Earnings Call Transcript - ATAT Q1 2023

Queenie Chen, Senior Manager of Investor Relations

Thank you, operator. Good morning, and good evening, everyone. Welcome to our first quarter 2023 earnings call. Joining us today are Founder, Chairman and CEO, Mr. Wang Haijun and our Co-CFOs, Mr. Rui and Mr. Wang Shoudong. Before we start, please note, the discussion today will include forward-looking statements made under Federal Security Laws that are subject to numerous risks and uncertainties. Actual results may differ materially from those stated or implied by our comments today. The company does not undertake any obligations to update any forward-looking statements except as required by applicable laws. During today's call management will also discuss certain non-GAAP financial measures for comparison purpose only. For definition of non-GAAP financial measures and the reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today. In addition, 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.

Haijun Wang, CEO

Thank you Queenie. Hello everyone and thank you for joining Atour's first quarter 2023 earnings call today. I'm pleased to share with you that Atour commenced the year 2023 on a strong note, achieving solid results in both our hotel and scenario-based retail businesses. Our core value proposition to serve people with exceptional experience continues to guide our steps as we refine and polish our hotel services and lifestyle products to deliver Atour experiences to every customer. These uncompromising efforts, combined with our dedication to excellence, drove a robust recovery in both the hotel and retail businesses during the first quarter. We continue to execute our three-year development plan to open 2,000 premier hotels while establishing the Chinese experience as the industry benchmark, which we believe will solidify our leading position in the upper midscale hotel industry post-pandemic. Now let me go through our performance details across our business lines. First, our hotel business development. As we enter into the post-pandemic era, we are seeing a rapid market recovery driven by a surge in travel and accommodation demand. Embodying our three-pronged mantra, high quality, high value and high efficiency, Atour responded quickly to the first quarter's rising market opportunities and achieved parallel growth in ADR and OCC. Our RevPAR for the first quarter rebounded significantly to 118% of 2019's level for the same period, while both ADR and occupancy rates exceeded 2019's level, demonstrating our exceptional recovery capability. Looking at the first quarter in greater detail, our RevPAR recovery rate was 102%, 136%, and 119% of 2019's level for January, February and March respectively. Furthermore, same hotel RevPAR for mature hotels in operation for more than 18 months recovered to 118% of 2019's level in the first quarter, showcasing a vigorous rebound of our business at the operational level. For the five-day Labor Day holiday, explosive demand for travel and hotels stimulated further improvement in RevPAR to 133% of 2019's level. Notably, RevPAR's recovery rates soared to over 160% of 2019 level in various provinces such as Shandong, Fujian and Hubei, among others. The pandemic during the second half of 2022, combined with the Chinese New Year holiday in the beginning of 2023, slightly impeded our overall progress with respect to new openings in the first quarter. However, alongside the market recovery, franchisee engagement trends have continued to improve. The number of new hotels we signed in the first quarter reached 94, representing a new record high for single-quarter signings. Furthermore, among our newly signed hotels, the repurchase rate from our existing franchisees was more than 40%, highlighting our product competitiveness and brand premium. It's also worth mentioning that our Atour Light 3.0 version has quickly gained market acceptance, achieving a remarkable performance with a total of 16 new projects signed by the end of Q1 since its release on February 22 of this year. Our hotel network continues to grow rapidly. As of the end of the first quarter this year, we had extended our coverage to 968 hotels, representing a year-over-year increase of 23%. Meanwhile, our pipeline remained healthy and continued to expand. Excitingly, we commenced the operation of our portfolio's 1,000 premier hotel today in Lanzhou, marking the inception of our 1,000 hotel era. As of the end of the first quarter, we had 413 hotels under development. We will continue to pursue and analyze the ever-evolving market prospects alongside opportunities to consolidate the hotel market as we aim for opening a total of 280 hotels by the end of this year. Our loyalty program and Central Reservation System, or CRS also maintained their steady growth momentum in the first quarter, benefiting from our high quality services and premier customer experiences. As of the end of Q1, our membership base surpassed 38 million, with an increase of over 2.8 million new members since the end of the previous quarter. Our members are young and engaged, representing the most energetic and promising consumer group in China. Among those members who stayed with us in the first quarter, about 46% of them were aged 30 to 40, and 25% were younger than 30. Meanwhile, the percentage of our nights sold through our CRS exceeded 60% in the first quarter of 2023, sustaining its healthy growth trend. Now moving to our scenario-based retail business. As a leading lodging-centric lifestyle brand, the retail business is a natural extension of our expertise in hospitality, reaching beyond accommodation to harmoniously complement our value proposition to serve people who have diverse lifestyles. In the past few years, we have successfully developed three product lines, namely Atour Planet, Z To Go and Soccer, focusing on sleep, travel, and aroma aesthetics, respectively. Through these premium offerings, we deliver Atour's signature experience of comfort, ease and relaxation to our customers when they are at home as well as on the go. These high-quality lifestyle products, along with our diversified online and offline distribution channels, and our continuously improving brand awareness, underpinned the robust growth of our innovative scenario-based retail business during the first quarter, further solidifying its role as our second growth driver. GMV increased by almost 200% year-over-year to RMB142 million in the first quarter of 2023 propelled by rapid growth in both our online and offline distribution channels. Revenues from our scenario-based retail business for the quarter reached the RMB100 million milestone, reflecting its powerful growth momentum. Currently, we are purposefully focused on our sleep category, with Atour Planet products as our cornerstone. In the first quarter, Atour Planet contributed nearly 80% of our retail businesses total GMV. In March, we launched the upgraded 2.0 version of our Atour Planet, R90 deep sleep pillow following a comprehensive user feedback study. We creatively refined the pillow's design and construction to strike the optimal balance between comfort and functionality. Thanks to these luxurious features, the Atour Planet R90, 2.0 version pillow became a popular product quickly after its release and has garnered enormous user recognition with its sales performance significantly exceeding the level of the 1.0 version for the comparable period. Our retail business is deeply rooted in our lodging-centric lifestyle brands philosophy. Adhering to our original goal of bringing the Atour Hotel experience into our customers' homes, we remain committed to exploring deep sleep from every angle as we strive to deliver a comfortable and relaxing sleep experience. We are very optimistic about the massive potential and development opportunities in China's sleep market. Moving forward, we will continue to strengthen our insight into users' evolving needs and push the boundaries of product development, providing our users with premier sleep experiences through a diverse and growing suite of sleep-related products. We believe that our ongoing holistic improvements across our product development capabilities, operational efficiency, and brand awareness will establish Atour as an important player in China's sleep products market. Since our establishment in 2013, we have consistently endeavored to provide our customers with cultural, inviting, and interesting experiences throughout every step of their journeys, creating an intimate ambiance where people can warmly connect. Meanwhile, we continuously explore new possibilities and expand our consumption scenarios, catering to the refined expectations of those who demand a high-quality lifestyle. Our value proposition originated with a goal to provide an exceptional experience to customers during their stay with us, which we further elevated to serve people who have diverse lifestyles. This has not only elevated our strong performance across both our hotel and retail businesses; it has also become the driving force behind Atour's core competitiveness and our key differentiator. As we move forward, this value proposition will further empower us to drive long-term sustainable growth and create greater value for our customers, franchisees, employees, and shareholders.

Shoudong Wang, Co-CFO

Thank you Mr. Wang. Now I would like to present the company's financial performance for the first quarter of 2023. Our net revenues for the first quarter of 2023 grew by 71.2% year-over-year to RMB774 million. The strong increase in the first quarter was driven by growth in both the hotel business and the scenario-based retail business. Revenues from our managed hotels for the first quarter of 2023 were RMB447 million, up by 63.2% year-over-year. This increase was primarily driven by the ongoing expansion of our hotel network and the recovery of RevPAR. As of the end of March this year, the total number of our managed hotels increased to 935, up by 24.3% year-over-year, while RevPAR of our managed hotels surpassed the pre-pandemic level in 2019, increasing to RMB331 for the first quarter of 2023. Revenues contributed by our leased hotels for the first quarter of 2023 were RMB187 million, representing an increase of 67.9% year-over-year. The increase was primarily due to the recovery of RevPAR, driven by increased customer traffic and stronger consumption sentiment since the beginning of 2023. RevPAR of our leased hotels surpassed the pre-pandemic level in 2019, increasing to RMB464 for the first quarter of 2023. Revenues from retail and others for the first quarter of 2023 increased by 109.5% year-over-year to RMB140 million, with scenario-based retail revenue growing by 174.3% year-over-year to RMB113 million. The increase was attributable to the growing recognition of our retail brand and enhanced product capabilities. Our hotel operating costs for the first quarter of 2023 increased by 18.1% to RMB382 million year-over-year, mainly due to the increase in variable costs associated with the ongoing expansion of our hotel network and recovery of RevPAR. Hotel operating costs accounted for 49.3% of net revenues for the first quarter of 2023 compared to 71.5% of net revenues for the same period of last year. Other operating costs primarily consist of costs for our scenario-based retail business and costs of other revenues. Other operating costs for the first quarter of this year were RMB72 million, representing an increase of 124.5% year-over-year, driven by increased costs in line with the rapid growth of our scenario-based retail business. Other operating costs accounted for 9.3% of net revenues for the first quarter of 2023, compared to 7.1% of net revenues for the same period of 2022. Selling and marketing expenses for the first quarter of 2023 increased by 135.6% to RMB56 million, primarily driven by the increased investment in branding initiatives and distribution channel development associated with our growing scenario-based retail business. Selling and marketing expenses accounted for 7.2% of net revenues for the first quarter of 2023 compared to 5.3% of net revenues for the same period of 2022. General and administrative expenses for the first quarter of 2023 were RMB193 million. Excluding share-based compensation expenses of RMB141 million, adjusted general and administrative expenses increased by 13.8% year-over-year to RMB52 million for the first quarter of 2023. General and Administrative expenses, excluding the impact from share-based compensation expenses accounted for 6.7% of net revenues for the first quarter of 2023, compared to 10.1% of net revenues for the same period of 2022. Our technology and development expenses for the first quarter of 2023 were RMB17 million, which were generally in line with the same period of 2022. Adjusted net income for the first quarter increased by 2,114.3% year-over-year to RMB160 million. Adjusted EBITDA for the first quarter of 2023 was RMB231 million, up by 584.8% year-over-year. Notably, we have maintained a healthy cash position ending Q1 with RMB 2.0 billion in cash and cash equivalents. Among them, net cash was RMB1.8 billion, representing an increase of 24.5% quarter-over-quarter. That concludes our financial highlights for the first quarter of 2023.

Sijie Lin, Analyst

Thank you management, and congrats on the strong results. So I have one question about RevPAR. Our Q1 RevPAR recovery reached 118%. So how's the RevPAR recovery in Q2, and for the full year of high recovery will we adjust our guidance? Thanks.

Haijun Wang, CEO

Thank you very much, Sijie, for that question. In Q1, there were some factors due to the retaliatory rebound. And we were not sure whether that trend was going to be long-term. So we needed to observe. That's why on last quarterly earnings call we gave a cautiously optimistic guidance which is single-digit positive growth for the whole year. We Atour always position ourselves in the upper midscale segment where there are no structural factors benefiting our recovery. As I said in the report in the first quarter of this year, our RevPAR recovery rate for all of our hotels, as well as for those mature hotels in operation for more than 18 months, were both 118%, showcasing a vigorous rebound of our business at an operational level. As for Q2, now that we see in April and the Labor Day holidays in May, the RevPAR recovery trend is looking quite good. So we are confident to reach a 110% recovery rate for the whole year. Thank you.

Ronald Leung, Analyst

Okay, let me ask the question in English. So management, how do you think about the franchisees and do you think there is good improvement in 2023? Also, if the RevPAR can continue to improve and be better than expectations, do you think there is any chance that the 280 hotels opening can be better than the number of guidance this year? Thank you very much.

Haijun Wang, CEO

Thank you very much for that question, Ronald. In the first quarter, in terms of signings, we made some rapid progress reaching 94 signings, which is the highest level of single quarter signings in history. Among those new signings, we found that over 40% of them are actually repurchases from our existing franchisees, and that really gave us a lot of encouragement. We do believe that with the recovery of the market, and given our pipeline reserves, we already have 413 in the pipeline from the first quarter. Together with the opportunities for chain hotels brought by the ongoing industry consolidation, we will be able to support the new hotel opening target of 280 this year. Atour always prioritizes quality over quantity. We believe that quality is a prerequisite for long-term healthy development. Also, just now you have heard that today marks the landing of our 1,000 hotels in operation that was in Lanzhou, marking that we have officially entered the 1,000 hotel era, and we will maintain this expansion speed while ensuring the quality of our products and those hotels.

Lydia Ling, Analyst

Hi management. Lydia from Citi. I have a question regarding the competitive landscape in the mid to upscale hotel segment. As the hotel industry gradually recovers, many hotel companies are shifting their model and investing more in that mid to upscale segment. With more hotel supply in the mid to upscale segment, do you face more intense competition and how do you plan to further enhance your competitiveness in this segment? Thank you.

Haijun Wang, CEO

The hotel industry has two approaches: cost-focused or experience-oriented. At Atour, we prioritize experience. Since our inception, our strategy of delivering exceptional experiences has built a strong reputation with our customers, increasing their satisfaction and likelihood to return. Our core principles of high quality, high value, and high efficiency have ensured consistent, long-term returns for our franchisees. This has also allowed us to gradually build recognition and market share with our franchisee partners. According to industry research, in terms of the number of rooms, Atour maintains the leading market share among the largest upper midscale hotel chains in China, and our advantage continues to grow. While competition exists, the overall trend indicates an increase in hotel chain penetration, making this industry less of a zero-sum game. Companies that excel in branding, operational capabilities, customer experiences, and innovative models will experience high-quality and sustainable growth.

Andy Fu, Analyst

Thank you management for taking my question. Congrats on the good earnings performance and the net income in the first quarter. Can management break down the reasons behind the outperformance in earnings? Also, considering the quick recovery in the travel channel, do we have an update on the expectation for earnings in the second quarter and the full year 2023? Thanks.

Shoudong Wang, Co-CFO

Thank you for that question. I'll be taking this question. Our company in the first quarter did achieve good performance. Our adjusted net profit was RMB160 million and the adjusted net profit margin was at 20%. Firstly, in terms of gross margin, our Q1 gross margin was 41%, which was 20% higher compared with Q1 of 2022. There were mainly two reasons. The first is that with our light asset model, we benefited from the rapid recovery of RevPAR and the economy of scale effect brought by the expansive expansion of our hotel network. The second reason was due to the continuous development of our relatively higher gross margin retail business. The revenue contribution from our retail business has continued to increase with its gross margin also improving. Those two reasons have driven our overall gross margin higher. In terms of expenses, our three expenses accounted for 16% of revenue in the first quarter this year, down by 3% year-on-year. Marketing expenses accounted for 7% of revenue, which was up by 2% because we increased our investment in branding initiatives and developing distribution channels for our scenario-based retail business. The remaining 9% of revenue were administrative and R&D expenses, down by 5% compared to last year, since we improved our management efficiency. The increase in management and R&D expenses was much smaller than the growth speed of our revenue. In the future, with our continuous expansion of our hotel network, along with the gradual implementation of the economy of scale effects plus the ongoing development of our retail business, we expect our overall profitability to maintain stable growth in the longer term.

Xin Chen, Analyst

I'd like to ask the question regarding the revenue potential. How does management perceive the growth potential of this scenario-based retail business? What can we expect from this future divestment, and how will it impact Atour's financials? Thanks.

Haijun Wang, CEO

Thank you for that question, Mr. Xin Chen. I'll talk about the business conditions of our retail business and then I'd like to ask Mr. Wang Shoudong to supplement on the financial side. We, as a lodging-centric lifestyle brand, see our retail business as a very natural extension of our expertise in hospitality, reaching beyond accommodation to harmoniously complement our value proposition to serve people who have diverse lifestyles. Our offline hotel scenes can provide a natural experience space, which also brings a lot of natural traffic to our retail businesses. Retail, on the other hand, helps to bring the Atour experience back to customers' homes, improve their perception of Atour, and also brings some back to our hotels for more stays in the future. The retail and hotel businesses form a nice loop with that kind of synergy. Product-wise, we currently focus on the pan-sleep category, taking Atour Planet as our core product. In the first quarter, our Atour Planet contributed nearly 80% to our overall GMV of the retail sales, with pillows, mattresses, quilts, and four-piece sets all selling very well. We are very optimistic about China's sleep products market with massive potential and we believe there are considerable development opportunities. We also believe Atour will find its place in China's sleep economy in the future. Apart from leveraging our expanding hotel network as both the consumption themes and customer traffic sources, we have also been developing online third-party channels that are growing rapidly from both offline and online.

Shoudong Wang, Co-CFO

Our scenario-based retail business last year reached a revenue of RMB254 million and already achieved a positive bottom line. For the first quarter of this year, our scenario-based retail revenue reached a milestone of RMB100 million. We expect our full-year revenue to reach above RMB400 million with an increase of more than 80% year-on-year, with profitability also increasing accordingly. Meanwhile, with stringent ROI requirements and reasonable profits, we will also increase investment in branding initiatives and distribution channel expansions to ensure that our scenario-based retail's contribution to the group's overall profit increases year by year.

Queenie Chen, Senior Manager of Investor Relations

Thank you, Operator. Thank you everyone once again for joining us today. If you have any further questions, please feel free to contact us. Have a great day. Goodbye.

Operator, Operator

Thank you. This does conclude the conference for today. Thank you for participating and you may now disconnect.