H World Group Ltd (HTHT) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the China Lodging Group Q1 2017 Earnings Conference Call. (Operator Instructions) I must advise you that this conference is being recorded today, Thursday, the 11th of May 2017.

I'd now like to hand the conference over to your first speaker today, Mr. [Hai-Ming Tzu]. Thank you. Please go ahead.

Thank you, operator. Good morning, everyone. Thanks to all of you for dialing in, and welcome to our first quarter 2017 earnings conference call. Joining us today is Mr. Ji Qi, our Founder and Executive Chairman; Ms. Jenny Zhang, our CEO; and Mr. Teo Nee Chuan, our CFO. Jenny and Teo will present the strategy review and Q1 results. 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 U.S. Private Securities and 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. China Lodging Group does not undertake any 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 the discussion of our performance. Reconciliations 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 supplementary slide presentations, 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 Jenny. Jenny, please?

Thanks, [Hai-Ming]. Good morning, everyone. Thank you for joining us. Before diving into the details of quarterly results, which are very strong, I'd like to walk you through the strategic focus we set at the beginning of 2017 and how we have been progressing on those focus areas.

Looking forward into 2017, we are continuing the upgrade for economy hotels, accelerating the expansion of midscale hotels through our multiple brand strategy, and driving further growth in same-hotel RevPAR.

So let's take a look at the economy hotel segment first. On Page 3, we are thrilled to see the continuous HanTing same-hotel RevPAR growth. The same-hotel RevPAR growth accelerated to 5.2% in Q1 after the encouraging turnaround of 1.1% growth in Q4 2016. We think the RevPAR growth were mainly driven by strategic product upgrades of HanTing 2.0, 2.5 as well as the successful branding and the sales efforts on top of the improving market conditions.

By the end of Q1 2017, 32% of all HanTing rooms' inventory are under 2.0 model or above, up from 17% in 2015. The improvement was a bit slow in Q1, mainly due to less new hotel openings in -- during the Chinese New Year and the upgrades in programs hasn't finished due to the vacation. We are determined to further upgrade HanTing in the upcoming years.

Another encouraging news coming from the ranking of BrandZ. Every year, BrandZ ranks top brands in China and across the world. HanTing has been on the top 100 list for China brands continuously for 4 years now. As shown on Page 5, HanTing's rank has moved up to number 78 across all brands in China and HanTing's brand value increased 25% to USD 448 million in 2017, ranked number 11th in terms of the growth of brand value.

We aim to build HanTing into a hotel for everyone, everywhere. We are pleased to see our progress in this front.

Let's move to the growth of midscale hotels. In the past months, we launched 3 new midscale hotel products, including the first one, CitiGo, which is affordable luxury brand designed for young people in the city center. And we also launched the urban version of Manxin. We used this resort brand to enter into urban locations, offering a lively and a colorful lifestyle choice. The third one, HanTing Plus, is an entry-level midscale brand derived from our flagship HanTing, which offers an all-touch, technology-enabled convenience and a high level of comfort. All 3 brands and products immediately excited and attracted many franchisees. We expect these new brands will accelerate our expansion in the midscale segment.

In addition to the above-mentioned strong performance of HanTing, our mid- and upscale hotels are also increasing the contribution to revenue. The revenue contribution from mid- and upscale hotels now account for 31% of total net revenue, an increase of 4 percentage points a year ago.

We are also proud of the progress that was made in terms of building our market share in this booming mid- and upscale market. As shown on Page 8, during the past 3 years, we have increased our room inventory in midscale and upscale segments from 11% in 2014 to 19% in Q1 2017. Approximately 50% of our room in pipeline are in the mid- and upscale segments.

With that, let me jump a little bit ahead to Page 14 to talk a bit about our progress on same-hotel RevPAR growth.

Our midscale hotels contributed more than 9% same-hotel RevPAR growth in Q1 this year. So together with the performance of our economy hotels, which contributed approximately 5% same-hotel RevPAR growth, the blended same-hotel RevPAR growth accelerated to 5.8% this quarter. This is our highest growth number in the 4 years since Q3 '19 -- 2012. It's really a record high. And then we see the momentum, partly supported by the market condition, consumption upgrade as well as the economy's stronger performance in the past quarter.

And we also attribute this to our continuous effort in our direct sales, including recruiting new members and they're upgrading their usage to midscale hotels.

If you dive deeper, you will find the growth of same-hotel RevPAR is attributable to both ADR increase as well as occupancy increase. The growth in the midscale segments are mainly due to the ADR growth; and the economy segment, the growth mainly comes from the increase in occupancy. We are very encouraged by this trend and we believe the strong RevPAR growth will continue into the rest of the year.

With that, let me turn this to Teo, who will walk you through in more details.

Thank you, Jenny. Good morning, everyone. Turning back to Page 12. We have seen the blended RevPAR continues its growth trend in 2016 and has accelerated to 9.8% in Q1 2017. This is an all-time high positive record growth since the Shanghai Expo in 2010.

Turning to Page 13. The RevPAR growth of 9.8% was driven by an increase in our occupancy rates by 3.5 percentage points and an increase of ADR by 5.2% year-over-year. The RevPAR growth was mainly due to the increasing mix of the midscale hotel room inventory as well as the upgraded hotels.

Turning to Page 15, moving on to the financial results. Our revenue grew by double-digit year-over-year at 10.8%, higher than our Q1 guidance. Our revenue growth was driven by a 20% increase in our manachised revenue and an 8% increase in our leased and owned hotels. We continue to see an increasing mix of net revenues from our manachised hotels increasing from 20.9% of -- in Q1 2016 to 22.7% in Q1 2017 of net revenues.

Move on to Page 16. Our adjusted operating margin came in at 11.5% for Q1 2017, increased by 5.6 percentage points from Q1 2016. The SG&A expenses in Q1 included a onetime transaction cost related to Crystal Orange acquisitions totaling approximately CNY 45.2 million. Excluding this one-time transaction cost, our normalized operating margin would have been expanded by 8.4% to [14.3%]. The adjusted operating -- adjusted hotel operating cost and other operating costs as percentage of net revenue decreased by 8.2 percentage points year-over-year. This is mainly due to our improved blended RevPAR and a favorable VAT impact on certain operating costs such as rental and utilities. The adjusted SG&A expenses as a percentage of net revenue increased by 3 percentage points year-over-year due to the CNY 45 million Crystal Orange transaction-related fees that I mentioned earlier. If we excluded this onetime affect, the normalized SG&A expenses as a percentage of net revenue would have been at 9.1% of net revenue.

Move on to our cash flow status on Page 17. In Q1, our net cash from operations reached up CNY 196 million, while the CapEx for maintenance and new developments totaled CNY 186 million. As a result, the free cash flow in Q1 2017 totaled of CNY 11 million.

Comparing to Q1 2016, our cash flow from operations was lower by approximately CNY 130 million. This is mainly because we mixed certain large rental prepayments to secure certain leased hotels at a more favorable rate, timing -- as well as the timing of the settlement of salaries, taxes and payables as we had a good quarter in Q4 2016. And we also see that our customer has also been increasing their use of prepaid cards to pay for their stays in our hotels.

Included in the [CNY 870 million] cash outflow was a deposit of CNY 700 million for the Crystal Orange acquisitions, and to balance our strategic investment into a mobile and apartment service company.

Finally, our guidance on Page 18. We expect to achieve a net revenue growth rate of 10% to 12% year-over-year in the second quarter of 2017. We revised our net revenue growth guidance upwards to 10 -- in the range of 10% to 13%, given the stronger RevPAR momentum. Our hotel opening target remains the same. Last, but not least, we expect the Crystal Orange acquisition to close in May 2017 as we have received the antimonopoly review approval earlier this month.

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

(Operator Instructions) Our first question comes from Yaoxin Huang from CICC.

I have 3 questions. First 2 questions goes to Teo. First, I saw in your report that the full year revenue growth was revised up to 10% to 13%. I just want to make sure that, does this estimate include Crystal Orange acquisition? And second question is that, what's the RevPAR trend recently in April and May?

Okay. The growth estimates, the net revenue growth estimate of 10% to 13%, did not include -- does not include the Crystal Orange acquisitions. That's number one. And number two is that the growth -- the RevPAR growth in April is still very positive. I would say that it is a double-digit growth, and we continue to see some momentum moving forward to May as well. But the May number is slightly lower than April due to the seasonality of the holidays.

I see, I see. So when you mentioned double-digit growth, you mean blended RevPAR or same-hotel? Blended, right?

Blended.

Okay, I see. My third question goes to Qi Ji. How do you view the Accor China acquisition after 1 to 2 years operation?

(foreign language)

(foreign language)

Okay, let me answer for Ji Qi's answer to Mr. Huang. First of all, I think we are very fortunate to have Accor's brand. Most of them are midscale and above. For example, ibis Styles and the Mercure. And even for the ibis, ibis itself is at the high end of the economy segment. When we have these brands from Accor Group, we take the right of the high growth of midscale market and see a very positive progress lately. Although we haven't disclosed Accor's separate number, but we are very satisfied. The result is very good.

And our next question comes from Justin Kwok from Goldman Sachs.

Perhaps I have 2 questions, one on the medium-term opening outlook and then the other one more on the previous quarter expenses. On the medium-term opening side, as you mentioned in your slide, you continued to look for roughly 500 gross openings for the hotels in this year. I want to check, how much visibility you have further down the road into the next 2, 3 years. Would you think that this opening target is sustainable? Or you think it's actually seeing more upside, given that you have already started to stabilize your franchise operation. And together with the fact that you have actually seen -- start to see a lower stock of your leased and operated hotels, do you think that this continues into the next few years, maybe you have more expiry than net opening? This is the first question on the outlook and opening. And the second question on the expenses that would be related to your comment on favorable VAT treatment for some of the items, like utilities and all these, is it one-off or is it already a new normal for a lower number going forward?

Let me address your first question, Justin, and I will ask Teo to comment on the VAT expense. We plan to open 450 to 500 new hotels this year and we also expect some hotels will expire and the lease term will expire. And there will also be some canceling out of low quality properties, so we also expect like a 100 deduction from the existing network. So net opening, we are expecting 350 to 400 this year. We expect the coming years that net opening will increase meaningfully from this level, mainly because we have launched quite a few new products, as I just mentioned, HanTing Plus, CitiGo, Manxin. We are also entering into the upscale market through Mercure, Grand Mercure and Novotel. All those efforts are going to accelerate our extension next year and onward.

Justin, I'll take on the second question on the VAT, the favorable VAT impact. The -- as you -- the VAT reform goes like -- started back in May in 2016 and the result was gradually trickling in, in the second half of 2016. And comparing it in 2017, we have a favorable impact because in 2016 Q1, the VAT reform has not started yet. But having said that (inaudible), you will see that the impact will continue to have some favorable impact, continue on back and gradually into this year, later this year, because the transition for the VAT invoice was a gradual process. In fact, it was only fully implemented at the end, in the last quarter of 2016. So I suppose that we will continue to enjoy some favorable impact from the VAT reform in the latter part of this year as well.

(Operator Instructions) And our next question comes from Jessica Hong from Haitong International.

I have one follow-up question on the store openings. You just mentioned that the net opening will be 350 to 400. Does this number include the Crystal Hotel? Remember, they have 125 -- 126 hotels already, so does this number exclude or includes the Crystal Orange?

Jessica, our net openings of 300 to 400 hotels does not include the hotel openings or acquisitions of Crystal Orange.

(Operator Instructions) There are no more further questions at this time. I'd like to hand the call back to the speakers for any closing remarks. Please continue.

Operator, let's wait 2 more minutes to see if anyone wants to ask some more questions. And if there's no more questions, we can end the call.

(Operator Instructions) And our next question comes from Lin He from Morgan Stanley.

One follow-up question from me. So on the operating cost side, we saw that, this quarter, the operating cost is down on a year-over-year basis. Is that just that the VAT, the favorable VAT impact, or there's anything else?

The percentage of the operating costs compared to the -- as a percent of our revenue decreased. It actually has a couple of impacts. Number one, the VAT impact is, I would say, coming up to approximately [2.3%], but the balance is actually related due to the increase in economy of scale due to the improvement in the -- of our blended RevPAR.

Okay, got it. And my, I think, Teo, my second question is on your brand portfolio. Jenny mentioned that you have recently launched the 3 more new brands and expect this will help you to accelerate the expansion going forward. With that, you actually have -- already have a pretty strong brand portfolio. Jenny, from your point of view, is the current brand portfolio, do you think it has reached an optimal size or you're thinking you can actually manage more new brands going forward?

We feel, currently, we have got a portfolio of very good economy in the midscale brands, especially with the launch of the few new products as well as the acquisition of Orange. We are particularly strong in the midscale to upper midscale segments now. In the future, I think we will need to seek opportunities to strengthen our position in the upscale and the luxury segment, which we don't have much there yet. So if we are to add new brands, I think we probably will add those segments.

And the next question comes from Leon Chik from JPMorgan.

I'm just wondering for the ADR increase, the 5.2%. So it was strong in the first quarter. How much of that is like-for-like increases? And how much is relating to renovations in HanTing 2.0?

The -- we do not have an exact breakdown on the impact, the RevPAR growth impact due to the various factors, but from what we can see is that from overall trends, with the increasing mix of the upgraded hotels, the upgraded hotels actually deliver a higher RevPAR that will highly contributed to the improvement in the occupancy in ADR in the economy segment.

If you look at our data release, you will find our blended RevPAR actually grew 9.8%, right, and that the same-hotel RevPAR grew 5.8%. So the difference between those 2 numbers are the mix shift. So we have a bigger portion of midscale hotels. And the second, in relation to the 5.8%, can we break this down to before renovation or after renovation? That's actually very challenging, because we have been kind of doing a lot of fine touch work on all of our properties. So it's very difficult to classify those changes from major renovations because they are -- we have been doing the work at full levels. But the 5.8% accurately reflects the same-property RevPAR performance this year compared with last year. And I think the main parts are not from the upgrade, it's really the performance improvement.

That's fantastic. Can you let us know what proportion of the Huazhu brand has been upgraded from 1.0 to 2.0? What's the number?

Oh, you mean, HanTing. Okay?

Yes, yes , the HanTing percentage. Yes.

Again, at Q1, we had 32% of HanTing at 2.0 above.

(Operator Instructions) And our next question comes from Justin Kwok from Goldman Sachs.

It's me, again. I actually have another question for, perhaps, Mr. Qi or Jenny, in terms of the geographical expansions. We have seen the company in terms of number of cities in China stabilizing at around 300-plus cities for some time, but in the very recent past, you have opened a new hotel in Hong Kong, which is the Hi Inn. So I wanted to get a sense on the overall strategies, like how do you look at the geographical expansion? Are you prepared to pursue more growth beyond Mainland China, like going to the cities like Hong Kong or other cities where you -- where there is a huge amount of Chinese [bank] tourists coming in, or you think that the one in Hong Kong is more like a one-off opening?

Ji Qi, do you want to comment on that? Okay, I'll comment on that. Justin, yes, we are happy that we have our first hotel off of Mainland China. We are exploring various opportunities going beyond Mainland China. But in the near term, we don't expect those efforts to be like very fast or can bring in a lot of additional growth in the near term. But in the long term, I think entering new markets will further give us growth opportunities. And then we also are prepared that our technology, our sales platform are very strong and they are likely to be replicable across different countries. So we are definitely more confident than ever that we will enter into international markets at some time point.

(Operator Instructions) There are no more further questions in this queue. Please continue.

Okay. Thank you, operator. If there are no more questions, we will end the call now. Thanks, every investors, for dialing in, and goodbye.

Ladies and gentlemen, that does conclude our conference call for today. Thank you all for participating. You may all disconnect. Have a great day. Bye.