H World Group - Earnings Call - Q1 2025

Transcript

Operator (participant)

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 speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one and one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one and one again. 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.

Jason Chen (Head of Investor Relations)

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 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.

Jin Hui (CEO)

[Foreign language] First of all, I'd like to share some of our observations on the industry during the quarter. In the first quarter, we saw the overall traveling demand was still resilient and grow steadily according to the data released by railway and airline industries. However, REPA remained under some pressure, especially on ADR. We believe it was largely due to the overall supply surge last year. Therefore, our REPA declined by 3.9% year over year, with ADR decreased by 2.6% year over year, and occupancy rate declined slightly by 1 percentage point. The slight decline in occupancy rate was mainly because those hotels newly opened in the last several quarters were still ramping up. Entering into the second quarter, the tariff issues started from April brought some uncertainties to the market outlook.

Also, we saw some temporary solutions on tariff issues recently. We remain cautious on potential future volatilities and uncertainties. However, on the leisure traveling front, we are still relatively optimistic as we saw the overall leisure traveling demand and the wellness remain strong. For instance, we saw both number of travelers and the total spending grow mid to high single digit year over year for Chinese New Year holiday, Qingming Festival holiday, and the Labor Day holidays. More importantly, according to third-party data, the industry RevPAR recorded a positive year-over-year growth during the Labor Day holiday. Therefore, we have been developing differentiated strategies on products and service offering with targeted sales and marketing program to better capture the rising leisure demand, especially those emerging travelers such as silver-haired tourists and inbound tourists. Also, we are still facing some uncertainties and challenges.

We will insist on implementing our core strategy with long-term focus. With that, I will share with you more data on our operational performance during the quarter. [Foreign language] Please turn to page four. In the first quarter of 2025, we opened 695 hotels and closed 155 hotels, respectively. Pipeline was 2,865 hotels by the quarter end. The slight quarter-over-quarter decline is mainly due to fast new hotels opening and proactive pipeline clearance to improve quality. The new signings in the quarter remain stable and healthy. [Foreign language] Please turn to page five. The proportion of upper-mid scale and above hotels increased meaningfully in our pipeline by the end of first quarter. It was mainly due to the fast new signings of our upper-mid hotels, as well as the different lengths of construction period and timing of new hotel openings.

However, in terms of the hotel in operation, limited service segment hotels remain our core market. [Foreign language] As I mentioned earlier, we maintain a strong growth momentum in the upper-mid scale segment. Please turn to page six. As of the first quarter, the number of upper-mid scale hotels in operation increased by 36% year over year to 933, and the pipeline grew by 22% year over year to 523. [Foreign language] Over the past several years, we have been seeing a clear trend that customers are seeking high-quality products and services with good value for money. Therefore, we have been continuously upgrading products under our core brands to better meet the customers' evolving demand. Please turn to page seven. The proportion of newer products under our core brands, including Hanting, Quanji, and Orange Hotel, has been increasing constantly.

[Foreign language] In terms of regional expansion, our penetration in the lower-tier cities continued progressing. Please turn to page eight. At the end of first quarter of 2025, 54% of the company's hotels in pipeline were located in tier three and below cities, 11 percentage points higher than the proportion in operating hotels. Additionally, by the first quarter, we are now covering 1,394 cities and counties, 104 more than a year ago. [Foreign language] Membership program and direct sales capability are the most critical aspects for our business to achieve long-term sustainable development. Please turn to page nine. At the end of first quarter of 2025, our member base further increased to nearly 280 million. Room nights generated through the central reservation system accounted for 65.1%, representing an increase of 5.4 percentage points year-over-year. [Foreign language] All above concludes the first quarter of 2025 operational updates for H World Group. Next, our Chief Strategy Officer Jihong He will provide an update on Deutsche Hospitality's first quarter operations and business performance. Please, Jihong, thank you.

Now I will hand over the call to our CSO, Ms. He Jihong, to give an update on Lexi DH. Thank you.

Jihong He (Chief Strategy Officer)

Thank you, Jin Hui. Please turn to page ten. In first quarter 2025, RevPAR of Lexi DH improved 12.7% to EUR 65, 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 Middle East. Please turn to page 11. In first quarter 2025, we did several transactions to change the leased hotel contracts to franchise contracts. Therefore, our managed and franchised hotel increased to 46%. This is a significant improvement compared to 38% in the first quarter 2024. The percentage of asset light hotels in our pipeline is 57% in first quarter 2025, which is also an improvement compared to the same period last year.

With this, I conclude the discussion about Lexi DH, and I will turn to CFO, Ms. Chen Hui, for financial performance. Thank you, Jihong.

Chen Hui (CFO)

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. Number of rooms increased 20% year-over-year to over 1.1 million by the end of the quarter. Hotel turnover in the fourth 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 RMB 5.4 billion, in line with our guidance. Revenue from Lexi 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 franchise hotels during the quarter.

However, our managed and franchise business achieved a robust growth of 21.1% year-over-year, at the high end of our guidance. The strong managed and franchise 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 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, excluding SBC, mainly benefiting from 11.1% year-over-year.

SG&A expenses decreased from legacy DH as a result of restructuring, and the cost optimization started the second half of last year. Our group's adjusted EBITDA grew 5.3% year over year to RMB 1.5 billion in the fourth quarter, of which legacy Huazhu's adjusted EBITDA increased 5.8% year over year to RMB 1.6 billion. Moving to our cash flow and the liquidity position on page 17. In the fourth quarter, we generated RMB 580 million operating cash flow. As of the quarter end, the group had RMB 11.8 billion cash and cash equivalent, and was in a solid net cash position of RMB 6.5 billion. Lastly, turn to page 18 on guidance. For the second quarter of 2025, we expect our group revenue to grow 1%-5% compared to the same quarter last year, and 3%-7% if excluding DH.

Jin Hui (CEO)

The managed and franchise revenue is expected to grow in the range of 18%-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.

Operator (participant)

Thank you. As a reminder, to ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. Our first question comes from the line of Candice Shang from Bank of America. Please go ahead, your line is open.

Candice Shang (Unknown)

[Foreign language] Bank of America [Foreign language] Let me translate my questions into English. So I have two questions. My first question is about ROFPA expectations. So what is management's latest expectations on ROFPA for Q2 and also 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 base last year. Could management share with us any specific weakness behind, any specific reasons behind the weakness? Thank you very much.

Jin Hui (CEO)

[Foreign language] So let me do the translation for you. In terms of the first question regarding the ROFPA, as we mentioned in our prepared remarks, basically the tariff issue happened in April added some of the uncertainties and the volatilities for the overall market outlook. Again, overall, year to date, we still see the demand is growing steadily.

The business, of course, because of the tariff, we are under some kind of the pressures, but we are trying very hard to navigate the difficulties and trying to increase our RevPAR to a more stabilized level. However, on the leisure traveling demand side, from various data as we observed year to date, we think the leisure traveling demand is still being very strong and still growing very steadily as the people's willingness to do traveling is still very strong. In terms of the number, in terms of the RevPAR for the second quarter, we think the RevPAR will decline at low single digit, but narrowed on a sequential basis. For the full year, again, because of the uncertainties, there are some of the volatilities and uncertainties ahead, we will try our best to achieve our full year guidance.

In terms of the second question on business traveling, we do not think it is a demand issue, it is more like a supply issue as over the last two years there was a lot of supply increase, which adds a lot of pressure to the RevPAR, especially on the ADR. However, we try to leverage more on our corporate customers and B2B business to overcome some of the uncertainties and the shortage of demand from individual traveling. Thank you.

Candice Shang (Unknown)

[Foreign language] Thank you.

Operator (participant)

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.

Lydia Ling (Director of Equity Research)

[Foreign language] Hi Management, I have two questions.

The first one is on the DH side, and we saw some progression on the SLI strategy in the first quarter. What's your further plan on the DH strategy to further improve the profitability? For example, how many lease and own hotels do you plan to transfer to franchise looking ahead? My second question is more on the industry supply, and how do you evaluate the competition landscape currently in the limited service? 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.

Jin Hui (CEO)

Okay, let me take the first questions about the DH. To improve the profitability of DH, legacy DH business is of course our priority. There are different measures and different strategies.

Asset light transaction is one of the parts that we can reduce the negative impact. We will continue to—we're 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 when it comes through. Other than asset light transaction, we are also further looking into reducing our overhead cost, restructuring our business, streamlining our processes. First quarter, you see still a negative EBITDA contribution. This is because we continued our restructuring effort, and first quarter is traditionally a very weak first quarter as well. We are confident that with time, especially with the second and third quarter coming, our profitability, especially adjusted EBITDA, will increase over time.

Jihong He (Chief Strategy Officer)

[Foreign language] Okay, so to answer your second question in terms of the demand supply dynamic for the industry, as you may notice that I know a lot of people are concerned about our ROFPA decline or the ROFPA pressure because of the oversupply or the supply surge over the past several years. Let me share with you, H World has been doing what we call the reform of the overall supply side, reform of the supply side of the China hotel industry. We have been building several capabilities to ensure that our franchisees still achieve a pretty good return in terms of the opening of hotels. First of all, from the franchisee sentiment front, there are several key costs. One is the fixed cost.

As you may see that over the past several years, the biggest fixed cost is the rental cost, which has been gradually declining over the past several years. Another key cost of running a hotel is the OpEx. The OpEx is the combination of the labor cost, sales and marketing cost, as well as the supplies cost. However, H World has been putting a lot of efforts to improve the operational efficiency and achieve the lowest cost, trying to be leading in the overall industry. By leveraging on our very strong capability of supply chain management, our loyalty program or membership program, as well as the technology capability. In conclusion, what I can share with you now is the overall sentiment has been quite stable and healthy for our existing franchisees. Thank you. Next question, please.

Lydia Ling (Director of Equity Research)

Thank you

Operator (participant)

Our next question comes from the line Dan Gieseke from Morgan Stanley. Please go ahead. Your line is open

converting to franchised hotels, the adjusted EBITDA loss actually increased from last year's RMB 66 million loss to RMB 77 million.

Dan Gieseke (Senior Portfolio Manager)

[Foreign language] My thank you Management for the opportunity. My first question is about DH. After the restructuring program in second half 2024, SG&A cost of DH declined 11% year on year. Is there still any one-off restructuring cost embedded in this quarter? 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 hotel changing to asset light, adjusted EBITDA loss still widened a little bit by RMB 11 million. What is the main reason for such hotel operating cost increase?

[Foreign language] Let me translate my second question is about legacy [Foreign language] So blended ROFPA declined 3.9% year on year in Q1, but life cycle declined 8.3% year on year. The gap was 4 percentage points. In fourth quarter 2024, we saw 4 percentage point gap, but this was wider than the previous quarters. What's the reason for the gap widening? Thank you.

Jin Hui (CEO)

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 cost in one go. That kind of cost effect still needs to be reflected gradually in our cost this year, quarter by quarter, because some of the restructuring efforts are not completely done yet, even from the 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, and we will see still some of the effects coming through this year. We are very sure that with this kind of measures, this will only improve our SG&A in the mid and long term. Please do not look at only really quarter to quarter results. We will reflect the whole year when we come to almost the end of our restructuring effort mid of this year.

To your second question about the first quarter loss, this is actually a very special event in the first quarter that caused this higher loss on paper. We gave up Davos as a hotel as a leased hotel, and we turned it into a franchise hotel. You know that Davos is a very, very seasonal event. Actually, the whole year of EBITDA focused on this one week of conference effort. That is why the first quarter results are very much skewed by this one-time event every year. This year, taking out the Davos event, actually our EBITDA is comparable to last year, even with the continued restructuring effort. What I wanted to say with this answer to you is that we are very, very conscious of our EBITDA commitment, and we are very conscious also in streamlining our unnecessary overhead cost.

Please bear with us. In the short term, we will still see some of the variation in SG&A and some of the other costs as well. We are very sure that in the mid and long term, we are on a better way. [Foreign language]

Jihong He (Chief Strategy Officer)

Okay, to answer your second question regarding to the gap between the blended ROFPA and the like-for-like ROFPA. You are right, the like-for-like ROFPA was underperforming compared to the blended ROFPA. There were two reasons behind. One is because of the product because we keep upgrading. As we mentioned earlier, we continuously upgraded our products and continuously do clearance of those older versions of products in order to improve the overall product quality.

That's one of the reasons why there was a gap or enlarged the gap between the blended RevPAR and the like-for-like RevPAR. Secondly, in certain areas, because of the surge of the supply over the several years, indeed there were some of the pressure on the RevPAR in both ADR and occupancy rates. We have already noticed that, and we are doing a lot of optimization in terms of our revenue management to set up a more rational ADR and occupancy rate in these particular regions. Thank you. Next question, please.

Operator (participant)

Thank you. Our next question comes from the line of Simon Chung from Goldman Sachs. Please go ahead, your line is open.

Simon Chung (Managing Director)

[Foreign language] Let me translate that into English. The first question is in relation to the hotel opening.

We noticed that your hotel opening were actually quite fast in the first quarter, almost 700, and that compared to full year 2,300, that was actually tracking ahead of the momentum last year. Just checking to see whether there is any timing issue here and whether there are going to be some upside risk to the full year 2,300 hotel additional guidance. The second question is in relation to the mid-upscale hotel, whereby I think H12 has done a great job in terms of adding the hotel, almost 1,000 by now. I think Arturo did mention that out of the 1,500 hotel, they are only exposed to 200 cities and have no intention to go into other new cities. Just wondering the strategy for H12 and where would they see growth going forward?

Jihong He (Chief Strategy Officer)

[Foreign language] So I'm very happy to see we achieved quite good number of hotel new openings in the first quarter. As one of the key strategies, we are looking for a high-quality scale growth, and we hope every newly opened hotel can be profitable. Therefore, in terms of the new opening, the quality of the hotel is much important than the purely scale growth. [Foreign language] We are not only looking to achieve a leading position in terms of the market share, but also trying to achieve a leading position for each of the brands in different segments. That's what we are looking for in the longer term to both achieve in terms of the scale, in terms of the number one or the leading market share, but also in each of different segments, we want to be top one or two at least for the brand.

[Foreign language] Although we are seeing a pretty good in terms of new opening and the new signings, but we want to stay at the conservative, not changing the full year opening target for now. [Foreign language] We have been putting a lot of efforts since last year to break through the upper mid segment, and I'm very happy to see that you are looking in details in terms of our upper mid segment development over the last several quarters. [Foreign language] We do see a lot of market opportunity, especially to reform those traditional upper mid scale segments. [Foreign language] At the current stage, we would like to focus only on tier one, tier two cities, especially those prime areas to establish stronger brands. [Foreign language] The demand actually is very concentrated in the tier one, tier two cities, especially for those upper mid segment hotels.

Therefore, in those particular areas and cities, we would like to take the most prime location to establish a brand. [Foreign language] In a longer term perspective, we are very confident to chase the leading company right now or even surpass them. Thank you. Next question, please.

Operator (participant)

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

Lin Lin (Investment Banking Division Analyst)

[Foreign language] This year we see relative bigger pressure on business demand compared with leisure demand. Meanwhile, why is it that upper mid scale segment performs better on both ROFPA and Pipeline? Because first, our upper mid scale Pipeline stay flat quarter over quarter. Second, the same ROFPA of mid scale and above segment also perform a bit better than economy segment.

Don't know if this is correct and trying to understand reason behind this. What is our view towards the upper mid scale market conditions and how we strengthen our competitiveness in these segments? Thank you.

Jin Hui (CEO)

[Foreign language] 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 efforts in terms of the products and the service offering, as well as the target sales and marketing, especially for those upper mid segment, to establish our overall capability to do the breakthrough in this particular segment. [Foreign language] Leveraging our good product design to improve our product power, as well as leveraging our very strong membership program, and to accumulate a lot of repeated customers for our upper mid segment products, therefore to increase the recognition and the acceptance of the products by the customers.

[Foreign language] We have been keep upgrading and optimizing the membership, especially for the upper mid segment, and we hope you can have a look going forward and you will see the progress. Thank you. Next question, please. Thank you.

Operator (participant)

Thank you. Our next question comes from the line of Jiwei Liu from Citi. Please go ahead, your line is open.

Jiwei Liu (Unknown)

[Foreign language] 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.

Jin Hui (CEO)

[Foreign language] In terms of the Intercity brand, actually the growth momentum started from last year, and the Intercity brand actually redefined the overall upper mid scale segment, and it is kind of a combination with Chinese as well as the Western design and service to provide more suitable products and service to the Chinese customers. I am happy to see that probably by the end of 2025, we can have around 100 Intercity hotels in operation. More importantly, we have been seeing that there are a lot of Intercity hotels that have been located in very important key areas and cities, which we call flagship hotels, in very prime locations. That will bring longer-term benefits for the brand establishment. [Foreign language] For the entire upper mid scale segment, we actually used multi-brand strategy. Apart from the Intercity, we still have Crystal Hotel, as well as Mercure and Novotel, for example.

The key strategy is definitely the multi-brand strategy, but with core brand focus. I think for those foreign brands within our portfolio, such as Mercure and Novotel, they are going to benefit from a rising inbound tourist in the future. Thank you. Next question, please.

Operator (participant)

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

Jin Hui (CEO)

Okay.

Jason Chen (Head of Investor Relations)

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

Jihong He (Chief Strategy Officer)

Thank you and bye-bye.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.