Key points of investment

Q2 revenue slightly exceeded performance guidelines: Q2 revenue in 2024 increased 11.2% year on year, slightly exceeding the upper limit of the guideline, achieving net profit to mother of 1.067 billion yuan, an increase of 5% year over year. The slight increase was mainly due to overseas business DH's loss. Among them, mainland business revenue was +11.1% year over year, contributing 1.033 billion yuan to mother net profit, +4% year over year; DH division revenue was +11.6% year over year, contributing 0.034 billion yuan to mother net profit, which significantly reversed losses from 0.174 billion yuan in the same period last year. Single Q2 achieved adjusted EBITDA of 2 billion yuan, +11% YoY; adjusted net profit was 1.25 billion yuan, +17% YoY.

The number of stores opened in mainland China exceeded expectations: by the end of 2024Q2, the number of Huazhu stores in the mainland business reached 10,150, +18% over the same period. The proportion of franchised stores was 94%, and the number of reserve stores reached a new high of 3,258.

In Q2, 567 new stores were opened in a single quarter, with a net opening of 466 stores, continuing the situation where Q1 sales exceeded expectations. This time, it was revealed that the company's target for opening new stores for the whole year was raised from 1,800 to 2,200. By the end of 2024Q2, the number of business units in mainland China reached 0.974 million, +19% over the same period, of which 0.889 million units were franchised, yoy +21.6%; the number of direct-managed housing units was 0.085 million, yoy -2.4%. The housing volume growth rate was further increased from 17% in Q1.

RevPAR led to a year-on-year decline in the high base, leading to a 2-5% revenue growth rate: 2024Q2 Huazhu's RevPAR was 244 yuan, -2.4% YoY, of which OCC was 82.6%, +0.8 pct year over year, ADR 296 yuan, or -3.0% YoY. The company expects the company's revenue growth rate to be 2 to 5% in 2024Q3. Excluding the DH caliber, the year-on-year revenue growth rate is 1 to 4%. In reverse, RevPAR will decline by about a high number of units. Additionally, the company disclosed a five-year $1 billion share repurchase plan in July.

Profit forecast and investment rating: As a leader in the hotel industry, Huazhu Group's brand, traffic and technology created competitive barriers, and its management culture enabled business development. It bucked the trend and expanded during the pandemic, and the market pattern improved markedly. Based on the Q3 guidelines, Huazhu Group's profit forecast was lowered. Net profit to mother for 2024-2026 was 3.7/4.07/4.48 billion yuan (previous value was 3.79/4.1/4.55 billion yuan), corresponding PE valuation was 18/16/15 times, maintaining the “buy” rating.

Risk warning: Competition in the industry intensifies, store growth falls short of expectations, etc.