Earnings Call Transcript - ATAT Q2 2024

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Atour Lifestyle Holdings Second Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Alison Zhang, Director of Investor Relations. Please go ahead, ma'am.

Alison Zhang, Director of Investor Relations

Thank you, operator. Good morning, and good evening, everyone. Welcome to our second quarter 2024 earnings conference call. Today, you will hear from our Founder, Chairman, and CEO, Mr. Wang Haijun; and our Co-CFO, Mr. Jianfeng Wu. 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 accessible on our website at ir.yaduo.com, where a copy of the results presentation is also available. Now, I will turn the call over to Mr. Wang, our CEO.

Haijun Wang, CEO

Thank you, Alison. Hello everyone, and thank you for joining Atour's second quarter 2024 earnings call today. During the second quarter of 2024, domestic travel market demand remained steady, with leisure tourism continuing its healthy growth alongside evolving customer preferences. By proactively adapting to these market changes, we have further solidified our leadership in the upper midscale hotel sector. We consistently enhanced the Chinese experience in our accommodation services during the first half of the year to meet our customers' varied and quality-focused expectations. At the same time, we effectively took advantage of new opportunities from recent retail business developments. We made significant progress in driving holistic, high-quality growth throughout our business and brand portfolio while deepening our understanding of customer needs and enhancing our brand reputation. Now, I would like to share more details about our performance for the second quarter of 2024. Let’s start with our hotel business. Our RevPAR reached RMB359 in the second quarter, which is 93.5% of the level from the same period in 2023. Notably, our occupancy growth remained strong, achieving 101.7% of 2023's level for the same period, highlighting Atour's resilient demand and strong brand presence. ADR was at 92.8% of last year's level, largely affected by last year's high comparison base. Our mature hotels that have been in operation for more than 18 months continued to outperform the Group's overall results during the second quarter. Excluding structural impacts like new hotel openings, same-hotel RevPAR reached 96.2% of 2023's level for the same timeframe, surpassing the Group's average by 2.7 percentage points. Specifically, occupancy increased by 2.2 percentage points year-over-year, and ADR was at 94.4% compared to the same period in 2023. Our synergistic development of Atour and Atour Light has unlocked substantial growth potential for our group. In the second quarter, we maintained strong momentum in our hotel network expansion, opening 123 new hotels, a 76% increase year-over-year, achieving a record pace for a single quarter. By the end of the second quarter, we had a total of 1,412 hotels in operation, a 37% year-over-year increase, moving us closer to our goal of 2,000 premier hotels across the country by 2025. Franchisee confidence remained robust this quarter, reinforced by our strong brand presence and competitive product offerings. We made significant advances in both the number and efficiency of our new signings, with a notable expansion in our development pipeline. The number of hotels under development reached 712 at the end of the second quarter, supported by many high-quality projects, laying a solid foundation for Atour's sustained growth and nationwide expansion. On June 28, to celebrate Atour's 11th anniversary, we proudly launched our first Atour 4.0 hotel in Xi'an. Inspired by the natural beauty of Yaduo Village, Atour 4.0 transforms the hotel into a peaceful retreat amidst city life. With extensive upgrades including multi-functional workspaces, premium guest room sleep settings, and improved dining services, Atour 4.0 focuses on creating an experience-driven model characterized by superior quality, greater pricing potential, and improved efficiency. In its first month of operation, the Xi'an Nanmen Atour Hotel achieved an occupancy rate exceeding 91% and a RevPAR surpassing RMB710. This outstanding performance not only demonstrates strong market support for Atour 4.0 but also reaffirms Atour's leading role in the upper midscale hotel sector. So far, we have signed 50 Atour 4.0 projects in over 30 cities nationwide, with flagship locations in prime business districts to be launched in succession. As a pioneering product that reflects our deep understanding of customer needs, we believe Atour 4.0 will advance the upper midscale hotel market into a new phase of high-quality development. Finally, regarding Atour Light, since its launch, Atour Light 3.0, our midscale product, has received widespread praise and recognition from customers and franchisees. We are optimistic about expanding Atour Light 3.0 into our second brand with 1,000 hotels.

Jianfeng Wu, CFO

Thank you, Haijun. Now, I would like to present the company's financial performance for the second quarter of 2024. Please turn to Slide 17 of the result presentation. Our net revenue for the second quarter of 2024 grew by 64.5% year-over-year and 22.4% quarter-over-quarter to RMB1,797 million. The year-over-year increase was driven by robust growth in the Manachised hotel business and retail business. The quarter-over-quarter increase was mainly attributable to an increase in RevPAR, which reached RMB359 for the second quarter of 2024, compared with RMB328 for the previous quarter. Revenues from our Manachised hotels for the second quarter of 2024 were RMB1,027 million, up by 63.9% year-over-year and 22.8% quarter-over-quarter. The year-over-year increase was primarily fueled by our ongoing hotel network expansion and the rapid growth of our supply chain business. The total number of Manachised hotels increased to 1,382 as of June 30, 2024, up by 38.1% year-over-year. The quarter-over-quarter increase was mainly due to an increase in RevPAR. RevPAR of our Manachised hotels was RMB355 for the second quarter of 2024, compared with RMB324 for the previous quarter. Revenues contributed by our leased hotels for the second quarter of 2024 were RMB180 million, reflecting a 17.9% year-over-year decline, about 7.3% quarter-over-quarter increase. The year-over-year decline was primarily due to a decrease in the number of these hotels as a result of our product mix optimization as well as a decrease in RevPAR. The quarter-over-quarter increase was driven by an increase in RevPAR; our leased hotels RevPAR was RMB503 for the second quarter of 2024, compared with RMB455 for the previous quarter. Revenues from our retail business for the second quarter of 2024 were RMB537 million, marking a significant increase of 153.6% year-over-year and 28.8% quarter-over-quarter. These increases were driven by widespread recognition of our retail brands and effective product innovation and development as we successfully broadened our range of product offerings. In the second quarter of 2024, comforter sales accounted for over 20% of retail revenues, further accelerating the growth of our retail business.

Operator, Operator

Thank you. We will now start the question and answer session. For everyone's benefit on today's call, if you ask your questions in Chinese, please repeat them in English immediately afterward. Please limit your questions to one at a time, and if you have follow-up questions, kindly return to the queue. One moment for the first question.

Dan Chee, Analyst

Please allow me to translate my question. This is Dan from Morgan Stanley. First of all, congratulations on the new quarterly record for hotel openings. I have two related questions about hotel openings and signings. We noticed that signing progress was very strong in Q2, but Mr. Wang also mentioned a year-on-year decline in RevPAR due to a high base. Will this change in RevPAR impact the signing progress in the second half of this year compared to the number of signings in the first half? My second question is, given the strong openings so far this year, will the company revise the full-year opening target of 360 hotels? That's all for my questions. Thank you.

Haijun Wang, CEO

Thank you, Dan. We have made significant progress this year in both new openings and new signings. In the second quarter, we continued a strong trend in hotel network expansion with 123 new hotel openings, setting a new quarterly record. This acceleration in openings during the first half of the year gives us confidence to raise our full-year new openings target from 360 to 400. Regarding new signings, our strengthening brand influence and product competitiveness in the upper midscale and midscale markets have encouraged franchisees to express strong interest in joining our Atour system. By the end of the second quarter, we have over 700 hotels under development. Furthermore, we have implemented stricter quality requirements this year as we aim for quality growth. Franchisees acknowledge our excellent operating performance and the long-term returns our brand offers in the market. We plan to sustain this momentum and maintain a healthy signing pace in the third quarter. Additionally, with the rising chain rate of the upper midscale and midscale hotel market in China, we see increasing customer demand for higher quality products and enhanced accommodation experiences. We have the capacity to leverage our Atour and Atour Light brands to set ourselves apart and extend our brand influence, paving the way for future growth of both brands. Thank you.

Alison Zhang, Director of Investor Relations

Thank you, Dan. Next question, please.

Xin Chen, Analyst

Let me translate. I'm Xin Chen from UBS. Thank you to the management for the opportunity to ask questions. My first question is about the company's RevPAR performance since July, and whether there is guidance for the full year 2024 RevPAR. My second question is regarding the changes in the Group's revenue structure, and if you could provide some insights on the full-year margin outlook. Thank you.

Haijun Wang, CEO

Thank you, Xin Chen, and let me try to answer your questions. In the third quarter last year, with the full recovery of domestic tourism, we observed that the number of tourists embarking on summer trips significantly exceeded 2019 levels. This year, our performance in the tourism market has shown some resilience. However, we expect that the high base effect from last year's summer peak season will still be evident in this year's July and August performance. Looking at the entire year, we notice that some uncertainties remain for RevPAR. Nonetheless, we are quite confident in our performance, particularly after adjusting for the impact of new hotels ramping up. We anticipate that the same hotel RevPAR for mature hotels operating for more than 18 months will outperform the Group’s blended performance by about 2 percentage points, maintaining a relatively stable position. Regarding our revenue guidance, despite some fluctuations in RevPAR, we expect the group's 2024 revenue to continue to grow at a faster pace. As previously mentioned, we are raising our 2024 full-year revenue growth guidance from 40% as estimated in the last quarter, to a range of 48% to 52% year-over-year, driven by our ongoing hotel network expansion and rapid retail business development. As for profit, considering this year's RevPAR fluctuations, and as you have pointed out, along with changes in our revenue structure and the ongoing optimization of our cost structure, our adjusted net profit margin is expected to remain at about 18% for the whole year. Thank you.

Alison Zhang, Director of Investor Relations

Thank you, Xin. Next question, please.

Sijie Lin, Analyst

Congratulations on another strong quarter. I'm pleased to see our continuous breakthroughs in product upgrades. Could you share the opening guidance for Atour 4.0 this year and its impact on RevPAR growth? Also, regarding our upscale brand upgrades we mentioned earlier, what is the current progress? Thank you.

Haijun Wang, CEO

Thank you, Sijie, for your question. With the grand opening of our first Atour 4.0 hotel, our upper midscale hotel market has entered a new stage of high-quality development. Currently, there are 50 Atour 4.0 hotels in our pipeline. We will gradually introduce benchmark projects in various core business areas to the market, and we expect to open 8 to 10 Atour 4.0 hotels within this year. For the first batch of Atour 4.0 projects, we are setting higher standards and requirements for aspects like site selection and property conditions. We have a strict screening process because we aim to create a number of benchmark Atour 4.0 hotel projects that can better showcase our brand value and market competitiveness. As we previously mentioned, our first Atour 4.0 hotel achieved a RevPAR exceeding RMB710 and an occupancy rate surpassing 91% in its first month of operation. Its excellent operating performance has far exceeded our expectations and further strengthened our confidence in the Atour 4.0 product line. We believe that as we gradually expand the scale of Atour 4.0 hotels, they will positively contribute to the RevPAR of the entire group. Regarding our upscale brand, we plan to officially launch our next generation upscale brand within this year, with the aim of continuously revitalizing our brand's development. Thank you.

Alison Zhang, Director of Investor Relations

Thank you, Sijie. Next question, please.

Ronald Leung, Analyst

Congratulations to management for achieving very rapid expansion in the midscale market. Could you elaborate on the new opening target for Atour Light 3.0 this year? Also, could you share some insights on the initiatives of Atour Light to connect with the younger demographic and enhance brand recognition? Thank you very much.

Haijun Wang, CEO

Thank you, Ronald. Since the launch of our Atour Light, it has received significant recognition in the market. In the second quarter of this year, we signed a total of 37 new Atour Light 3.0 agreements, which accounted for over 20% of our total new signings. By the end of June, we had 54 Atour Light 3.0 hotels in operation, and we anticipate that around 70 to 80 new Atour Light 3.0 hotels will open this year, potentially bringing the total to 100 by year-end. Our focus on diversifying and appealing to younger consumers in China has led to a noticeable increase in the proportion of young and female consumers for Atour Light. In the first half of this year, the percentage of consumers under 30 reached 30%, nearly 5 percentage points higher than in 2023, while the proportion of female consumers approached 50%. To support our philosophy of a relaxed lifestyle, we have been consistently enhancing our unique services at Atour Light hotels, including expanding partnerships with well-known cultural IPs. We aim to better meet the needs of young business travelers, raising their awareness of our brand and continuing to grow our membership and consumer base. Thank you.

Alison Zhang, Director of Investor Relations

Thank you, Ronald. Next question, please.

Liu Ji Wei, Analyst

I'll translate my question. I am Ji Wei from CITIC. I understand the company announced a dividend plan for the next three years, estimating the dividend payout ratio to be about 60% of last year's net growth rate. What is the guidance on the dividend payout ratio for the next two years? Additionally, will the company consider other shareholder return plans, such as share buybacks? Thank you.

Haijun Wang, CEO

Thank you, Ji Wei, for your question. We have always been assessing and implementing sustainable returns for our shareholders. Given our confidence in the company's long-term development and after careful consideration of our profit distribution, we have announced dividends totaling no less than 50% of our net income from the previous financial year for the upcoming three financial years starting this year. However, since our company is currently in a rapid growth phase, we will retain some flexibility in capital utilization while ensuring business development. The exact dividend amounts will be evaluated based on our actual and projected operational results, financials, cash position, capital needs, and other factors. Additionally, besides cash dividends, we will continue to explore and actively consider other viable methods to share the benefits of our growth with our shareholders. Thank you.

Alison Zhang, Director of Investor Relations

Thank you, Ji Wei. Next question, please.

Lydia Ling, Analyst

Thanks, management. I have a question regarding the retail business, which we saw still has very solid momentum in the second quarter. Can management share what the growth driver is behind this solid growth? Also, could you provide your latest revenue guidance for the retail business? Additionally, what new products are you planning to introduce, and what are the operating profit margins for the retail business? Thank you.

Haijun Wang, CEO

Thank you, Lydia. Atour Planet focuses on enhancing deep sleep experiences and addressing consumer demands for better sleep quality. We prioritize innovation in design and materials in our product development while continuously upgrading our products to meet evolving consumer needs and market trends, ensuring we provide exceptional sleep experiences. Regarding new products, we recently launched our Deep Sleep Thermo-Regulating Comforter PRO, a significant addition to our Deep Sleep series, which reinforces our commitment to user-driven product development. In terms of retail revenue, our second quarter retail revenue reached RMB537 million, reflecting a year-over-year increase of over 150%. This growth not only surpassed the industry rate but also contributed to the overall growth within relevant e-commerce categories. Given our strong performance in the first half of the year, we anticipate that our retail revenue for the entire year of 2024 will double compared to last year. As for our retail operating margins, the gross margin was sustained at 51% in the second quarter due to improved product and channel structures, along with well-controlled expenses. We believe that our retail operating margin will remain in the double-digit range. Thank you.

Operator, Operator

And that concludes the question-and-answer session. I would like to turn the conference back over to Alison Zhang for any additional or closing comments.

Alison Zhang, Director of Investor Relations

Thank you for joining us today. If you have any further questions, please feel free to contact us. We look forward to speaking with you again next quarter. Thank you and good-bye.

Operator, Operator

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.