Original title: Huazhu Group-S (01179) 2020Q3 Performance Review: Revenue Exceeded Expectations, Goodwill Impairment Provisions Increase Losses Source:CITIC Securities

Q3 revenue was better than expected, benefiting from operating recovery, cost control and government subsidies, and adjusted EBITDA turned a loss into a profit. Domestic and overseas operations recovered at an accelerated pace in Q3. It is expected that domestic hotels will recover to more than 90% during the same period. Overseas hotels have been repeatedly affected by the European epidemic or are under pressure again, but the accelerated implementation of the vaccine is expected to speed up the pace of restoration. It is recommended to focus on further value restoration in the short term and be optimistic about the company's growth opportunities as a leading hotel company in the context of structural upgrading and chain upgrading in the long term.

Q3 revenue was above the guideline limit, and DH goodwill depreciation increased losses. Q3 revenue was 3.158 billion yuan/ +3.4%, including direct management of 2,131 billion yuan/ +2.0%, and franchise of 995 million yuan/ +6.0%. Huazhu's domestic hotel revenue was 2,734 million yuan/ -10.5%, in line with the guidelines; German Hotel revenue was 424 million yuan, better than expected (according to the guidelines, about 306 million yuan). Operating profit - 201 million yuan, Huazhu domestic brands and Germany were 523 million yuan/-724 million yuan respectively (vs. (20Q2 was -208 million yuan/-286 million yuan, respectively). Net profit to mother - 212 million yuan vs. +431 million yuan for the same period last year. Huazhu domestic brands and Germany were 482 million yuan/-694 million yuan respectively. The adjusted EBITDA was 184 million yuan, turning a loss into a profit compared to 20Q2 (-169 million yuan). Huazhu's domestic hotel profits exceeded expectations mainly due to reduced pre-opening expenses (20q3 was -42 million yuan vs. 19Q3 was 126 million yuan), and the effects of manual streamlining were evident (20Q3 management cost ratio 8.6% vs. 9.1% in 19Q3), and received a government subsidy of $99 million. The overall loss exceeded expectations as a result of DH's non-cash provision of $437 million for impairment of goodwill.

Domestic: Strong recovery in Q3 strengthens soft brand control, and Q4Blended RevPAR is expected to recover more than 90%.

After excluding epidemic prevention, Huazhu domestic hotels had a 20Q3 blended RevPAR of 179 yuan (-16.9%, same below), ADR 218 yuan (-11.1%), Occ 82.0% (-5.7pcts); same store RevPAR 178 yuan (-19.8%), ADR 212 yuan (-13.5%), and Occ 83.8% (-6.5pcts). In terms of grade, the mid-high end RevPAR is 238 yuan (-17.4%), which is better than the economy same-store RevPAR of 144 yuan (-21.9%). Mainly because leisure travel is the main factor driving recovery, the recovery in middle and high-end ADR is more obvious (mid-to-high-end -11.2% vs. economical -15.7%), and Occ repair is relatively close (mid-to-high-end -6.0pcts vs. economy-6.8pcts). Of the net increase in Huazhu stores in 20Q3, there were 31 soft brands and 288 core brands (vs.

In 20Q2, there was a net increase of 153 soft brands and 81 core brands), and the opening of core brands accelerated. Among them, the full season, Hanting, and Orange opened 107/84/54, respectively (vs. (41/8/14 stores were net opened in 20Q2, respectively). In terms of hotel structure, the share of middle and high-end companies (34.1%) and the share of franchisees (89.2%) continues to rise. There are 2,272 pipelines, a net decrease of 63 compared to Q2, which is mainly related to soft brand control. Domestic hotel blended RevPAR recovered about 100% and more than 90% in October and November. According to the company, Q4 revenue is expected to drop by 4%-7% year on year. We expect Q4 Blended RevPAR to recover more than 90%, and revenue is expected to be close to the upper limit of the guideline.

Overseas: Q3 German Hotels improved month-on-month, and Q4 is expected to be under pressure again due to the disturbance of the epidemic. Deutsche Hotel 20Q3 Blended RevPar €35 (-52.2%, vs. 20Q 2-77.6%), ADR 93 Euros (-4.7% vs. 20Q 2-13.4%), Occ 37.9% (-49.9pcts vs. 20q2-52.4pcts). In 20Q3, 3 new German hotels were opened, 1 net was opened, and 41 pipelines were opened. Deutsche Hotel has been recovering steadily from July to mid-September; the second wave of the epidemic broke out in Europe in late September, which is expected to affect overall business performance in Q4. The company ensures safe cash flow by deferring rent payments and reducing non-essential operating expenses and capital expenses.

As of the end of November, 89% of German Hotels, or 107 hotels, were in operation. The lowest occupancy rate in November was only 10%, then rebounded to 22% in December. According to its guidelines, the revenue of German Hotels in 20Q4 is estimated to be around 204 million yuan. It is expected that Deutsche Hotel will still be undergoing restoration in 2021. The accelerated implementation of the COVID-19 vaccine is expected to speed up the pace of restoration. Stay tuned for this recommendation.

Investment advice: The overall restoration pace of the leading hotel company is better than expected, and it is expected that the restoration of the same store's operating indicators will be completed in the next 1-2 quarters. After the company returned to Hong Kong for the second listing, it was more conducive to the accelerated expansion of reserve strength and further consolidated brand awareness. The strong restoration of domestic hotel operations in the short term supports valuation premiums. In the long term, we are optimistic about the company's growth opportunities as a leading Chinese hotel in the context of structural upgrading and chain upgrading. Considering the impact of goodwill impairment, the 2020 EPS forecast was adjusted to -8.26 yuan (originally -6.68 yuan), and the 2021 and 2022 EPS forecasts were maintained at 6.31 yuan and 10.51 yuan. The current price corresponds to the 21-year PE55X and EV/EBITDA26X, and the 22-year PE33X and EV/EBITDA19X. Maintaining the “gain” rating, active configuration is recommended.