Title

Presentation

H World Group Limited beats earnings expectations. Reported EPS is $2.48, expectations were $0.42.

Operator: Good day and thank you for standing by. Welcome to the H World Q1 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Jason Chen, Head of IR. Please go ahead.

Jason Chen: Thank you. Good morning and good evening, everyone. Thanks for joining us today. Welcome to H World Group 2025 first quarter earnings conference call. Joining us today is our Chairman, Mr. Ji Qi; our CEO, Mr. Jin Hui; our CFO, Ms. Chen Hui; and our CSO, Ms. He Jihong. 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 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.

H World Group does not undertake any obligations to update any forward-looking statements except as required under applicable laws. On the call today, we will also mention adjusted financial measures during the discussion of our performance. Reconciliation of those measures to comparable GAAP information can be found in our earnings release that was distributed early today. 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 the first quarter of 2025. Mr. Jin, please.

Hui Jin: [Foreign Language] Hello, everyone. Thanks for joining H World’s first quarter of 2025 earnings conference call. [Foreign Language] First of all, I’d like to share some of our observations on the industry during the quarter. In the first quarter, we saw the overall traveling demand was still resilient and growing steadily according to the data released by Railway and Airline industries. However, RevPAR remained under some pressure, especially on ADR. We believe it was largely due to the overall supply surge last year. Therefore, our RevPAR declined by 3.9% year-over-year with ADR decreased by 2.6% year-over-year and occupancy rate declined slightly by one percentage point. The slight decline in occupancy rate was mainly because those hotels newly opened in the last several quarters were still ramping up.

Entering into the second quarter, the tariff issues started from April brought some uncertainties to the market outlook. Also, we saw some temporary solution on tariff issues recently. We remain cautious on potential future volatilities and uncertainties. However, on the leisure traveling front, we are still relatively optimistic as we saw the overall leisure traveling demand and the willingness remained strong. For instance, we saw both number of travelers and total spending grow mid-to-high single-digits year-over-year for Chinese New Year holiday, Qingming festival holiday and the Labor Day holidays. More importantly, according to third-party data, the industry RevPAR recorded a positive year-over-year growth during the Labor Day holiday.

Therefore, we have been developing differentiated strategies on products and service offering with targeted sales and marketing programs to better capture the rising leisure demand, especially those emerging travelers such as silver-haired tourists and inbound tourists. Also, we are still facing some uncertainties and challenges. We will insist on implementing our core strategy with long-term focus. With that, I will share with you more data on our operational performance during the quarter. [Foreign Language] Please turn to Page 4. In the first quarter of 2025, we opened 695 hotels and closed 155 hotels respectively. Pipeline was 2,865 hotels by quarter end. The slight quarter-over-quarter decline is mainly due to fast new hotels opening and proactive pipeline clearance to improve quality.

The new signings in the quarter remained stable and healthy. [Foreign Language] Please turn to Page 5. The proportion of upper midscale and above hotels increased meaningfully in our pipeline by the end of first quarter. It was mainly due to the fast new signings of our upper mid hotels as well as the different lengths of construction period and timing of new hotel openings. However, in terms of the hotel in operation, limited service segment hotels remains our core market. [Foreign Language] As I mentioned earlier, we maintain a strong growth momentum in the upper midscale segment. Please turn to Page 6. As of the first quarter, the number of upper midscale hotels in operation increased by 36% year-over-year to 933 and the pipeline grew by 22% year-over-year to 523.

[Foreign Language] Over the past several years, we have been seeing a clear trend that customers are seeking high quality products and services with good value for money. Therefore, we have been continuously upgrading products and our core brands to better meet the customers’ evolving demand. Please turn to Page 7. The proportion of newer products and our core brands, including HanTing, JI Hotel and Orange has been increasing constantly. [Foreign Language] In terms of regional expansion, our penetration in the lower-tier cities continued progressing. Please turn to Page 8. As of the end of first quarter of 2025, 54% of the company’s hotels in pipeline were located in Tier 3 and below cities, 11 percentage points higher than the proportion in operating hotels.

Additionally, by the first quarter, we are now covering 1,394 cities and countries, 104 more than a year ago. [Foreign Language] Membership program and direct sales capability are the most critical aspects for our business to achieve long-term sustainable development. Please turn to Page 9. At the end of first quarter of 2025, our member base further increased to nearly 280 million. Room nights generated through the central reservation system accounted for 65.1%, representing an increase of 5.4 percentage points year-over-year. [Foreign Language] All above concludes the first quarter of 2025 operational updates for Legacy-Huazhu. Now I will hand over the call to our CSO, Ms. He Jihong to give an update on Legacy-DH. Thank you.

Jihong He: Thank you, Jin Hui. Please turn to Page 10. In first quarter 2025, RevPAR of Legacy-DH improved 12.7% to EUR65 with ADR improved 2.8% and occupancy increased 5.3 percentage points. This increase of RevPAR is a mixture of different markets. We have seen particularly strong performance in North Africa and Middle East. Please turn to Page 11. In first quarter 2025, we did several transactions to change the leased hotel contracts to franchise contracts. Therefore, our Manachised and Franchised hotel increased to 46%. This is a significant improvement compared to 38% in the first quarter 2024. The percentage of asset-light hotels in our pipeline is 57% in first quarter 2025, which is also an improvement compared to the same period last year. With this, I conclude the discussion about Legacy-DH, and I will turn to CFO, Ms. Chen Hui, for financial performance.

Hui Chen: Thank you, He Jihong. Good evening and good morning everyone. Let me walk you through our financial review for the first quarter of 2025. Please turn to Page 13. We continued expanding our hotel network. Number of rooms increased 20% year-over-year to over 1.1 million by the end of the quarter. Hotel turnover in the first quarter grew 14% year-over-year. Revenue grew steadily in the quarter. Please turn to Page 14. Our Group revenue increased 2.2% year-over-year to RMB5.4 billion, in line with our guidance. Revenue from Legacy-Huazhu grew 5.5% year-over-year, while DH revenue decreased 11.3% year-over-year mainly due to the transformation of 10 leased hotels to franchised hotels during the quarter. However, our Manachised and Franchised business achieved a robust growth of 21.1% year-over-year at the high end of our guidance.

The strong Manachised and Franchised revenue growth was driven by our strong network expansion. As a result, our revenue contribution from our asset-light model further enlarged to 46% for the Group and 55% for the Legacy-Huazhu as shown on Page 15. Moving to cost and expense side, both hotel operating costs and SG&A expenses were well-managed during the quarter. Please turn to Page 16. In the first quarter, hotel operating costs only grew by 1.1% year-over-year, slower than our revenue growth, thanks to our continued asset-light transformation. Total SG&A expenses decreased 1.8% year-over-year or reduced by 4.6% year-over-year if excluding SBC mainly benefiting from 11.1% year-over-year. SG&A expenses decreased from Legacy-DH as a result of the structuring and the cost optimization started at the second half last year.

Our Group’s adjusted EBITDA grew 5.3% year-over-year to RMB1.5 billion in the fourth quarter of which Legacy-Huazhu’s adjusted EBITDA increased 5.8% year-over-year to RMB1.6 billion. Moving to our cash flow and the liquidity position on Page 17. In the first quarter, we generated RMB580 million operating cash flow. As of the quarter end, the Group had RMB11.8 billion in cash and cash equivalent and was in a solid net cash position of RMB6.5 billion. Lastly, turn to Page 18 on guidance. For the second quarter of 2025, we expect our Group revenue to grow 1% to 5% compared to the same quarter last year and 3% to 7% if excluding DH. The Manachised and Franchised revenue is expected to grow in the range of 18% to 22% compared to the same quarter last year.

With that, we are ready to take your questions. Operator, please open the line for Q&A.

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Candice Zhang from Bank of America. Please go ahead. Your line is open.

Candice Zhang: [Foreign Language] Let me translate my questions into English. So I have two questions. My first question is about RevPAR expectations. So what is management latest expectations on RevPAR for 2Q ’25 and also full year 2025? This is my first question. My second question is about the business travel. So the business travel has been under pressure even though off an easy pace last year. Could management share with us any specific weakness behind any specific reasons behind the weakness? Thank you very much.

Hui Jin: [Foreign Language]

Jason Chen: So let me do the translation for you. So in terms of the first question in regarding to the RevPAR. So as we mentioned in our prepared remarks, so basically the tariff issue that happened in April add some of the uncertainties and volatilities for the overall market outlook. But again, overall, year-to-date, we still see the demand is growing steadily. But the business, of course, because of the tariff, we’re under some kind of the pressures, but we are trying very hard to navigate the difficulties and trying to increase our RevPAR to a more stabilized level. However, on the leisure traveling demand side from various data as we observed year-to-date, so we think the leisure traveling demand still being very strong and still growing very steadily as the people’s willingness to do traveling is still very strong.

So in terms of the number or in terms of the RevPAR for the second quarter, we think the RevPAR will decline at low-single-digit, but narrowed on a sequential basis. And for the full year, again, because of the uncertainties, there are some of the volatilities and uncertainties ahead. We will try our best to achieve our full year guidance. And in terms of the second question on the business traveling, we don’t think it is the demand issue. It is more like the supply issues as over the last two years, there was a lot of supply increase, which adds a lot of pressures to the RevPAR especially on the ADR. However, we try to leverage more on our corporate customers and B2B business to overcome some of the uncertainties and the shortage of the demand from the individual traveling.

Thank you.

Candice Zhang: [Foreign Language]

Operator: Thank you. We will now move on to our next question. Our next question comes from the line of Lydia Ling from Citi. Please go ahead. Your line is open.

Lydia Ling: [Foreign Language] Hi, management. I have two questions. The first one is on the DH side. And so we saw some progression on asset-light strategy in the first quarter. So what’s your further plan on the DH strategy to further improve the profitability. And for example, how many like leased and owned hotels you plan to transfer to franchised looking ahead? And my second question is more on the industry supply and so how you evaluate the competition landscape currently in the limited service? And so how — we see some like the pipeline sequential decline in the first quarter. So what’s the reason and how is the franchise sentiment on the opening so far? Thank you.

Jihong He: Okay. Let me take the first question about the DH. So to improve the profitability of the DH, Legacy-DH business is, of course, our priority. There are different measures and different strategies. Asset-light transaction is one of the part that we can reduce negative impact. So we will continue to — we are very happy that we finished the transaction of 10 hotels in the first quarter and we will continue to look for opportunities. There are several discussions currently in the pipeline and we will disclose as and when it comes through. Other than an asset-light transaction, we are also looking — further looking into reducing our overhead costs, restructuring our business, streamlining our processes. So first quarter, you see still a negative EBITDA contribution.

This is because we continued our restructuring efforts. And first quarter is traditionally a very weak first quarter as well. So we are confident that with time, especially with the second and third quarter coming, our profitability, especially adjusted EBITDA will increase over the time.

Hui Jin: [Foreign Language]

Jason Chen: Okay. So to answer your second question in terms of the demand-supply dynamics for the industry. So as you may notice that, I know a lot of people are concerned about our RevPAR decline or the RevPAR pressure because of the oversupply or the supply surge over the past several years. But let me share with you, H World has been doing what we call the reform of the overall supply side, reform of the supply side of the China lodging industry. And that’s — we have been building several capabilities to ensure that our franchises still achieve a pretty good return in terms of the opening of the hotels. First of all, from the franchisee sentiment front, there are several key costs. One is the fixed cost. As you may see that over the past several years, the biggest fixed cost is the rental cost, which has been gradually declining over the past several years.

And another key cost of running a hotel is the OpEx. So the OpEx is the combination of the label cost, sales and marketing costs as well as the supplies cost. However, H World has been putting a lot of efforts to improve the efficiency — operational efficiency and achieve the lowest cost and then trying to be leading in the overall industry and by leveraging on our very strong capability of supply chain management, our loyalty program or membership program as well as the technology capability. So in conclusion, what I can share with you now is the overall sentiment has been quite stable and healthy for our existing franchisees. Thank you. Next question, please.

Operator: Thank you. Our next question comes from the line of Dan Chee from Morgan Stanley. Please go ahead. Your line is open.

Dan Chee: [Foreign Language] Thank you management for the opportunity. My first question is about DH. After restructuring program in second half 2024, SG&A costs of DH declined 11% year-on-year. Is there still any one-off restructuring costs embedded in this quarter? And going forward, can we assume this quarter’s SG&A is clean and normalized? After the cost savings in SG&A together with the 11 asset-heavy hotels changing to asset-light, adjusted EBITDA loss still widened a little bit by RMB11 million. What’s the main reason for such hotel operating cost increase? [Foreign Language] Let me translate my second question. It’s about Legacy-Huazhu. So blended RevPAR climbed 3.9% year-on-year in Q1, but like-for-like declined 8.3% year-on-year. The gap was four percentage points. In fourth quarter ’24 was also four percentage point gap, but this were wider than the previous quarters. What’s the reason for the gap widening? Thank you.

Jihong He: Thank you, Dan. Let me take the first question about DH. So the restructuring is still ongoing. Last year, we announced 30% reduction of overhead costs in one go. And that kind of cost effect, it still needs to be reflected gradually in our costs in this year quarter-by-quarter because some of the restructuring efforts are not completely done yet, even from the last year’s restructuring measures. And this year, we continue some of the — not this kind of 30% one-off, but we still identify possibilities in different departments, in different processes so that we can continue our effort in streamlining. So to your question about whether the numbers and SG&A are clean, as of now, I would say not completely yet. And we will see still some of the effects coming through this year.

But we are very sure that with these kind of measures, this will only improve our SG&A in the mid and long-term. So please do not look at only really quarter-to-quarter results. We will reflect the whole year when we come to almost the end of our restructuring effort mid of this year. And to your second question about the first quarter loss, so there’s actually a very special event in the first quarter that caused this higher loss on the paper. We gave up Davos as a hotel for — as a leased hotel and we’ve turned it into franchised hotel. And you know that Davos is a very, very seasonal event. Actually, the whole year of EBITDA focus on this one week and conference effort. So that’s why the first quarter results is very much skewed by this onetime event every year.

So this year taking out the Davos event, actually our EBITDA is comparable to last year even with the continued restructuring effort. What I wanted to say with this answer to you is that we are very conscious of our EBITDA commitment and we are very conscious also in streamlining our unnecessary overhead cost. Please bear with us in the short-term. We will still see some of the variation in SG&A and some of the other costs as well. But we are very sure that in the mid and long-term, we are on a better way.

Hui Chen: [Foreign Language]

Jason Chen: Okay. To answer your second question regarding to the gap between the blended RevPAR and the like-for-like RevPAR, so you’re right. So the like-for-like RevPAR was underperforming compared to the blended RevPAR. There are two reasons behind. One is because of the product — because we keep upgrading, as we mentioned earlier, we upgraded — continuously upgraded our products and continuously do clearance of those older versions of products in order to improve the overall product quality. So that’s one of the reasons why there was a gap or enlarged gap between the blended RevPAR and like-for-like RevPAR. And secondly, in certain area, because of the surge of the supply over the several years, indeed there were some of the pressure on the RevPAR in both ADR and occupancy rates.

But we have already noticed that and we are doing a lot of optimization in terms of our revenue management to set up a more rational ADR and occupancy rates in these particular regions. Thank you. Next question, please.

Operator: Thank you. Our next question comes from the line of Simon Cheung from Goldman Sachs. Please go ahead. Your line is open.

Simon Cheung: [Foreign Language] Let me translate that into English. So the first question is in relation to the hotel opening. We noticed that your hotel openings were actually quite fast in the first quarter, almost 700 and that compared to full year of 2,300. That was actually tracking ahead of the momentum last year. Just checking to see whether there’s any timing issue here and whether there are going to be some upside risk to the full year 2,300 hotel additional guidance. And then the second question is in relation to the mid-upscale hotel, whereby I think H World has done a great job in terms of adding the hotels, almost a dozen by now. I think you did mention that out of the 1,500 hotels, they are only exposed to 200 cities and have no intention to go into other new cities. Just wondering the strategy for H World and where would they see growth going forward?

Hui Jin: [Foreign Language]

Jason Chen: So I’m very happy to see we achieved a quite good number of hotel new openings in the first quarter as our — one of the key strategies, we are looking for a high-quality scale growth. And we hope every newly opened hotel can be profitable. And therefore, in terms of the new openings, the quality of the hotel is much important than the purely scale growth.

Hui Jin: [Foreign Language]

Jason Chen: We are not only looking for to achieve a leading position in terms of the market share, but also trying to achieve a leading position for each of the brands in different segments. So that we are looking for in the longer term to both achieve in terms of the scale, in terms of the number one or the leading market share, but also in each of different segments, we want to be top one or two, at least for the brand.

Hui Jin: [Foreign Language]

Jason Chen: Although we are seeing a pretty good in terms of the new openings and the new signings, but we want to stay at the conservative, not changing the full year opening target for now.

Hui Jin: [Foreign Language]

Jason Chen: We have been putting a lot of efforts last year — since last year to break through the upper-mid segment and I’m very happy to see that you’re looking in details in terms of our upper-mid segment development over the last several quarters.

Hui Jin: [Foreign Language]

Jason Chen: We do see a lot of market opportunity, especially to reform those traditional upper mid-scale segment.

Hui Jin: [Foreign Language]

Jason Chen: At the current stage, we would like to focus only on Tier 1, Tier 2 cities, especially those prime areas to establish a stronger brand.

Hui Jin: [Foreign Language]

Jason Chen: The demand actually is very concentrated in the Tier 1, Tier 2 cities, especially for those upper-mid segment hotels. Therefore, in those particular areas and cities, we want like to take the most prime location to establish the brand.

Hui Jin: [Foreign Language]

Jason Chen: In the longer-term perspective, we are very confident to chase the leading company right now or even surpass them.

Hui Jin: [Foreign Language]

Jason Chen: Thank you. Next question, please.

Operator: Thank. Our next question comes from the line of Sijie Lin from CICC. Please go ahead. Your line is open.

Sijie Lin: [Foreign Language] So this year, we see relative bigger pressure on business demand compared with leisure demand. But meanwhile, why it seems that upper mid-scale segment performs better on both RevPAR and pipeline? Because, first, our upper mid-scale pipeline stayed flat quarter-over-quarter. Second, the same-store RevPAR mid-scale and above segment also performed a bit better than economy segment. I don’t know if this is correct and trying to understand the reason behind this. And what is our view towards the upper mid-scale market conditions and how we strengthen our competitiveness in this segment? Thank you.

Hui Jin: [Foreign Language]

Jason Chen: As I mentioned earlier, we see plenty of opportunity to reform the existing very traditional upper mid-scale segment. Therefore, we have been putting a lot of efforts in terms of the products and the service offering as well as the sales — target sales and marketing especially for those upper-mid segment to establish our overall capability to do the breakthrough in this particular segment.

Hui Jin: [Foreign Language]

Jason Chen: Leveraging on our good product design to improve our product power as well as leveraging our very strong membership program and to accumulate a lot of repeated customers for our upper-mid segment products, therefore, to increase the recognition and the acceptance of the products by the customers.

Hui Jin: [Foreign Language]

Jason Chen: We have been keep upgrading and optimizing the membership, especially for the upper-mid segment and we hope you know you can have a look going forward and you will see the progress. Thank you. Next question, please.

Operator: Thank you. Our next question comes from the line of [indiscernible] Liu from CITIC. Please go ahead. Your line is open.

Unidentified Analyst: [Foreign Language] Hi management. The intercity brand has received strong consumer reputation. Can management share some more insights regarding the franchise profile, single-store model and store opening target plans for this year or the next five years? Thank you.

Hui Jin: [Foreign Language]

Jason Chen: So in terms of the intercity brands, actually, the growth momentum started from last year and the intercity brand actually redefined the overall upper mid-scale segment. And it’s kind of a combination with Chinese as well as the Western design and service to provide more suitable products and service to the Chinese customers. And I’m happy to see that probably by the end of 2025, we can have around 100 intercity hotels in operation. And more importantly, we have been seeing that there’s a lot of intercity hotels has been located in a very important key areas and cities, which are we call flagship hotels in very prime locations. That will bring a longer-term benefit for the brand establishment.

Hui Jin: [Foreign Language]

Jason Chen: For the entire upper mid-scale segment, we actually use the multi-brand strategy. Apart from the intercity, we still have Crystal Hotel as well as Mercure and Novotel for example. So the key strategy is definitely the multi-brand strategy but with core brand focus. And I think for those foreign brands within our portfolio such as Mercure and Novotel are going to benefit from a rising inbound tourist in the future. Thank you. Next question, please.

Operator: Thank you. There are no further questions at this time. So I’ll hand the call back to Jason for closing remarks.

Jason Chen: Okay. Thank you everyone for taking your time with us today and we look forward to see you in upcoming quarters. Thank you and bye-bye.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.