Good day, and thank you for standing by. Welcome to the H World Q2 2025 Earnings Conference Call. 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. Please go ahead.

Thank you, Heidi. Good morning, and good evening, everyone. Thanks for joining us today. Welcome to H World Group 2025 Second Quarter Earnings Conference Call. Joining us today is our Founder and 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 and applicable laws. On the call today, we will also mention adjusted financial measures during the discussion of our performance. Reconciliations of those measures to comparable GAAP information can be found in our earnings release that was distributed earlier 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 second quarter of 2025. Mr. Jin, please?

Dear investors and analysts, good day. Thank you for joining our second quarter 2025 earnings conference call. First, I'd like to share some observations on the overall market. On the demand side, the domestic number of travelers continues to grow steadily according to data from railways, airlines, and tourism statistics. However, the hotel industry is still facing challenges due to the rapid increase in hotel supply over the past two years, as well as the negative impacts of various macro factors on business travel and consumer spending willingness. Despite these challenging market conditions, we remain committed to focusing on long-term business development, emphasizing high-quality growth, and securing prime locations in major cities. We are also deepening our presence in lower-tier cities and optimizing the location and quality of our existing hotels. In the second quarter, we achieved another quarter of high-quality network expansion by entering more new cities and regions and further penetrating lower-tier cities, with an 18.3% year-over-year increase in the number of rooms in operation. Our group hotel GMV grew by 15% year-over-year to RMB 26.9 billion. Additionally, along with our hotel network expansion and the continuous enhancement of our H Rewards membership program, our member base grew by 17.5% year-over-year to nearly 290 million. The number of room nights booked by members exceeded 60 million nights, representing a 28.8% year-over-year growth. More importantly, our asset-light managed and franchised business delivered robust growth in hotel network, revenue, and profit, with M&F revenue rising 22.8% year-over-year to RMB 2.9 billion in the second quarter and gross operating profit increasing by 23.2% year-over-year to RMB 1.9 billion, contributing nearly two-thirds of the group's total gross operating profit. Macro uncertainties and weakened consumer spending are expected to have a more pronounced impact on high-end consumption. H World remains steadfast in our strategic focus on economy and middle-scale segments to serve the mass market. Given the current consumer preference for value-for-money products and services, H World is well positioned to leverage its competitive advantages. By enhancing our brands, optimizing and upgrading our products, and improving our services, we will further solidify our core competitiveness, customer loyalty, and achieve resilience during market cycles. We are pleased that after 20 years of development, our HanTing brand ranked #1 on the latest hotel magazines' World's Top 50 hotel brands list and became the world's largest hotel brand by room count. However, we believe this is just the beginning and will continue to refine and upgrade our product to better meet customers' demands. We recently launched the HanTing 4.0 version, which represents a revolutionary supply chain reform and involves systematic optimization across CapEx, construction, maintenance, and operations, resulting in benchmark products with lower cost, higher quality, and greater efficiency. HanTing will be a key driver for further expansion into lower-tier cities. HanTing Hotel has established itself as a leading brand in the economy segment, while JI Hotel leads in the middle-scale segment. We are also excited that our Orange Hotel recently surpassed the milestone of 1,000 hotels. With its industry-leading products, cost competitiveness, and operational capabilities, Orange Hotel is positioned to become our second growth engine in the middle-scale segment. Together, HanTing, JI, and Orange form the Golden Triangle brands of our limited service segment, demonstrating strong competitiveness as we aim for our goal of 20,000 hotels in 2,000 cities in the midterm. Simultaneously, H World has made rapid breakthroughs in the upper-midscale segment. As of the second quarter, the number of upper-midscale hotels in operation and in the pipeline exceeded 1,500, up 23.3% year-over-year. Our Intercity Hotel has rapidly gained traction among franchisees and consumers, achieving remarkable growth in recent quarters due to its clear brand positioning, exceptional product quality, and strong operational performance. In the second quarter, Intercity achieved positive year-over-year growth in its same hotel RevPAR. Continuous product optimization and upgrades in both the limited service and upper midscale segments rely on strong supply chain capabilities, as we believe that supply chain strength is vital for high-quality development. Therefore, we continue to innovate and optimize our supply chain by expanding our supplier pool, strengthening modular applications, and optimizing product design to achieve higher product quality, lower OpEx and CapEx, and shorter construction periods, which will further enhance our core competitiveness. Lastly, we remain focused on our direct sales capability through the H Rewards membership program, which is essential for our sustainable long-term business growth. As we expand our hotel network and enter more cities, our membership base continues to grow. By the end of the second quarter, H Rewards membership reached nearly 290 million, with direct bookings through CRS increasing by 5.2 percentage points year-over-year to 65.1%. We recently introduced price guarantee features in our H Rewards app to ensure our members receive the best room rates. Moving forward, we will enhance membership benefits, expand loyalty point usage, and explore cross-industry partnerships to improve member engagement and further boost our direct sales capability. This concludes the business update for H World Second Quarter 2025. Now I will hand over the call to our CFO, Ms. Chen Hui, to present the group's financial performance for the quarter.

Thank you, Jin Hui. Good evening, and good morning, everyone. Let me walk you through our second quarter financial overview. During the quarter, our group revenue grew 4.5% year-over-year to RMB 6.4 billion, near the high end of our previous guidance, of which Legacy-Huazhu's revenue increased 5.7% year-over-year. We are glad to report that as we continue carrying out our asset-light strategy and cost optimization efforts, we saw year-over-year margin improvements from both Legacy-Huazhu and Legacy-DH. As a result, our group adjusted EBITDA rose by 11.3% year-over-year to RMB 2.3 billion. Adjusted net income increased 7.6% year-over-year to RMB 1.3 billion. More importantly, as we may notice, we started providing revenue and gross operating profit breakdown for our managed and franchised and leased and owned business in our presentation. We believe it could better demonstrate our future business development strategy, especially on the profit growth driver during our asset-light transformation period. Looking into the numbers. In the second quarter, our managed and franchised business revenue recorded a robust 22.8% year-over-year growth to RMB 2.9 billion, and gross operating profit increased by 23.2% year-over-year to RMB 1.9 billion in the second quarter, respectively. The robust growth in both revenue and profit was mainly driven by hotel network expansion. More importantly, given the nature of the asset-light business model, the managed and franchised margin profile is relatively stable and is less impacted by RevPAR movements compared to leased and owned. On the leased and owned business front, we continued reducing our exposure. In the second quarter, our leased and owned revenue and leased and owned gross operating profit decreased 7.6% year-over-year and 13.4% year-over-year, respectively. Our asset-light transformation resulted in further enlargement of profit contribution from managed and franchised business. In the second quarter, our managed and franchised business contributed to 64% of our total gross operating profit, up 7.5 percentage points year-over-year. Moving to the cash flow and liquidity position. In the second quarter, we generated RMB 2.7 billion in operating cash flow. And at quarter end, the group had RMB 13.7 billion cash and cash equivalents and RMB 6.2 billion net cash on the balance sheet. We are committed to paying out dividends consistently and adhering to our shareholder return plan. For the first half of 2025, we are glad to declare a USD 250 million interim cash dividend, which represents 74% of our first half net profit, along with roughly USD 62 million share buyback. Lastly, on our guidance for the third quarter of 2025, we expect our group revenue to grow 2% to 6% compared to the same quarter last year and 4% to 8% excluding DH. The managed and franchised revenue in the third quarter of 2025 is expected to grow in a range of 20% to 24% compared to the third quarter last year. With that, we are ready to take your questions. Operator, please open the line for Q&A.

We would take our first question, and the question comes from Ronald Leung from Bank of America.

I have two questions. My first question is about RevPAR. What is your expectation for RevPAR in the third quarter and in 2025? Is there any change in the full year revenue guidance? My second question concerns the potential impact on RevPAR from new hotel openings. Do you anticipate any cannibalization when new hotels open and ramp up, potentially affecting all hotels? If so, are there any initiatives that management can implement to address this concern?

Okay. Let me translate. I understand you are still closely monitoring the RevPAR movements so far. We hope you can focus more on H World's long-term performance regarding market share gains and improvements in products and brands, as well as various advancements to strengthen our core competency. For the RevPAR guidance for the third quarter and the full year, particularly during the summer holiday, we have seen many local governments promoting the tourism sector by providing significant discounts and even free tickets to boost demand for leisure travel. However, in some areas facing extreme weather and macro uncertainties, along with reduced consumer spending willingness, the overall performance so far this summer holiday is slightly below our previous expectations. Therefore, we anticipate the third quarter's RevPAR to show a small year-over-year decline, although it will narrow significantly on a sequential basis. Regarding the full year RevPAR, due to macro uncertainties and notable supply increases over the last two years, we are currently expecting the full year RevPAR performance to be slightly below our previous guidance. Nonetheless, we are putting considerable effort into enhancing our products, sales capability, and supply chain to remain resilient in these challenging market conditions. We aspire to achieve our previous revenue guidance. In terms of the impact of new hotels on existing ones, we must acknowledge that over the past 20 years, especially in Tier 1 and Tier 2 cities where we have a higher market share, we have a higher baseline. Many older versions of our products have been in operation for years, and their competitiveness is low in the current environment. You may have noticed our consistent introduction of new products, such as upgrading JI Hotels from 3.5 to 5.0, the Orange brand from 1.0 to 3.0, and HanTing from 2.0 to 4.0. The quality of our products has greatly improved, which adds pressure on older products. Additionally, due to weakness in the real estate market in Tier 1 and Tier 2 cities, many high-quality properties have entered the market, enabling us to open new hotels with superior offerings. We acknowledge that this has a negative impact on existing older hotels, but we see it as a short-term challenge that we must navigate. Our goal is not just to gain market share but to do so with high-quality products, which remains unchanged. We are seeking solutions to address this issue, including actively upgrading existing hotels and being more strategic in positioning new hotel openings.

Your next question comes from the line of Dan Chee from Morgan Stanley.

Thank you to the management for this opportunity. We noticed the company breaking down the gross operating profit between the asset-heavy leased and owned segments and the asset-light franchised and managed business segments. What is the key message behind this new disclosure regarding the strategic focus between these two segments? Should we anticipate any changes in the future? Additionally, the asset-light franchise and managed segment now represents 64% of total gross operating profit, with revenue in this segment growing 23% this quarter. Although the gross operating profit margin increased slightly, the gross operating profit for the asset-heavy leased and owned segment declined by 13%, with the Legacy China Huazhu business in this category seeing a 20% drop. Moving forward, what is the outlook for the margin of this segment? Are there any operational adjustments we can expect to support the margin of the leased and owned business?

Thank you for the question. Over the past several years, we have been actively transforming to an asset-light model. Our managed and franchised business has rapidly grown due to high-quality network expansion and revenue growth. Meanwhile, our leased and owned business has seen a gradual reduction in exposure. The stable asset-light business maintains a more consistent gross margin and reflects our strategic direction moving forward. Starting this quarter, we have provided a breakdown of our asset-light and asset-heavy businesses. Concerning the margin performance of our leased and owned business, there has been a year-over-year decline primarily due to the decrease in exposure to this segment. Thus, both volume and margin, as well as profits, are trending downwards. To improve the margin performance of the leased and owned business, we are implementing several key measures. We are actively negotiating rental reductions with landlords, having secured approximately RMB 390 million in rental reductions in the first half of this year. Additionally, we are focusing on revenue management, sales and marketing, and cost optimization within our leased and owned business. Despite reducing our exposure to this segment, we continue to invest significant effort into enhancing the performance of our existing properties, aiming to improve both revenue and profitability.

Your next question comes from the line of Lydia Ling from Citi.

I have two questions. The first one is about store expansion. We noticed some deceleration in the second quarter. Considering the current macroeconomic conditions, what is the franchise sentiment regarding new openings? Are there any adjustments being made to your plans for openings this year? If possible, could you provide insight into the momentum of new signings? My second question pertains to margins. At the group level, are there further cost optimization efforts underway? Could you share some details regarding the full year margin trend?

Okay. As you may notice, over the past several years, we have been implementing a high-quality, sustainable growth strategy. We are not only looking for growth in scale; quality is much more important than scale itself. So we will continue to implement this strategy. Moving forward, we will be even stricter on new signings regarding property location, as well as ensuring our franchisees can be profitable and that the hotel products themselves are of high quality. With this standard, we believe we can maintain a relatively healthy pace of new openings in the near future.

In the second quarter, our asset-light transformation positively impacted our margin performance, resulting in increased revenue and profit from the asset-light business, alongside cost optimization and enhanced supply chain capabilities. This, coupled with a rise in CRS contributions and some reductions in rental costs, led to an 11.3% adjusted EBITDA growth for the group, even with a decline in RevPAR. When considering SG&A, excluding SBC, it actually decreased by about 1%. Looking ahead to the second half, we may make some investments, but we will certainly evaluate the return on investment carefully. Over the long term, we believe that increased contributions from our asset-light approach can lead to stable or gradual margin improvements.

Your next question comes from the line of Simon Cheung from Goldman Sachs.

I have two questions. The first question is about the same-store RevPAR performance of the company, which has been somewhat impacted by some of the older stores under the HanTing brand that management mentioned. I would like to know how long it will take to resolve this issue so we can start seeing stabilization in the same-store RevPAR. Secondly, regarding the upscale segments, particularly the Crystal Orange and Intercity brands, which have performed well over the last couple of quarters, I am curious about management's views on long-term growth potential and market share expectations.

So regarding your question about the HanTing brand, we recently launched the HanTing 4.0 version. Over the years, we have been steadily upgrading the HanTing brand, and we believe the 4.0 version is quite mature both locally and globally. In terms of design, the hotel quality should be at the forefront, utilizing our strong supply chain capabilities to achieve lower capital and operational expenditures, shorter construction times, and enhanced performance. Concerning the pressures from new hotels on older ones, we have observed that the HanTing versions 2.0 to 2.5 are experiencing the most significant challenges in RevPAR performance. It may take 1 to 2 years to address this issue due to the extensive foundation laid over the last two decades. Nonetheless, we are encouraged by the strong new signings for HanTing this year. We will continue to sign new contracts and open hotels in various regions while also upgrading existing properties to boost competitiveness. Regarding our Orange brand and Intercity brands, I am pleased to report that after launching the 3.0 version of the Orange brand, we have seen considerable interest from franchise customers. The Orange brand has become an important partner to the JI Hotel, and we recently reached the milestone of 1,000 hotels with the Orange brand. For JI Hotel, the number of operational and pipeline hotels has surpassed around 4,000. We hope that the Orange Hotel can become the second growth driver in our mid-scale segment. Together with JI Hotel, we aim to be the top two hotel brands in this segment in the overall market. Regarding Intercity Hotel, its high quality and precise brand positioning have led to rapid growth in recent quarters. Notably, Intercity saw positive growth in its like-for-like same-hotel RevPAR in the second quarter, a feat many other brands have struggled to achieve. Therefore, over the next 3 to 5 years, we certainly want our Intercity brand to establish itself as a leading name in the upper midscale segment.

Your next question comes from the line of Si Lin from CICC.

I have two questions. First, I would like to know how we can strengthen our supply chain capability in detail. Could you provide more information on this? Additionally, how will this impact future reductions in operating costs? My second question pertains to DH. What is the expected pace of the transition to the asset-light model for DH?

In terms of our supply chain capability, we have always emphasized that it has become a core competency for us to maintain or achieve high-quality, sustainable growth over the long term. Since 2024, we have been upgrading our supply chain capabilities by expanding our network of top-tier suppliers and collaborating closely with them. We are also increasing modularization, optimizing product designs, and enhancing our quality standards and review systems to achieve higher quality products while lowering capital and operational expenses, as well as reducing construction timelines. For instance, in categories like furniture, furnishings, and basic materials, we have observed a cost decrease of about 10% to 20% year-over-year. Moreover, taking HanTing 4.0 as an example, the increased use of modularization has shortened the construction time for these products by 30 days. Thus, bolstering our supply chain capability will certainly contribute to our long-term growth with enhanced leadership and efficiency.

This is Jihong. I can address the DH asset-light business model and development. In Europe, especially in Germany or Central Europe, the legal requirements make it not easy to dissolve any lease contracts. So we are working hard on discussions and negotiations with the landlords. Not everything will turn out exactly as we expected, but we are continuously screening the profitability of our leased hotels, especially focusing on low-performing or nonperforming hotels. While we cannot disclose anything yet, some lease negotiations and changes are in progress. We aim to shift towards the asset-light model for DH and are very cautious in signing any potential lease contracts. We need to consider the commitments and also the returns over the long term.

Thank you. This concludes today's question-and-answer session. I will now hand back to Jason Chen for closing remarks.

Thank you, everyone, for taking your time with us today, and we look forward to seeing you in the upcoming quarter. Thank you, and bye-bye.

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