Good day and thank you for standing by. Welcome to the H World Q1 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jason Chen, Head of IR. Please go ahead.

Thank you. Good morning and good evening, everyone. Thanks for joining us today. Welcome to H World Group 2025 first quarter earnings conference call. Joining us today is our Chairman, Mr. Ji Qi; our CEO, Mr. Jin Hui; our CFO, Ms. Chen Hui; and our CSO, Ms. He Jihong. 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. H World Group does not undertake any obligations to update any forward-looking statements except as required under 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 early today. As a reminder, this conference call is being recorded. The webcast of this conference call as well as a supplementary slide presentation is available at ir.hworld.com. With that, now I will hand over the call to our CEO, Mr. Jin Hui to discuss our business performance in the first quarter of 2025. Mr. Jin, please.

Hello, everyone. Thanks for joining H World's first quarter of 2025 earnings conference call. First of all, I'd like to share some of our observations on the industry during the quarter. In the first quarter, we observed that overall travel demand remained resilient and continued to grow steadily, based on data from the Railway and Airline industries. However, RevPAR faced some pressure, particularly on ADR, which we attribute primarily to the significant increase in supply from last year. Consequently, our RevPAR declined by 3.9% year-over-year, with ADR down by 2.6% year-over-year and occupancy rate dropping slightly by one percentage point. This slight dip in occupancy can be largely attributed to the new hotels that opened in recent quarters still ramping up their operations. As we moved into the second quarter, tariff issues that arose in April created some uncertainties regarding market outlook. Additionally, we observed some temporary solutions for these tariff concerns. We remain cautious about potential future volatility and uncertainties. Nonetheless, in terms of leisure travel, we maintain a relatively positive outlook as we noticed a strong overall demand and willingness among travelers. For example, during the Chinese New Year, Qingming Festival, and Labor Day holidays, the number of travelers and total spending increased by mid-to-high single digits year-over-year. More importantly, third-party data indicated that industry RevPAR experienced positive year-over-year growth during the Labor Day holiday. Therefore, we are developing differentiated strategies for our products and service offerings, complemented by targeted sales and marketing initiatives to effectively capture the rising leisure demand, especially from emerging traveler segments such as silver-haired tourists and inbound tourists. However, we are still navigating some uncertainties and challenges, and we will continue to focus on implementing our core strategy with a long-term perspective. With that, I will share more data regarding our operational performance during this quarter. Please turn to Page 4. In the first quarter of 2025, we opened 695 hotels and closed 155, resulting in a pipeline of 2,865 hotels by the end of the quarter. The slight decline compared to the previous quarter is mainly due to the rapid opening of new hotels and proactive clearance of our pipeline to enhance quality. The new signings during the quarter remained stable and healthy. Please turn to Page 5. The share of upper midscale and above hotels in our pipeline increased significantly by the end of the first quarter, mainly due to the fast new signings of upper mid hotels and variations in construction durations and timings for new openings. Nevertheless, regarding hotel operations, the limited service segment continues to be our core market. As I mentioned earlier, we are maintaining strong growth in the upper midscale segment. Please turn to Page 6. As of the first quarter, the number of operational upper midscale hotels grew by 36% year-over-year to 933, and the pipeline expanded by 22% year-over-year to 523. Over recent years, we have observed a clear trend where customers are prioritizing high-quality products and services that offer good value for money. As such, we have been consistently upgrading our products and core brands to align with the evolving demands of our customers. Please turn to Page 7. The share of newer products within our core brands, including HanTing, JI Hotel, and Orange, has been continuously increasing. In terms of regional expansion, we have made significant progress in lower-tier cities. Please turn to Page 8. By the end of the first quarter of 2025, 54% of our hotel pipeline was situated in Tier 3 and below cities, which is 11 percentage points higher than the share among our operating hotels. Moreover, we are now present in 1,394 cities and countries, an increase of 104 compared to a year ago. Our membership program and direct sales capabilities play crucial roles in achieving long-term sustainable growth. Please turn to Page 9. By the end of the first quarter of 2025, our membership base rose to nearly 280 million. Room nights generated through our central reservation system represented 65.1%, marking an increase of 5.4 percentage points year-over-year. This concludes the operational updates for the first quarter of 2025 for Legacy-Huazhu. Now, I will hand over the call to our CSO, Ms. He Jihong, for an update on Legacy-DH. Thank you.

Thank you, Jin Hui. Please turn to Page 10. In the first quarter of 2025, RevPAR of Legacy-DH improved 12.7% to EUR65 with ADR improved 2.8% and occupancy increased 5.3 percentage points. This increase of RevPAR is a mixture of different markets. We have seen particularly strong performance in North Africa and the Middle East. Please turn to Page 11. In the first quarter of 2025, we did several transactions to change the leased hotel contracts to franchise contracts. Therefore, our Manachised and Franchised hotels increased to 46%. This is a significant improvement compared to 38% in the first quarter of 2024. The percentage of asset-light hotels in our pipeline is 57% in the first quarter of 2025, which is also an improvement compared to the same period last year. With this, I conclude the discussion about Legacy-DH, and I will turn to CFO, Ms. Chen Hui, for financial performance.

Thank you, He Jihong. Good evening and good morning everyone. Let me walk you through our financial review for the first quarter of 2025. Please turn to Page 13. We continued expanding our hotel network. The number of rooms increased 20% year-over-year to over 1.1 million by the end of the quarter. Hotel turnover in the first quarter grew 14% year-over-year. Revenue grew steadily in the quarter. Please turn to Page 14. Our Group revenue increased 2.2% year-over-year to RMB5.4 billion, in line with our guidance. Revenue from Legacy-Huazhu grew 5.5% year-over-year, while DH revenue decreased 11.3% year-over-year mainly due to the transformation of 10 leased hotels to franchised hotels during the quarter. However, our Manachised and Franchised business achieved robust growth of 21.1% year-over-year at the high end of our guidance. The strong Manachised and Franchised revenue growth was driven by our strong network expansion. As a result, our revenue contribution from our asset-light model further enlarged to 46% for the Group and 55% for the Legacy-Huazhu as shown on Page 15. Moving to the cost and expense side, both hotel operating costs and SG&A expenses were well-managed during the quarter. Please turn to Page 16. In the first quarter, hotel operating costs only grew by 1.1% year-over-year, slower than our revenue growth, thanks to our continued asset-light transformation. Total SG&A expenses decreased 1.8% year-over-year or reduced by 4.6% year-over-year if excluding SBC mainly benefiting from 11.1% year-over-year. SG&A expenses decreased from Legacy-DH as a result of the structuring and the cost optimization started at the second half last year. Our Group's adjusted EBITDA grew 5.3% year-over-year to RMB1.5 billion in the fourth quarter, of which Legacy-Huazhu's adjusted EBITDA increased 5.8% year-over-year to RMB1.6 billion. Moving to our cash flow and liquidity position on Page 17. In the first quarter, we generated RMB580 million operating cash flow. As of the quarter end, the Group had RMB11.8 billion in cash and cash equivalent and was in a solid net cash position of RMB6.5 billion. Lastly, turn to Page 18 on guidance. For the second quarter of 2025, we expect our Group revenue to grow 1% to 5% compared to the same quarter last year and 3% to 7% if excluding DH. The Manachised and Franchised revenue is expected to grow in the range of 18% to 22% compared to the same quarter last year. With that, we are ready to take your questions. Operator, please open the line for Q&A.

Thank you. Our first question comes from the line of Candice Zhang from Bank of America. Please go ahead. Your line is open.

Let me translate my questions into English. So I have two questions. My first question is about RevPAR expectations. So what is management's latest expectations on RevPAR for 2Q 2025 and also for the full year 2025? This is my first question. My second question is about the business travel. So the business travel has been under pressure even though off an easy pace last year. Could management share with us any specific weakness and specific reasons behind the weakness? Thank you very much.

Jason Chen: Let me address your questions. Regarding RevPAR, we noted in our prepared remarks that the tariff issue from April caused some uncertainty and volatility in the market outlook. However, year-to-date, we still see steady growth in demand. While the tariff has put some pressure on our business, we are working diligently to manage these challenges and stabilize our RevPAR. On the leisure travel front, data we've gathered indicates that demand remains robust and continues to grow as people's desire to travel is strong. For the second quarter, we anticipate a low-single-digit decline in RevPAR, though it has narrowed sequentially. For the full year, given the uncertainties ahead, we will strive to meet our full year guidance. Regarding business travel, we believe the issues are related more to supply than demand. Over the past two years, there has been significant supply growth, which has pressured RevPAR, particularly ADR. We are focusing more on our corporate clients and B2B business to mitigate some of the demand shortfall from individual travelers. Thank you.

We will strive to meet our full year guidance. Regarding business travel, we believe it's not a demand issue but rather a supply issue. Over the past two years, there has been a significant increase in supply, which has created pressure on RevPAR, particularly ADR. We are focusing more on our corporate customers and B2B business to navigate the uncertainties and the decline in individual travel demand. Thank you.

Thank you. We will now move on to our next question. Our next question comes from the line of Lydia Ling from Citi. Please go ahead. Your line is open.

Hi, management. I have two questions. The first one is on the DH side. We saw some progression on the asset-light strategy in the first quarter. So what's your further plan for the DH strategy to further improve profitability? For example, how many leased and owned hotels do you plan to transfer to franchised looking ahead? My second question is more on the industry supply; how do you evaluate the competition landscape currently in the limited service? And we see some pipeline sequential decline in the first quarter. What's the reason and how is the franchise sentiment on the opening so far? Thank you.

Okay. Let me take the first question about the DH. To improve the profitability of the DH, Legacy-DH business is, of course, our priority. There are different measures and different strategies. Asset-light transactions are one part that can reduce negative impact. So we will continue to be very happy that we finished the transaction of 10 hotels in the first quarter and we will continue to look for opportunities. There are several discussions currently in the pipeline and we will disclose as and when it comes through. Other than asset-light transactions, we are also further looking into reducing our overhead costs, restructuring our business, and streamlining our processes. So in the first quarter, you see still a negative EBITDA contribution. This is because we continued our restructuring efforts. The first quarter is traditionally a very weak quarter as well. We are confident that with time, especially with the second and third quarters coming, our profitability, especially adjusted EBITDA will increase.

Jason Chen: To address your second question about the demand-supply dynamics in the industry, many are worried about the recent decline in RevPAR due to the oversupply in the market. However, H World is actively reforming the supply side of the China lodging industry. We are enhancing our capabilities to ensure our franchisees can still achieve favorable returns on hotel openings. From the perspective of franchisee sentiment, several key costs impact operations. The primary fixed cost has been declining rental expenses over the past few years. Additionally, operational expenses, which include labor, sales and marketing, and supplies, are crucial. H World is dedicated to improving operational efficiency and maintaining low costs. We leverage our strong supply chain management, loyalty programs, and technological capabilities to lead the industry. Overall, I can say that the sentiment among our existing franchisees remains stable and positive. Thank you. Next question, please.

Thank you. Our next question comes from the line of Dan Chee from Morgan Stanley. Please go ahead. Your line is open.

Thank you management for the opportunity. My first question is about DH. After the restructuring program in the second half of 2024, SG&A costs of DH declined 11% year-on-year. Is there still any one-off restructuring costs embedded in this quarter? And going forward, can we assume this quarter's SG&A is clean and normalized? After the cost savings in SG&A together with the 11 asset-heavy hotels changing to asset-light, the adjusted EBITDA loss still widened a little bit by RMB11 million. What's the main reason for such a hotel operating cost increase? My second question is about Legacy-Huazhu. So blended RevPAR climbed 3.9% year-over-year in Q1, but like-for-like declined 8.3% year-over-year. The gap was four percentage points. In the fourth quarter of 2024, there was also a four percentage point gap, but this was wider than the previous quarters. What's the reason for the gap widening? Thank you.

Thank you, Dan. Let me take the first question about DH. The restructuring is still ongoing. Last year, we announced a 30% reduction of overhead costs in one go. That kind of cost effect still needs to be reflected gradually in our costs this year quarter-by-quarter because some of the restructuring efforts are not completely done yet even from last year's restructuring measures. This year, we continue some of the not this kind of 30% one-off, but we still identify possibilities in different departments, in different processes so that we can continue our effort in streamlining. To your question about whether the numbers and SG&A are clean, as of now, I would say not completely yet. We will see some of the effects coming through this year. But we are very assured that with these measures, this will only improve our SG&A in the mid and long term. So please do not look at only the quarter-to-quarter results. We will reflect the whole year when we come to almost the end of our restructuring effort mid this year. Regarding your second question about the first quarter loss, there was actually a very special event in the first quarter that caused this higher loss on paper. We gave up Davos as a hotel for leasing and turned it into a franchised hotel. You know that Davos is a very seasonal event. The whole year of EBITDA focus is on this one week and conference effort. That's why the first quarter results are very much skewed by this one-time event every year. So this year, taking out the Davos event, our EBITDA is comparable to last year even with the continued restructuring efforts. What I wanted to highlight is that we are very conscious of our EBITDA commitments and we are very conscious also in streamlining our unnecessary overhead costs. Please bear with us in the short term. We will still see some variations in SG&A and some of the other costs as well. But we are assured that in the mid to long term, we are on a better way.

To address your second question about the difference between blended RevPAR and like-for-like RevPAR, you are right that the like-for-like RevPAR has not performed as well as the blended RevPAR. There are two main reasons for this. First, it is related to our product strategy, as we continually upgrade our offerings and phase out older versions to enhance overall quality. This has contributed to the widening gap between the two metrics. Secondly, in specific markets, the increase in supply over the years has put pressure on RevPAR, affecting both average daily rate and occupancy rates. We have recognized this issue and are actively optimizing our revenue management to establish more reasonable average daily rates and occupancy levels in those regions. Thank you. Next question, please.

Thank you. Our next question comes from the line of Simon Cheung from Goldman Sachs. Please go ahead. Your line is open.

Let me translate that into English. So the first question is in relation to the hotel opening. We noticed that your hotel openings were actually quite fast in the first quarter, almost 700 and that compared to full year of 2,300. That was actually tracking ahead of the momentum last year. Just checking to see whether there's any timing issue here and whether there are going to be some upside risks to the full year 2,300 hotel additional guidance. And then the second question is about the mid-upscale hotel, whereby I think H World has done a great job in terms of adding the hotels, almost a dozen by now. I think you did mention that out of the 1,500 hotels, they are only exposed to 200 cities and have no intention to go into other new cities. Just wondering the strategy for H World and where do they see growth going forward?

I'm very happy to see that we achieved a good number of new hotel openings in the first quarter, which is one of our key strategies as we aim for high-quality scale growth. We hope that every newly opened hotel will be profitable. Therefore, when it comes to new openings, the quality of the hotel is far more important than just growth in numbers. Jason Chen: We aim to not only capture a leading market share but also establish each of our brands as leaders in their respective segments. In the long term, our goal is to achieve substantial scale and strive for the number one or leading market share. Additionally, we aspire to rank among the top one or two brands in each segment. Jason Chen: While we are experiencing a positive trend with new openings and signings, we prefer to remain cautious and will not be adjusting our full-year opening target at this time. Jason Chen: We have invested significant effort since last year to penetrate the upper-mid segment, and I'm pleased to see your detailed focus on our progress in that area over the last several quarters. Jason Chen: We recognize significant market opportunities, particularly in transforming the traditional upper mid-scale segments. Jason Chen: At the current stage, we would like to focus only on Tier 1 and Tier 2 cities, particularly those prime areas to establish a stronger brand. Jason Chen: The demand is concentrated in Tier 1 and Tier 2 cities, particularly for upper mid-segment hotels. Therefore, in those specific areas, we aim to secure the best locations to establish our brand. Jason Chen: In the long run, we are very confident in pursuing the leading company right now or even surpassing them. Thank you. Next question, please.

Thank you. Our next question comes from the line of Sijie Lin from CICC. Please go ahead. Your line is open.

So this year, we see relative bigger pressure on business demand compared with leisure demand. But meanwhile, why does it seem that the upper mid-scale segment performs better on both RevPAR and pipeline? Because, first, our upper mid-scale pipeline stayed flat quarter-over-quarter. Second, the same-store RevPAR mid-scale and above segment also performed a bit better than the economy segment. I don't know if this is correct and am trying to understand the reason behind this. What is our view towards the upper mid-scale market conditions, and how will we strengthen our competitiveness in this segment? Thank you.

Jason Chen: As I mentioned earlier, we see plenty of opportunity to reform the existing very traditional upper mid-scale segment. Therefore, we have been putting a lot of effort into enhancing our products and service offerings, along with targeted sales and marketing specifically for these upper mid-segments, to establish our overall capability to achieve breakthroughs in this particular segment. Jason Chen: By utilizing our strong product design to enhance product effectiveness and our robust membership program to build a loyal customer base for our upper mid-segment products, we intend to boost customer recognition and acceptance of these products. Jason Chen: We have been continuously upgrading and optimizing the membership program, particularly for the upper mid-segment, and we encourage you to look at our ongoing progress. Thank you. Next question, please.

Thank you. Our next question comes from Liu from CITIC. Please go ahead. Your line is open.

Hi management. The intercity brand has received strong consumer reputation. Can management share some more insights regarding the franchise profile, single-store model, and store opening target plans for this year or the next five years? Thank you.

Jason Chen: In terms of the intercity brands, the growth momentum actually began last year, and the intercity brand has redefined the overall upper mid-scale segment. It blends Chinese and Western design and service to offer products and services that are more suitable for Chinese customers. I'm pleased to report that by the end of 2025, we expect to have around 100 intercity hotels in operation. More importantly, we are observing many intercity hotels situated in significant key areas and cities, which we refer to as flagship hotels in prime locations. This will provide long-term advantages for brand establishment. Jason Chen: For the entire upper mid-scale segment, we use a multi-brand strategy. In addition to intercity, we have brands like Crystal Hotel, Mercure, and Novotel. The key approach is definitely the multi-brand strategy with a focus on core brands. I believe that foreign brands in our portfolio, such as Mercure and Novotel, will benefit from the increase in inbound tourism in the future. Thank you. Next question, please.

Thank you. There are no further questions at this time. So I'll hand the call back to Jason for closing remarks.

Okay. Thank you everyone for taking your time with us today and we look forward to seeing you in upcoming quarters. Thank you and goodbye.

This concludes today's conference call. Thank you for participating. You may now disconnect.