Yahoo Finance H World Group Limited (NASDAQ:HTHT) Q3 2023 Earnings Call Transcript
H World Group Limited (NASDAQ:HTHT) Q3 2023 Earnings Call Transcript November 27, 2023
Operator: Thank you for standing by and welcome to the H World Q3 2023 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Jason Chen, Senior IR Director. Please go ahead.
Jason Chen: Thank you. Good morning and good evening, everyone. Thanks for joining us today. Welcome to H World Group 2023 Third Quarter Earnings Conference Call. Joining us today is our Chairman, Mr. Ji Qi; our CEO, Mr. Jin Hui; our CFO, Ms. He Jihong; and our President Ms. Liu Xinxin. 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. Reconciliations of those measures to comparable GAAP information can be found in our earnings release that was distributed last Friday. As a reminder, this conference call is being recorded. The webcast of this conference call, as well as supplementary slide presentation is available at ir.hworld.com. With that, now I will hand over the call to our CFO, Ms. He Jihong for the opening speech. Ms. He, please.
HE Jihong: Good morning and good evening, ladies and gentlemen. Thank you for joining H World third quarter 2023 earnings call today. We are delighted to report that H World delivered another strong quarterly financial result, reflecting the continuous healthy recovery of lodging market in China. In today's call, H World Group CEO, Jin Hui, will first elaborate on the business performance and highlight our achievements. I will then go through the key financial numbers. As usual, we will have the Q&A session after the management presentation. With this, I will hand over to Mr. Jin Hui.
JIN Hui: [Foreign Language] [interpreted] Thank you, Jihong. Please turn to Page 3. As usual, let's go through Legacy-Huazhu's RevPAR recovery in the recent months. In the third quarter, we maintained our market-leading performance since the year beginning. Our RevPAR recovered to 129% of the 2019 level. The RevPAR recovery continued to be supported by ADR growth, which was mainly driven by our product mix change. Meanwhile, occupancy rate recovery also improved sequentially in this quarter. Breaking down into monthly numbers, our RevPAR in July, August, and September recovered to 132%, 128% and 128% of the 2019 levels in the corresponding months respectively. This strong set of number was benefited from the strong leisure travel demand during the summer holiday season, as well as the continuous business travelling recovery.
In addition, our RevPAR performance reflected our hotels' superior product quality and brand power, which should continue to support our industry-leading position in operational performance. This year, the rebound of China's leisure traveling demand was better than our previously expected in the year beginning. Nevertheless, we keep our cautiously optimistic view on the market outlook unchanged. We certainly saw some pent-up leisure travel demand during some of the peak seasons, such as the Chinese New Year, May holidays, and the summer holiday. But the structural changes in Chinese consumers' consumption structure post the COVID should not be ignored. Especially, the demand for experience-related activities were growing rapidly with the government's efforts on stimulating the domestic demand.
After the strong summer holiday season, our RevPAR recovered to 123% of the 2019 level during the Golden Week holiday. For the entire month of October, our RevPAR still recovered to 120% of that in 2019. In the short term, although the macro condition could possibly remain volatile and uncertain, we will continue executing company's long-term strategies with focus on building and enhancing our products, brands, management, and execution capabilities. We will continue to expand our hotel networks and further gain market share to achieve a long-term sustainable quality growth. Please turn to Page 4. With the current macro uncertainties, we want to re-emphasize below four key points to drive our RevPAR to achieve long-term sustainable growth. Firstly, further penetrating into lower-tier cities.
That could help us to deliver relatively stable and solid performance with macro volatility and uncertainties given lower-tier cities markets are more resilient. Secondly, the organizational restructuring and optimization enable us to achieve more efficient localized operations. We have accomplished some initial success since the establishment of our original headquarters. We believe those regional headquarters will continue to support the company's hotel network's expansions and achieve further penetration into regions that we were previously weak. Thirdly, the continuous upgrade and improvements of our products and services to achieve better RevPAR premium. No matter in economic segments or middle-scale segments, we are committed to keep enhancing our products and services in order to further strengthening our dominant market position in the limited service hotel segment.
Lastly, further breakthrough in the upper mid-segment to increase our market share and optimize our overall hotel network portfolio. This year our upper mid-scale segment achieved encouraging progress in operational performance, mainly supported by our three key brands. Please turn to Page 5. At the end of September, out of total 9,028 hotels in operation, there were 40% located in the lower tier cities and 55% of our 2,935 hotels in pipeline were in the lower tier cities. On a year-over-year basis, we see a small increase in the hotel proportion in the Tier 1 and Tier 2 cities, thanks to the economic recovery post-COVID in those top-tier cities. Nonetheless, we continue to push forward our lower-tier cities penetration strategy. In terms of absolute hotel number increase in the lower tier cities, our number of hotels in operation increased by 6% year-over-year to reach close to 3,600 hotels and the number of hotels in pipeline grew around 20% year-over-year to over 1,600 hotels.
And the number of cities that we covered reached to 1,217. Please turn to Page 6. We continued implementing our sustainable quality growth strategies and to expand our hotel networks by opening high-quality hotels. Supported by strong new signings and hotels in pipeline, our hotel openings in the third quarter increased both year-over-year and quarter-over-quarter. In the third quarter, we opened 545 hotels, up 28% year-over-year, and we closed 139 hotels which was mainly included 96 -- 94 Hanting 1.0 version and soft economic hotels. Under our sustainable quality growth strategy, we have been continuously cleaning up those unqualified hotels which can help improve the overall quality of our hotel portfolios. Please turn to Page 7. The proportion of Hanting 1.0 version and soft economic hotels decreased from 26% at the end of 2020 to only 8% at the end of September this year.
And over the same period, the proportion of Hanting 2.7 version and above increased from 14% to 27%. Please turn to Page 8. We emphasized that economic and mid-scale hotels will always be our core products. As we strive to better serve Chinese mass consumer market, as of the end of September, 55% of our hotels in operation were economic hotels and 37% were mid-scale hotels. The proportion of mid-scale hotels was up 3 percentage points on a year-over-year basis. For hotels in pipeline, around 37% were economic hotels and 48% were mid-scale. Proportion of mid-scale hotels were up 5 percentage points year-over-year. In the third quarter, 91% of the new hotel openings were economic and mid-scale hotels. As you can see, while we are optimizing and enhancing our overall hotel product quality, our limited service hotel segment, which [compromise] (ph) economic and mid-scale segments, are always our key focus to continue improving in order to better meet the travel and accommodation needs for Chinese mass market.
It is worth noting that within the limited service segment, we are seeing the proportion of mid-scale is increasing which perfectly match with consumers' rising demand on better quality of accommodation products. Please turn to Page 9. This year, we achieved encouraging breakthrough in the upper-mid segment. At the end of September, we had 605 hotels in operation, which represented a year-over-year and quarter-over-quarter increase of 18% and 8%, respectively, and we had 357 hotels in pipeline which grew 35% year-over-year and 13% quarter-over-quarter. The strong pipeline growth reflects the rising brand awareness of our upper mid-scale hotels and provides solid support for the future development. Please turn to Page 10. Within the upper mid-scale segment, our two key brands, including InterCity and Crystal Orange, both have achieved remarkable new signings this year.
Last year, we launched DH's InterCity brands in China and opened several new leased InterCity hotels in Wuhan, Zhengzhou, Shenzhen, Shanghai and so on. Over the past three quarters, the new signings of InterCity grew meaningfully. At the end of September, we have 41 InterCity hotels in the pipeline and the number of pipeline for Crystal Orange brand reached 108. The fast-growing pipeline demonstrates that our InterCity and Crystal Orange products and brands are getting more recognized and accepted by our franchisees. Here concludes our business review and updates for the third quarter of 2023. With that, I will now turn the call over to our CFO, Ms. HE Jihong to discuss DH's operational update and our group's financial performance. Jihong, please.
HE Jihong: Thank you, Jin Hui. I will now elaborate DH's activity so far this year. Please turn to Page 11. Despite Germany's slow economic recovery post COVID, RevPAR of DH portfolio outperformed the overall German market using relevant [RGI] (ph) data. In third quarter 2023, year-over-year cost growth is in line with revenue growth, despite inflationary pressure in Europe after excluding one-off adjustment and restructuring costs. Our priority remains to control and reduce costs through business restructuring as well as leveraging on technology. At the same time, we are repositioning the current hotel product design to reflect demand of the modern travelers. We are also spending effort in strengthening our presence in Middle East and exploring new international markets such as Asia Pacific.
I'm now going to highlight the financial performance in the next section. Please turn to Page 13. Our hotel network continued to expand in the third quarter 2023. Total number of rooms in operation increased 11% year-over-year and reached 885,756. Hotel turnover increased 55% year-over-year and reached RMB23.5 billion. Please turn to Page 14. Legacy-Huazhu blended RevPAR recovered to 129% of 2019 and achieved RMB278. This was primarily driven by ADR increase, which was 33% over Q3 2019 and 27.7% of Q3 2022. Occupancy still lags Q3 2019 by 1.8 percentage point. Nevertheless, the occupancy of 86% is quite a high benchmark for the size of our total portfolio. Please turn to Page 15. Legacy-DH blended RevPAR increased 4.5% year-over-year and achieved EUR79.
ADR remained flat compared to third quarter 2022, but occupancy increased by 2.9 percentage point. Please turn to Page 16. Total revenue of H World increased 54% year-over-year achieving RMB6.3 billion. Legacy-Huazhu revenue increased 62% year-over-year, achieving RMB5.1 billion. This achievement was possible through; first, strong domestic travel demand, especially during the summer holiday; second, continued product upgrade and improvement of product mix; and the third, market penetration and synergy through regional offices. Revenue from Legacy-DH also improved 26% year-over-year, driven by higher RevPAR and higher hotel turnover. Please turn to Page 17. Legacy-Huazhu operating income achieved RMB1.9 billion in third quarter 2023. Compared to third quarter 2022 and the second quarter 2023, this is a significant improvement.
This is achieved through revenue increase and at the same time, cost management effort for both hotel costs and SG&A expenses. On Legacy-DH side, operating costs increased in line with the revenue increase. On SG&A side, there are some one-off effects and restructuring costs booked in Q3 2023. Taking this effort out, the SG&A cost also increased proportionally with the revenue increase compared to Q3 2022. Please turn to Page 18. Legacy-Huazhu adjusted EBITDA achieved RMB2.1 billion in Q3 2023 and adjusted net income achieved RMB1.4 billion. Legacy-DH adjusted EBITDA was RMB55 million in Q3 2023. Adjusted net income fell into negative territory of minus RMB37 million. On the group level, operating cash flow was RMB1.2 billion. The fluctuation compared to Q2 2023 is due to short term change of timing of franchisee fee payment at the end of September.
Please turn to Page 19. The group is in a net cash position as of end of September. There's a net cash of RMB3.9 billion and unutilized bank facility of RMB2.7 billion. Please turn to Page 20. We estimate the revenue in Q4 2023 will be a growth of 41% to 45% compared to Q4 2022. Excluding DH, the Legacy-Huazhu revenue is estimated to grow 48% to 52% compared to Q3 2022. This ends the management presentation. I hand over to Mr. [Chen Eba] (ph).
Jason Chen: Hi, operator. We can start the Q&A session, please.
Operator: Thank you. [Operator Instructions] Your first question comes from Mr. [Dan Chi] (ph) from Morgan Stanley.
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