Earnings Call: Q2 2021

Aug 25, 2021

Welcome to the Huazhu Group Limited Q2 2021 Earnings Conference Call. At this time, all participants are in listen only mode. After the speakers' presentation, there will be a question and answer Please be advised that today's conference is being recorded. I would like to hand the conference over to your first speaker today, Jason. Please go ahead. Thank you, Karina. Good morning and good evening, everyone. Thanks for joining us today. Welcome to Huazhu Group's 20 21 Q2 and Interim Earnings Conference Call. Joining us today is our Founder and Mr. Ji Qi our President, Mr. Jin Hui our Chief Digital Officer, Ms. Liu Xinxing our CFO, Ms. Our Deputy CFO, Ms. Yifei and Mr. Li Dong. Following their prepared remarks, management will be available to answer your Before we continue, please note that the discussion today will include forward looking statements made under the Safe Harbor provision of the United Private Securities Litigation Reform Act of 1995. Forward looking statements involve inherent As such, our results may be materially different from the views expressed today. A number of potential risks and that was distributed yesterday. As a reminder, this conference call is being recorded. The webcast With that, now I will turn the call over to Mr. Ji Ji. Mr. Ji, please. Good morning. Good evening, everyone. Thank you for joining us today. I would like to give you an overview of our business. In the Q2, our China Reunha recovered to 102% over same period of 2019, supported by strong leisure traveling demand in May, but offset However, unfortunately, the delta Variant of COVID-nineteen was again detected in Nanjing since later July. With With the fever spreading into many other provinces and cities, the Delta variant Promoted Chinese government posted another round of stricter traveling restrictions, which seriously affected our performance in August. Our European business saw some positive trend It's mainly due to the continued progress of vaccination and restriction However, we remain cautious on the future recovery as the European governments, Looking ahead, uncertainties brought by the pandemic may It exists for a longer than expected time, and we expect In the long term, we have high confidence in China's future economic growth and I think the upward trend The China lodging industry remains intact. Therefore, we will be implementing our strategies, such as future penetration of low tier cities, bidding up of upper middle scale and up Concentrating on high quality hotel expansion to support our sustainable growth. With that, I will turn the call to Jin Thank you, Jiechi. As usual, I will discuss our recent business recovery trend in details. Please turn to Page 2. For the Q2, our RevPAR recovery shows upward trends with RevPAR in April and May recovered to 100 However, as mentioned by Jiqi earlier, due to the COVID-nineteen resurgence in Guangdong and traffic control in Beijing Unfortunately, since late July, Post that, the government imposed another round of strict traveling restriction, which negatively affected traveling demand, It significantly affected our business as August was normally a peak season for traveling. Therefore, due to the impact From the delta variant as the historical high base as of August 23, our RevPAR only recovered to 46% of 2019 level. However, we saw the recent wave of Delta variant has been largely Given the good provision measures posted by the government, the newly confirmed case declined Please turn to Page 3. For the hotel development, we achieved a record number of new Sign in at 1502 for the first half of this year, increased by nearly 50% year over year. At the same time, our lower tier cities penetration is further Accelerating. Lower tier cities proportion accounted over 50% for both our current hotel Moreover, we have already penetrated into over 1,000 cities as of June, including both hotels in operation and the pipeline, added 200 cities compared to the same period of last year. However, please note that Given the travel restrictions due to the delta variance of COVID-nineteen as we mentioned above, our recent new signings and construction Please turn to Page 4. For our Market opportunities. Our up middle hotel brand portfolio includes Crystal Orange, Intercity, Mercure, As of June We have total of 404 upper middle hotels in operation and 248 in pipeline. We are targeting to achieve over 1,000 upper middle hotels in operation and the pipeline by the end of 2023. On 9th July, we announced that we announced a License agreement between Steigenberger and Porsche Design Group to establish a joint hotel brand. This is another breakthrough To the Upscale and Luxury Hotel segment globally, please turn to Page 5. We are planning to open at least Eight hotels in next 10 years, those hotels will be all located in prime area of international metro policies. Brand positioning and awareness globally, it would help us to catch more opportunities in upscale and Now please turn to Page 6. Along with our lower tier cities Our membership program synergies to lower tier cities and our ability of traffic generation to hotels are the most concerned parts that you may have. We are very happy to see that our CRS contribution in lower tier cities achieved to Please turn to Page 7. We constantly emphasize on the data security matters, and it is the bottom And the highest priority for Huazhu. First of all, we have established the Information Securities Committee and set up the Information Security Standard. Secondly, our data are all saved locally. And lastly, we had received various certificates on data security. As As shown in our slide, in year of 2019, Huazhu became the 1st domestic hotel group which received ISO 27,001 certificate and in 2020, Huazhu became one of the global hotel groups which received ISO 27,701 certificate. Additionally, Huazhu has also obtained the PCI DSS Please turn to Page 8. After we acquired Diodes Hospitality, we launched 500 days digitalization plan for it. As of the second quarter, All functions and the system setup is completed and ready to use. We are now in the stage of massive rollout We're targeting to roll out to 70% of DS hotels by the end of this year and 100% completion next year. With that, now I will turn the call to Ms. Yifei to discuss Thank you, Jingwei. Good morning and good evening to everyone wherever you are. Let's move on to our operational and financial review for the Q2 of 2021. As shown on Slide 10, our hotel network expanded by 15% in the 2nd quarter to 692 ks rooms compared to the 2nd of last year of 599 ks Rooms. Excluding DH, Lexi Huazhu's Hotel network expanded by 16% year on year to roughly 668 ks rooms in the 2nd quarter. For our hotel turnover in the 2nd quarter, our total turnover grew by 98% year on year to RMB RMB13 1,000,000,000 in the 2nd quarter. It was mainly due to our continued network expansion in China and the initial recovery of Deutsche operation as well as the low base for both China and the European business last year. Excluding BH, Lexi Huazhu's hotel net turnover grew 95% year on year to RMB12.7 billion in the 2nd quarter and the Recorded a 45 percentage increase if compared with the Q2 2019. The growth is mainly driven by the hotel network expansion under the asset light model. Turn to Page 11. Lexi Huazhu's blended RevPAR for the Q2 grew 2% from 2019 to RMB210. The ADR in the 2nd quarter grew by 8% to RMB 255 compared to 2019. While the occupancy in the Q2 is still 5 percentage lower compared to 2019, it was mainly caused by the COVID-nineteen situation, especially the resurgence in Guangdong province and also the traffic control in Beijing in June. Turn to Page 12. Our legacy DH business saw initial recovery in the 2nd quarter Vaccination and the restriction ease, our legacy DH blended RevPAR for the Q2 grew 26 percentage to €20 compared to the Q2 of 2020. The occupancy improved by 6 percentage points compared to Please see our financial results on Slide 13. Total net revenues grew by 84 trend year over year to RMB3.6 billion in Q2 2021. Excluding DH, Lexi Huazhu recorded an 85 percentage year on year growth rate to RMB3.4 billion. The revenue was slightly below our previous guidance. It was mainly due to the COVID-nineteen resurgence in Guangdong province and actually in line with our previous guidance. Breaking down the revenue of the 2nd quarter, leased and owned revenue increased by 85% year on year to RMB2.3 billion. Excluding DH, the fees and owner revenue of Lexi Huazhu grew by 84% year over year to RMB2.1 billion. Net revenue from Managed and Due to the further expanding hotel networks with asset light model, in the Q2 2020 at the group lab. For Legacy Huazhu, the managed and franchised model also expanded to 38 percentage in the Q2 of 2021 compared with 37 percentage a year ago. Now let's move Quarterly operating income turned positive to RMB629 1,000,000 compared to a loss of RMB494 1,000,000 last year and a loss of RMB575 a quarter ago, mainly due to the business recovery in both China and Europe. Excluding DH, the legacy Huazhu's operation income in the second quarter 2021 was RMB763 1,000,000 compared to a loss of RMB207 1,000,000 last year and a loss of RMB172 1,000,000 a quarter ago. The hotel operating cost 8% year on year. The cost increase was mainly driven by the legacy Huazhu, which recorded RMB2.2 billion Hotel operating costs, indicating a 29% year on year growth. The increase was mainly attributable to the higher rental rapidly and the higher D and A, depreciation and amortization costs, which were related to the Upscale hotel openings and upgrading of existing hotels. As we mentioned in the previous quarters, our future expansion Upscale hotels will mainly use SLI's model. Therefore, our pre opening costs declined by 84 year over year and 20% Q on Q to only RMB16 1,000,000 in the Q2 of 2021. Our SG and A in the Q2 of 2021 increased by 49% year over year to RMB 5 of RMB53 1,000,000, mainly driven by the increase of Lexi Huazhu. Excluding DH, the SG and A for Huazhu increased by 70 of selling and marketing expenses due to the revenue recovery, the increase of headcounts for our BDT support penetration into lower tier cities, The increase of personal cost for upscale business unit and the increase of IT investment as Other operating income in the Q2 of 2021 increased by 121 percentage to Received from the German government, this is related to the 2020 lockdown period. Turning to page 15. Our adjusted EBITDA income turned positive to RMB1 1,000,000,000 compared to a loss of RMB97 1,000,000 a year ago. The EBITDA loss in the second quarter was RMB73 Excluding DH, Lexi Huazhu recorded adjusted EBITDA income of RMB101.1 billion, RMB grew by 709 percentage in the Q2 of 2020. In the Q2 of 2021, we recorded adjusted net income of RMB464 1,000,000 compared to a loss of RMB476 a year ago. Excluding DH, Lexihuahua recorded an adjusted net The non GAAP pro form a adjustment mentioned on this page unrealized gain or losses from fair value change of equities related to some of our investments. Coming to the cash position. We further lowered our net debt of RMB4.4 billion by the end of second quarter Compared with RMB5.2 billion by the end of the Q1, and there is no risk of breaching the financial covenants of the covenants of the US1 $1,000,000,000 syndication loan. Our cash balance was RMB6.2 billion and the unutilized bank facilities was RMB6.8 billion, this cash and bank facilities would allow us to further pay down Huazhu's bank debt The 2021 and also 2022 CB and also will be used to weather any Coming to DH's update on Page 18. The recovery is coming to the right direction, although the path is bumpy. Destination commenced since December 2020 has been speeding up in the Q2 of 2021. Restriction were eased especially towards people who recovered from COVID-nineteen infection and people with either complete injection or negative test As of August 23, about 64% of German population have received at least one shot and 59% of the whole And now it's about 50% in August summertime. The recovery ratio compared to 2019 is about 54% in July and 67% in August month to Meantime, DH is taking further actions to reduce costs and preserve cash, including negotiating for lease waivers, streaming line overhead at both hotel and headquarter levels. The impact of the extension of the lockdown would be also partially offset by the short term worker allowance and also the special government subsidy, of The company is still working towards more government subsidy, which would be related to the 2021 lockdown. The company's cash position is sufficient And still have another €12,000,000 credit line available. Turning to Page 19 on guidance. Considering the impact of COVID-nineteen resurgence in Guangdong and traffic control in Beijing since late May As the impact of Delta variant spreading from 19 to several cities in China recently, we lowered our Q3 and full year revenue guidance. For the Q3 of 2021, HARTU expects net revenue growth to be in the To provide a more meaningful guidance excluding the impact of COVID-nineteen, Baju expects net revenue growth will be in the range of 12% to 8% excluding DH. To provide a more meaningful guidance excluding the impact of COVID-nineteen, of 2029 or to the range from 2% to 6%, excluding DH. Please note that our current revenue guidance is based on the expected impact the recent delta variant of COVID-nineteen These instructions can be well maintained by the beginning of September. However, given the future situation of pandemic is still uncertain We may need to adjust our guidance accordingly. We also keep the gross opening target of 16018 100 The timing speed of the new pipeline and the construction of the new hotels in the next few months will be affected as well. With that, let's open up for Q and A. Your first question comes from the line of Yan Ho from PH Capital. Please ask your question. Yes. Good morning, management. I have a few questions. And would you please give us some color on the member The situation, how so in 2Q, how many members newly And what is your channel for member acquisition? So that is number One question. Number 2, in your Q3 guidance, and what do you see Q3 guidance, what do you see in China In terms of traveling hotel demands as well as COVID, It seems like the COVID here and there always pop up. So I just wonder how In this guidance, how much do you already see in your guidance? What's the base for your Q3 guidance, domestic guidance. Thank you. Okay. Let me just switch to the English. I think I can answer the first question and then to Mr. Jin Hui for the second question. In Q2, From the membership performance, the number was 6,000,000 increased, Okay. Anyway I think that we continue the best practice to develop a new member To develop a member recruitment such as something like the hotel based From the all service touching point just to be transferred to the member And how to make sure that something like The frequency, okay. But I think that from the second way, this is that we encourage our team And just to develop like B2B and B2C from the local sales team and corporate sales team. And number 3, this is the most important, but something with the innovation. This is the we do a lot of partnership With B2B2C or B2B2B such as just Alipay and WeChat and even like Didi, We do this kind of partnership with many useful ways to do the external, I mean, the membership recruitment. That's for my question for number 1. Thank you. For our Q3 revenue guidance, we have to admit that the Chinese government Having post a very strict traveling restriction and a provision control measurement That's really affected our business performance recently. For the Q3 guidance and full year guidance, our current estimate and expectation for the RevPAR recovery for the Q3 On the same hotel level, we are expecting the RevPAR in Q3 will be recovered to 70% to 75% of 2019 level and 90% to 95% of in Q4 of 2019 level. Again, as I mentioned previously in my prepared remarks, our current focus and the revenue guidance Very much based on there will be no massive COVID-nineteen rescissions happening again in the remaining of this year. Thank you. Thank you. That's all my questions. Your next question comes from the line of Praveen Choudhary from Morgan Stanley. Please ask your question. Hi, thanks so much for taking my call. I have two questions. The first one is about lower tier cities. I just wanted to understand, what are the challenges that you are facing in lower tier cities? It seems like it's going very well based on the pipeline. But if you can talk about any challenges that you're facing in future. And the second one relates to the other strategy, which is upscale strategy. Wanted to understand what portion of upscale hotel opening would be in lease and operating versus franchise and managed. The reason for asking this question is to understand how long will it take before you can have A good size of these hotels and during that time what kind of cost do you have to incur? Remember previously you used to have very big Preopening expenses, should we worry about similar expenses going forward? Thank you. Okay. So for The lower tier cities penetration is progressing pretty well, but we have to say that we are still facing some of the challenges, Especially for the local sales and also matching and meeting the local customers' demand. For We are continuously adjusting our strategies and especially on the sales In addition, we also trying to building up localized employment We will be Doing quite a lot of organizational restructuring, especially for those lower tier cities in different district Okay. So for Huazhu, we divided the hotel Four segments, which including economic middle scale, upper middle scale as well as the upscale. Within these 4 segments, we always think the most interested parts as well as the attractive area And for the upscale segment for China market, it's more like a consolidation story. As You may know that the upscale segment hotel upscale hotel segments in China was run was supplementary for the property developers as well as for the government. It's not a real Market driven investment many years ago, there's a lot of existing hotels in the market. For Huazhu, we have been cooperating with Sunax with a joint venture, and we will do some incremental And for the developing model, We will no longer use the leased and owned business model. We rather choose a franchise or hotel management contract, which is the asset In current stage, we are still exploring and learning and doing the research in The upscale hotel segment rather than the timing that we are going to get some return from those investments. Thank you. Your next question comes from the line of Yulin Zhang from Haitong International. Please ask your question. Hello. Good morning, management. Thank you for taking my question. My question is regarding the DHL Retail. I was wondering to what extent you can improve the Thank you. As we just shared for the DHT progress, okay. I think that up to today We just fulfilled the 1 global digital platform ready. And now this is for the We already launched a massive reward in the DHL for all the hotels. As we shared before, the One Digital platform is not only focused on the Business operation efficiency, but also just to do something like the loyalty and even the CIS contribution. So we hope that we can improve the CIS contribution From the before, I think the very orange, the version now around the 1% or 2%. We hope that we can achieve in the coming New Year to achieve around 20%. This is the target, On the other hand, we are not only just to focus for the CIS contribution, but also to pay the serious attention To the global loyalty platform such as recruitment, the membership recruitment. And according to the current plan, we would like to officially launch The new global loyalty program, we call it, this is an H1, will be released officially at the beginning of So, that's it's a system program not only focused for the One Point. We hope that We can very quickly just deploy the 1 digital platform for all hotels in DTH and then we can achieve The business value in the coming several years in the coming year by the business integration program, by the operation efficiency improvement program, by the CIS contribution and the global loyalty. That's all. Thank you. Hi, this is. I just wanted to build on Xixi's point. I I think you asked a very good question. Right now, I think it's still too early to tell you the margin improvement of digitalization because we are still in the first phase of Setting up the Instructure and preparing for the rollout. Right now, the company's focus is still sharpening the brand and reducing the loss of operations And then bringing the brand back to Asia, but your question is very important and it's also our midterm target as well. I think putting into more digital equipment and also solutions can help strongly support the company's Streamline its organization. Right now, we have a rough target that we probably need to reduce I mean, optimize like 20 30% of the staff, both in the headquarter and also the operation level through the several years program. And I believe this will contribute at least several percentage points regarding the margin improvement. Thank you. That's very helpful. Your next question comes from the line of Simon Cheng from Goldman Sachs. Please ask your question. Hi. Thanks for the presentation. I got 2 questions. Remember in the Q1, you mentioned something related to the cleanup of the hotel, In particular, on Ylan, some of the lower branded hotel, I wanted to get a sense about the update and it's grateful to You maintained your across that guidance full year, 1,600,000 to 1,800. Wanted to get a sense how is the trend looking like perhaps Quarter to date in the Q3 and your confidence level of achieving that targets, what sort of assumption you have baked in for in order to achieve that guidance? That's the first question. The second one, if I Here's your forward guidance, the revenue guidance excluding or not excluding DH, It's seemingly like that you're expecting the revenue for DH will jump to around, call it, RMB600 1,000,000 in the 4th quarter Compared to, I think, Q2, you're running at about 254,000,000,000, so doubling. I think that's Basically all driven by RevPAR supposedly. So at that level, would you expect your EBITDA to be breaking even for your DH For Eli brand, as you may know, it was our So the brand used to penetrating into the economic segment, but you may also know that we have So Simon, I wanted to clarify your question regarding the DH. I think your first one is asking about the guidance for the Q4 of DH's revenue. Is that correct? And also The second one is that you wanted to understand the development of DH in Europe. Yes, correct. Because I'm just Using your full year guidance versus your Q3 guidance, seemingly you are baking in quite a bit of a step up in terms of the Q4 revenue expectations. So if that were to be achieved then, would you be able to turn EBITDA breakeven by Q4 this year? That's the really the question. I think First of all, I think the Q4 probably we are generally positive about the improvement But we still be cautious about the recovery given there might be a 4th wave of delta variant on the way. So I think, yes, based on our guidance, the revenue for the Quarter is certainly will be the highest among all the quarters. But however, it's still I think it's still not reached Breakeven point yet. But having said that, the company is still working hard on striving for another Government subsidy, which is related to the 2021 lockdown. That's DH. And on the development of DH brand, first of all, as we mentioned before, we're bringing DH's major brand To China, particularly the Steigenberger and also Steigenberger, Deutsche sorry, Porsche Design, etcetera, and Also Intercity and also the MAX brand as an upscale brand as well. That's number 1. And in Europe, we are positive It's about the market consolidation in the lower tier segment, especially the economy and mid scale segments. And DH Brand has actually enjoyed pretty good market reputation, especially in terms of Intercity in Germany and Zillip in the northern part of the Europe. So we are going to continue to grow these 2 brands, combining both lease model and also management franchise In the meantime, we'd also sharpen the top brands like the steigenberger and the Max by further improving The product design and also infrastructure facilities as well in order to establish The Sheigenberger as a truly upscale brand in the European market and also trying to find the right expansion model across the globe. Understood. Thanks a lot. That's very helpful. Thank you. Your next question comes from the line of Bruce Mee from UBS. Please ask your question. Hi, management. Thanks for taking my questions. So I have two small questions. The first one is, As you previously mentioned, one of the challenges you when penetrating into lower tier cities is to meet different franchisees demand on brand. So may I ask currently for the hotels in pipeline and new signing in lower tier cities, how much are from the core brands such as HanTing and JI Hotel? And how much is SoftBank? And my second question is that if we look at the same brand, so how is the take rate in lower tier cities compared with Tier 1 and Tier 2 cities? Thank you. For our current lower tier cities penetration, Currently, from our news earnings, JI Hotel and Hanjin brand are still the key brands For the penetration, it accounts roughly 70% to 75% of the new signings and some other brands such as Starbase, Orange As well as Nihao are also progressing pretty well. Sorry, can you please repeat your second question? Sure. So my second question is, if we look at the same brands, for example, Tihanin as example, So how is the take rate, for example, the franchise fees compared between lower tier cities and Tier 1 and Tier So I just want to understand in the margin comparison between the lower tier cities and Tier 1 Our take rate for HanTing and the JI Hotel brands in the lower tier cities are very close to the higher tier cities or at some As you may see that our CRS contribution in the lower tier cities are very close to the higher tier cities. Therefore, At the percentage perspective, the charge rate or the take rates are very similar to each other. Thank you. I would like to hand the conference back to today's presenters for any closing remarks. Please continue. Thank you, everyone, for taking your time with us today, and we look forward to connect with you again in upcoming quarter. Thank you, and goodbye.