Event: The company announced results for the third quarter of 2024. The company achieved operating income of 6.442 billion yuan, a year-on-year increase of 2.4%, which is at the bottom of the company's 2-5% growth rate; achieved net profit to mother of 1.273 billion yuan, a year-on-year decrease of 4.8%; and achieved net profit to adjusted mother of 1.372 billion yuan, a year-on-year decrease of 10.8%.

The full-year store opening guidelines were raised twice, and RevPAR was under pressure in the third quarter under high base. In the third quarter, Huazhu headquarters opened 774 new stores, an increase of 42.0% over the previous year, and closed 217 stores. There was an increase over the same period last year. The company continued to reduce quality and Hanting 1.0 stores. Huazhu headquarters's RevPAR for the third quarter was 256 yuan, down 8.1% year on year, and price pressure continues under high base. In the third quarter, Huazhu Headquarters/DH's revenue increased 1.0%/8.9% year-on-year, respectively, and gross margin decreased by 2.3 pct/3.3 pct, respectively. The scale expansion offset the impact of direct store closures and the decline in RevPAR, but gross margin declined quarterly due to cost rigidity.

DH's asset-light transformation continues, and one-time restructuring expenses affect short-term profits. The SG&A fee rate for the third quarter was 15.1%, up 2.0pct year-on-year, mainly due to the increase in equity incentive expenses and the impact of the one-time DH restructuring fee of 0.081 billion yuan. The adjusted net profit of Huazhu Headquarters/DH for the third quarter was 1.461/-0.089 billion yuan, respectively. DH losses increased compared to the same period last year. DH continues to carry out asset-light transformation. It launched the Zsleep A/S joint venture in the third quarter, withdrew from 14 direct-run hotels and reduced headquarters management personnel by 30% +. It is expected that subsequent operation efficiency will be further optimized.

Investment advice: The company has outstanding advantages in terms of brand, operation and membership, leading the industry in store opening speed and operating efficiency. We expect the company's net profit to be 3.64/4.276/4.816 billion yuan in 2024-2026, and the corresponding PE is 20.00/17.02/15.11 times, respectively, adjusted to an “increase in holdings” rating.

Risk warning: demand recovery falls short of expectations; store expansion falls short of expectations; macroeconomics falls short of expectations