Atour Lifestyle Holdings Ltd Q3 FY2023 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to the Atour Lifestyle Holdings Third Quarter 2023 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Alison Zhang, Director of Investor Relations. Please go ahead, ma'am.

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

Thank you, Alison. Hello, everyone, and thank you for joining Atour's third quarter 2023 earnings call today. We are pleased to report another strong quarter. Our ongoing goal of reaching 2,000 premier hotels across the nation by 2025, while setting the standard for the Chinese experience in the industry and continuing to enhance our brand presence, has allowed us to seize growth opportunities from both business and leisure travel. Consequently, we achieved significant milestones across all our business segments. Now, let me discuss our performance in detail. Let's start with our hotel business. Demand for travel and accommodations continued to grow steadily in the third quarter, with a marked increase during the summer season. Our RevPAR for the third quarter reached a record high of RMB424, and our recovery rate rose to 118% of 2019's levels, with the months of July, August, and September recording 122%, 116%, and 115%, respectively. Additionally, our ADR and occupancy rate saw robust growth during the Mid-Autumn Festival and National Day Holiday period, increasing by 14.6% and 7.2%, respectively, compared to the same period in 2019. This contributed to a RevPAR recovery rate of 123% of 2019's levels during that time. Meanwhile, our established hotels, which have been in operation for over 18 months, continued their strong performance. Their same-hotel RevPAR recovery rate reached 118% of 2019's levels in the third quarter, consistent with our overall hotel business performance, underscoring the market's recognition of Atour's brand and our operational efficiency. We also accelerated our hotel network expansion with 81 new openings in the third quarter, bringing our total to 1,112 hotels by the end of September. Our competitiveness in products and brand has led to rapid growth in new hotel signings, with our pipeline increasing to 577 hotels, up over 60% year-over-year. Atour Light 3.0, our midscale offering, has gained popularity among franchisees since its launch in February, with 25 new projects signed this quarter, representing over 15% of the total signings. By the end of September, we had opened 13 Atour Light 3.0 hotels, primarily in key business districts in major cities. The stylish design and premium experience of Atour 3.0 have been well-received, showing strong performance across key metrics since their openings. In the fourth week of operation, average occupancy reached 78.8%, and RevPAR exceeded RMB340. We believe Atour Light 3.0 is well-equipped to meet the demands of young business travelers seeking high-quality accommodations while capitalizing on opportunities in core business areas. Looking ahead, we expect it to quickly gain traction. Moreover, we are committed to product innovation to better cater to our customers' changing needs. On November 11th, we launched our new upper midscale flagship product, Atour 4.0 With Nature. This concept is inspired by Yaduo Village and focuses on natural tranquility, offering customers immersive experiences filled with relaxation. The lobby is elegantly decorated with images of Yaduo Village's tea trees, designed to reintroduce nature and calm into urban spaces. It features a new chatting room that provides a functional open area for work and socializing. We also upgraded the service standards, amenities, and facilities in Atour 4.0 hotels. This includes a dedicated breakfast area with nutritious and healthy options made from high-quality ingredients. We're collaborating with two niche luxury bathing brands to enhance the bathing experience, and our gyms are equipped with top-notch equipment from Precor for a safe and effective workout. In addition to the enhanced public spaces and service standards, we introduced an exclusive deep-sleep floor in Atour 4.0 hotels, featuring stylish corridors with special lighting and soothing scents. Each room is fitted with advanced dimming systems, smart controls for quick sleep, and improved sound insulation to create a tranquil sleep environment. We also offer signature deep-sleep products to ensure an optimal sleep experience. Overall, the product innovations embedded in Atour 4.0 underscore our dedication to providing the best accommodation experience. We are confident that Atour 4.0 will set a new industry standard for customer experience in the upper midscale market, driving developments in the sector and reinforcing Atour's market-leading position. Moving on to our prime memberships, our A-Card membership program continues to deliver exceptional value to our customers through our consistent efforts to enhance membership services and exclusive benefits. Our membership network has expanded to include hospitality, retail, dining, culture, art, sports, and other premium offerings, leading to significant recognition and a growing member base. As of the end of September, our A-Card members exceeded 54 million. We are exploring cross-industry collaboration to enhance the perceived value of A-Card. As an official partner of the Beijing Marathon in October, we offered our members access to the event and value-added services such as special breakfasts and energy packs. Going forward, we will expand membership benefits to cover a wider range of interests through cross-industry initiatives, thereby enriching our membership ecosystem. In addition, we have continued to improve our APLUS services to better meet the growing demands of our A-Card customers and ensure memorable experiences during their stays at Atour. Our deep-sleep offerings, such as pillow selection and good night milk, have seen high demand among A-Card members. The diverse selection of high-quality offerings has effectively increased user recognition and engagement, leading to a significant rise in APLUS service usage since the start of the year. Simultaneously, our direct sales channels remain strong, achieving stability even during the peak summer travel season, with room nights sold through our CRS reaching 62.5% in the third quarter. The strength of our individual and corporate membership channels has supported the sustainable growth of our occupancy rates. Now, let’s discuss our scenario-based retail business, which had another successful quarter with total GMV hitting a record high of RMB302 million, reflecting a 292% year-over-year increase. Online sales, particularly, surged, contributing about 80% of our total GMV. Our retail operations also excelled during the recent Double Eleven Shopping Festival, topping pillow sales across numerous e-commerce platforms. Our Double Eleven GMV exceeded RMB250 million, up over 600% from the same period last year and over 140% compared to this year's June 18th Shopping Festival. This strong performance indicates the increasing brand awareness and growth potential of Atour Planet. We are continuously innovating in our scenario-based retail business by understanding and responding to our users' changing needs through their feedback. Recently, we implemented an efficient product development mechanism that has enabled us to launch several successful products. Our Deep-Sleep Pillow PRO has sold over 800,000 units since its launch in March this year. Additionally, our Deep Sleep Temperature Control Quilt achieved over RMB10 million in GMV in September, underscoring our strong product development capabilities. Exceptional customer experience is essential for Atour as a lifestyle brand. Our retail success is driven not only by our innovative product offerings but also by the high-quality shopping experiences we provide, with our flagship stores receiving five-star ratings for customer experience on platforms like Douyin and Tmall. From accommodations to retail, we have effectively implemented our Chinese experience strategy to enhance brand recognition and promote sustainable, quality growth. Lastly, in October, we took a journey to revisit Atour's original mission by returning to Yunnan province and Yaduo Village. The spirit of Yaduo Village has always guided us, inspiring our commitment to fostering connections among people. In 2018, we helped create a specialized tea cooperative in the village, adopting an innovative model that encourages collaboration among enterprises, cooperatives, and tea farmers. This initiative has provided a stable income for local villagers and has been instrumental in eradicating poverty in the village by the end of 2019. As of September this year, we have expanded the area of our tea farms in NuJiang Prefecture to nearly 10,000 mu. We believe promoting these tea farms will not only reclaim wasteland for agriculture but also positively impact Yunnan's ecological and environmental development. Now, I'll turn the call over to our Co-CFO, Mr. Wu Jianfeng, to discuss our financial results.

Thank you, Haijun. Now I would like to present the company's financial performance for the third quarter of 2023. Our net revenues for the third quarter of 2023 grew by 93.1% year-over-year and 18.4% quarter-over-quarter to RMB1,294 million. The strong increase in the third quarter was driven by the robust growth in both our hotel and scenario-based retail business. Revenues from our managed hotels for the third quarter of 2023 were RMB781 million, up by 82.9% year-over-year and 24.7% quarter-over-quarter. These increases were primarily driven by the ongoing expansion of our hotel network and the increase in RevPAR. The total number of managed hotels increased to 1,080 as of September 30, 2023, up by 27.5% year-over-year and 7.9% quarter-over-quarter, while RevPAR surpassed 2019's level and recovered to RMB418 for the third quarter of 2023 from RMB317 for the same period of 2022. Revenues contributed by our leased hotels for the third quarter of 2023 were RMB238 million, representing an increase of 49.3% year-over-year and 8.5% quarter-over-quarter. These increases were primarily due to the growth of RevPAR. RevPAR of our leased hotels surpassed 2019's level and recovered to RMB571 for the third quarter of 2023 from RMB384 for the same period of 2022. Revenues from retail and others for the third quarter of 2023 increased by 229.1% year-over-year and 11.4% quarter-over-quarter to RMB275 million, with scenario-based retail revenues growing by 291.7% year-over-year and 11.1% quarter-over-quarter to RMB235 million. These increases were attributable to our ongoing efforts to address evolving customer needs as well as our efficient product development mechanism, which enabled us to consistently launch sleep products that are well received by consumers. In addition, we continued to expand our customer base and enhance our brand recognition through a combination of various online and offline distribution channels. Now, let's move to costs and expenses. Our hotel operating costs for the third quarter of 2023 increased by 58.4% year-over-year to RMB617 million, mainly due to the increase in variable costs, such as supply chain costs associated with the ongoing expansion of our hotel network. Hotel operating costs accounted for 60.5% of total hotel revenues for the third quarter of 2023, compared with 66.3% for the same period of 2022. The decrease was due to the robust growth of RevPAR and the economies of scale brought by our rapid network expansion. Other operating costs for the third quarter of 2023 were RMB131 million, representing an increase of 190.8% year-over-year, driven by increased costs associated with the rapid growth of our scenario-based retail business. Other operating costs accounted for 47.6% of retail revenues and others for the third quarter of 2023, compared with 53.8% for the same period of 2022. The decrease was attributable to improved retail business profitability as a result of the increasing contribution from higher-margin online distribution channels. Selling and marketing expenses for the third quarter of 2023 increased by 269.3% year-over-year to RMB112 million. Selling and marketing expenses accounted for 8.7% of net revenues for the third quarter of 2023, compared with 4.5% for the same period of 2022. The year-over-year increase was primarily attributable to the rapid growth of the scenario-based retail business, which was particularly driven by online channels. General and administrative expenses for the third quarter of 2023 were RMB79 million. Excluding share-based compensation expenses of RMB9 million, adjusted general and administrative expenses increased by 53.3% year-over-year to RMB70 million for the third quarter of 2023. Adjusted general and administrative expenses accounted for 5.4% of net revenues for the third quarter of 2023, compared with 6.8% for the same period of 2022. The decrease was due to the improvement of our management efficiency and operating leverage. Our technology and development expenses for the third quarter of 2023 were RMB20 million, compared with RMB16 million for the same period of 2022. Technology and development expenses accounted for 1.6% of net revenues for the third quarter of 2023, compared with 2.5% for the same period of 2022. We will continue to improve our technology and development capabilities and invest in comprehensive digital infrastructure to facilitate our long-term sustainable growth. Adjusted EBITDA for the third quarter of 2023 was RMB380 million, up by 122.4% year-over-year. Adjusted EBITDA margin for the third quarter of 2023 was 29.4%, with an increase of four percentage points year-over-year. Adjusted net income for the third quarter increased by 144.7% year-over-year to RMB272 million. Adjusted net profit margin for the third quarter of 2023 was 21.0%, with an increase of four percentage points year-over-year. The improved group's overall net margin was primarily driven by the increase in gross profit margin in both our hotel and scenario-based retail businesses, along with our improved operating leverage. Operating cash inflow for the third quarter of 2023 was RMB543 million. Investing cash outflow and financing cash outflow for the third quarter of 2023 were RMB779 million and RMB98 million, respectively. Notably, we have maintained a healthy cash position with stable growth momentum. As of September 30, 2023, our cash and cash equivalents totaled RMB2.2 billion. Together with bank structured deposits, we have cash and short-term investments totaling RMB3.0 billion. That concludes our financial highlights for the third quarter of 2023. With that, let's open for Q&A.

Thank you. We will now proceed with our first question from Lydia Ling at Citi. Please go ahead with your question.

Thank you. Hi, management. I'm Lydia Ling from Citi. Thanks for taking my questions. First, congratulations on the solid results for the third quarter, including the hotel and retail businesses. I also want to discuss the first quarter-to-date trend, so do you have any updates on your full-year guidance regarding openings by RevPAR, as well as your top and bottom line guidance? Additionally, as we approach the end of this year, could you provide any growth outlook for next year? Do you have any preliminary expectations to share with us? Thank you.

Thank you, Lydia. Let me address your question. As of September 30th, we have opened a total of 189 hotels this year. The trend indicates a quarterly increase, and we are confident that the pace of new hotel openings will accelerate in the fourth quarter. Therefore, we aim to maintain our target of 280 new hotel openings for the full year. Regarding RevPAR, in our last earnings call, we stated that our full-year RevPAR recovery rate was expected to be between 113% and 117%. Our overall progress includes solid performance during the summer and the national day holidays, which aligns with our expectations. Hence, we are keeping our full-year guidance unchanged within that range. Concerning revenue, we have made significant strides in our retail business, resulting in revenue that consistently surpasses our expectations. As a result, we are raising our full-year revenue guidance to approximately RMB4.4 billion, with a year-on-year growth of over 90%. Looking ahead to next year, new hotel openings are expected to continue steadily, helping us reach our goal of opening 2,000 premier hotels by 2025. The RevPAR target for next year is anticipated to show moderate growth based on this year's performance. As we are currently in the midst of our internal budgeting for 2024, we plan to provide more detailed information in the next quarter's earnings call. Thank you.

Thank you, Lydia. Operator, please invite the next question.

Thank you. We are now going to take our next question. And the questions come from the line of Sijie Lin from CICC. Please ask your question. The line is open.

So, my question is about Atour 4.0, which we launched recently. I feel that there is a significant improvement in overall style and quality compared to previous versions. How can we manage the capital expenditure at 145,000 per room while we're delivering this? Also, could you please share your expectations regarding its future revenue per available room and the unit economics, including the payback period? Thank you.

Well, thank you very much, Sijie, for your questions. Let me answer that. Atour 4.0 with nature distinguishes itself from our traditional business hotels or others. It incorporates many natural elements to create a sense of tranquility, providing a relaxing and leisurely atmosphere for our guests, whether they are on business trips or constantly on the go. For a mature Atour 4.0 hotel, we anticipate a RevPAR target of RMB400. Additionally, with breakthroughs in design styles and upgrades in both facilities and amenities, the CapEx per room would be around RMB145,000, based on a total of 140 rooms. Atour 4.0 adopts a large-scale modular design, which helps to ensure better project quality while also reducing material usage and construction time. In general, the investment return period for Atour 4.0, including the renovation period, is estimated to be 3.5 years, which is shorter than the previous version. We expect that Atour 4.0 will continue to enhance our competitiveness in the upper mid-scale hotel market and support our long-term growth. Thank you.

Thank you, Sijie. Let's have our next question.

Thank you. We are now going to proceed with our next question. And the question comes from Ronald Leung from Bank of America. Please ask your question.

The performance of the retail business in the third quarter continues to exceed expectations. There was also another breakthrough during 2011. Could you provide insights into the company's future plans and growth expectations for the retail business? Thank you very much.

Thank you for your question. Our midterm strategy for the retail business focuses on two main approaches. The first is a subtraction; we intend to concentrate and enhance our presence in the sleep market. The second is an addition; we will utilize our insights into customer behavior and technology to continuously improve our product research and development and expand our deep sleep product categories. As we have previously mentioned, our retail product capabilities are consistently advancing, from the popular deep sleep pillow that received notable recognition to the deep sleep temperature control quilt, which achieved a monthly GMV of over tens of millions in September. Additionally, we have more products set to launch soon that showcase the effectiveness of our product R&D, especially the strong systems in place for that. A new product in our deep sleep series, including the Deep Sleep Mattress, will be officially launched soon. Our deep sleep product line is continually growing, gradually transitioning from hotel users to a wider consumer base. This growth has significantly enhanced Atour Planet's brand presence within the sleep economy. Our retail revenue reached RMB235 million in the third quarter, showing a remarkable increase of about 292% year-over-year. During the recent 11.11 Shopping Festival, we led the pillow sales on various third-party e-commerce platforms. The GMV from the 11.11 event across all third-party e-commerce channels surpassed RMB250 million, marking an increase of over 600% compared to the same period last year and over 140% more than this year’s June 18th Shopping Festival. With all these developments, we project our retail revenue for the year to reach RMB900 million, with year-on-year growth exceeding 250%. Thank you.

Thank you. We can take our next question.

Thank you. We are now ready for the next question. The question comes from the line of an analyst from Citi. Please go ahead, your line is open.

Thanks, management. I'm interested in the rapid progress regarding signing and opening new stores. Could you provide more information about the current business situation of the stores? Additionally, we need to infuse more passion into the group's plan development alongside the increase in production of Atour Light. Thank you.

Thank you for your question. Let me answer this one. As of the end of September, Atour Light 3.0 has accumulated 71 fine projects, consistently gaining recognition from our franchisees. 13 hotels have been opened, primarily focusing on core business districts in higher-tier cities. These stores aim to set a benchmark for quality in the mid-scale hotel segment. Looking at those Atour Light 3.0 hotels that are currently opened, they had a significantly shortened ramping-up period as a new product. Both ADR and RevPAR are highly competitive when compared to other mid-scale hotels in the same business districts. Overall RevPAR next year, despite the structural changes and pressures from the rapid expansion of new hotels and the increasing proportion of Atour Light, we plan to enhance product competitiveness through product upgrades and rejuvenation of existing hotels. Additionally, support for new hotels ramp-up will continue, aiming for sustained and healthy growth in RevPAR. The goal is to achieve moderate growth compared to this year's RevPAR as a baseline. Thank you.

Thank you. We are now going to wait for a few minutes before taking the next question. That concludes the question-and-answer session. I would like to turn the conference back over to Alison Zhang for any additional or closing remarks. Thank you.

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

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.