H World Group Ltd (HTHT) 2024 Q4 法說會逐字稿

Good day, and thank you for standing by. Welcome to the H World Q4 full year 2024 earnings conference call. (Operator Instructions) Please be advised today's conference is being recorded.

I'd now like to hand the conference over to your first speaker today, Jason Chen, Head of IR. Please go ahead.

Thank you, Sarah. Good morning, and good evening, everyone. Thanks for joining us today. Welcome to H World 2024 fourth quarter and full year 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, Mr. 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. Reconciliation 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 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 fourth quarter and the full year of 2024. Mr. Jin, please.

(spoken in foreign language)

(interpreted) thank you. Hello, everyone. Thank you for joining H World Group fourth quarter and full year of 2024 earnings conference call.

(spoken in foreign language)

(interpreted) Although there were some still macro uncertainties and challenges in 2024, the overall domestic travel demand continued achieving steady growth as suggested by some industry data and our operational results. For example, the number of passengers transported by railway increased 11.9% year-over-year in 2024, and the domestic air passenger traffic rose by 8.8% during the same period.

Leisure travel continued its strong growth momentum and outperformance of business travel. According to the data from the Ministry of Culture and Tourism number of the domestic tourists reached 5.6 billion up 14.8% year-over-year with the total domestic tourism spending up 17.1% year-over-year, hitting RMB 5.8 trillion. This reflects the people's strong willingness on traveling as well as strong support from local governments to promote tourism activities.

(spoken in foreign language)

(interpreted) Looking to the hotel industry in China specifically, steady growth in demand particularly the fast growth in leisure demand has led to supply increase in some regions and areas, which resulted a temporary supply demand imbalances and hence, brought some pressures on the ADR.

However, in the long run, we believe that the hotel industry is a highly market-oriented and fully competitive industry, and the supply and demand dynamics will gradually return to a more balanced and a reasonable level after a certain period of time. As the market leader, we will continue pursuing our high-quality development strategy leveraging better products and services, stronger brand positioning and efficient operations as our core competitive edges to attract more customers and build up stronger capability to navigate through cycles.

Now let me walk you through our 2024 key achievements and operational highlights.

(spoken in foreign language)

(interpreted) First of all, in May 2024, Legacy-Huazhu achieved a key milestone of 10,000 hotels in 1,000 cities and counties after hotel open in county in where is the last country to gain highway access in China. Secondly, the group opened a record high of 2,442 new hotels during 2024, of which 2,430 new openings was contributed from Legacy-Huazhu, and was supported by our acceleration of lower-tier cities penetration to better capture more growth and development opportunity in the China market.

Thirdly, we are happy to see our upper-mid segment continued gaining momentum with hotel network grew by 35% year-over-year in 2024, outpacing last year, thanks to the strong development of intercity and Crystal Orange brands. Lastly, we continued pursuing our asset-light model strategy.

In 2024, the asset-light revenue contribution exceeded 50% for (technical difficulty) business. At the same time, the asset line transformation also achieved some breakthroughs, which we will elaborate later. We believe that the asset-light model will help us to achieve more stable and sustainable development in long run and generating stronger and healthier cash flow.

(spoken in foreign language)

(interpreted) Please turn to the next page. Over the past decade, Legacy-Huazhu's network expansion achieved a CAGR of 18.6%, growing from less than 2,000 hotels in 2014 to our current level. And our expansion was getting even faster in the past two years, with over 2,000 new growth -- new hotels opened in 2024. It helped us further solidify our leading position in the industry. 2025 marks the 20th anniversary of H World Group. Over the past 20 years, we have involved a step-by-step from a single hunting branded hotel to the current multi-brand hotel management group with over 11,000 hotels in operations.

Moreover, we are also transforming from an asset-heavy business model to an asset-light expansion model, which focused more on product and service quality as well as brand positioning and management capability. Going forward, we will stick to our high-quality expansion strategy and aim to reach our next goal of 2,000 cities with 20,000 hotels in the near future.

(spoken in foreign language)

(interpreted) Now let's review our Legacy-Huazhu's operational performance in 2024. Please turn to page 5. In 2024, Legacy-Huazhu's blended RevPAR decreased slightly by 3% to RMB235. In 2024, our occupancy rate improved by 0.2 percentage points year-over-year to 81.2% despite that our room count grew by 20% year-over-year in 2024, and a lot of newly opened hotels were still in their ramp-up period. This further demonstrated our strong capability to attract and serve more customers and grab more market shares. However, ADR was down 3.2% to RMB289 mainly due to a high base last year as well as supply increase.

(spoken in foreign language)

(interpreted) Please turn to page 6. In 2024, we achieved a record high hotel expansion of 2,430 new openings. At the same time, the number of motel closures in 2024 was 668, lower than that in 2023. This was mainly due to fewer closures of Elan and Hunting 1.0.

Moving forward, we will still privatize quality over quantity in terms of expansion and continuously phase out unqualified hotels from our portfolio and pipeline to ensure a constant product and service quality improvements. By the end of 2024, we have a total of 2,988 hotels in the pipeline increased by 89 hotels sequentially.

(spoken in foreign language)

(interpreted) We continue focusing on the economy and mid-scale segment for mass market penetration and development. Please turn to page 7. By the end of 2024, Legacy-Huazhu's economy and the middle-scale hotel accounted 91%, 79% and 89% of the hotels in operation, the hotels in pipeline and the new openings, respectively. We believe the mass market remains the largest and the most promising market in China, and it is also the foundation of our business.

Going forward, we will constantly roll out high quality and good value for money limited service hotels, expand our coverage nationwide and solidify our leading position in this limited service segment.

(spoken in foreign language)

(interpreted) Continuous product upgrades is one of the key factors to maintain market-leading position and enhance competitive etch for achieving long-term sustainable growth. In 2024, we launched new versions and three brands which included (technical difficulty) 2.0, 6.0 and Crystal Orange 2.5. and serves as Hunting supplementary brands to fulfill the accommodation demand for younger generation and to support lower-tier cities' penetration and to help strengthening our presence and a leading position in the mass market.

While Crystal Orange 2.5 was designed for the business travelers in higher-tier cities and together with Intercity to be our key brands to further breakthrough and catch up in the upper-mid segment in China.

(spoken in foreign language)

(interpreted) We continue to improve product quality through upgrades for our Golden Triangle brand in service segment over the last several years. Please turn to Page 8. Hunting 3.5 and above version has been increasing every year. By the end of 2024, the proportion of Huntings 3.5 and above expanded 15 percentage points year-over-year and accounted over 36% of hunting hotels in operation. Please turn to page 9. Among hotels in operation, the proportion of G4.0 version and above up from 30% in 2020 to 76% in 2024.

Then please turn to Page 10, the proportion of Orange 2.0 and above expanded from 14% in 2021 to 66% in 2024 through consistent product upgrades, the brand and brand power for our Golden Triangle brands will see continuous enhancement and codification.

(spoken in foreign language)

(interpreted) In terms of regional expansion, our penetration in the lower-tier cities continued progressing. Please turn to page 12. At the end of 2024, around 42% of the company's hotels in operation were located in Tier 3 and below cities reflecting a 2 percentage point year-over-year increase. The proportion of pipeline hotels in this market reached 54%, a 12 percentage points higher than operating hotel ratio. Additionally, by the end of 2024, our cities and counties coverage expanded to 1,380 added 123 new cities and counties compared to a year ago.

(spoken in foreign language)

(interpreted) Our upper-mid segment continued gaining strong growth momentum. Please turn to page 13. At the end of 2024, the number of hotels in operation and hotels in pipelines in the upper mid segment, both increased by 35% year-over-year, reaching 873 and 521 hotels, respectively. After a few years of development, our core brands in this segment have gained better recognition among customers and franchisees, which helped us to expand network faster than before. We will continuously put more efforts on developing in this segment and strive to become one of the top brands in the near future.

(spoken in foreign language)

(interpreted) Page 14. In 2024, the rapid development of our corporate business effectively offset some impact from the shortage of individual business traveling demand and helped us to achieve a stable occupancy rate. For the full year, direct corporate bookings exceeded 27.6 million room nights sold, reflecting a 39% year-over-year increase. With active corporate accounts surpassed by 5,300, up by 49% year-over-year.

(spoken in foreign language)

(interpreted) We always emphasize that the membership program and direct sales capability are the most critical aspects for our business to achieve long-term sustainable development and growth. Please turn to page 15. At the end of 2024, our member base further increased to nearly $270 million. During the fourth quarter of 2024, room nights generated through the central reservation system accounted for 66.4% of the total bookings, representing an increase by 4.1 percentage points year-over-year and 2.2 percentage points.

(spoken in foreign language)

(interpreted) After reviewing our performance in the year of 2024, let's now look into our key focus in 2025. Please turn to Page 16. In 2025, we will continue focusing on high-quality growth. We are further penetrating into lower-tier cities as well as those white spaces for our limited service segment. In addition, we will continuously enhance our development and presence for the upper mid brand in the selected service segment. At the same time, we will focus more on brand building and brand positioning as well as continue implementing our service excellence strategy with a customer-centric principle.

On the product front, we will further improve product quality and launch new products to strengthen our brand and product consistency to improve customer satisfaction. Meanwhile, we will motivate and authorize our staff and employees to encourage them to proactively provide the proper services to the customers. By doing so, we can ultimately achieve a low-cost, high-efficiency and outstanding service level with strong award characteristics. Thirdly, we will continue to pursue our asset-light strategy to achieve a more stable and sustainable longer-term development.

Lastly, in terms of sales and marketing. Our Edge Reward membership program is undoubtedly the core focus. We are aiming to improve member engagement level and improve user retention and repurchase. Additionally, we will also further optimize our sales capabilities to better serve and attract more diverse customer base and various consumption scenarios.

(spoken in foreign language)

(interpreted) All above concludes the 2024 operational updates for Now I will hand over the call to our CFO, Mr. Chen Hui, to give an update on Thank you.

Thank you, Jin Hui. I will highlight the key performance of Legacy-DH business now. Please turn to Page 17. For our Legacy-DH business, we are happy to report that in the fourth quarter of 2024, RevPAR improved over 10% to EUR81 compared to last year. This improvement is mainly driven by 7 percentage point occupancy improvement.

For the full year 2024, RevPAR increased 5.9% to EUR76 compared to 2023. This is contributed by a 1.5% increase in ADR and a 2.7 percentage point increase in occupancy. Please turn to Page 18. In the second half of 2024, we carried out a series of cost-cutting and restructuring activities. We reduced the main staff at the headquarters by 30%. We restructured our operations management team to improve hotel performance.

At the same time, we accelerated the portfolio restructuring to become more asset light. In 2024, we exited 14 leased hotels. All these efforts started to pay off, although full year benefit will only be realized in 2025. In 2024, our revenue increased 9.6% to CNY4.9 billion. More importantly, our core adjusted EBITDA, which excludes restructuring costs, brand value and goodwill impairment and other adjustments of onetime nature, it increased by 64% to CNY356 million.

Please turn to Page 19. Looking forward, we will continue our effort to improve legacy DH business. We will focus on 3 key areas: first of all, optimization of hotel operations through a disciplined approach for revenue enhancement and cost management in each of our hotels. Secondly, will start to see positive impact of overhead reduction from 2024. At the same time, we will not stop our overhead streamlining effort and we'll continue scrutinizing the admin costs. Third, we will continue to pursue asset-light strategy and exit unprofitable at leases.

As a matter of fact, we exited another 11 leased contracts in February 2025. With all these efforts, we strive to improve the profitability of our DH business. In 2025, due to exit of leased hotels and the change of these leases to franchise contracts, our top line revenue will decrease at the first glance. However, this portfolio reshuffling effort will improve our sustainable profitability as we transform the leases to a fee-based franchise business. This concludes the DH review.

I'm now handing over to CFO, Mr. Chen Hui, for financial review.

Thank you, Jihong. Good evening, and good morning, everyone. Let me walk you through our operational and financial review for the fourth quarter and full year of 2024. Please turn to page 21. Our hotel network continued to expand. The overall number of rooms increased to (technical difficulty) year-over-year compared (technical difficulty) Hotel turnover for the full year of 2024 was RMB93 billion, a 15% year-over-year increase versus 2023. By segment, Legacy-Huazhu hotel turnover grew 16% year-over-year to RMB85 billion and the next total turnover increased 9% year-over-year to RMB8 billion.

Please turn to page 22. For our revenue, in the fourth quarter of 2024, total revenue for the group increased 7.8% year-over-year to RMB6 billion, exceeding the high end of our guidance. For the full year of 2024 total revenue for the group increased 9.2% year-over-year to CNY23.9 billion. By segment, revenue from Legacy-Huazhu increased 9.2% year-over-year to RMB4.8 billion in the fourth quarter, beating the high end of our guidance thanks to the better-than-expected hotel openings and RevPAR performance and its full year revenue grew 9.1% year-over-year to CNY19 billion.

In 2024, we further closed 63 leased and owned hotels as we pursue a more asset-light model. As a result Legacy-Huazhu's revenue from lease and owned hotels decreased 4.8% year-over-year in Q4 and decreased 3.9% year-over-year for the full year. On the other hand, it's monetized and franchise revenue recorded a much stronger growth of 24% year-over-year in Q4 and 23.6% year-over-year for the full year, mainly attributable to our strong new hotel openings despite a slight decline in RevPAR.

For Legacy-DH, its revenue rose 2.9% year-over-year to RMB1.2 billion in the fourth quarter and was up 9.6% year-over-year to RMB4.9 billion for the full year, driven by RevPAR growth.

Turn to page 23. As we have been continuously implementing our asset-light strategy, revenue contribution from our (technical difficulty) and franchise hotels further enlarged. For the full year of 2024, revenue contribution from and franchise hotels reached 40% for the group, up from 35% a year ago.

For Legacy-Huazhu, revenue contribution from and franchise hotels reached 49% compared to 43% a year ago. Exceeding the revenue contribution from this owned business for the first time on a yearly basis. We expect this trend to continue, and we believe our asset light strategy will support a gradual and continuous margin expansion of the company and generating strong cash flow as well as help us to become more resilient when navigating through economic cycles.

Now moving to the cost and expense section. Please turn to page 24. Hotel operating costs for the group were RMB4.2 billion in the fourth quarter and RMB15.3 billion for the full year, up 4.9% year-over-year and 6.6% year-over-year, respectively. Total operating costs of Legacy-Huazhu decreased 5.3% year-over-year in Q4. That increased 3.8% year-over-year for the full year. Slower than the revenue growth in the corresponding period, thanks to the transformation to a more asset-light portfolio.

Legacy-DH hotel operating costs amounted to RMB1.4 billion in Q4 and RMB4.3 billion in 2024 representing 33% and 14.4% increase, respectively, primarily due to roughly RMB420 million impairment loss booked in Q4. SG&A expense for the group will RMB1 billion in the fourth quarter and RMB3.7 billion for the full year, up year-over-year and 15.7% year-over-year, respectively.

Legacy-Huazhu's SG&A increased 13.4% year-over-year and 19.7% year-over-year in 2024, mainly due to a higher share-based compensation to attract and retain core employees who are key to our sustainable long-term business growth. If excluding share-based compensation, Legacy-Huazhu's SG&A expense would have increased 8.8% year-over-year in Q4 and 12.5% for the full year. Legacy-DH SG&A decreased 14.4% year-over-year in the fourth quarter, thanks to our restructuring and cost optimization effort.

DH's full year SG&A increased year-over-year. Our income from operations grew 19.2% year-over-year to RMB902 million in the fourth quarter and increased 10.3% year-over-year to RMB5.2 billion for the full year. By segment, Legacy-Huazhu reported 47.7% year-over-year operating income growth in Q4 and 14.4% year-over-year growth for the full year of 2024. Legacy-DH operating loss widened due primarily to the impairment loss as mentioned previously and around RMB100 million one-off restructuring costs booked for the full year.

Please turn to page 25 for our profitability and cash flow. Our group's adjusted EBITDA grew 10.3% year-over-year to RMB1.2 billion in the fourth quarter and increased 8.8% year-over-year to up to RMB6.8 billion for the full year. To better reflect our core operational performance, we further made adjustments on noncash impairment loss, one of DH restructuring costs the previous year (technical difficulty) related government subsidies and the rental reductions, which are nonoperational or one-off items. Our group's core adjusted EBITDA increased 15.5% year-over-year to RMB1.7 billion in the fourth quarter and grew 13.9% year-over-year to RMB7.5 billion for the full year.

By segment, Legacy-Huazhu's adjusted EBITDA increased 14.5% year-over-year to RMB1.5 billion in Q4 and grew 12.5% year-over-year to RMB7.1 billion for the full year, driven by our high-quality network expansion and the asset-light strategy. DH core adjusted EBITDA increased year-over-year in the fourth quarter and 54.1% year-over-year for the full year, thanks to the RevPAR growth and our cost optimization efforts. Adjusted net income was RMB221 million in the fourth quarter which was drive primarily by searching withholding tax, which was mainly related to our dividend distribution.

For the full year of 2024, our group adjusted net income increased 5.8% year-over-year to RMB3.7 billion, of which Legacy-Huazhu's adjusted net income grew 1.2% year-over-year to RMB4.2 billion. In 2024, the group generated operational cash flow -- cash inflow of RMB7.5 billion. Please turn to page 26 for our liquidity position. As of end 2024, the group had RMB9 billion cash, cash equivalents, restricted cash and time deposits and was in solid net cash position of RMB6.5 billion, including time deposits. We also had RMB3.3 billion unutilized bank facilities as of end 2024.

Now moving to our shareholder returns. Please turn to Page 27. We started to pay dividends to shareholders since 2017. Except for 2020 and 2022, which were heavily impacted by Corvid. In 2024, we revised up our dividend payout policy from up to 45% to no less than 60% of net profit, together with the announcement of up to USD2 billion three year shareholder campaign.

Today, we are glad to announce that the Board has approved a USD300 million final cash dividend for the second half of 2024. As a result, the total shareholder return for 2024, react to USD770 million, which include $500 million cash dividend and $270 million share buyback. This accounted for more than one-third of our three year plan three year plan and over 80% of free cash flow generated in the year. As we are growing more asset-light and expecting stronger healthier cash flow in the future, we will be highly committed to our current shareholder return an and consistently pay dividend to our shareholders.

Lastly, page 28 on guidance. For the fourth quarter of 2025, we expect our group revenue to grow 0 to 4% compared to Q1 2024 and 3% to 7% if excluding DH. As you may recall, we initiated the asset-light transformation of D in early 2024. In the beginning of this year, we have successfully completed 11 DH hotels transformation from lease model to a franchise model. If excluding the impact of this asset-light transformation on a comparable basis, the group revenue would grow 3% to 7% year-over-year in Q1 2025.

For the full year we expect our growth revenue to grow 2% to 6% year-over-year and 5% to 9% is excluding DH. If excluding the impact of DH asset light transformation on a comparable basis, the group revenue would grow 4% to 8% year-over-year in 2025. As you may notice, in addition to the total revenue guidance, we are now providing revenue guidance for the and franchise business. As we are pursuing a more asset-light model, we believe the franchise business better distract the company's growth trajectory in the long run.

We expect our monetized and franchise revenue to grow 18% to 22% compared to Q1 2024. And for the full year of 2025, we expect our monetized and franchise revenue to grow 17% to 21% year-over-year. In terms of unit growth, we are expecting to open around 2,300 hotels in 2025 and closed around 600 hotels for the same year. It represents roughly 15% year-over-year hotel network growth.

With that, we are ready to take your questions. Operator, please open the line for Q&A.

(Operator Instructions)

Ronald Leung, Bank of America.

Let me translate my questions into English. I have two questions. My first question is about RevPAR outlook. May I ask what is your outlook for 1Q and also for full year RevPAR growth? That's the first question. The second question is about -- so for DHL, what is -- would there be any strategy change ahead? And how should we think about the earnings recovery going forward?

(spoken in foreign language)

(interpreted) so let me answer your first question regarding to the RevPAR. As you may notice that in the first quarter, there are some of the seasonality as well as the different performance among different regions and areas. But we clearly see the demand from the leisure traveling to very strong.

However, for the business, we trend of the recovery from the bottom, and we also saw some of the third-party research that they have -- the expectation that business travel demand may recovering this year. But however, in the first quarter, given the seasonality, given the underperformance or a bit weak performance in the first half of March. We now expect the first quarter RevPAR to be a low single-digit decline on a year-over-year basis. However, looking into a full year basis, we are still quite confident that the RevPAR for the full year are going to be stabilized compared to 2024 or even a little bit increase. Thank you.

This is Jon. I will take the question about the edge. So in 2024, as I explained in the presentation, that we started a quite heavy-handed restructuring and all these efforts will start to pay off on a full year basis in 2025. So in 2025, our main strategy is to still stop the bleeding and to stabilize the business and the performance.

And with that turnaround accomplished, we will also to look -- we'll also look for growth opportunities at the same time as well mostly through asset-light and organic growth for the PH currently. So if you look at the net income, for 2024. Actually, that's why we focused and also stressed the core EBITDA improvement and that is really the result of a turnaround effort and our portfolio restructuring.

And that kind of a trend we can -- you can expect it to continue. This time, we do have impairment and also restructuring costs recorded for 2024, especially in the last quarter. This impairment is the brand value and goodwill as well from the purchase. Under this kind of impairment we evaluate every year based on our growth trajectory and growth plan. And next year, we will continue to observe the market but we do not expect this kind of heavy impairment immediately. And the restructuring asset, we will continue case by case. In some cases, because of the overhead and because of all the we will probably still have to do some restructuring and property will record some of some restructuring costs but it will not be in the same magnitude as 2024.

[Dan Xu], Morgan Stanley.

(spoken in foreign language) Allow me to translate my question into English. For FY 2024, total shareholder return was close to USD800 million, among which $500 million was dividend exceeded 100% of payout ratio. So going forward, if there is no good buyback opportunity, should we expect even higher dividend payout to match the total shareholder return levels seen in 2024?

(spoken in foreign language)

(interpreted)Let me help to translate -- so in 2024, we returned total around USD770 million to our shareholders, which $500 million through cash dividends and $270 million through the share buyback. This is thanks to our asset-light model and transformation, which help us to generate much stronger and healthier cash flow -- and looking forward, so we will stick to our current shareholder return plan, which is a three years plan to return up to USD2 billion. So -- and mainly through the cash dividend. So that's the current plan for now. Thank you.

I would now like to hand the conference back to management for any closing remarks.

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

Thank you. This concludes.

Portions of this transcript that are marked (interpreted) were spoken by an interpreter present on the live call. The interpreter was provided by the company sponsoring this event.