H World Group Limited (NASDAQ:HTHT) Q1 2023 Earnings Call Transcript

H World Group Limited (NASDAQ:HTHT) Q1 2023 Earnings Call Transcript May 29, 2023

H World Group Limited misses on earnings expectations. Reported EPS is $-0.32 EPS, expectations were $-0.02.

Operator: Good day and thank you for standing by. Welcome to the H World First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker’s presentation, there will be a question-and-answer session. 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.

Jason Chen: 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, Ms. Liu Xinxin. Following their prepared remarks, management will be available to answer your questions. Before we continue, please note that the discussion today will include forward-looking statements made under the safe harbor provision of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today.

A number of potential risks and uncertainties are outlined in our public findings with the SEC. H World Group does not undertake any obligations to update any forward-looking statements except as required by applicable laws. On the call today, we will also mention adjusted financial measures during the discussion of our performance. Reconciliation of those measures to comparable GAAP information can be found in our earnings release that was distributed yesterday. As a reminder, this conference call is being recorded. The webcast of this conference call, as well as supplementary slide presentation is available @ ir.hworld.com. With that, now I will hand over the call to our CFO, He Jihong for opening speech. Ms. He, please.

He Jihong: 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 (ph). 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’re 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 presentation. With this, I now hand over to Mr. Jin Hui.

Jin Hui: 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 hotel’s blended RevPAR in January, February, March, and April recovered to 96%, 140%, 120%, and 127% of 2019 level 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 fast 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 three key aspects.

Firstly, our organizational restructuring and optimizations. 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 products 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 three key areas. First is our high quality hotel network expansion.

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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 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 first quarter, including 122 inferior economic soft brands and HanTing 1.0 version hotels to further improve the quality of our hotel portfolios. In addition, as we mentioned 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 a year ago. Our second strategy is to further breakthrough in the midscale and upper midscale segment. Please turn to Page 7 and Page 8. For our midscale segment, we launched Orange Hotel 3.0 version with the orange as the theme color, emphasizing the concept of LOHAS, 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 a 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 renewable. In summary, our new Orange Hotel 3.0 version express 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’ demands on nice design, experiences, and the vitality and becomes a good complementary product to our JI Hotel, and we believe the Orange brand should further enhance H World competitiveness in the middle scale hotel segment.

Please turn to Page 9 and 10. For our upper mid-scale segments, we successfully introduced InterCity brands to China. We recently opened four new InterCity Hotels in Wuhan, (ph), Shenzhen, and Shanghai. These grand openings are very important steps for InterCity’s future scalable development in China. InterCity Hotels in Germany mainly target and 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. development in China market is always our key focus and introducing InterCity brands in China market well reflected. As our Chairman Mr. Qi Ji once said, we are not simply introduced 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 brands DNA, which is offering the ultimate business travel experiences from German features of efficiency, quality, and . In China, InterCity hotels will be mainly located in major commercial centers and the 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 the direct sales capabilities. We are very pleased that you see our H World App and H World Mini programs 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 excluding 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.

He Jihong: 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 rooms. Hotel turnover achieved 71% growth, compared to first quarter 2022 and stands at more than RMB16 billion. Please turn to Page 14. Legacy-Huazhu blended revenue recovered to RMB210. This is 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. Legacy-DH blended revenue recovered to EUR55. This is an increase of 66%, compared to first quarter 2022. The recovery is driven by both ADR and occupancy. As first quarter 2022, we still face a quite heavy COVID impact in many countries where DH operates. Please turn to Page 16. H World revenue grew to RMB4.48 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 RMB3.59 billion and the legacy DH revenue grew 818% in the same period achieving RMB886 million. This reflects RevPAR recovery trajectory. Thanks to the reopening of China and the rest of the world, continued product upgrade, as well as the 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 RMB664 million, compared to a loss of RMB708 million in first quarter 2022. Legacy-Huazhu achieved RMB822 million, turning into positive territory, compared to a loss of RMB416 million in the first quarter 2022. Legacy-DH still made a loss in the first quarter 2023, but it narrowed its loss by RMB140 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 revenue and it is under our closed monitoring constantly. In Germany and the European countries, we need to cope with cost in an inflationary environment, which has some impact on our profitability.

Please turn to Page 18. In the first quarter 2023, our adjusted EBITDA recovered to RMB1.65 billion. This is a significant increase from a negative RMB333 in the first quarter 2022. This adjusted EBITDA increased around RMB500 million gains from sales in Accor’s shares in the first quarter. Adjusted net income was RMB1 billion in this quarter, compared to negative RMB662 million in the same period last year. The strong EBITDA and the net income performance are mainly contributed by recovery of Chinese business. Operating cash flow stands at RMB1.84 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 31 March 2023, we have a net cash of RMB957 million.

Our cash balance stands at RMB10.4 billion and we have an unutilized bank facility at RMB2 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.

Jin Hui: Yes. Thanks, Jihong. So, now we can open for the Q&A session. Operator, please.

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Q&A Session

Operator: Our first question comes from the line of Ronald Leung from Bank of America. Please go ahead, Ronald.

Ronald Leung: Hey, hello, good morning management. Thank you for taking my question. Hi. Good morning management. Let me ask my questions in English. My first question is, what is management expectation for RevPAR recovery in the second quarter? The second question is about supply outlook for the hotel industry. Has the RevPAR recovery has been solid? Some franchisee’s hotel owners are planning to reopen their hotels in the upcoming year. So, do you expect the increase in the hotel supply will hurt the RevPAR recovery? Thank you very much.

Jin Hui: 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 basis, 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 the branded hotel penetration or the churn ratio continuously improved.

And this is actually keep the main thesis 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 the service, as well as our organizational capability to increase our entire competitiveness in the market. Thank you.

Ronald Leung: Thank you very much.

Operator: Thank you. Our next question comes from the line of Sijie Lin from CICC. Please ask your question, Sijie.

Sijie Lin: So, I’ll translate my questions into English. So, my first question is 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 exist for long? And my second question is that, what’s the pace of hotel’s new and the franchisees segment in Q2 after they saw Q1’s recovery? Thank you.

Jin Hui: 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 the ADR, undeniably, you know 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 global laundry 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 especially in the leisure market. People are becoming more willing to pay 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.