H World Group Ltd Q3 FY2021 Earnings Call

Thank you. Good morning and good evening everyone. Thanks for joining us today. Welcome to Huazhu Group's Q3 Earnings Conference Call. Joining us today is our Founder and Chairman, Mr. Ji Qi; our CEO, Mr. Jin Hui; our President, Ms. Liu Xinxin; our CFO, Ms. Chen Hui; and our Deputy CFO, Ms. Ye Fei. 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 filings with the SEC. Huazhu 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 a supplementary slide presentation, is available on Huazhu Group's website at ir.huazhu.com. With that, now I will turn the call over to Mr. Qi Ji. Mr. Ji, please.

Good morning and good evening everyone. Thank you for joining us today. I was optimistic at the beginning of last year, and in hindsight, this pandemic has felt like a heavy shower rather than a light downpour. The ongoing variations of COVID-19 and the resurgence we saw last year have had significant effects and uncertainties on the lodging industry, as well as severely impacting consumers' travel activities. This has led to periods of disruption in our hotel construction and opening timelines. The prolonged presence of COVID-19 has understandably diminished the confidence of our franchisees and their willingness to invest in the lodging market. Over the past few years, in response to the increasing influence of external online traffic, we have consistently pursued large-scale expansion to become more self-sufficient. However, we have faced the complexities and challenges posed by the global macroeconomic situation and international politics, all exacerbated by COVID-19. Nonetheless, the Chinese government has been actively promoting supply-side structural reforms and enhancements, aiming to elevate both quantity and quality, which has prompted us to reconsider our strategy and shift our growth focus from primarily scale-driven expansion to a more connected growth model going forward. This means that in addition to the established framework of our hotel network, we will continue to enhance our offerings and improve service quality to enrich the customer experience. We aspire for our hotel products to embody true craftsmanship, being more durable, environmentally sustainable, and providing long-term benefits to our franchisees. We will leverage our core strengths such as loyalty programs, technology, and supply chain capabilities to help our franchisees navigate challenges, streamline hotel management, and achieve better profitability over time. I would like to acknowledge our new management team, CEO Jin Hui and President Liu Xinxin, who have both been with Huazhu for many years and have made significant contributions to the company. I appreciate their dedication during these challenging times in their new roles, and I am confident they will provide strong leadership for Huazhu as we enter this new growth chapter. With that, I will turn the call over to Jin Hui for an update on our business development. Thank you.

Thank you, Ji Qi. As Ji Qi mentioned, Huazhu is shifting its growth strategy from major growth to linked growth. We have already implemented COVID-19 prevention measures since the outbreak began in 2020. To ensure customer safety, all our hotels are required to use contactless services such as self-check-in and check-out, robust delivery, and online checking through our Huazhu app. These initiatives help minimize time spent in public areas, thereby reducing the risk of virus transmission. In May 2020, we introduced the Comfort 360 White Paper, the first in the Chinese lodging industry, which details professional cleaning standards. Earlier this year, we enhanced our Comfort 360 program in partnership with our quality hotels, placing a strong focus on COVID-19 prevention, safety, and improving customer experiences. We are using online big data management alongside offline quality checks to ensure effective implementation of this program. Currently, 67% of our operational hotels meet all four standards laid out in the Comfort 360 program. The quality of our hotel products and services is vital for our growth strategy, prompting us to continually upgrade the program to deliver exceptional experiences for our customers. Since January, COVID-19 has recurred eight times in various scales, which has notably affected our RevPAR recovery. As of November 23rd, our month-to-date RevPAR has recovered to 68% of the 2019 levels. The ongoing COVID-19 outbreaks and government-imposed travel restrictions have significantly hindered our construction timelines and hotel openings. Our new signings have seen a healthy growth of 41% by the end of September, with over 2,100 new signings, although the pace slowed slightly in the third quarter as our franchisees have adopted a more cautious approach in this uncertain environment. In June, we introduced a new franchisee care policy offering discounts and deferred management fee payments for franchisees in high-risk areas. We are committed to supporting our franchisees during these challenging times. Regarding upscale hotel development, as of September 30, we have opened 10 upscale hotels and signed 44 more. We are also rebranding around 20 upscale hotels previously managed by other groups, which will help us better penetrate the high-end market while allowing us to manage the associated challenges. We are confident in our ability to establish a distinctive presence in the upscale sector. Furthermore, we are investing in IT development to enhance customer engagement and empower our franchisees. Although we lead in the IT market, there is still potential for improvement. We aim to drive effective business empowerment by leveraging technology for our linked growth strategy moving forward. Thank you.

Thank you. Good morning or good evening to everyone, wherever you are. Let's move on to our operational and financial review for the third quarter of 2021. Our hotel network expanded by 14% in Q3 to 723,000 compared with 634,000 last year. Excluding DH Legacy, Huazhu's hotel network expanded by 14% year-on-year to roughly 700,000 in Q3 2021. In the third quarter, our total hotel turnover grew at 15% year-on-year to RMB12.2 billion, primarily due to continuous network expansion in China, while offset by COVID-19 resurgence impacts. Legacy-Huazhu’s blended RevPAR for Q3 2021 declined 18% compared to 2019. The ADR was flattish compared to 2019 at RMB246 while occupancy was significantly lower due to COVID-19 impacts. Our Legacy DH business continues to recover, with occupancy improving and ADR rising. In Q3 2021, we recorded a total net revenue growth of 12% year-over-year to RMB3.5 billion. Excluding DH, Legacy-Huazhu recorded a 7% year-over-year growth rate. The growth in leased and owned revenue increased by 10% year-over-year to RMB2.3 billion. While net revenue from managed and franchised hotels also grew by 13% due to strong growth of our network in China. Our hotel operating cost for Q3 2021 increased by 17% year-over-year to RMB2.9 billion, driven by higher rental costs for new hotels and personnel costs. However, we remain confident in managing costs and evaluating opportunities for future expansion. The reported operating income was RMB72 million compared to a loss last year and strong prior quarter results, and it was mainly driven by DH business recovery. The adjusted EBITDA income for Q3 2021 was RMB385 million, a year-over-year increase. Our cash balance was RMB5.4 billion, providing a solid foundation for the company to manage challenges. For guidance, considering the current COVID impacts, Huazhu expects growth for Q4 2021 in the range of 6% to 10% compared to the same quarter last year. Now let's open up for Q&A. Thank you.

Thanks and good morning management team. I have two questions. The first question is, we noticed the opening pipeline. The company now has 2,800 hotels in the pipeline. I just want to get the management's view on how many of these could open in the next 12 months and if any are at risk given the current situation.

Okay, I think regarding our pipeline for openings in the next year, the progress has been significantly affected by COVID. However, we still believe these opportunities can be realized without the COVID impact, but we will keep assessing the situation as we move into next year.

Great! And thanks. My second question is related to the high-end hotel. It seems like the company already has at least 10 high-end hotels in operations. I just wonder if you can provide a bit more color and update on these hotels in terms of their RevPAR, the GOP rates, and margin?

In our high-end hotels, the take rates are similar to those of international brands like Marriott and IHG. However, the newly opened hotels have faced significant challenges due to COVID, and we are currently in a recovery phase. We utilize our team's expertise to lower costs and enhance these hotels with IT capabilities. We believe that over time, we can achieve a gross operating profit that is 20% higher compared to other competitors.

Now the Chinese rule is that enterprises have been suffering from a lot of issues, will the cooperation between the company and Sunac be influenced?

Thank you. I have recently spoken with the management team at Sunac. The Chinese real estate industry has faced significant challenges due to macroeconomic and political changes, particularly affecting residential properties. This raises concerns about the liquidity of real estate companies. However, hotel properties generally maintain higher liquidity. In light of the current circumstances, Huazhu's strength lies in our efficient operations, enabling us to navigate these conditions effectively. We remain confident that our partnership with Sunac will continue to thrive, and we are optimistic about potential new hotel openings together next year.

Hello! Thanks for taking my question. I have two questions. Just on the first one, I understand the message about the difficulty to secure contracts and opening hotels due to the COVID situations. I just wanted to understand to what extent this is driven by the housing market downturn and liquidity situations in China.

Given the ongoing recurrence of COVID-19, we have indeed observed a decline in supply, especially among independent hotels, which presents opportunities for Huazhu to consolidate the industry. The situation in China has improved, and we are experiencing a strong recovery in business and demand across various segments.

Thanks for the answer. My second question is related to your earlier point about consolidating the markets. How is management considering using their balance in the current difficult situation? Has guidance changed for the full year?

Huazhu remains open to mergers and acquisitions and actively looks for opportunities to serve different hotel segments. Besides mergers and acquisitions, we are utilizing management and joint ventures for operations in various parts of China. We will provide more details to the market soon.

Thank you everyone for taking your time with us today, and we look forward to connecting with you again in the coming quarter. Thank you. Bye-bye!

That does conclude the conference call for today. Thank you for your participation. You may now disconnect your lines.