Revenue grew steadily year over year, and overseas interest expenses dragged down net profit
The company released a quarterly report. The year-on-year decline in non-net profit in Q1 of 2024 was 3.26 billion yuan (yoy +6.77%, qoq -13.04%) and net profit to mother of 190 million yuan (yoy +34.56%, qoq +610.37%), including Louvre Group property asset disposal and fair value changes in transactional financial assets, after deducting 62.344 million yuan (yoy -32.43%). The year-on-year decline in non-net profit was mainly due to rising overseas interest rates and a year-on-year increase in interest expenses. Based on the long term, the company is currently at the starting point of a new round of reforms, and is looking forward to subsequent CRS channel and supply chain revenue growth, integration and efficiency improvements to bring new growth perspectives. We expect the 24-26 EPS to be 1.54/1.72/1.92 yuan, and the target price is 33.88 yuan, corresponding to 22X24 PE (comparable to the average PE expected by the company Wind in 24 and Bloomberg), maintaining a “buy” rating.
Domestic RP is under pressure, and scale drives continued growth in franchise fee revenue
In the first quarter of '24, the company's hotel business revenue increased 6.78% year on year. Among them, domestic and overseas hotel business revenue increased 7.04% and 6.11% year on year, respectively. The 121.58% year-on-year increase in early service fees for domestic hotels was mainly due to the low base for the same period in '23, and the continuous increase in franchise fee revenue of 7.58% year-on-year was mainly due to the increase in store size. Domestic limited-service hotels RP -1.55% YoY, OCC declined slightly by 1.74pct YoY to 59.92%, ADR +1.31% YoY to 242.41 yuan/night. In terms of grade, budget hotels are more resilient than mid-range hotels. Economy RP fell 1.20% year on year vs. mid-range fell 4.05% year on year, and mid-range OCC fell 3.97 pct year on year. We think it was mainly due to weak business demand. Overseas hotel RP decreased slightly by 0.06% year over year, mainly due to OCC drag. Catering and food revenue increased 6.42% year over year.
Mid-tier brands continue to expand, and the economy is being adjusted
In the first quarter of '24, the company opened a total of 222 businesses (1,200 new businesses planned for the whole year, 2,500 new contracts signed), closed 75 stores (including 7 direct-run stores), bringing a net increase of 147 hotels to 12,595. New domestic hotels are still the main force, with a net increase of 141 compared to the end of '23, with Li Feng, Huanpeng, and Vienna as the main players, adding Zhejiang and Xi'an; the economy is still being adjusted, with a net decrease of 17 in the seven-day series; and the scale of overseas hotels has remained stable. By the end of the first quarter of '24, the company had 61 full-service hotels, 11,345 limited-service hotels (including 47 direct-run), 4 unopened full-service hotels, and 3,997 limited-service hotels (including 3 directly managed).
Focus on reform and efficiency, lay out inflection points in operation, and maintain “buying”
The first quarter was dragged down by financial expenses. In view of the basic implementation of management-side reforms and personnel adjustments, the results of the peak tourist season reform in the second and third quarter are expected to gradually become apparent. Considering 25 years or still in the reform and adjustment stage, the management priority comes before expansion. We expect EPS to be 1.54/1.72/1.92 yuan in 24-26 (value before 25/26:1.54/1.94/2.22 yuan), and the target price is 33.88 yuan (corresponding to 22X 24-year PE, comparable to companies Wind and Bloomberg, which agree to expect an average PE value of 22X in 24), and “buy”.
Risk warning: Business demand falls short of expectations; market competition worsens; travel demand falls short of expectations.