Thomas Barwick
Elevator pitch
I have a hold rating for H International Group Limited (Nasdaq: HTHT) (1179: Hong Kong). The focus of my previous article dated March 22, 2024 was to review the company’s full-year 2023 results.
With this latest update, I’m evaluating H World’s Near-term financial prospects and long-term growth potential. HTHT’s Q2 2024 performance is expected to be lackluster given the company’s guidance and industry data. On the flip side, H World still has the potential to deliver meaningful revenue growth and margin expansion in the long term, considering venture into new Chinese cities and shifting to a capital-light model for its overseas operations. Since there is a difference between HTHT’s short-term and long-term forecasts, I have chosen to leave H World’s current Hold rating unchanged.
Q2 guidance was disappointing
H world It outlined the company’s outlook for the second quarter of 2024, when it released its forecast Q1 2024 earnings press release Last month. Specifically, HTHT guided for Q2 top-line expansion of between +7% y/y and +11% y/y in RMB terms. By comparison, the company had much better revenue growth of +18% YoY in Q1 2024.
Furthermore, HTHT revealed a “flat to slightly negative” revenue per available room (RevPAR) growth rate forecast for its mainland Chinese hotel operations in Q2 2024 in its Q1 analyst call. It is worth noting that H World’s China business, which is referred to as the Legacy-Huazhu segment in company disclosures, recorded a relative +3% increase in RevPAR year over year for the first quarter of this year. Also, H World’s domestic RevPAR forecast indicates that achieving the company’s overall expansion of +7%-11% for Q2 2024 will depend largely on new hotels rather than organic growth.
The Chinese mainland’s hotel industry generally did not perform well during the Labor Day holiday in the first week of May this year. This may explain why H World has a bleak outlook on its expected performance in the second quarter of 2024.
May 12, 2024 South China Morning Newspaper A news article cited data from a Chinese stockbroker Caitong Securities Which indicates that the hotel industry in mainland China saw RevPAR and occupancy rate decline by -5% and -430 basis points, respectively during the 2024 Labor Day holiday (versus the same holiday period in 2023).
Another report published by travel industry research firm Smith Travel Research or STR On May 22, 2024, he noted that the Chinese hotel sector’s Labor Day holiday ADR (Average Daily Rate) was -12% lower compared to last year. An STR research report released in late May attributed the poor performance of the Chinese hotel industry to factors such as “oversupply in the market” and “diversion of travel abroad.”
Separately, HTHT’s profitability may also come under pressure in the second quarter, as the company’s selling and marketing expenses could remain elevated.
H World’s S&M costs rose +33% year-on-year to CNY260 million in the fourth quarter. This also means that the ratio of support and maintenance costs to revenues for the company rose from 4.4% in the first quarter of 2023 to 4.9% in the first quarter of 2024. In its latest quarterly analyst briefing, HTHT confirmed that the rise in support and maintenance expenses was driven by “markets New” and “new brands.” As previously mentioned, H World’s Q2 2024 revenue is expected to depend heavily on new hotel openings, which will likely translate into an increase in S&M costs.
But the long-term growth story remains intact
There are concerns about HTHT’s near-term prospects as detailed in the previous section. But the long-term outlook for H World remains favorable.
Based on consensus data obtained from Standard & Poor’s Capital IQ, sell-side analysts expect H World’s revenue and normalized operating profit to expand at a CAGR of +10% and +18% for fiscal 2023-2027, respectively. HTHT’s normalized operating margin is expected to improve from 21.5% for FY2023 to 28.3% in FY2027 according to consensus estimates.
HTHT’s expansion into lower-tier Chinese cities (e.g., Tier 3 and below) for domestic business (Legacy-Huazhu sector), and the shift to a capital-light model for overseas business (Legacy-DH sector) are the two key factors in the long term. -Drivers on term for the company.
In its Q1 2024 results presentation slides, H World shared details of the company’s progress in penetrating new cities in mainland China, especially lower-tier cities. The proportion of Chinese HTHT hotels, both existing and operating, in lower-tier cities rose from 39% in the first quarter of 2023 to 40% in the first quarter of 2024. Also more than half, or 54% to be precise, are in the company’s mainland China hotels under construction are located in lower-tier Chinese cities.
Considering its existing hotels and planned new hotels, HTHT has a presence in 1,290 cities in mainland China as of March 31, 2024, which is 14% more than last year. Looking to the future, H World’s long-term goal is to have hotels in 2,000 Chinese cities, and it is clear that the company has made good progress in getting closer to its long-term goal.
On the other hand, H World’s profitability for the company as a whole has the potential to improve in a meaningful way when its overseas business (Legacy-DH segment) successfully transitions to a capital-light operating model.
HTHT intends to gradually move its overseas hotel business away from leased and owned hotels towards franchised hotels. In the company’s Q1 2024 earnings call, H World stressed that an “asset-light strategy” and transitioning to a “hotel brand management company” for the Legacy-DH segment or outsourced hotel business is a “long-term goal.” The company also noted in its recent quarterly results conference that “progress (in the shift towards a capital-light model for Legacy-DH) remains within our expectations” and stated that it would continue to update the market on related developments.
It is reasonable to believe that HTHT’s overall operating profitability will improve as its overseas business or Legacy-DH segment grows its share of franchised hotels over time.
Concluding thoughts
The Hold rating for H World is maintained after considering the company’s lackluster short-term outlook and its good long-term growth prospects. HTHT’s ratings are also comparable to those of its peers, supporting the neutral view. H World is currently trading at 14.4 times consensus EV/EBITDA for the next twelve months according to Standard & Poor’s Capital IQ Data. For comparison, the forward EV/EBITDA multiples for Hyatt (H) and Marriott International (MAR) are 14.3x and 15.4x (Source: Standard & Poor’s Capital IQ), respectively.
