3Q24 results are basically in line with our expectations

The company announced 3Q24 results: Huazhu's overall revenue in 3Q24 increased by 2.4% to 6.442 billion yuan, at the lower end of the previous revenue guidance (2-5% increase). Adjusted EBITDA/adjusted net profit decreased 9.5%/10.8% to 2.113/1.372 billion yuan respectively. The overall performance was basically in line with our expectations. Company guidance 4Q24 Huazhu's overall revenue and Huazhu China's revenue both increased by 1-5%. The total amount of 1-3Q24 cash used for repurchases is approximately $0.27 billion, combined with the previously disclosed dividend amount (about 0.2 billion US dollars for total dividends in January-July). We estimate the shareholder return (dividend+total repurchase amount/current market value) up to now about 4.5%.

Development trends

Guide the 4Q RevPAR to a single digit drop, focusing on marginal changes in its lead compared to the industry and peers.

Huazhu China's RevPAR fell 8.1% in the 3Q period (2Q performance indicator: same drop in single digits; ADR fell 7.0% and OCC fell 1.0ppt), mainly due to the high ADR base in 3Q23, the impact of some extreme weather in September, and excessive channel adjustments in some stores, which further affected OCC. The company observed that the year-on-year downward trend of RevPAR in the fourth quarter was narrowing and guided the 4Q RevPAR to a single digit decline. It initially determined that 25 years may enter a relatively sustainable stabilization cycle, and predicts that RevPAR performance will be at least the same as 24 years. It is recommended to focus on the marginal changes in Huazhu RevPar's performance and its leading edge over the industry and peers.

The opening of new stores in 3Q exceeded expectations, and the target for opening stores for the whole year was raised to 2,400. Stores continued to flourish. In 3Q, Huazhu China opened 774 new stores and closed 217 stores (including 25 direct-run stores closed; the company said it is continuing to promote an asset-light strategy; 4Q may maintain the pace of direct-run store closures faster than the first half of this year but slower than 3Q), with a net opening of 557 stores, and a total of 1,910 new stores were opened in 1-3Q. More than 800 companies actually signed in 3Q. We estimate a slight decrease compared to 1Q and 2Q, but the trend is still good. The company once again raised its annual store opening target to 2,400 (from 1,800 to over 2,200 in 2Q results). As of 3Q, the total number of active stores reached 10,845 (YoY +18%) and 2,925 stores in reserve (2Q24:

3,294 stores). The month-on-month decline was mainly due to the number of new stores opened in 3Q and the company actively cleaned up the reserve pool during the quarter. It is recommended to continue to track changes in the number of subsequent reserve stores and the performance of new contracts.

Strengthen channel optimization; DH promotes asset-light transformation and restructuring. 1) In September, the company carried out targeted channel optimization to enhance store managers' store-centered customer acquisition and sales capabilities, emphasizing the importance of direct sales and membership. 3Q24 Huazhu CRS accounted for 64.2% (YOY+2.2ppt), reaching 0.257 billion as of 3Q members.

2) DH is promoting asset-light transformation and restructuring optimization (30% + layoff of headquarters administrative staff, reduction of non-human resources in management expenses, etc.). As a result, 3Q generated a one-time restructuring cost of about 81 million yuan. It is recommended to focus on the cost savings and profit improvements brought about in 25 years.

Profit forecasting and valuation

As a comprehensive leader, we are still optimistic about Huazhu's steady growth based on a high-quality development strategy, outstanding cost and expense control capabilities, back-end operating efficiency, and long-term investment value brought by impressive shareholder returns. We are also concerned about marginal changes in its RevPAR and new contracts. Considering the declining trend of RevPAR and the number of direct store closures, etc., we lowered our 24/25 profit forecast by 4%/4% to 4.09/4.642 billion yuan, respectively. The outperforming industry rating and target price of $42 remain unchanged, corresponding to 14/13x 24/25eEV/eBITDA and 27% upward space. The current stock price corresponds to 11x/10x 24/25e EV/EBITDA.

risks

RevPAR's recovery fell short of expectations due to weak consumption power or increased supply; the scale expansion fell short of expectations.