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H World Group Limited (HTHT)

Q3 2017 Earnings Call· Wed, Nov 29, 2017

$50.66

+1.60%

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Transcript

Operator

Operator

Ladies and gentlemen, thank you for standing by, and welcome to China Lodging Group Third Quarter 2017 Earnings Conference Call. At this time all participants are in a listen only mode. There will be a presentation followed by a question and answer session. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday November 29, 2017. I would now like to hand the conference over to your first speaker today, Ms. Ida Yu. Thank you. Please go ahead.

Ida Yu

Analyst

Thank you, Li Chi. Good evening, everyone. Thanks to all of you for dialing in, and welcome to our third 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 our strategy review and Q3 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 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. 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 presentation is available on the IR section of China Lodging Group's website at ir.huazhu.com. Now I would like to turn the call over to Jenny. Jenny, please?

Jenny Zhang

Analyst

Good morning everyone. Now, I am pleased to outline our strategic focus for 2017. As we proceed towards the end of the year, today I would like to give you a comprehensive review on how we have executed those strategies and the achievements due to those strategies. On Page 3, our first strategic focus is to upgrade our economy hotels. We don’t view HanTing as just one of the major hotel brands. Our ambition is to position this as the hotel of choice for Chinese people. As you can see, with the efforts from multiple fronts, the same hotel RevPAR for HanTing brand has accelerated to 9.8% in Q3, a historical high. The growth was mainly driven by the growing mix of our upgraded products, which is HanTing 2.0 and 2.5, our improved operational quality and the customer satisfaction level, the successful branding and sales efforts, we also attribute this phenomenal growth to strong domestic travel demand. Page 4 shows the first HanTing Plus hotel performance in the first operational month. As you can see, we not only created HanTing 2.0 and 2.5, we continued to upgrade our products and elaborating the well-known HanTing brand for some more innovation. This brand, HanTing Plus is positioned as an entry-level midscale brand, and this first completed hotel was opened at the beginning of October in Shanghai. The picture shows some perks and to give you a flavor of this new product, in addition to the new and refreshed layout of the lobby and rooms, HanTing Plus also provides more convenience to customers including Niiice Café, Self Check-in/-out kiosks, a wider selection of pillows, 24 hour self storage and laundry and many other features. We are proud to report that this newly opened HanTing Plus hotel achieved a RevPAR of RMB358 in the…

Teo Nee Chuan

Analyst

Thank you, Jenny. Hi, good morning everyone. At the end of Q3 2017, our total number of hotels in operation has reached 3656, the net opening of this quarter is 115, with 167 of gross openings and 52 closures. Including the 108 Crystal Orange hotels consolidated from the acquisition in Q2, we have achieved a total gross hotel openings of 528, or 387 net. In the first nine months this year, excluding the hotels consolidated from the Crystal Orange acquisition, we maintain our cadence of 500 organic gross hotel openings for this year. Page 20 shows that our hotel pipeline remains robust standing at 606 as at the end of Q3 and our hotel pipeline numbers continue to grow in Q4. Therefore, we are positive on the views on the new openings of hotels in the future. Turning to Page 21. In Q3, our blended RevPAR grew by 17.3%. This was driven by an increase in occupancy by 4.2 percentage points, an increase of ADR by 12.1% year-over-year mainly due to the increasing mix of midscale and upgraded the current hotels as well as strong domestic travel demand. Moving to the financial results on Page 22, our net revenue grew 33.8% year-over-year. This was at the high end of our quarterly guidance range. Looking down the revenue of RMB2.4 billion is the RMB1.86 billion contributed from our leased and owned hotels and RMB507 million from manachised and franchised hotels. Net revenues from our leased and operated hotels increased by 34% year-over-year and net revenue from our manachised and franchised hotels was up by 6% year-over-year. As demonstrated on Page 23, our operating margin came in at 34.9% in Q3 2017. This is an increase of 5.1 percentage points from Q3 2016. The hotel room cost and other operating cost as…

Operator

Operator

[Operator Instructions] Your first question comes from the line of Yaoxin Huang from CICC. Your line is now open.

Yaoxin Huang

Analyst

[Interpreted]Hi, thank you for taking my question. I have two questions, and it goes to Mr. Ji and Mr. Chuan. So, I have two questions, first on, OYO hotel investment, second is on the [indiscernible] IT platform development strategy. Thank you.

Jenny Zhang

Analyst

Okay, let me address those two questions and Mr. Ji can add on that as we did. OYO is an interesting player in India. We actually have combined the business model of hotel operator and OTA. They face the interesting market which is the strategy of supply of quality, reasonable price inventory. So that demand was very similar to what we faced 12, 15 years ago when the economy hotel chain started in China, so we see that as a strategic opportunity. That’s why we invested in OYO. Despite it’s not a significant amount, we expect OYO to have a significant contribution to the travel industry in India. As of now, I think OYO is the largest economy hotel chain in the country. As to JI Hotel and our automatic check-in [indiscernible], this is a product we already rolled out in all the Ji Hotels across the country, and we just started to roll it out to other brands in the Huazhu portfolio. Our target is to equip half of whole of our hotels in the next year with this automatic check-in machine. [Indiscernible] which is a IT service company, funded and is supported by Huazhu, not only provides services to Huazhu hotels, they also serve mainly the upscale hotels. They have customers such as [indiscernible], MGM, and we provide comprehensive IT solution to upscale hotel operators of different scales. They supply products like PMS, CRM, also supply solutions like [Indiscernible] and in-house housekeeping tools. So far the customer feedback has been very positive. We expect [indiscernible] to accelerate their growth next year. I hope that addresses your question.

Yaoxin Huang

Analyst

Okay, got it. Thank you, Jenny.

Jenny Zhang

Analyst

You are welcome.

Operator

Operator

Thank you. Your next question comes from the line of Justin Kwok from Goldman Sachs. You may now proceed.

Justin Kwok

Analyst

Hi, morning. Thanks for taking my question. Perhaps, two broader questions and one question on the numbers. The first question, that’s again on the use of cash, since you now have a – well, for this quarter, a very auspicious RMB888 million operating cash flow and surely you are going to continue the free cash flow trend. And at the same time, you also initiated another one-off special dividend during the quarter. So I just want to get a sense on going forward, how are you going to plan to deploy this free cash flow? Would it be a more recurring redistribution of cash back to shareholders as dividend or are you going to deploy more in new investments like OYO, or other [indiscernible] kind of new initiatives that you are doing? That’s the first question.

Jenny Zhang

Analyst

Thank you, Justin. We are going to reinvest most of the cash we generated from the business into new opportunities. That includes strengthening our own hotel portfolio. As Teo mentioned, we are considering not only expanding our business in China, we are also considering overseas opportunities. And secondly, we also leverage our scale and the business know how to create or support more new business, [indiscernible] is virtually one of those examples. Apart from those, we want to maintain a moderate dividend which will be approximately RMB300 million a year. So that’s the overall thinking of our cash deployment.

Justin Kwok

Analyst

Great. That’s very clear. The second things is, in your slide, you also added the HanTing Plus, some of the new products that you are rolling out in the kind of entry-level midscale setting, can you share a bit more on what kind of pricing differential you are going to see between HanTing Plus and other midscale products you have like Ji; and with these entry-level products rolling out, would it be more coming in from an upgrade of your existing HanTing pipeline or there is more coming in from a new opening from third-party premises?

Jenny Zhang

Analyst

That’s a very good question. We are seeing -- as the Ji Hotel becomes more and more popular in the market, the pricing points of Ji Hotel has increased significantly in the past three years. Now in Tier-1 city, the pricing points between Ji Hotel and HanTing are somewhere around RMB150 to RMB200 right now. We see that as an opportunity to push one more product EPP, the existing HanTing and Ji Hotel. So, that’s where we put the HanTing Plus. As you can see in the first HanTing Plus in Shanghai, that property wouldn’t be ideal for Ji Hotel because the room size is smaller, and the lobby size is also kind of not as grand as you would want to see in a Ji Hotel. Nevertheless, it had made very significant RevPAR improvement from the original HanTing Hotel. Currently, from the feedback of franchisees, we see the growth fueled by both upgrading of the existing property, but more will come in from the new hotel, new builds or a converted from other brands or other independent hotels to this model. Because of its flexibility in the lobby side, as well as the room size, I think it will be a very attractive offering for all the hotel owners currently running a economy hotel.

Justin Kwok

Analyst

I see. Thanks for this sharing. Maybe, my last question on some numbers, is that you now roll out the two 2018 opening target on the gross side 650 to 700 new additions. Can you also share what would be the runrate of the closure in 2018? So, I think year-to-date for the first three quarters you’ll probably close 150 hotels. Is this something more like happening in 2018, so it’s the stabilization of the franchise network mostly done in 2017 or do you still see some happening in 2018? Thank you.

Jenny Zhang

Analyst

Last year, we opened approximately 200 – we closed about 200 hotels and in this year we also expect to close, a little bit more than 200 hotels. We will maintain the number into 2018. Currently, we are budgeting closure of 220 hotels next year. Those closures are attributable to three different types of reasons. One is of course, the expiration of the lease for our leased hotels as well as the franchisees or some other reason like resuming that prohibit us from continuing the operation in the property. So that will contribute about one-third of the closures and the rest are either coming from a - quality issues, compliance issues or there are some problems between the partners within one franchise hotels. So there are many different situations contribute to the other two-thirds, but mainly those are hotels we want to close because of they are not willing or to keep up to our quality standards. So we see those closures as generally healthy for the overall portfolio.

Justin Kwok

Analyst

Thank you.

Operator

Operator

Thank you. Your next question comes from the line of Chun Choi from 86Research. Your line is now open.

Chun Choi

Analyst

Hi, thank you management for taking my questions. I have two. The first one is, we noticed that the combination in midscale hotel segment has been increasing and a lot of more players are entering into this segment. So my question is, do management view this as an opportunity to HanTing or is that to Huazhu to HanTing overall? And also could management remind us what was our – what is our core competency to keep us ahead of other players? This is first question. Second question is, I noticed that we no longer disclose the percentage of HanTing 2.0 upgrade. Was that because some of them converting to HanTing Plus or some of them converting to other hotels as well? So, what was the degree of ruling for these franchisees to convert to HanTing Plus and also what is the additional CapEx for them to upgrade to HanTing Plus? Thank you.

Jenny Zhang

Analyst

First of all, in the midscale competition, Huazhu is very well positioned. As we discussed with our investors on a one-on-one basis, currently there are seven brands has more than 100 hotels in the midscale segment. And off of the seven, Huazhu has three brands which are Ji Hotel, Orange, as well as Starway. We also expect our HanTing Plus will quickly surpass the 100 mark in the next 18 to 24 months. So we have a very strong portfolio in the midscale segment. And we not only have more brands compared to our competitors, we also have the best brand in our portfolio. Ji Hotel has a highest GOP rate among other midscale brands. And Orange has the highest RevPAR achievement among all the hotel brands. So, we have two – in the midscale segment. So we believe we are very well positioned in this competition. That’s also why we are confident in approximately two-thirds of our new openings next year will be coming from the midscale segment. And in response to your question about the HanTing portfolio, we have now taken a more adaptive approach to renovating the HanTing existing hotels. We have rolled out multiple solutions to fit the different CapEx budgets and locations and the remaining lease tenure for our franchise hotels. That has created a more kind of a suitable solution for each hotel. We don’t report – we didn’t report the percentage of HanTing 2.0 this quarter does not mean we are starting the effort there. Actually the numbers are continuing moving forward. We are targeting to have approximately 40% of our HanTing portfolio to be fully renovated to HanTing 2.0 or above product version. At the same time, I also want to point out, even for many of the hotels, we haven’t done a major renovation by improving the operation standards and the customer services, we are also achieving very significant same-hotel RevPAR growth. So, the upgrade for HanTing should be viewed at multiple fronts, not only at the major renovation level, but also at the operational improvement level, we are pushing both.

Chun Choi

Analyst

Thank you very much. Very helpful. Thank you, Jenny.

Jenny Zhang

Analyst

You are welcome.

Operator

Operator

Thank you. [Operator Instructions] And we have a follow-up question from Yaoxin Huang from CICC. Your line is now open.

Yaoxin Huang

Analyst

Hi, I have two following questions and the first question is about the rate of hotel rooms in first tier and second tier cities. I notice in the PPT that the rate of hotel in tier 1 and tier 2 cities stay the same at 77% this quarter similar to last year and 2015. The thing is, do you expect that there are still large potential even in tier 1 city to expand in the future or do we plan to increase the percentage in tier 3 or lower tier cities? That’s my first question. And the second question is about just a financial data. I noticed that we have recorded in third quarter 51,000 other income net. So what is the other income net? What does this item included? Thank you.

Jenny Zhang

Analyst

Okay. I will address the first question and then ask Teo to address the second question. On city mix, we expect our mix in the near term to maintain at a similar level as you have seen historically. We see a lot of opportunities in tier 1 and tier 2 cities and we clearly maintain a much higher percentage compared with our competitors and that’s the outcome of our market brand strategy. We try to create different solutions to different properties, so we can maximize the returns of each property.

Teo Nee Chuan

Analyst

Hi, the question – the second question is on the other income, that you recorded 1 million in other income in Q3, and this is actually – it comprises of two items, number one, it’s actually a reversal of losses from – of a previous investment in which posted will gain of approximately 14 million and now the remaining 10 million is actually a gain from a short-term investment.

Yaoxin Huang

Analyst

Okay, got it. Thank you.

Teo Nee Chuan

Analyst

Thank you.

Operator

Operator

Thank you. Your next question comes from the line of Vincent Yao [Ph] from Citi. Your line is now open. I am sorry. Vincent Yao’s [Ph] line is having problem. [Operator Instructions] I’ll move on to the next questioner Mr. Tallan Zhou from Deutsche Bank. Your line is now open. Tallan Zhou your line is now open. Please check your phone if it’s on mute.

Tallan Zhou

Analyst

Hi, management. I have one question. If we exclude the Crystal Orange, what is the likely growth rate for EBITDA in the third quarter on a like-for-like basis? Thanks.

Teo Nee Chuan

Analyst

Sorry, can you repeat the question again?

Tallan Zhou

Analyst

So, if we exclude – excluding Crystal Orange, what is the likely growth rate for EBITDA in the third quarter?

Teo Nee Chuan

Analyst

Okay. If we excluded the Crystal Orange, our EBITDA growth rate will be approximately 38%.

Tallan Zhou

Analyst

Okay, thanks.

Operator

Operator

The next question comes from the line of Vincent Yao [Ph] from Citi. Your line is now open.

Unidentified Analyst

Analyst

Hi, I have a quick follow-up question on Crystal Orange and in general, can you describe a little bit more about the overall execution process of Crystal Orange? And also what is the strategy for Crystal Orange going forward? Is the team more operating more independently or already a lot of collaboration internally in the two teams? Thank you.

Teo Nee Chuan

Analyst

Sorry, can you repeat your questions again?

Unidentified Analyst

Analyst

Just a follow-up more on the strategy of – equation strategy for Crystal Orange. The overall – how is the integration process after the acquisition of Crystal Orange? Is the team of Crystal Orange more operating independently or you already have a lot of collaboration between two teams and also secondly what is the overall strategy Crystal Orange going forward? Thank you.

Jenny Zhang

Analyst

Vincent, we have acquired Crystal Orange, firstly because they have a strong brand and a strong operational team. So, we maintain the existing team to continue to run those hotels. From that side we can say the front end is reasonably independent. At the same time we have integrated the systems and the back office to achieve the – how to optimize the efficiency. For example, we have connected all the reservation systems and we have also merged the loyalty program Orange has into the Huazhu Club program. We also have integrated HR, IT, Finance, other back office functions. We also consolidate the call center. So, because Huazhu has a much more of the wealth in terms of technology and system and automation in terms of other back-end office work. So we see clearly, efficiency gain through those efforts. At the same time, the consolidation of the loyalty program also enables Huazhu’s 100 million members to use Orange Hotel more. So that has a meaningful impact to the occupancy as well as the RevPAR growth of Orange in the past few months. As you can see, before the acquisition, Orange didn’t have a significant same-hotel RevPAR growth. But immediately, after the acquisition, we have seen the double-digit same-hotel RevPAR growth starting from June and continue into Q3. So, we have seen this acquisition integration work being quite successful.

Unidentified Analyst

Analyst

Thanks a lot.

Operator

Operator

[Operator Instructions] There are no further questions at this time. I would now like to hand the conference back to today’s presenters. Please continue.

Ida Yu

Analyst

Thank you everyone for your time being on the call today and we look forward to talk to you in the next quarter. Thank you.

Operator

Operator

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