Cost-saving and efficiency-improvement measures are implemented while adhering to business growth (Summary of Huazhu's Q3 22 Conference Call)
The following is a summary of the third quarter conference call of Huazhu Group. For detailed financial report reviews, please refer to "In the Cracks of the Pandemic, Huazhu is Fighting for Growth."
1. Management Presentation (Performance Highlights):
1. Under the influence of the epidemic, Huazhu China's 22Q3 RevPAR is recovering well
Benefiting from the recovery of demand in the leisure travel market in July and August, and the gradual recovery of business travel demand at the end of September, the overall RevPAR level has recovered to 90% of the level in 2019. However, since October, the epidemic has resurged and control measures have become stricter. As a result, the RevPAR level in October has only recovered to 74% of 2019's level.
2. Adopting a lean growth strategy on multiple fronts
Continuous growth in GMV-
·By the end of the third quarter, the company's hotel rooms had increased by 10% YoY to 797,000, including a YoY increase of 11% in Huazhu China's hotel rooms to 772,000. In the third quarter, the company's total GMV for hotels increased by 24% YoY to RMB 15.2 billion, of which Huazhu China's GMV increased by 22% YoY to RMB 13.5 billion.
Network Expansion of hotels-
·The company continues to promote its strategy of sinking into third- and fourth-tier cities. By the end of the third quarter, Huazhu owned and managed hotels in middle- and low-tier cities accounted for 41% and 59%, respectively, of the total number of hotels. Half of the newly signed hotels in the third quarter were located in low-tier cities. In addition, the number of newly contracted hotels in the third quarter was still lower than the same period last year, indicating that our franchisees' investment confidence has not fully recovered under the backdrop of the epidemic.
Trend of Chain Operations-
·From the industry data in recent years, chain-branded hotels have stronger risk resistance than standalone hotels and are more stable in performance. The number of hotels owned by Huazhu China has been continuously increasing in the past two years, and the closure rates in 2020 and 2021 were 10% and 7%, respectively, which is much lower than the industry average.
·The trend of chain operations in the industry is constantly increasing, reaching 35% by 2021. The trend of accelerating industry consolidation under the epidemic has not changed, and more standalone hotels will turn to chain-branded hotels. This trend will give Huazhu more opportunities for market consolidation.
Product upgrades and improved customer satisfaction-
·Taking the HanTing brand as an example, we have continuously upgraded the HanTing product in the past few years. After upgrading to a newer version, RevPAR has increased by about 20% compared to the old product. By the end of the third quarter, versions 2.7 and above of HanTing hotels accounted for 59% of the total hotel operating revenue, an increase of 25 percentage points from 2020. At the same time, HanTing's customer satisfaction score has increased from 4.5 in 2020 to 4.67 in the third quarter of 2022.
·We are working hard to improve the overall quality of the group's hotels. As of the third quarter, the proportion of low-quality economy soft brand hotels and HanTing 1.0 products has dropped to about 14.3% of the total number of hotels in operation. At the same time, our customer satisfaction score continues to rise, from 4.54 in 2020 to 4.68 in the third quarter of 2022. 3. Continuous Development of High-end and High-end Hotels
Orange hotels reached the milestone of 500 hotels in the third quarter, becoming the third brand of the group with more than 500 stores.
During this season, Quanjia hotels launched new products - two new product stores located in transportation hubs and bustling business centers will open in Shenzhen and Wuhan respectively.
In the high-end hotel field, Yitel is gradually breaking through the tourism and vacation market. After the acquisition, Huazhu continues to transform the operation mode of Yitel from self-operation to light-asset franchise, and currently the proportion of franchised stores has increased to 67%, while expanding the Yitel Group and Yitel Series brands to achieve multi-brand development.
4. Huazhu Club 4.0 App Successfully Launched
This app upgrade focuses on Huazhu services and the whole process digital guest experience, further enhancing the interaction experience with guests at different service touchpoints based on efficient services, and strengthening membership benefits perception. The proportion of service onlineization has increased from 21% in 2021 to 71% in the third quarter of 2022.
5. DH International Business Continues to Recover
DH's mixed RevPAR in the third quarter increased by 57.2% year-on-year and recovered to 102% in 2019.
Business demand has been driven by short-term leisure travel and enterprise group business. In the third quarter, our team focused on cost management and profit margin improvement. EBITDA in the third quarter was RMB 94 million, an increase of 230% compared to the second quarter of 2022. The driving force for the increase in profit margin comes from the reduction of management expenses, the improvement of operating efficiency, and the growth of RevPAR.
We have launched some energy management measures in hotels to cope with the continuously rising energy costs in Europe, especially in Germany. Compared with the third quarter of 2019, the system scale of hotel rooms in the third quarter has increased by 23%.
We have launched a new website for the brand and a new Hrewards program to focus on loyalty development and direct booking channels.
We have launched several new digital products to improve technical deployment and further improve efficiency.
6. 22Q4 Guidance
Revenue vs. Q4 2021
• Increase 7%-11% • Excluding DH - Decrease 1%-5%
Q&A：
Q1: Regarding the decline of Huazhu China's RevPAR in October, can I ask about the RevPAR situation from November to now? As for the guidance for the fourth quarter, what are the expectations for store expansion and RevPAR?
A1: Due to the impact of the outbreak and epidemic control policies, we expect the recovery of China's business RevPAR in the fourth quarter to be between 70% and 75%. As for opening new stores in the fourth quarter, epidemic control will have a certain impact on store openings, but overall, revenue will be minimally affected by the impact of the RevPAR of newly opened stores. Q2: Regarding the overseas DH business, it was just mentioned that energy-related measures were implemented in the context of high inflation and energy crisis in Europe. What is the trend of operating costs in Q4? Should we expect further increases in winter?
A2: First, we focus on revenue management - we try to increase ADR as much as possible, which is suitable for every international hotel management group, and is particularly effective in cases of inflation. We will continue to manage operating costs, improve operational efficiency, and manage energy efficiency. We are also conducting a portfolio review and looking at the true performance of assets.
In terms of energy management, we have some precise and workable measures, such as turning off air conditioning when it is unnecessary, turning down the heating when it's hot enough, and turning off lights when people leave. At the same time, we are also negotiating with energy supply companies to seek the possibility of flexible pricing. We try to adopt short-term fixed prices and medium to long-term flexible pricing to reduce costs.
The impact of the above measures may be reflected in the Q4 report, but we should continue to observe the situation in the first quarter of next year.
Q3: Has the recent fluctuation in the epidemic over the past few months affected franchisees' investment confidence? Can you reveal the hotel signing situation in the recent months?
A3: Currently, the signing speed from the end of Q3 to Q4 is about 80% of the normal situation. At the same time, we have observed differences in different cities - the concern of third- and fourth-tier cities about the impact of the epidemic is much smaller than that of first- and second-tier cities. Overall, the recovery of franchisees' confidence may still require the relaxation of overall epidemic control and economic recovery. Of course, under such circumstances, Huazhu will not slow down the breakthroughs of sinking in third- and fourth-tier cities and the development of mid- to high-end strategy. We are still steadily promoting the establishment of mid- to high-end brand and the creation of new products.
Q4: Regarding the overall progress and long-term goals of Huazhu in the southern market?
A4: The southern market is the top priority for Huazhu's development. Huazhu has made some preparations in the past year:
Regional organization sinking and forward: Cultivate a core group of cadres from Shanghai/localization to form a southern company, and the overall organizational structure has basically taken shape;
Localized talent cultivation, marketing, and product development: The demand of the southern market is differentiated compared to the past, and the work of approaching users and adapting brand and product capabilities has been basically completed.
Huazhu has seen a growing trend in the south over the past year. We hope to achieve a market penetration rate of 20% in the southern and other regions in the future. In the core areas and major cities of the south, part of our brand stores have settled in and achieved very good operational and demonstration effects. We are looking forward to conducting the entire southern strategy in an orderly manner and achieving gradual breakthroughs in the next 3-5 years.
Q5: Regarding the relatively impressive performance of ADR in the past few quarters, will there be room for price increases in the long term?
A6: The improvement of ADR benefits from two dimensions, internal and external.
As Huazhu's regional management deepens, we have built price synergy between different brands and regional joint marketing within the company. Therefore, internal reasons have also made necessary adjustments to our ADR, ensuring long-term growth in the future. Inwardly, we do regard the management of ADR as an essential revenue source. Inevitably, some external factors, such as inflation and the weakening of individual hotels, will provide us with room for improvement in our ADR in the market. ADR is a vital core revenue management element at Huazhu and will continue to be strengthened next year, with necessary and rapid adjustments and adaptations to market changes.
Q6: Earlier, you mentioned that Huazhu operates more than 500 stores under the brands of HanTing, Elan, and JI Hotels. Could you tell me what's the company's brand strategy? Will Huazhu focus on expanding, or will the company pay more attention to quality?
A: Huazhu's core logic in brand strategy is to ensure that each brand ranks number one or number two. We hope to cultivate and incubate the top brands in different strategic levels in China. In the past, we have fostered HanTing in the domestic market, and Elan has become one of the top mid-range brands in China. We hope that JI Hotels will become the second top mid-range brand. For Huazhu, it is our goal that each brand we foster becomes a beloved, profitable, and leadership brand in their respective sectors.
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