Key points of investment
Huazhu Group: China's Hospitality Industry Leader
The company started with Hanting Hotel, founded in 2005. Under the founder's leadership, it has become one of the fastest growing hotel groups in the world. In 2013-2023, the company's CAGR for number of hotels was 20.8% and CAGR of revenue was 18.0%. Comparing the industry horizontally, the company's leading position continues to be consolidated. Before 2019, the company's revenue volume was comparable to that of its peers, and net profit to mother was 52% higher than the average value of industries including Jinjiang and First Travel. In 2023, the company continued to strengthen its own barriers. In terms of the number of guest rooms, the company's market share was 14%, second only to Jinjiang International's 18% level. Judging from domestic performance, the company achieved a net profit of 114% higher than the industry average.
Industry update: supply returns, leisure demand continues
The hotel industry is cyclical and growing. Looking at the pace of cycle evolution, 1) Supply has basically recovered. At the end of 2023, the number of hotels in China recovered to 96% before the pandemic. 2) The demand for leisure continues, and the demand for business is rational. During the May Day holiday in 2024, the number of domestic travelers recovered to 128.2% in the same period in 2019 according to a comparable level, and demand for leisure continued to be strong after the epidemic. However, business demand returned to rationality after being released centrally, and the 2024Q2 conference demand sentiment index turned negative. In terms of growth, the hotel chain conversion rate at the end of 2023 was 41.0%, continuing to increase 2.2 pct year-on-year; structural upgrades continued to advance, and the ADR upward trend remained unchanged.
Core highlights: Thousands of stores, advancing to the middle and high-end, internationalization
Adhering to the original intention of “transforming the traditional service industry with the IT spirit”, the company has accumulated over many years to form a competitive barrier integrating “brand (product power) + technology (innovation power) + traffic (return power)”, creating a platform-based enterprise gene.
At present, leading enterprises still have unfinished beauty. Domestically, at the bottom, Huazhu still has many small and medium-sized cities to be covered; upward, through outward mergers and acquisitions and internal integration, the middle and high-end brands already have genes and expansion potential to be unleashed; globally, DH's profitability has improved marginally, and it is worth looking forward to exporting China's services to the world.
The company's leading position is stable, giving it an “increase in holdings” rating
We expect the company's revenue for 2024-2026 to be 24.24/26.12/28.11 billion yuan, respectively, with corresponding growth rates of 10.8%/7.7%/7.6%, and 3-year CAGR of 8.7%; net profit to mother of 4.25/4.91/5.67 billion yuan, 3-year CAGR of 11.6%, and corresponding PE of 16x/14x/12x respectively. In view of the company's stable leading position, there is still plenty of room for domestic stores to sink and brand improvement. Globalization is gradually improving. For the first time, coverage was given, and a “gain” rating was given.
Risk warning: risk of macroeconomic growth slowing; risk of expansion falling short of expectations; risk of worsening competition patterns, etc.