Introduction to this report:

There is still room for improvement in direct management, and overseas financial expenses are dragging down performance. With the optimization of the capital structure and the improvement of operational efficiency, operating data and performance are expected to improve sequentially.

Key points of investment:

Meets expectations. Considering the incremental performance and efficiency improvements in property sales, EPS was raised to 1.50/1.60/1.93 (+0.14/+0.01/+0.03) in 2024/25/26. There is plenty of room for subsequent efficiency improvement, giving 24 x PE higher than the industry average for 24 years, maintaining a target price of 36.45 yuan, and increasing holdings.

Performance summary: 24Q1 achieved revenue of 3.26 billion yuan/ +6.77%, net profit of 190 million/ +34.56%, and deducted non-net profit of 62 million/ -31.19%. Limited service hotel RevPar -1.55% year-on-year, mid-high-end RevPar -4.05%, economical -1.2% direct-run RevPar -2.4%, joining RevPar -1.7%. 222 new ones were opened, 75 were closed, a net increase of 147.

Direct management still needs to be improved, and incremental financial costs are being dragged down. ① Overall and direct-run RP still need to be improved compared to 23 years (-1.55%/-2.4% year over year), and gross margin was -0.4 pct year-on-year. ② Overseas financial expenses did not improve in the first quarter, and due to rising interest rates in the euro, the financial expenses ratio further increased by about 50 million (6.68% vs 23q1 was 5.21%). ③ If incremental interest expenses are excluded, 110 million yuan of non-performance will be deducted from the mother, or 90 million yuan for the same period in 2023, an increase of 0.2 billion yuan over the previous year. ④ Non-recurrent increases are due to the disposal of overseas Louvre assets ($120 million), and changes in fair value.

The structure has been rationalized and the capital structure has been optimized, and significant improvements are expected in the future. ① The 24Q1 company structure and personnel are still in the process of being rationalized. In the future, with store optimization and operation improvements, operating data will improve steadily; ② Capital structure optimization is progressing steadily. Previously announced overseas capital increase plans are progressing steadily, and financial expenses are expected to be significantly optimized in the next quarter. ③ The company is actively promoting multi-dimensional optimization such as capital structure, membership system, and asset-light assets. Rationalizing the interests of the personnel structure will support the sustainability of improvements and release long-term profit margins.

Risk warning: Economic fluctuations affect demand, organizational structure integration, and efficiency improvements fall short of expectations.