19. We all know 2022 was a very difficult year in China due to strict COVID policy. Despite the tough operating environment, we managed to grow our hotel network. The number of rooms increased 7% year-on-year to 809,478 rooms in 2022. Our hotel turnover was RMB49.6 billion, a 9% increase compared to 2021. Page 20; due to restrictions of COVID policies, blended RevPAR for our China business in 2022 was RMB157. This is a decrease of 8.8% compared to 2021 and a 20.5% decrease compared to 2019. This was mostly due to lower occupancy, which was 5.5% lower than 2021 and a 17.7% lower compared to 2019. Page 21; in our international business, the market recovery started in Q2 2022. We achieved 96% RevPAR increase compared to 2021, which was driven by 23% of ADR increase and the 21% occupancy increase. Please turn to Page 22. In Q4 2022, our total revenue for the group increased by 11% compared to the Q3 ’z22, which is mainly due to 66% revenue improvement in our international business. For the whole year 2022, our revenue increased by 8.4% year-on-year, which is contributed by 108.5% revenue increase from DH. For the whole year 2022, revenue from our China business decreased by 5.3%. However, the recovery of our China business accelerated after Chinese government announced the reopening policy in mid-November. The overall 4Q 2022 revenue was at the high end of our guidance, despite fee waiver of RMB58 million to support our franchisees. Please turn to Page 23. Operating costs in 4Q 2022 was RMB3.4 billion and RMB12 billion for the full year 22. This includes RMB195 million impairment loss of our China business and RMB169 million for DH business. Income from operations, therefore was the minus RMB93 million in 4Q '22 and the minus RMB294 million for the full year '22. Please turn to Page 24. Our adjusted EBITDA was RMB398 million in 4Q '22 and RMB610 million for the full year 2022. Our China business reported a foreign exchange gain in 4Q '22, but this was offset by impairment loss. For DH business, adjusted EBITDA in 4Q '22 decreased by RMB68 million compared to 2021 because of the absence of COVID-related government subsidies, which was received in 2022. For the whole group, adjusted net income was minus RMB255 million for 4Q 2022 and the minus RMB1.27 billion for the four year 2022. Please turn to Page 25; as we had a quite substantial amount of non-cash impairment as loss due to change in fair value of equity securities as well as the foreign exchange losses, we would like to show the normalized EBITDA and the net income here separately. As you can see the adjusted EBITDA before impairment and the FOREX exchange was RMB1.7 billion for the full year 2022. We achieved this level of normalized adjusted EBITDA due to disciplined cost control measures such as rental reduction and streamlining of our headquarter costs. Please turn Page 26. We would like to update everyone on the liquidity position as well. As of December 31, 2022, our net debt was RMB4.8 billion and our cash balance is RMB5.1 billion. We have unutilized the bank facility of RMB2.1 billion. We would like to mention here that our cash position was further improved as of today since we did a very successful follow-up public offering of USD300 million in January, 2023 and we liquidated our core shares at €300 million in February, 2023. Please turn to Page 27. As each year, we give a broad guidance for our business in the coming year. Since China is just starting the recovery tragedy and we need to further observe the business trend we remain optimistic, but stay cautious. We estimate our net revenue in Q1 2023 to grow at about 61% to 65% compared to Q1 2022. Excluding DH business, our China business is estimated to grow at 53% to 57%. For the year, revenue is estimated to grow at 42% to 46% and the China business is estimated to grow at 46% to 50%. Gross hotel opening target is estimated at 1,400 and we plan to close about 600 hotels to 650 hotels. Among hotels to be closed in 2023, there are substantial numbers of them already not revenue generating, but are still going through legal closure procedures due to delay because of the COVID. Many of these hotels are soft bread hotels and Hanting 1.0. We will have some of these hotels to be officially taken out of our inventory this year. This concludes our presentation today. Now we can start with Q&A session. Operator: First question comes from the line of Ronald Leung of Bank of America. Please proceed with your question. Ronald Leung: Hi good morning, management. I have two questions. The first question is about the revenue guidance. So based on the first quarter revenue guidance for domestic China growing 53% to 57% and the full year revenue growing 46% to 50%, what would be the RevPar recovery assumptions that the management is putting in right now? The second question is about the global expansion strategy. So what would be the next step for the global expansion strategy in this year and next year? Would management still consider further mergers or acquisitions to compliment the brand portfolios? Thank you very much. Qi Ji: Okay. To answer your first questions, so basically we are seeing the demand was getting quite strong in the beginning of this year and we are seeing the RevPar recovery was mainly driven by the ADR. However we are still seeing the business traveling, especially the business traveling still has some gap compared to the normal year. That's why the OCC was having some gap as well. So by considering all the factors in terms of the revenue guidance, so by considering all the factors which we mentioned before, so the revenue guidance actually implies the RevPAR recovery compared to the same period of 2019 was around 110%. Ronald Leung: Okay. So I will give you a little bit introduction in terms of our strategy focus for the 2023. So basically as you can see, after the reopening in the first quarter, we are seeing a quite strong demand in the China market, especially during the Chinese New Year. So we are still being very confident in terms of the demand in China and the growth potentials in the future. So definitely, so our key focus will be in China market. We are going to further penetrate into the China market by leveraging our key brands and also further strengthening our mid-scale and upper mid-scale sacrament penetration as well. So in terms of the global expansion, so first the priority is definitely to further improve the DH operations by improving the profitability as well as the customer's experiences. But at some times, we will be looking for some of the opportunity and the potentials in the global market if there are something suitable, Jihong He: I can add a little bit of flavor to our international business. Since acquisition of H, this business, the H business has been our base for our international expansion after the COVID difficult time, and we have seen really good turnaround of the business. So starting in 2023, we will continue to use the H as a base for our international expansion. So the basic what Ms. Ye Fei mentioned was really to improve the operations of the H, but also further expand the H brand in different markets. For example, we had good enrolled into Middle East as well. For the international expansion in other areas, we remain opportunistic for the further M&A opportunities, but I will say H is our first and the most priority at this moment. Operator: Our next question comes from the line of Simon Cheung of Goldman Sachs. Please proceed with your question Simon Cheung: So I will ask follow up with English in the questions. I think Ronald earlier asked also about the 2023 revenue guidance and the implied RevPar for the full year. Would like to see whether you can provide us the RevPar guidance for the full year and also that going forward in the long run, what is your expectation of RevPar growth in the next perhaps two, three years, given all this master concern over about the over surprise situation in China? That's the first question. And then the second questions, notice that you have given up accelerations, a guiding of accelerations in the hotel ads from 1,200 to 1,400. Wondering whether you have seen a bit more appetite by the investors, hotel investors to come back into the market and also whether you have any update on the Southern China regional office strategy. Thank you. Qi Ji: Okay. To answer your first questions as I mentioned earlier, so basically we're seeing a quite strong holistic demand starting from the year beginning of the year posted the government you know announced the reopening policy. So it was many RevPAR recovery was mainly driven by the ADR growth. And especially from the leisure market, we are seeing a pretty good recovery from the leisure market. So in, in terms of the RevPAR I mean in terms of the blended RevPAR recovery compared to the same period of 2019 the current full year revenue guidance implies, the blended RevPAR will recover to 110% to 115% compared to the same period of 2019. To answer your second questions in terms of the business growth, so yes I think in the first quarter we are seeing a good business recovery and we are seeing the franchises confidence is coming back a bit, and we are also seeing the investments appetite is improving as well especially post the Chinese New Year. So from the, the number front we are seeing good trends in terms of the new signings and pipeline increase, which is slightly better than our pre previous expectations. And in terms of the less penetrated market development, not, not only the southern part of China like for example, the central area and the Western area were also previously quite weak places for four for H worth. So after we completed our organizational restructuring and regional of office establishment we are seeing a pretty good progress as development in that, that those particular regions, and we are still remain very confident in terms of the growth potentials over there. Mainly leveraging our flagship stores strategy as well as our main brands development. Operator: One moment for our next question. Our next question comes from the line of Sijie Lin of CICC. Please proceed with your question Sijie Lin: So I have just one question about Ni Hao Hotel. Considering it is positioning economy hotels is it quite similar with Orange Hotels positioning in mid-scale hotels? And what is Ni Hao Hotels open target in future? And also what's the difference in the room numbers and compared with HanTing? Thank you. Qi Ji: Okay. so to answer your questions, so actually along with our strategy with the lower tier cities penetrations and further penetrating to the entire China market we realized that that actually, especially in the lower tier cities, we are seeing quite a lot of, new demands. Like a lot of young generations, a lot of local leisure traveling demand, and those customers actually not, probably not the HanTing brands key customers or target customers. So, as HanTing was positioned as a very unique business traveling product and to fulfil those kind of new demand in the lower tier cities. We incubated our Ni Hao brand starting from 2020. And we, what we are targeting is to, to further penetrating the, the, the very much market mass market in China and, and especially in the economic segment. we would like to use HanTing and the Ni Hao as our two key brands in to further penetrate the market and provide more choices to the, to the customers for the potential mass market in China. Thank you. Operator: Thank you. At this time, I will now like to turn back to Jason Chen for closing remarks. Jason Chen: Thank you everyone for taking your time with us today.
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Huazhu Group Limited (NASDAQ:HTHT) Sees Impressive Performance Amid Expansion Efforts

  • Huazhu Group Limited (NASDAQ:HTHT) has experienced a monthly gain of approximately 31.45%, showcasing strong market confidence.
  • The company's growth potential is highlighted by a projected stock price increase of 40.02%, driven by strategic expansions and technological advancements.
  • HTHT's financial health is robust, with a Piotroski Score of 8, indicating strong fundamentals and the ability to sustain growth.

Huazhu Group Limited (NASDAQ:HTHT) is a leading hotel management company in China, operating a wide range of hotel brands catering to different market segments. The company has a strong presence in the Chinese hospitality industry, with a portfolio that includes economy, midscale, and upscale hotels. Huazhu's strategic focus on expanding its brand portfolio and enhancing customer experience has positioned it as a key player in the market. Competitors in the industry include other major hotel chains like Marriott International and Hilton Worldwide.

Over the past month, HTHT has shown impressive performance with a monthly gain of approximately 31.45%. This upward trend highlights the market's confidence in Huazhu's growth strategy and its ability to capture market share. However, the stock has seen a slight pullback of about 8.88% in the last 10 days. This dip could be an opportunity for investors to enter the market at a lower price point, potentially benefiting from future gains.

HTHT's growth potential is significant, with a projected stock price increase of 40.02%. This potential is supported by the company's strategic initiatives, such as expanding its hotel network and leveraging technology to improve operational efficiency. These efforts are expected to drive substantial growth in the coming months, making HTHT an attractive option for investors seeking long-term gains.

The company's financial health is robust, as evidenced by its Piotroski Score of 8. This score indicates strong fundamentals, suggesting that HTHT is well-equipped to sustain its growth and manage any market challenges. A high Piotroski Score is a positive indicator for investors, as it reflects the company's ability to generate profits, manage debt, and maintain liquidity.

With a target price of $52.90, HTHT offers a promising upside from its current levels. This target is based on thorough analysis and reflects the stock's potential to reach new heights as it continues to execute its growth strategy. Investors looking for a stock with strong fundamentals and significant upside potential should consider HTHT as a valuable addition to their portfolios.