Text: Jin Wei
Shorting occurred on the eve of the listing. The first announcement after listing was to block shorting agencies and continue to fight back. This kind of incidentHuazhu GroupIt's all caught up.
On September 22, Huazhu Group-S (01179.HK) listed on the Hong Kong stock market. This isHuazhu GroupIt went public for the second time, yet it was targeted by shorting agencies.
On the evening of September 21, the short selling agency Bonitas Research (Bonitas Research) released a report questioning the financial data of Huazhu Hotels, saying that Huazhu Group exaggerated the reported profit and inflated profits by 2 billion yuan in 2019.
On September 22, on the day Huazhu went public, it plummeted due to shorting. The stock price once dived 6% in the intraday period. After that, Huazhu quickly denied the accusations in the short selling report, and only then did the stock price stabilize. On the evening of September 28, Huazhu Group clarified the five major accusations of the Bonitas report one by one, saying that the Bonitas report was actually unfounded; it could be described as a major drama between listed companies and short selling agencies.
Judging from Huazhu's stock trend, it doesn't seem to have been affected in any way. On the first day of listing, Huazhu Group reported HK$311 per share, up 4.7%, with a total market value of HK$98.4 billion. On September 29, Huazhu opened and rose 2.4% again. As of midday trading, it closed at 339 yuan/share, with a market value of 109 billion yuan. However, although shorting agencies have been blocked, Huazhu's own crises have declined quite a bit, profits have declined, and debt ratios have risen. Especially in the context of the pandemic, Huazhu is still bucking the trend and expanding, which has undoubtedly increased its own risks.
Huazhu responds to the five-point accusation
In 2007,CtripFormer president Ji Qi founded Hanting Hotel, which later changed its name to “Huazhu Hotel Group”. Three years later, Huazhu Group was listed on the US Nasdaq Exchange. On September 22 of this year, under Ji Qi's leadership, Huazhu Group went to Hong Kong to ring the bell for the second time. Originally, it was a moment of celebration, but the arrival of shorting agencies made this listing a bit noisy.
On the evening of September 21, the night before Huazhu Group went public, it was suddenly attacked by short selling agency Bonitas Researc (Bonitas Researc).
Boridas was only founded in 2018, and is not as popular as old players such as Muddy Waters, Incense, and Groux. However, in reality, Boridas, who is not very experienced, came menacingly as soon as he debuted. He has sniped beforeHosa International, P2P leaderSino-Singapore Holdings,Hengan International,Bosideng,JinkoEnergieetc. Listed companies.
According to Bolidas's field investigations in Beijing and Shanghai, Huazhu Group did not disclose some franchised hotels owned by current Huazhu employees and other undisclosed related parties in accordance with regulations, and provided secret operating cost support to these undisclosed franchise hotels.
Bolidas provided this chain of evidence: as of fiscal year 2019, Huazhu Group actually controlled 1,952 hotels, accounting for about 35% of the group's total number of hotels, but the number of hotels claimed by Huazhu to the outside world was only 688, accounting for about 12%; by the end of 2019, the Ministry of Commerce's franchise registration showed that Huazhu had a total of 3,020 independent franchisees, 37% less than the 4,930 managed and franchised hotels reported by Huazhu; the records of the Administration for Industry and Commerce show that Huazhu underreported at least 16 per cent in the US Securities and Exchange Commission report % of the number of employees. According to forecasts, Huazhu Group inflated profits by 2 billion yuan in 2019.
According to Boridas research, the documents submitted to the US Securities and Exchange Commission andHong Kong Stock ExchangeCompared with the data in the report, the profits generated by Huazhu Group and the PP&E assets held by Huazhu Group are clearly small. According to the actual financial performance of Huazhu Group, its stock price should be far below the current level to be reasonable.
On September 22, Huazhu Group's first announcement after listing was a response to short selling agencies. Huazhu said the report lacked factual basis and contained numerous errors, unconfirmed statements, and misleading conclusions about the company's business and operations.
On the evening of September 28, Huazhu Hotel submitted a response to the Bolidas short selling report to the US SEC and Hong Kong Stock Exchange, once again stressing that the report was unfounded, and that the accusations about the company's business and operations were inaccurate, misleading, and unconfirmed.
Huazhu mainly responded to the five-point accusation, which mainly involved ownership issues in the hotel portfolio, underreporting the number of employees, related transactions, and excessive profits.
In response to Bolidas's accusation of “secretly controlling” 1,952 hotels, Huazhu publicly stated that it only operated 688 hotels. Furthermore, according to registration data from China's Ministry of Commerce, Huazhu has a total of 3,020 independent franchisees, which is 37% less than the 4,930 reported by the company.
Huazhu responded that the ownership data of Bolidas hotels came from popular reviews, but the platform did not clearly differentiate the ownership of hotels. Only “franchise contracts” need to be registered with the Ministry of Commerce. However, the law does not clearly stipulate whether the franchise and management agreements entered into to manage franchise hotels require registration, so these hotels have not registered with the Ministry of Commerce.
In response to related transaction issues, Huazhu said that the company prohibited employees of the Group from becoming group franchisees, and that none of the people on the list of contractors indicated in the short selling report were current employees of the Group. Furthermore, according to US accounting standards, employees of the Group cannot be classified as related parties.
In response to the question of inflated profits, Huazhu said that since these accusations were based on data that did not indicate the source, or based on unfounded arguments. The company believes these allegations are unfounded.
Judging from Huazhu's recent Hong Kong stock trend, its stock price has not been affected much. Being honest and not afraid of being overshadowed, Huazhu chose a direct leverage shorting agency. It is possible that this time, shorting has not been accurate.
Huazhu's hidden concerns about expansion
Currently, Huazhu Group is the first multi-brand economic hotel chain group in China. It owns many well-known hotel brands covering high-end to affordable markets, including Grand Mercure, Xiyue, and Huajiantang in the high-end market, full-season orange crystal, orange selection, ibis styles, etc., as well as Hanting, Hanting Premium, and Ibis in the affordable market.
The main types of hotels in Huazhu include leasing and own hotels, management of franchise hotels, and franchise hotel management. Among them, leased hotels account for nearly 70% of revenue. Huazhu Hotel has developed rapidly in recent years. At the end of December 31, 2017, the number of hotels was 3,746. By the end of 2019, the number of hotels had reached 5,618, with a compound annual growth rate of 22.5%.
As of June 30, 2020, Huazhu Group has 6,187 active hotels and 2,375 hotels are in preparation, with a total of 59,9235 hotel rooms. If you calculate the number of hotel rooms it operates, Huazhu Group has become second only toJin Jiang InternationalChina's secondGrand HotelGroup.
Over the past few years, Huazhu Hotel's revenue has grown rapidly. In 2017-2019, the company's net revenue was 8.229 billion yuan, 10.063 billion yuan, and 11.212 billion yuan respectively. The net profit attributable to the company was RMB 1,228 million, 716 million, and 1,769 million yuan respectively.
However, when the epidemic hit in 2020, Huazhu's revenue and net profit both declined in the first half of the year. According to its prospectus, Huazhu Group lost 2.158 billion yuan in net profit in the first quarter of this year and 554 million yuan in the second quarter, with a total net loss of nearly 2.7 billion yuan.
Huashu stated in its prospectus, “Due to the impact of the pandemic, more than 2,000 hotels were temporarily closed during the peak period in February 2020. As of the first half of this year, the average rental room revenue of Huazhu Group hotels was 137 yuan, down from 196 yuan in the same period in 2019.”
The “black swan” of the epidemic has revealed a weak side of Huazhu Group's business. However, Huazhu Group itself is still facing huge goodwill and debt pressure. This is mainly due to the merger and acquisition strategy implemented by Huazhu Hotels in the past.
Over the years, Huazhu has continued to expand and expand the scale of hotels. In 2013, Huazhu acquired Starway Hotel; in 2017, it also acquired all of Orange Crystal's shares with 3.65 billion yuan; in 2018, Huazhu acquired 71.2% of Huajiantang's shares with 460 million yuan; in January 2020, Huazhu used 700 million euros to include all of Deutsche Hotel's shares.
The acquisition of Deutsche Hotel Group was originally to pave the way for Huazhu's internationalization, then the pandemic suspended the path of internationalization. At the same time, Huazhu's profit start was affected. At the same time, mergers and acquisitions have allowed Huazhu's goodwill to continue to grow. From 2017 to 2019 and the first half of this year, Huazhu Group's goodwill was 2,265 billion yuan, 2,630 billion yuan, 2,657 billion yuan, and 5.402 billion yuan, respectively.
It is worth noting that Huazhu Group has never confirmed impairment of goodwill since 2017. If the subsequent epidemic is repeated or there are other signs of impairment, it may cause changes in the valuation assumptions of goodwill, which may cause impairment expenses and affect net profit.
Through mergers and acquisitions, Huazhu achieved large-scale expansion and became the biggest in the industry, but it also boosted its own debt.
As of June 30, 2020, Huazhu Group's total liabilities reached 56.537 billion yuan, with a balance ratio of 92.17%. Among them, short-term debt was 5.821 billion yuan, mainly including convertible senior notes due in 2022 and bank loans of 180 million US dollars; long-term debt of 9.24 billion yuan, mainly including non-current parts of convertible senior notes due 2026, 440 million euros and 200 million US dollars of syndicated loans, and 1 billion yuan of bank loans.
In the second quarter of this year, Huazhu's net cash flow from operating activities was 512 million yuan, a sharp decrease of more than 50% over the previous year. At the same time, the cash on Huazhu Group's books was only 3,699 billion yuan, which was completely insufficient to cover the debt.
This time, Huazhu Group went public in Hong Kong for the second time. There are four main uses of capital raised by Huazhu Group: supporting the company's capital expenditure and expenses, repaying part of the US$500 million revolving credit financing withdrawn by the company in December 2019, and enhancing the company's technology platform, including the company's Huazhu Association, for general corporate purposes.
In other words, listing financing and debt repayment is a very important aspect. Despite high debt and the heavy pressure of the epidemic, Huazhu's expansion has not stopped. The prospectus shows that up to now, Huazhu is developing 2,375 new hotels, including 54 leased and owned hotels and 2,321 managed franchise and franchise hotels.
Huazhu Group has an ambitious plan: to achieve the goals of “ten thousand lights” and “one thousand stores in one city”.
In December 2019, Ji Qi stated: “Within the next 3 years, Huazhu plans to increase the number of stores opened to 10,000, and truly achieve '10,000 lights'.” In other words, in 2020-2022, the average number of stores opened by Huazhu each year will reach more than 1,000.
Huazhu's Qiancheng Wandian Store Plan is mainly aimed at the sinking market and opening hotels to the county town. However, after more than ten years of rapid growth in the Chinese hotel industry, the “ceiling” of the industry is obvious. Moreover, in the sinking market, Huazhu Group is not alone. For example, the first trip to Jinjiang is like home,AlibabaFlying Pig's brand “Fizhi” and Ctrip's brands are all “fighting” in the sinking market.
The Huazhu Group is sinking in expansion and facing fierce competition in the market. The prospects are still unknown. In particular, Huazhu's debt ratio continues to rise, and its interest continues to eat up its meager profits. On the eve of this listing, Huazhu was targeted by shorting agencies. Although it was an episode, how Huazhu achieved a balance between its own expansion and crisis resolution through the second listing still needs time to be verified.