H World Group Ltd (HTHT) 2014 Q2 法說會逐字稿

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Ladies and gentlemen, thank you for standing by and welcome to the China Lodging Group 2014 Q2 earnings conference call. (Operator Instructions). I must advise you that this conference is being recorded today, August 12, 2014. Now I would like to hand the conference over to your first speaker for today, Ms. Ida Yu. Thank you. Please go ahead.

Thank you William. Good morning everyone. Thanks to all of you for dialing in and welcome to our second quarter 2014 earnings conference call. Joining us today is Mr. Qi Ji, Executive Chairman and CEO, Mr. Xie Yunhang, our COO, and Ms. Jenny Zhang, our CFO and CSO. 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 provisions 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 corporate filings with the SEC. China Lodging Group does not undertake an obligation to update any forward-looking statements except as required under applicable law.

On the call today we will also mention adjusted financial measures during discussion of our performance. Recalculation of those measures to comparable GAAP information can be found in the 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 the management's slide presentation is available on the investor relations section of China Lodging Group's website at ir.huazhu.com. Now I would like to turn the call over to Mr. Ji. Mr. Ji, please.

Good morning everyone. Thank you for joining us today. At the end of second quarter 2014 we had more than 179,000 hotel rooms in operation. We still see huge potential for future growth in the economy hotel sector in China. Only 20% of total economy hotels are branded, as shown on page 3. We remain our leading position and continue to strive for expansion in this segment.

The development of HanTing hotels and Hi Inn are both well on track, as shown on page 4 and 5. We intend to have about 1,530 HanTing hotels and about 160 Hi Inns in operation by the end of this year. This will translate into five-year CAGR of 40% and 80% of HanTing and Hi Inn respectively. We are confident that our focus on better products and a great experience will continue to set us apart from other competitors.

To basically consolidate the market we have recently launched the Elan hotel, a new brand, as shown on page 6. This brand is a non-standardized hotel economy hotel brand to enable existing economy hotels to join Hua Zhu's premier platform at the lowest conversion cost. We will start testing the market with a primarily manachised model.

In addition to our leading position in economy hotel segment, I'm also glad to report that we have achieved proven success in mid-scale hotel segment, particularly in tier-one cities. JI Hotel is very well received by the upgrade in the consumption trend. In two examples of this hotel in Shanghai, as shown on page 7, both hotels have over 200 rooms and reached to 90% of occupancy, over 90%, within six months. The same-hotel RevPAR of JI Hotel recorded a double-digit growth year over year.

The stellar performance of the hotels drive the fast rollout of our mid-scale hotels. Including JI Hotel and Starway Hotels, (inaudible), at the end of the second quarter we had 137 mid-scale in operation and 83 in pipeline. One thing to note is that our manachised hotels have shown they're particular favorite mid-scale hotels (inaudible). About 80% of the mid-scale pipeline has been contributed by manachised hotels.

With that I will turn the call to Yunhang who will walk you through our Q2 operational results. Yunhang please.

(Interpreted). Thanks Qi Ji. Now let me walk you through our operational highlights for Q2 2014. In Q2, as shown on page 10, we opened 15 new leased hotels and 125 net new manachised hotels. At the end of Q2 we had 1,669 hotels in operation among which 35% were leased hotels, 64% were manachised hotels and the remaining 10 were franchised Starway hotels. Thanks to the popularity of our brand we continue to see a greater number in pipeline, with a record high of 505 hotels at the end of Q2.

As shown on page 11, in Q2 our Group blended occupancy was 91%, the same as a year ago. The blended ADR was RMB180, a decrease of 1% year over year as a result of more hotels in lower tier cities where ADR tends to be lower. In summary, in Q2 the blended RevPAR was RMB164, a decrease of 1% year over year.

This slide provides a detailed review of the growth trends of our same-hotel RevPAR. For hotels in operation for at least 18 months in Q2 the same-hotel RevPAR remained the same, with both flattish ADR and occupancy. Due to the soft macro-economy we maintained a relatively conservative pricing strategy and consequently our same-hotel occupancy stabilized at 96%.

With that I will turn the call over to Jenny, our CFO and CSO, who will walk you through our Q2 financial results. Jenny, please.

Thanks Yunhang. Hello everyone. In Q2, 2014, as shown on page 14, our net revenue increased 20.5% year over year. Leased hotels' revenue grew 18.9% and the manachised and the franchised hotels' revenue grew 32.6% year over year. Our manachised and franchised hotels' revenue reached 13.4% of our total revenue in Q2 this year.

On page 15 the adjusted quarterly operating margin came in at 13.2%, the same as that of Q2 last year.

The hotel operating cost as a percentage of net revenue increased by 2.4% year over year, mainly attributable to the soft RevPAR and the increased number of mid-scale leased hotels in the ramping-up stage. We added 23 new leased JI Hotels in the past four quarters. Typically a new JI Hotel incurs a significant amount of rental and depreciation cost before it can be ramped up to a stable level. Our pre-opening expenses as a percentage of net revenue saw a 1.4% decrease due to our enlarged revenue base. Benefiting from economies of scale and cost-saving efforts, adjusted SG&A expenses and other operating income as a percentage of net revenue decreased by 1%.

Last but not least, move on to cash position, as shown page 16. Our cash balance closed at RMB683m at the end of Q2. We had a total credit facility of RMB898m from IDGC and China Merchant Bank. For second quarter 2014 our operating cash flow totaled RMB427m, a 41% increase from a year ago. Our investing cash flow totaled RMB220m, a 25% from a year ago.

In June 2014 we completed the investment in Quanjude Group for a total amount of RMB100m. As of June 30, 2014 the Company recognized RMB27m gain to other comprehensive income under equity in the balance sheet as a result of share price appreciation of Quanjude from our purchase price. Such gain will be not be reflected in our income statement until the investment is reclassified as a trading asset or being sold.

We believe that our cash balance, our operating cash flow and our available credit facility will be sufficient to fund our rapid expansion plan in the near future.

Finally, as shown on page 17, we expect to achieve net revenue for Q3 will increase 20% to 22% year over year.

With that, let's open the floor for questions. Operator.

(Operator Instructions). Justin Kwok, Goldman Sachs.

Good morning. Thanks management for taking my question. I'll have just two questions. The first one maybe I'll pose it to you, Mr. Ji. It's about the brand portfolio building of the Company. So you have added another new brand called Elan into your portfolio. I just want to get a sense on the management thinking of how you're going to treat the whole brand strategy. What will be the customer segmentation, what will be the focus and also, with now seven brands, are those enough or you are still looking for building more or adding more brands into the portfolio?

And instead of building your own brand, are you also open to buying more, like (inaudible) for (inaudible). This is my first question. Thanks.

(Interpreted).

Yes, let me translate for Mr. Ji. In the past six, seven years HanTing has well established itself as a premium brand in the economy hotel sector. We have maintained a very consistent brand quality and the product standards have been strictly followed throughout all of our standard hotels.

We noticed that in the market there are also a group of economy hotels which are of decent quality. However, they do not fit into the HanTing standards. Just for example, as a potential franchisee of a hotel in like a third or fourth tier city in China and he will often put like two large vases in the lobby and particularly at HanTing we're not going to accept that because it's not in line with our brand standard. However, if you look at it from the customers' perspective, it may not be such a bad thing to see the vases in a hotel (inaudible).

And we also noticed that in the market there are a few players who are more open to the stagnation in certain standards have also reached certain sites. Although they are not as successful as our HanTing brand, we do see the demand for a more flexible product in the market.

That's the rationale we brought out the Elan brand and we would like to use it as a non-standard brand, but still with reasonable quality standards. Such as in terms of the decoration, we would have a lot higher color and flexibility as compared with our HanTing brand. So this is our current thought.

Okay. Thanks. Maybe just a quick follow up. Is it fair to say that you will still keep the manachised way of doing business, i.e. that you still retain the management of the hotel instead of just purely franchising out the system or your membership network to the incremental franchisees?

At this stage, while the brand is still in the testing phase, we are typically using the manachised model, but we do not exclude the possibility that once the operating platform is well established and the brand standard, in spite of its flexibility, are well established, we may consider using the franchised model in the future. But in the near term we'll (inaudible) manachised model.

Okay. Thank you. Thanks. Maybe my second question just quickly on, in the presentation you also mentioned that your pricing strategy has been a little bit conservative in the previous quarter, so what are you seeing in the third quarter? Have you been trending a bit more upbeat in terms of pricing as we are now in the middle of the peak season? Thanks.

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Okay.

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So let me translate. We have clearly in Q3 these are high season for us throughout the year so we definitely see a price up-tick from the second quarter, but our seasonal pricing strategy has been in place for many years so the base for last Q3 is also very high. So in general we have seen a reasonably nice momentum and we have pushed forward new management practice in the tourism cities where we can raise our price. So in those tourism-focused cities we have seen a 2% to 3% up-tick in the same-hotel price, but for overall, whole country, the price up-tick is not meaningful.

Okay. Thank you. Thank you very much for the color.

You're welcome.

Jamie Zhou, Macquarie Bank.

Hi. Good morning management. Thanks for taking my questions and congratulations on a solid set of results given a tough second quarter. I've got a couple of questions. The first one is on a follow up to the Elan brand reintroduction. I want to clarify with you on what the non-standardized model for the Elan, what is the price positioning for the brand and how are the economics compared to our existing manachised hotels in the economy hotel segment. That's my first question.

(Spoken in Mandarin).

Jamie, let me take your question. Currently in the way we are positioned Elan in terms of pricing in the ballpark of HanTing. It may have a little lighter valuation in terms of the pricing practice. And since the brand is just rolled out we cannot very accurately predict (inaudible) we get. We will need probably 6 to 12 months to so see how well the brand is accepted by the consumer. And so the general positioning in terms of the economy segment, it will be positioned like in par with HanTing, but with a little bit lighter valuation. And you [effectively] know about our HanTing brand. That's where we stand.

And in terms of our economics, are we getting the same 6% of the room night revenue from the franchisees?

We are applying the same kind of pricing as compared with HanTing. And we may offer a little bit more discount in the one-time joining fee as this is a new brand.

Okay. Thank you. And also a small follow-up. I read on Chinese local media that you -- it quoted China Lodging trying to expand this brand potentially in five years to more than 1,400 hotels. Can you confirm that?

This is our internal goal we have given to our newly set-up brand team. Nevertheless, we do not want to put this number forward as a (inaudible) to our investors.

Okay. I see. And this will be in addition to what we previously have seen in your pie chart planning for the next 5 years to reach 4,000 to 5,000 hotels. Is that correct?

Yes. We believe we will maintain the expansion pace of HanTing, as you have seen, currently between 300 to 400 hotels a year. And we will also continue the acceleration of Hi Inn brand, which has nearly doubled last year and also this year. So those trends will not be impacted by the introduction of the Elans.

Okay. Thanks. My second question is on the full-year margin outlook. I notice that in the second quarter you guys have done an excellent job in pushing through some excellent economies of scale. What can we expect from our current spending in the third quarter as to second half margins on the EBITDA line? Can we see any EBITDA margin expansion compared to the same period last year?

As we, you know, mentioned about half a year ago, our objective is try to maintain the overall EBITDA margin this year. We've already seen some achievements in the second quarter, but the overall picture I think still has some challenges attached. So currently we wouldn't be too optimistic to guide a margin expansion for the moment, but we are quite confident that our fast growth will continue into the second half of the year and also the years ahead.

I see. Thanks. And lastly, very quickly, are you maintaining your full-year revenue growth target of 20% to 23% from last year?

Yes.

Okay. Great. Thanks very much.

You're welcome.

Lin He, Morgan Stanley.

Hi. Good morning management. Thanks for taking my questions. First question is for Qi-[xiong]. Qi-[xiong], can you please talk about the competition landscape, competition environment you are seeing for the midscale segment? This year I think we have seen some international players putting a little bit more focus on the segment. We have seen Hyatt open the Hyatt Place in Shenzhen and we have seen Hilton open the Garden Inn product in China. So can you talk about the competition environment?

And secondly, my second question is about the pipeline. This quarter we have seen a very strong pipeline momentum for the Company. Can you talk about which segment, which brand we have seen particularly strong growth to drive this pipeline increase? Thank you.

(Spoken in Mandarin).

Let me translate for Mr. Ji. So a couple of years ago Mr. Ji thinks that, it's his opinion that the midscale probably will be the next we will see for hotel growth and in the past two years clearly this become a common view in the industry. So we see a lot of players joining the battle. Not only the Hyatt, IHG, Hilton have rolled out or continue to grow their existing mid-scale brand, but also see a lot of local players like Jinjiang, 7 Days, (inaudible), Home Inns all try their own brands getting into this segment.

Currently we haven't seen any brand become dominant in this segment yet, but we clearly have used our own advantage in this segment. Our two brands, JI and Starway, in combination are in the, in terms of feel are definitely in the best position in this competition. And also we have seen in terms of our performance these hotels have the big success in attracting both consumers and franchisees.

Specifically about your question on the foreign players, honestly speaking I think it's more at the upper part of midfield market, similar as Garden Inn. So without experience in the economy hotel, we think they are going to face challenges in terms of cost management and how to attract sufficient amount of consumers into the hotels.

The midfield hotel pool is mainly driven by the consumers demand for consumption upgrade. And for economy hotel players like us, we have the advantage of owning a large pool of the existing consumers who would like to choose a better hotel. However, Hyatt, Hilton and IC, they do not have such a customer base. They are stronger placed in the upscale and luxury segment. So I think they are going to have challenges when they try to build up their customer base.

And your second question about the pipeline growth drivers, we have seen a very strong pipeline for HanTing and JI Hotels. We also see a very solid pipeline for our Hi Inn. So those are the main drivers for our pipeline growth.

Thanks Qi-zong. Thanks Jenny. Very helpful.

Thank you Lin.

Billy Ng, Bank of America - Merrill Lynch.

Hi. Good morning management. I just have one question. I just want to get a sense what do you guys think. At the macro level we see some recovery. TMI is improving, things like that, and seems like the overall market also shares some optimism here. But have you seen business travel pick up in your hotel? And also I know like your full-year guidance hasn't changed, but let's say compared to a quarter ago, have you changed more optimistic or it still remains the same?

So far the trends we have seen are fairly stable. So we maintain our view of a quarter ago.

Okay. Thanks.

Thank you Billy.

Yaoxin Huang, CICC.

Thank you for taking my question. I have a question goes to Mr. Ji. (Spoken in Mandarin).

(Spoken in Mandarin).

Let me translate the question and Mr. Ji's answer. The question is about Hi Inn. Yaoxin has seen that Hi Inn currently has been sited to more than 100 hotels and your asking what's the [ramp production] and how does it distinguish itself from HanTing and other competitors like (inaudible).

Mr. Ji's answer is Hi Inn is positioned as a budget hotel. Its price is generally 30% to 35% lower than a HanTing in the same location. We have seen in the past few years the competitors in the low end, in the budget hotel segment actually has been decreasing because many of them have seen challenges in cost control, in how to generate reasonable profits in such a low price.

And we are very glad and proud to say that in our Hi Inn has figured out the right method here and we have won in the last couple of years the recognition of our franchisees since they're generating very decent profits. We have seen many of continuous or repeated franchisees. They would like to invest in a second and third Hi Inn hotel after they achieve success in the first one.

In terms of properties Hi Inn is smaller than HanTing in terms of both room cost as well as room size so it's addressing a different segment as HanTing with pricing. We see a large amount of the small hotels existing in China. They become a very fertile soil for the expansion of Hi Inn in the future.

Okay. Thank you. That's very helpful.

Thank you, Mr. Yao.

Tian Hou, TH Capital.

Hi management. Thanks for taking my question. (Spoken in Mandarin). I will do the translation. So I'm asking Ji-[xiong] a question regarding the relationship between standardized budget hotel chain and a non-standard acquisition, non-standard hotel acquisition. And the initial thought for standard hotel budget chain is to take advantage of the scale to earn some returns or profits, but now we're acquiring non-standard so how do we generate economies of scale? (Spoken in Mandarin).

(Spoken in Mandarin).

Okay. Understood. So the second question is for (inaudible). So related to your hotel expansion, the hotel expansion recently you opened a lot of hotels in tourism attraction places so I wonder is there a difference in terms of RevPAR seasonality. (Spoken in Mandarin).

Let me translate Qi Ji's answer to the earlier question about what's the advantage of having a non-standardized hotel which (inaudible). We have realized that in the market, our existing franchisees and some potential franchisees have raised the question to us that it's easier for them to achieve consistent quality standards, but if we have to push them to change the whole decoration it will cost us a huge amount of CapEx. And the Company has a new brand that has a wider following in terms of the appearance. And so we have seen -- we have heard a lot of voices from our franchisees in that regard. And also we have seen our, some of the competitors actually losing their core brand standards to tolerate all kinds of different looks and feel.

We look at the situation and we feel that instead of expanding the HanTing brand to embrace those hotels that have a different look and feel, we would rather keep HanTing a very consistent brand with integrity and then we will have another brand to meet the needs of more diversified decoration style.

In our brand portfolio we have a very clear positioning for each offer. We have HanTing positioned as a very upper part of the economy hotels and Hi Inn positioned as a lower part, a clear distinction in terms of brand standards and pricing model. And Elan will be positioned at a similar kind of pricing level with a much more diversified style.

However, in terms of the core quality standards and the operational procedures, that will be largely the same as HanTing. For example, we will use the same kind of same kind of (inaudible), same kind of membership programs, same kind of quality standards for the (inaudible) facilities, same kind of mattress with the comfort level required, and also same kind of WiFi services will be expected. So the difference in the look and feel (inaudible), but we have no difference between the basic quality standard. We want to make that clear.

We have seen in the more established markets some of the brands have widened themselves to accommodate to different styles. For example, (inaudible) has consolidated Four Seasons (inaudible) into a sub-brand of [Ibis] and made their (inaudible) separate. And Days Inn, if you travel from the east to the west of the United States, you will see Days Inn also have (inaudible) looks and feels across the continent. So we think that in the more established markets the consumer is reasonably well tolerant for some of those [evolutions].

We are going to watch how our consumers react to the rollout of Elan and probably we still prefer to keep HanTing as our consistent brand and Elan will be a consistent core quality level, more diversified appearance. We'll have to see.

(Spoken in Mandarin).

Sure. Let me translate for Mr. Ji. Primarily you know that the tourism demand has been booming, as we all are aware of, and think this trend will continue. To address this booming demand we have increased our presence in tourism destination. For example, in Yunan we have expanded into a much larger scale in the first couple of years.

Clearly you know the tourism destinations has a very clear seasonality. The low season and the high season could pose a very significant deviation in terms of RevPAR. However, if you blend those hotels into our overall portfolio I think it's actually very clearly a hedge to our existing portfolio because of the seasonality of the tourism hotels and of the business hotels are almost exactly offsetting each other in terms of the fluctuation.

And to support our expansion into the tourist market we have also adopted a new set of tools to attract new members. We have various programs to enlist more diverse who has a travel, leisure travel demand. So our customer base are also evolving to support our network expansion into the tourism destinations.

Thank you. That's very helpful.

Thank you Tian.

Shang Koo, One North Capital.

Hi. Good morning. Thank you very much for the opportunity to have some questions answered. I have two broad questions. One relates to the new brand, the Elan brand. I just want to get a better understanding of the target customer segment for this brand and what is your promise to the customer given that the look and feel will be pretty different across the different hotels.

And related to that, from a different perspective, from a perspective of, let's say, a prospective current hotel owner who is deciding between the different brands that you offer whether he would go for Elan or HanTing, what would drive his decision, given that it seems that Elan proposition seems to say that, hey, you can join the China Lodging family without incurring the CapEx necessarily to transform your hotel? So that's the first of my questions. I've got a second broad question to follow.

Let me address the question. The Elan customers in general come from a pool of economy hotels. They are looking for reasonably priced economy hotels with very reliable quality. That's still the same customers you will see who are attracted to various different economy hotels.

And in terms of the perspective of the hotel owner clearly we have the same kind of pricing schemes in terms of franchisees so pricing is not the main distinguishing point. I think they are -- the owners or franchisees probably will need to trade off between invest more to convert it into a standard HanTing hotel, which is a reliable, established brand which does have a more attractive high RevPAR can be achieved, and the trade off is probably a higher investment CapEx because they have a standardized product requirement.

Then the second choice for them will be to, if this is an existing hotel, then they can invest mainly on the (inaudible) maybe keep of the appearance and not necessarily have to convert everything into the HanTing standard. However, the Elan brand clearly is not as well established as HanTing in spite of it sharing the same kind of the membership program and our management service.

So there will need to be some trade-offs there. So for franchisees I believe that if they are currently having a hotel has a good quality it may be better trade off to choose Elan. But if the hotel currently is not offer decent quality standards, probably it will be better off to invest more to convert it into a HanTing.

Right. Okay. Thanks for the clarification. I just want to understand a little bit more about your thought process about EBITDA margins going into 2015 or even going forward. Given your understanding of where you are in terms of the development of your hotel pipeline and how the new hotels that have been opened over the past 12, 18 months, the operating trends of these hotels, can you help me just understand what would it take for EBITDA margin to expand in 2015?

There are actually fairly quite strong factors will have an impact on the EBITDA margin, but let me just quote a few most important ones.

I think number one would be the same-hotel RevPAR appreciation (inaudible) versus the inflation. In general the economy has been a little bit soft in the past few quarters. However, we see some positive events are going to happen in the next couple of years may have a positive trend. For example, the Disney is expected to get into operation in 2015 and we still have more than 10% of our hotels in the Shanghai area. And if you count the few neighboring provinces, Jiangsu and Zhejiang, this whole East China represents a significant portion of our portfolio. So we expect benefit from the opening of Disney. So the (inaudible) like that is definitely very key driving factor.

And secondly I think our revenue mix between the leased hotels and the franchised and manachised hotel revenue is another driving factor. We have been accelerating the expansion through more leased ?- or more manachised and franchised hotels and that trend as it continues will also positively impact the overall margin.

However, we also need to keep in mind, since we're still in the fast expansion stage, we're investing into our platform systems, we're investing into our new brand, so we expect the next couple of years to still incur quite some platform expenses to support our very ambitious expansion plan in the next five years.

So those few factors I think we need to take (inaudible) to see it and for now it's a bit too early to predict exactly where the margin will be in the next couple of years.

Sure. That's very helpful. Thank you so much. If I could just wrap up with just one quick question, how much of your new hotels in 2014 involves conversion of an existing hotel, not a new-build hotel?

Currently we are seeing about 40% to 50% of our new hotels are actually conversions from existing lodging facilities.

Okay. Great. Thank you so much and all the best for the rest of the year.

Thank you. With that, we will need to close our call today. Once again, thank you everyone for making time from your busy schedules to join our call today. We look forward to talking to you in the next quarter earnings call. Goodbye everyone.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may all now disconnect.

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.