H World Group Limited (NASDAQ:HTHT) Q4 2023 Earnings Call Transcript
H World Group Limited (NASDAQ:HTHT) Q4 2023 Earnings Call Transcript March 22, 2024
H World Group Limited isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and thank you for standing by. Welcome to H World Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to hand you over to H World Senior IR Director, Mr. Jason Chen. Please go ahead.
Jason Chen: Thank you. Good morning, and good evening, everyone. Thanks for joining us today. Welcome to H World Group 2023 Fourth Quarter and Full Year Earnings Conference Call. Joining us today is our Chairman, Mr. Ji Qi, our CEO; Mr. Jin Hui; and our CFO, Mr. Zou Jun. 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 Security 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. Reconciliations of those measures to comparable GAAP information can be found in our earnings release that was distributed yesterday. 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 2023. Mr. Jin, please.
Hui Jin: In 2023, the domestic traveling industry experienced strong momentum of recovery along with the robust rebound of the industry. H World continued implementing our sustainable, high-quality growth strategy and achieved great results. First of all, let's take a look at our achievements in 2023. Please turn to Page 3. Thanks to the strong leisure demand and the gradual recovery of business demand post-pandemic. In 2023, our China business achieved a robust recovery with RevPAR recovered to 122% of the 2019 level for the whole year. Entering into 2024, we still see our RevPAR performing steadily so far. Our hotel network continued to expand. Please turn to Page 4. Excluding the economic softer brand, we opened a total of 1,641 hotels in 2023, reached a record high in terms of annual opening number.
At the same time, we closed 789 hotels in 2023. However, excluding the low-quality economic softer brand and HanTing 1.0 version, the closure were only 273 hotels, a slight increase from 237 in 2022. The high closure number in 2023 demonstrated our determination to remove or upgrade low-quality hotels in accelerative manner, which is in line with our sustainable quality growth strategy. In terms of our pipeline by the end of 2023, our hotels in pipeline reached 3,061, another record high. The limited-service segment remains our key strategic focus. Our economic and middle-scale products, which target the mass market are the key drivers of our network expansions, breaking down our hotels in operation, hotels in pipeline and hotel opening in 2023.
The proportion of economic and middle-scale hotel were 92%, 85% and 90%, respectively. H World has set a specific brand strategy named Iron Triangle to develop the economic and the middle-scale segments. The Iron Triangle strategy consists of our 3 key brands, namely HanTing, JI Hotel, and Orange. In 2023, we have upgraded products for all these 3 brands. Please turn to Page 6. Firstly, our HanTing products were being constantly upgraded. The proportion of HanTing 1.0 version were significantly declined from 28.5% as of 2020 to only 4.4% as of 2023. While the proportion of HanTing 2.7 and above version steadily increased from only 34.4% as of 2020 to 71.2% as of 2023. As the first flagship brand with the longest history within the group, HanTing has maintained its market competitiveness and attractiveness to customers and franchisees through continuous product innovation and upgrades.
Please turn to Page 7. We launched the newest version 5.0 for JI Hotel at the end of last year. The new version further elaborates lifestyle of oriental acetic and shows confidence in distinctive Chinese style service. Starting from the stage of design, JI Hotel 5.0 version implements the concept of sustainable development such as adopting prefabricated design, intelligent lighting system, and environmentally friendly construction systems. These implementations could largely help reducing environmental pollution and energy consumption. Additionally, we also explored some new business models in the public area of lobby area of JI Hotel 5.0 version. We introduced an innovative Tea Space or Tea House in JI Hotel's public area and also further strengthening the curtain products, which is the scenario-based retail business.
Lastly, our Orange brand. We launched LoHaS version in 2023. Please turn to Page 8. After only 1 year post its official launch, Orange LoHaS version has already gained tremendous popularity in the market. As of 2023, the LoHaS products accounted for 58% of the total Pipeline of Orange brand. H World continued to expand geographic coverage of our hotel network. Please turn to Page 9. We kept on penetrating in lower-tier cities in China. As of 2023, around 40% of hotels in operation were located in Tier 3 and 4 and below cities, representing a 2-percentage point increase compared to 2022. At the same time, 55% of hotels in Pipeline were located in lower-tier cities. Also, the percentage number were lower compared to 2022. Its absolute number was higher.
As of 2023, the number of city coverage was 1,257, added 131 new cities penetration compared to 2022. In addition, our capabilities of localized development and operation in the previously less penetrated or weak areas in China has been improving significantly, and we achieved initial results post our organizational restructuring by establishing regional headquarters. Please turn to Page 10. In the South, West, and the Central China, the total new signings in 2023 increased more than 100%, 80%, and 40% year-over-year, respectively, and increased more than 200%, 130%, and 110% compared to the pre-COVID year of 2019, respectively. Please turn to Page 11. Our upper mid-scale segment development is continuously progressing. As of the fourth quarter of 2023, there were 645 upper-midscale hotels in operation, representing a 23% year-over-year increase and a 7% quarter-over-quarter increase.
And there were 386 of upper-midscale hotels in Pipeline, representing a 34% year-over-year increase and an 8% on increase on a sequential basis. Combining the hotels in operations and hotels in Pipelines together, the total number of our upper-mid hotels reached 1,031 in 2023. We are very glad that we had achieved our target, which was set in the second quarter of 2021. However, it is still far from enough. We will continue to strengthen our footprint in the upper-midscale segment, mainly through our core brands and strive to become a leading brand in the market in the foreseeable future. Please turn to Page 12. Being one of our core brands in the upper-midscale segment, Intercity brand launched its new products in 2022. And the number of its Pipeline hotels has quickly increased to 53 at the year-end, demonstrating the high market recognition and acceptance of the brand and the products.
Turning to Page 13. At the same time, the Crystal Orange gained a good momentum of new signings as well. By the end of 2023, the number of hotels in Pipeline reached 119, which doubled from the beginning of 2023. Lastly, let's review our performance in regards to the membership and the Central Reservation System. Please turn to Page 14. The total number of members continued to increase to 228 million in 2023 and has ranked #1 worldwide. Direct bookings through our Central Reservation Systems was 62.6% in 2023, representing a 9-percentage points increase on a year-over-year basis. All in all, we continue to reinforce our membership program and a Central Reservation System. After discussing our achievements in 2023, let's now go through our key strategic forecast in 2024.
Please turn to Page 15. Service Excellence-Centric Sustainable Growth, quality growth will be the strategic focus of Legacy-Huazhu in 2024. This strategic focus is divided into 3 major areas. Firstly, High-Quality Hotel Network Expansion. In the limited-service segment, we will continuously expand our footprint nationwide by executing our Iron Triangle strategy, which focus on less penetrated areas and lower-tier cities. In the upper middle segment or selected service segment, we will consistently implement our multi-brand strategy to further strengthen our presence. Secondly, customer-centric product upgrades and service excellence. In terms of product quality, we will continue to upgrade old hotels and introduce new products for each brand to meet our customers' diversified needs.
In terms of service quality, 2024 marks the beginning of an year of service excellence for H World. It means that we are going to put more emphasis on service, which provided to both our customers and franchisees to continuously enhance their experiences and their satisfaction. Lastly, the Digitalized-Based Organizational Capability Enhancement. Continued improvements on both products and service quality would be difficult in the access of a strong support from a strong organizational and digitalization capability. We are going to further enhance our management capability and operational efficiency in the areas such as supply chain optimization, integrated marketing program, talent reserve, organizational capability, and so on through a comprehensive digitalization process.
By doing so, it could help us to establish a solid foundation to support our business development in a rapid and a sustainable manner. Please turn to Page 16. In terms of our overseas business, there are our 4 major strategic focus. Firstly, transforming to Asset-light model; secondly, continuously focusing on cost reduction and profitability improvement; thirdly, further strengthening direct sales via H Reward Global Loyalty Program; and lastly, looking for the APAC and the Middle East growth opportunity. All above our 2023 review and our 2024 strategic focus discussions. Now, I will hand over the call to our CFO, Mr. Zou Jun, to discuss our 2023 fourth quarter and full-year operational and financial reviews. Mr. Zou, please.
Jun Zou: Thank you, Jin Hui. Good morning and good evening to everyone. Let's go through our operational and financial review for the fourth quarter and full year of 2023. Please, now turn to Page 18. In 2023, we continue to expand our hotel network. Our overall number of rooms increased 13% year-over-year to over 912,000 rooms by the end of 2023 compared to over 809,000 rooms as of end of the last year. Our hotel turnover for the full year of 2023 was RMB 80.4 billion, representing a 62% increase compared to 2022. Excluding DH, Legacy-Huazhu Hotel turnover grew 66% year-over-year to RMB 73.3 billion. Now, let's turn to Page 19. Since China lifted a travel restriction in late 2022, we saw a strong rebound in leisure travel and a gradual recovery in business travel throughout 2023.
Blended RevPAR for Legacy-Huazhu reached RMB 242 representing a recovery of 122% compared to the 2019 level and a year-over-year increase of 54%. The robust RevPAR growth was primarily driven by ADR, which raised 27% to RMB 299 in 2023, which was mainly due to our product mix change as well as continued product upgrade over the last few years. Occupancy rate also improved throughout the year to 81% for the full year of 2023. Now, Page 20. For DH business, full year 2023 blended RevPAR grew 14.5% year-over-year to EUR 71, which was driven by a 1% increase in ADR and a 7% increase in occupancy rate to 63% OTC. Now, please turn to Page 21. In 4Q 2023, our total revenue for the group increased 51% year-over-year to RMB 5.6 billion, exceeding our previous guidance of 41% to 45% year-over-year growth.
For the full year of 2023, our group revenue increased 58% year-over-year to RMB 21.9 billion, of which Legacy-Huazhu achieved 64% year-over-year revenue growth to RMB 17.4 billion, and the DH grew 39% year-over-year to RMB 4.4 billion. The revenue growth of Legacy-Huazhu was driven by the strong travel demand in China as well as our continued product upgrade and the market penetration throughout regional offices. For DH, its revenue growth was attributable to the market recovery on network expansion as well as favorable exchange rates. Now, please turn to Page 22. Hotel operating costs were RMB 4 billion in the fourth quarter of 2023 and RMB 14.3 billion for the full year of 2023. The year-over-year increase was primarily due to our business recovery and the Q-o-Q increase in the fourth quarter was mainly due to RMB 200 million impairment loss on the Legacy-Huazhu level as well as RMB 162 million impairment from Legacy-DH.
The increase of our hotel operating costs was slower than our revenue growth, reflecting operating leverage of the business. The pre-opening expenses reduced meaningfully as we continue to execute our asset-light strategy and become more selective on opening lease and owned hotels. SG&A expenses were RMB 970 million in the fourth quarter of 2023 and RMB 3.2 billion for the full year of 2023. The year-over-year increase in SG&A were mainly due to increased personnel costs, OTA commissions, and promotional expenses, along with the business recovery. Overall, we achieved operating leverage and deliver income from operation of RMB 757 million in the fourth quarter of 2023 and RMB 4.7 billion for the full year of 2023 compared to an operating loss in the fourth quarter and the full year of 2022.
Turning to Page 22. Legacy-Huazhu reported adjusted EBITDA of RMB 1.3 billion in the fourth quarter 2023 and RMB 6.8 billion for the full year of 2023. Please take note that the reported adjusted EBITDA consistent of several one-off items, including around RMB 590 million gains from selling across shares and other investments and around RMB 213 million COVID-related tax subsidy and the rental reduction for the full year of '23 and also unrealized foreign exchange gain of RMB 71 during the year of 2023. Now, for the full year of 2023, our DH business reported a positive adjusted EBITDA of RMB 87 million. Our group adjusted net income were RMB 657 million in the fourth quarter of 2023 and RMB 4.1 billion for the full year of 2023. Compared to net loss in the fourth quarter and the full year of 2022, our operating cash flow improved significantly, reached RMB 2.4 billion in the fourth quarter of 2023 and RMB 7.7 billion for the full year.
Now, please turn to Page 24. As of December 2023, the Group had RMB 10.5 billion cash, cash equivalents, restricted cash, and time deposits on hand and was in a solid net cash position with RMB 5.2 billion net cash, including time deposits. We also had RMB 2.8 billion unutilized bank facilities end of last year. Now, let's turn to Page 25. In November 2023, we declared approximate USD 300 million cash dividend, which includes USD 200 million regular dividend and a USD 100 million special dividend. We also repurchased about USD 122 million worth of shares from the market during the first quarter of 2023, fourth quarter. As we become more asset-light and cash risk we'll continue to reward our shareholders dividend [indiscernible]. Now, please turn to Page 26 on guidance.
For the third quarter of 2024, we expect revenue to grow 12% to 16% compared to first quarter last year or 11% to 15%, excluding DH. For the full year of 2024, we expect revenue to grow 8% to 12% year-over-year or 8% to 12% excluding DH. We'll further accelerate our high-quality network expansion, setting our gross hotel opening target of around 1,800 hotels in 2024, and we expect to close about 650 hotels. With that, we're ready to take your questions. Operator, please open the line for Q&A.
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