2Q24 reached the upper end of the revenue guidance under a high base: Despite the impact of the high base, Huazhu Group reached the upper end of the company's revenue growth guide in 2Q24 (revenue increased 7%-11% year over year). The 2Q24 Group's revenue was RMB 6.15 billion, up 11.2% year on year. Excluding overseas business (Legacy DH) revenue, which increased 11.1% year over year. The adjusted net profit for 2Q24 reached 1.25 billion yuan, a year-on-year increase of 16.9%.
Domestic business indicators have weakened, but they are better than the market: Huazhu Group's 2Q24 domestic business (Legacy-Huazhu) RevPar was 244 yuan, down 2% year on year. Among them, ADR fell 3% year on year, mainly due to explosive travel and insufficient supply in the hotel industry last year, which raised the base figure, while the company's OCC increased by 0.7 ppt year on year, offsetting some of the negative effects of the decline in ADR. Management said that in July-August of this year, when the market RevPar fell 10%, Huazhu RevPar only fell by a middle single digit year on year, outperforming the market. We believe that with a high base, bad weather, and poor macro environment, it will be difficult to reverse the year-on-year decline in the hotel industry's RevPAR in 2024, but Huazhu's decline will be better than that of its peers.
Increased operational efficiency helps increase profit margins: 2Q24 Group's rent, depreciation and consumables costs as a share of revenue declined year on year, driving the Group's gross margin to increase by 2.3 ppt year on year.
Despite a year-on-year increase in operating expenses due to scale expansion, the Group's adjusted EBITDA ratio continued to expand 1.2ppt year over year. We believe that excellent operating efficiency will also drive the company's profit margin expansion in 2024.
Store opening guidelines were raised, and the 3Q24 revenue guide growth rate slowed: Huazhu Group achieved the strategic target of 10,000 stores during the 2Q24 period, and the number of domestic stores reached 10,150. Of these, 567 were newly opened and 101 were closed. We believe that although 3Q24's RevPAR and revenue base are higher, revenue guidance can be completed better under the guidance of opening stores more quickly.
Maintaining the “buy” rating and lowering the target price: We have appropriately lowered the profit forecast for Huazhu 2024E-2026E. Based on the 11x 2025E EV/EBITDA, we valued Huazhu Group based on the 11x 2025E EV/EBITDA, and adjusted the target price for Hong Kong stocks to HK$28.0 and the target price for US stocks to $35.4.
Investment risks: 1) Demand in the sinking market is weaker than expected; 2) competition in the mid-range hotel market intensifies; 3) travel demand is slowing down.