occurrences

The company announced its results for the third quarter of 2024. 2024Q3 achieved revenue of 6.44 billion yuan/YoY +2.4% (previous guidance: 2%-5%), of which Legacy-Huazhu revenue +1.0% YoY/Legacy-DH revenue +8.9%; net profit to mother during the same period was 1.27 billion yuan/-4.8% YoY, of which the net profit of the Legacy-Huazhu division was 1.36 billion yuan/YoY -1.3%, and the net profit of the Legacy-DH segment was -0.083 billion yuan/year-on-year increase in losses.

Revenue is at the lower end of the guideline, and adjusted interest rates declined

The overall revenue of 2024Q3's /Legacy-Huazhu/Legacy-DH segment was 6.4/5.2/1.3 billion yuan respectively, with year-on-year growth rates of +2.4%/+1.0%/+8.9%, respectively. Compared with previous performance guidelines, the company's overall /Legacy-Huazhu revenue fell to the lower limit of the guideline. Looking at the spin-off, the strong expansion of domestic stores in another quarter hedged against the downward pressure of direct store closures and RevPAR, supporting Legacy-Huazhu's revenue to fall within the guidance range. On the cost side, driven by rising personnel costs, 2024Q3's gross margin was 41.0% /-1.5pct year over year, and Legacy-Huazhu's gross margin fell 2.3 pct year over year. At the same time, business expansion brought cost pressure. The company's sales expense ratio increased by 0.1 pct to 4.7% year on year, and the company's management expense ratio increased 1.9 pct year over year due to an increase in the number of employees, increased equity incentives, and one-time DH restructuring costs. Judging from the profitability of the company's core business, the company's operating profit margin/adjusted net interest rate declined by 3.7 pct/3.2 pct, respectively.

Domestic RevPAR declined year-on-year, and stores continued to expand rapidly

Against the backdrop of a high base, extreme weather, and weak consumption, the pressure on the domestic hotel industry continued in Q3. The hotel industry's RevPAR, which had previously disclosed results, declined by around 8%. The company's domestic RevPAR fell by 8.1% year on year, mainly due to the 7.0% drop in ADR. The company's overseas RevPAR side achieved a 3.7% year-on-year growth rate in the third quarter, with both ADR and OCC making positive contributions. Expanding the store side, the company continues to be attractive to franchisees. 2024Q3 opened 774 new hotels/closed 217 hotels in China, continuing the rapid expansion trend. At the same time, Legacy-Huazhu has 2,899 stores to support high-quality store expansion in 2024Q4 and 2025.

The company's leading position is stable and maintains an “gain” rating

Considering the consumer environment, we expect the company's revenue for 2024-2026 to be 23.56/25.71/27.67 billion yuan, with corresponding growth rates of 7.7%/9.1%/7.6%, respectively; net profit to mother is 3.75/4.44/5.01 billion yuan, respectively, and corresponding PE is 21x/18x/16x, respectively. In view of the company's stable leading position and strong brand and operating strength, there is still plenty of room for domestic stores to sink, brand improvement, and globalization, maintaining the “gain” rating.

Risk warning: risks such as a slowdown in macroeconomic growth; progress in expansion falling short of expectations; and deterioration of the competitive landscape.