01 What on earth happened?

Huazhu Hotel closed down 4.63% on March 14 and opened lower on March 15, falling 10.34%, with a turnover of US $450 million, more than five times that of the day before yesterday, the highest daily trading volume and volume since the stock went public in 2010.

It turned out that after the US stock market opened on March 14 (in the early morning of March 15), Huazhu Hotel announced its fourth-quarter and full-year results, with net revenue of $340 million.It was down 6.6 per cent from the previous month and below the $344.5 million expected by Wall Street; net profit was down 48.8 per cent from the previous month and 4 per cent lower than CICC had forecast.

In addition, Huazhu expects:

Net revenue increased by 27% in the first quarter of 2018 and 29% in Murray.

Full-year net revenue rose 16%, 19%, below Wall Street's expectations of 26%.

02 Why did net profit fall so much from the previous month?

To answer this question, let's first look at the revenue.

The net revenue of Q4 in fiscal year 2017 was 2.2149 billion yuan, up 32.6% from the same period last year and down 6.6% from the previous month.

Figure 1 year-on-year and quarter-on-quarter revenue in FY2017

The net revenue of Q4 in fiscal year 2016 was 1.67 billion yuan, up 10.9% from the same period last year, down 9.05% from the previous month.

Figure 2 year-on-year and quarter-on-quarter revenue in the fourth quarter of fiscal year 2016

The revenue of Q4 in the two fiscal years increased year on year and decreased compared with the previous year, which to some extent shows that there is an obvious phenomenon of off-peak season in the hotel consumer market.

And in the financial report, Huazhu also mentioned that it was mainly caused by seasonal factors (seasonality).。

In 2017, the net profit of Q4Non-Gaap was 248.7 million yuan, an increase of 79.7% over the same period last year and a decrease of 48.8% from the previous year.

In 2016, the net profit of Q4Non-Gaap was 138.4 million yuan, an increase of 63.4 percent over the same period last year and a decrease of 54.7 percent from the previous month.

As for the reason why the decline in net profit is greater than that in revenue, exceptRevenue factors, as well as the company continues to expand the hotel at a high speed (mentioned later), personnel costs, marketing expenses, management expenses also increase.

Figure 3 fourth quarter and quarter-on-quarter figures of FY2017

03 The story is the same, why the fate is different?

Last year, the Huazhu four Seasons also announced its results on March 15, but the market reacted positively, rising 10% for two trading days in a row.

Source: Futu Securities

But this time, it has fallen by more than 14% in two trading days, most likely because the current valuation is too high.

Here we simply use the PEG index to compare it with Jinjiang Hotel, a listed company in Hong Kong (02006). (Jinjiang has not published its annual report, so compare the two three quarterly reports.)

Huazhu's current TTM price-earnings ratio is about 50 times; Jinjiang Hotel TTM price-to-earnings ratio is 24 times.

The net profit of Huazhu in the first three quarters increased by 49.92% over the same period last year, while the net profit of Jinjiang Hotel increased by 40.75% in the first three quarters compared with the same period last year.

Count down Huazhu PEG=1; Jinjiang Hotel PEG=0.59.

04 3With an annual increase of more than seven times, can Huazhu still run?

Huazhu Hotel shares have risen more than sevenfold in the past three years, while Trip.com, which specialises in online travel services, has more than doubled over the same period.

Source: Futu Securities (weekly K line)

As for why Trip.com is mentioned, it is because they have a lot in common in their focused market, except that the former is a provider of tourism and hotel services brought by it, while Trip.com is a platform provider of related services. Of course, Huazhu Hotel's official website and its own APP China Hotels Club have also begun to raise the banner, and direct sales is now the main channel of Huazhu Hotels.

There is a deeper relationship between the two: Ji Qi, founder of Huazhu, one of the founders of Trip.com, is his former president. Therefore, Huazhu and Trip.com are real brothers.

Huazhu has risen slightly in the last two trading days after falling in the previous two days. The market began to slowly digest the previous news, can Huazhu rise in the future? What else is interesting about it?

1) the strong growth of RevPAR is sustainable:

CICC pointed out that as the overall economy maintains strong growth and the industry leading effect appears, products continue to upgrade, which is expected to support the sustained growth of RevPAR.

It is worth mentioning that its RevPAR is still growing at a high rate of double digits this quarter, and is much higher than that of its peers:

In the fourth quarter of 2017, the RevPAR of Huazhu hotels was Rmb181, up 15 per cent from a year earlier.

RevPAR is the abbreviation of Revenue Per Available Room, meaning "average income per available room". It is an important indicator to measure the level of hotel room management.

2) the speed of opening new stores and product upgrades will be accelerated in 2018

Huazhu expects the total number of new stores to open in 2018 is650~700 Home, mid-range hotels account for 600.65%. As of the fourth quarter, Huazhu still has 696 hotels under construction.

Source: Huazhu official website

Zhang Min, CEO of Huazhu Hotel Group, said: "the continued expansion of Huazhu hotels is due to the strong consumer demand for the Huazhu brand" and will continue to accelerate its layout in the middle and high end markets in the future.

Although the current mid-and high-end hotel revenue accounts for only 38%, but the growth rate is quite astonishing, as high as 68%.

Source: Huazhu official website

The transformation of market demand brought about by the upgrading of consumption drives Huazhu hotels to continuously increase the proportion of medium-and high-end hotels when integrating hotel brands.

At the same time, Huazhu Hotel continues to implement its light asset strategy. As of December 31, 2017, Huazhu had opened 3746 hotels in 378 cities across the country, including 671 direct stores, 2874 franchise stores and 201 franchise stores.

CICC believes its asset-light strategy will help improve its profit margins in the future.

3) the number of members has greatly exceeded 100 million

Huazhu's membership reached 103 million in the fourth quarter, a 20-fold increase from 2011 and has maintained high growth since 2014.

In 2017, members contributed more than 76 per cent of overnight sales; for the whole year, more than 87 per cent of overnight sales were sold through Huazhu's direct sales channels.

Members and direct sales all point to a feature: user stickiness. Market competition is becoming more and more fierce, strong user stickiness is a guarantee for enterprises to continue to grow.

CICC maintained its recommended rating on Huazhu in a research report released on March 15, lowering its target price by 6 per cent to $178.41.

Source: Bloomberg

(Wen / Wu Dongxia, Audit / Li Chen)