H World Group Limited

Good day and thank you for standing by. Welcome to H-World Third Quarter 2024 Earnings Conference Call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 1 again. Please be advised that today's conference is being recorded. It is now my pleasure to hand you over to the Senior IR Director of the company, Mr. Jason Chin. Please go ahead.

Thank you, Amber. Good morning and good evening, everyone. Thanks for joining us today. Welcome to Edgeworth Group 2024 Third Quarter Earnings Conference Call. Joining us today is our Chairman, Mr. Jiqi, our CEO, Mr. Jinghui, our CFO, Ms. Chenghui, and our CSO, Ms. He Jihong. Following their prepared remarks, management will be available to answer your questions. Before we continue, please note that the discussion today will include forward-looking statements made under the safe harbor provision of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. Edgeworth Group does not undertake any obligations to update any forward-looking statements except as required and applicable laws. On the court today, we will also mention adjusted financial measures during the discussion of our performance. Reconciliations of those measures to comparable GAAP information can be found in our earnings release that was distributed yesterday. As a reminder, this conference call is being recorded. The webcast of this conference call, as well as supplementary slide presentation, is available at ir.edgeworld.com. With that, now I will hand over the call to our CEO, Mr. Jin Hui, to discuss our business performance in the third quarter of 2024. Mr. Jin, please. Hello, everyone. Thanks for joining Edgewater Group Third Quarter's 2024 Earnings Conference Call.

In the third quarter of 2020, the overall travel demand in China continues to grow steadily. Due to the impact of high ADR in the hotel industry last year, RERPAR was also affected. In addition, the extreme typhoon weather before and after the Mid-Autumn Festival caused a certain impact on travel in Shanghai and surrounding areas. At the same time, in the third quarter, we have made some proactive business strategy adjustments, especially the optimization of sales channels. I will explain in detail later. Although this adjustment has had a negative impact on the performance of this quarter, it has a very important strategic meaning for the long-term sustainable sustainable development of the company. Please turn to page 3. Let us review the business performance of Huazhou China in the third quarter. Huazhou China's third quarter RERPA is In the third quarter of 2024,

the domestic travel demand continued to demonstrate steady growth. The hotel industry saw some year-over-year pullback in Revta from a high base ADR last year. In addition, Shanghai and its surrounding regions experienced two typhoons right before and after the mid-autumn holidays, which affected travel demand in September. On top of this, in the quarter, We proactively adjusted our operational strategies, especially on optimization of our sales channels, which I will elaborate later. This proactive adjustment caused some negative impacts on the quarter's performance. However, it is strategically crucial to ensure the healthy, sustainable growth of the company in the long term. Please turn to page 3 on Lexi Huazhou's operational performance in the third quarter. In the third quarter, Lexi Huazhou's RAF PAR decreased 8.1% year-over-year to RMB 256, of which ADR was down 7% year-over-year to RMB 301 from high base last year. Despite our rapid hotel network expansion, our occupancy rate still maintained at a healthy 84.9%, declined only marginally by 1 percentage point.

Please turn to the fourth page. In the third quarter, our hotel network continues to expand. The number of newly opened hotels has reached 774. At the same time, we maintain the normal concept of quality over size. We are constantly making higher requirements for hotel quality. The number of closed hotels in the third quarter is 217. For example, the removal of low-quality soft brands and the influence of Hanting 1.0. with 123 power outlets. In the future, we will continue to process and eliminate low-quality power outlets to ensure further improvement in overall hotel products and service quality. As of the end of the third quarter, there will be 2,899 power outlets. Due to the rapid opening of the third quarter and the improvement of effective pipe standards in the context of high-quality development, we will clean up the ineffective pipes Please turn to page 4. In the third quarter, we continued our accelerated network expansion in China, and the number of hotel openings reached a record high of 774 hotels in the quarter.

At the same time, we uphold our philosophy of high-quality growth, putting quality ahead of pure quantity increase, and continuously raise the standard of our hotel. In the third quarter, we closed 217 hotels. If excluding the low-quality Soft Economy brand and Hunting 1.0 version, we closed 123 hotels. Going forward, we will continue sorting out our existing hotel and phasing out low quality ones to ensure further enhancements of the product and service quality of our overall hotel portfolio. As of the end of third quarter, the number of hotels in the pipeline decreased slightly year over year and quarter over quarter to 2,899, mainly due to the rapid opening pace in the third quarter as well as to clean up some of the pipelines given we continuously raise our quality standards for not only new open so pipelines our friends interest level and the new signings momentum remains strong in fact new signings in this quarter still exceeded 800 hotels

We believe that China's national hotel market is still the largest and most potential market, and it is also the foundation and basic plate of Chinese business. We continue focusing on economy and the middle skill segment for mass market penetration and development. Please turn to page five. As of the end of third quarter 2024,

economy and middle-skilled hotels accounted for 91%, 80%, and 90% of our hotels in operation, hotels in pipeline, and hotel openings, respectively. We believe the mass market remains the largest and the most promising market in China, and it is also the foundation of our business. Going forward, we will consistently roll out high-quality and good value for money limited service hotels. and products, expanding our coverage nationwide, and solidify our leading position in the limited service segment.

The percentage of hotel revenue has increased by 11%. With the increase in the number of contracts under the southern strategy and the growth in the number of high-end hotels, the percentage of one-way hotels has increased by 2%. Since the end of this year, we have added 117 new cities to the total number of Chinese cities.

we keep penetrating into the lower tier cities. Please turn to page six. As the end of third quarter 2024, around 42% of our hotels in operation were in tier three and below cities, up two percentage points year over year. In the pipeline, hotels in tier three and below cities accounted for 53%, 11 percentage points higher than that in operation. At the same time, as the new signings picked up in southern China, along with our regional strategy, and as our upper mid-segment segment grew, the proportion of pipeline hotels in tier one cities increased two percentage points year over year. As of the end of third quarter, the number of cities we covered reached 1,324, around 117 more cities than a year ago.

Huazhou continues to flourish in the mid-high-end hotel industry. Our mid-high-end main brand has been recognized by consumers and has also gained the trust of the business owners. Please turn to page 7. By the end of the third quarter of 2024, Huazhou's mid-high-end hotel revenue has exceeded 800, which is 33% of the total growth, while the hotel's total revenue is 487, which is 36%. Our upper-mid segment development continued in the third quarter.

Our key upper-middle skills brands have been gaining recognition and attractions among customers and franchisees. Please turn to page 7. As of the end of third quarter 2024, the number of up-mid segment hotels in operation exceeded 800, up 33% year-over-year, and the number of hotels in pipeline reached 487, up 36% year-over-year. One of our core brands in that segment, Intercity, had 125 hotels in operation and in the pipeline. 近期,我們的另外一個中高端主力品牌,

Shui Jing Hotel officially launched the 2.5 version. Please turn to page 8. Shui Jing 2.5 is a high-end hotel built exclusively for business owners. The overall product combines the perfect design of the lighting and color, high-quality guest rooms and bedding, and the unique fragrance of Shui Jing brand. From the visual, touch, taste, and other aspects, it provides the busy city people with a comfortable, relaxing, and relaxing quality space. Recently, Crystal Orange, the co-brand for our Upper Mid segment, launched its 2.5 version. Please turn to page 8.

Orange 2.5 version is an upper-mid-scale product that we designed and tailored for elite business travelers. The harmonious integration of lines and colors, the usage of high-quality bedding facilities, and the special crystal-designed fragrance diffuser offers a comfortable, relaxing, and high-quality space for the busy business travelers working and living in the fast-paced metropolis. The hotel also has lounge space with special cocktail offerings, which is a public area that is suitable for guests either to enjoy their private time or to hang out with their friends.

After a few years of cleaning up the Chinese high-end business in Huazhou, the performance has gradually improved this year. However, we believe that our Chinese high-end business still needs to be refined in many aspects, such as brand, product, After several years of development, our upscale segment is starting to bear some fruit in this year.

However, we think there are still more polishing and improvements needed in areas such as branding, product, customer insights, customers' experiences and services, and so on, especially under the background of our service excellence strategy stated since the beginning of the year. Therefore, we will continue working and improving, and we aim to become one of the leading brands in the upper mid-scale segment in the near future. Please turn to page 9.

Due to the influence of the macroeconomic economy, the overall recovery of the business market is still relatively slow. We continue to make up for the loss of some business travelers through the increase in the number of business travelers, and the stability of the exit rate when traveling leisurely. In the third quarter of 2024, more than 7.5 million businesses were set up by corporate branches, which increased by 11% and increased by 19%. Please turn to page 9.

Affected by the macroeconomy, the recovery of China's overall business travel demand is still relatively stagnant. To offset the impacts from some missing demand from individual business travelers, and to maintain a relatively stable occupancy rate during the low season of leisure travel, we have been improving our direct B2B capabilities. In the third quarter of 2024, the number of room nights booked directly via our B2B platform exceeded 7.5 million, up 41% year-over-year, and 19% quarter-over-quarter. The number of active corporate clients exceeded 4,500, up 45% year-over-year and 23% quarter-over-quarter.

Huazhou is expanding rapidly and constantly covering new areas. In the process of breaking through the new level, we need some time to gather members and improve the sales of these new stores. Therefore, in the short term, especially in the process of climbing new stores, we need some traffic support from other channels. But in the long term, members and sales are still the most important and the most sustainable channels. In the third quarter, we did a targeted round to improve the work of the channels, to promote door-to-door shop owners, to improve the customer and sales capability of the door-to-door center, and to further emphasize the importance of direct sales and membership for long-term sustainable development of the company's business. The contribution of the central reserve to the industry has been increased in the third quarter to 64.2%, and the same ratio and return ratio have been increased by 2.2% and 4.3%.

we have always been emphasizing the importance of membership and direct sales. Please turn to page 10. The membership base of our Edge Rewards continued increasing. As of the end of third quarter, Edge Rewards had close to 260 million members. As we rapidly expand our hotel networks, entering into new regions and breaking through in some new segments, it will naturally take some time for us to accumulate new members and improve the direct sales contribution for those new hotels. As a result, in the short term, we do need traffic support from other channels during the ramping up pace of the new hotels. Nevertheless, members and direct sales remain the most important and the most sustainable sales channel for us. In the third quarter, we rolled out a round of targeted optimization of our sales channel. We urged our hotel managers to improve their hotel-level customer acquisition and sales capabilities. And we re-emphasized the importance of membership and direct sales capability for the company's long-term sustainable growth. In the third quarter, our CRS contribution improved by 2.2 percentage points year-over-year and 4.3 percentage points quarter-over-quarter to 64.2%.

以上就是2024年第三季度华驻中国业务情况的更新。 下面有请BSO何继鸿为大家更新DH本季度的经营和业务情况更新。 All above conclude our third quarter 2024 business updates for Laxley, Huazhou.

Now I will hand over the call to our CSO, Ms. He Jihong, to give an update on Lexie DH's business.

Thank you, Jinghui. I'm happy to give everybody an overview on the overseas business of H-World. Please turn to page 11. We are very happy to report that the blended ADR from DH increased 2.5% from 114 euro to 117 euro in the third quarter 2024. With 0.8 percentage point increase in occupancy, REFPA increased 3.7% from 79 euro to 82 euro. Please turn to page 12. We restructured our economy brand Zleep business in this quarter as well. We exited a joint venture with entrepreneur Peter Haber and took over 100% ownership of the Zleep brand. As a part of the asset-live strategy, we exited 14 lease and owned hotels in Denmark. This transaction has a minimum impact on our financial statement. Please turn to page 13. In the third quarter, we also started a major restructuring effort in DH business. First of all, we streamlined the headquarters and reduced at least 30% of the headquarters' non-operational staff. We stepped up our effort to reduce G&A non-personnel costs. we continued to scrutinize hotel performance and optimize hotel operations. All this restructuring effort incurred around remaining the $81 million one-off expense in this quarter. The negative impact on financial performance of Deutsche Hospital in this quarter is largely due to this restructuring cost, which you will see later. We will start to observe full year savings in 2025, and we are confident that our overseas business is on a successful trajectory. With this, I conclude the overview of the international business and hand over to our CFO, Chen Hui, for the financial performance review.

Thank you, Ji Hong. Good morning and good evening everyone. Let me talk you through our operational and financial review for the third quarter of 2024. Please turn to page 15. Our hotel network continues to expand. The overall number of rooms increased 20% YOY to close to 1.1 million as of end Q3 this year. Compared with 886,000 rooms a year ago. Hotel turnover for the third quarter of 2024 was RMB 26 billion, representing an 11% YOY increase, of which Lexi Huazhou's hotel turnover grew 11% YOY to RMB 24 billion and the Lexi DH turnover grew 8% YOY to RMB 2.1 billion. Page 16. In the third quarter of 2024, our hotel revenue for the group increased 2.4% YOY to RMB 6.4 billion in line with our guidance. Revenue from Lexi Huazhou grew 1% YOY to RMB 5.2 billion, of which revenue from Huazhou leased and owned hotels decreased 10.4% due to the closure of leased hotels. We net closed 22 leased hotels in the quarter, and the number of leased and owned hotels decreased by 38, or 6.3%, on a year-over-year basis. Revenue from Huazhou, monetized and franchised, grew 14.7% YOY, driven primarily by our strong hotel opening, but was negatively affected by the decline in River Path from the high base last year. Next DH's revenue rose 9% YOY to RMB 1.3 billion, which was a tribute to both business recovery and hotel network expansion. Please turn to page 17. We have been committed to grow and as a line model, expanding our hotel network using monetized and franchise hotels. As a result, revenue from our franchise and franchise hotels continues rising. In the third quarter of 2024, revenue contribution from franchise and franchise hotels reached 50% of our Lexi Huazhou's revenue, up from 44% a year ago. We expect this trend to continue as we become more and more as a light. We believe this will drive a gradual and continuous margin expansion, as well as help us to become more resilient when navigating through economic cycles. Please turn to page 18. Hotel operating costs will unbeat $3.8 billion in the third quarter of 2024, up 5% YOY. The increase was due to rising personnel cards from our continued hotel network expansion. Pre-opening cards remained at a low level as we continue moving towards the SLI model and staying selective on opening lists and owned hotels. SG&A expands or RMB 975 million in the third quarter of 2024, up 18% YOY, of which Lexi Huajus increased 9% YOY and the Lex DH rose 42% YOY. The 8% YOY increase in Lexi Huajus SG&A was mainly due to a high share-based compensation to attract and return core employees who are key to our sustainable long-term business growth. Excluding share-based compensation, SG&A expense for Lexie Huazhou increased 2.5% YOY. The 42% YOY increase in Lexie DH's SG&A was due primarily to a RMB 81 million one-off restructuring costs excluding the non-recurring restructuring costs, SG&A expense for LexisDH increased 7% YOY. As a result, our income from operations in the quarter was RMB $1.7 billion, which is representing a 10% YOY decline, but a 10% Q2 growth. Please turn to page 19 for our profitability and the cash flow during the quarter. In the third quarter of 2024, our adjusted EBITDA decreased 9.5% YOY to RMB 2.1 billion. By segments, Lexi Huazhou's adjusted EBITDA was down 5.4%. 7.5% YOY to RMB 2.1 billion due to the rare part decline from the high base last year and SG&A normalization. Our DH business generated RMB 21 million adjusted EBITDA, which was down YOY due primarily to the non-recurring destruction costs mentioned previously. However, After this round of restructuring, we believe our DH business will be leaner and its profitability should see some improvement next year. In the quarter, our group generated RMB 1.4 billion adjusted net income and RMB 1.7 billion operating cash flow. Page 20 for our liquidity position. As of end of September 2024, the group had RMB 9.3 billion cash, cash equivalent, restricted cash, and time deposits, and was in a solid net cash position of RMB 4 billion, including time deposits. We also had RMB 3.6 billion in utilized bank facilities as of end September. Next page, please. As part of our total shareholder return plan, we continued buying back shares. As of September year-to-date, we have bought back roughly 270 US dollar million worth of shares from the market. In the first nine months, we have returned around 470 million US dollars to the shareholders through both dividend and share approaches, which accounted for more than 80% of our free cash flow generated in the same period. Lastly, page 22 on guidance. For the fourth quarter of 2024, apart from the ongoing rare power pressure, we will continue closing some leased and owned hotels as we are committed to our asset-light strategy. The closure of more leased and owned hotels will definitely bring some negative impact on our revenue in the quarter. Therefore, we expect our group revenue to grow between 1% to 5% compared to Q4 2023, and also 1% to 5% if excluding DH in the fourth quarter. With that, we are ready to take your questions. Operator, please open the line for Q&A.

Thank you. We will now begin the question and answer session. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. We will now take our first question from the line of Ronald Leung from Bank of America. Please ask your question.

Good morning, Director Chang. Thank you for giving me a chance to ask a question. I have two questions. The first question is about the situation of RAFPA. I would like to ask, what is the performance of RAFPA of the company in October and November? What are your expectations for the RAFPA of the city? The second question is about the management of the membership system. Let me translate the questions in English. My first question is about RAFPA. May I ask what are the RAFPA trends in October and November? And what is your expectation for the RAFPA growth in 4Q? My second question is about the management of the membership system. May I ask, what is the company's strategy to enhance the membership's loyalty so as to increase the direct sales ratio? Thank you very much.

I'm Jin Hui. Let me answer these two questions. From the trend, we can see that China's business market is still growing weakly, so it is recovering. So the entire year has been affected by ADR, mainly by ADR, especially the decline in ADR in Chinese high-end hotels, which has had a greater impact on the entire hotel industry. We also see a positive aspect. The exit rate, our entire market demand, is still in a relatively stable state of growth. China is still maintaining high-quality development at this stage. Our fourth quarter, OK. Let me answer your first question regarding to the rough part. So clearly as you may see from the market, so this year, business traveling activity remain a bit weak compared to the leases.

And that caused a major ADR impact and the pressures for this year on a year-over-year basis, as well as the high base from the last year. And also, we are seeing the up mid and up skill segment was underperforming. And the ADR has even higher pressures, which also are going to have some of the pressures to our segment in terms of the ADR. However, on the positive side, we still see a pretty good demand for the overall traveling. And therefore, we still can maintain a relatively healthy and high occupancy rate despite our fast pace of hotel network expansion. Therefore, we remain committed to ensure our high quality growth strategy. And for the first quarter, according to our estimate, mainly due to the ADR pressure, the REF PAR for the first quarter will be around middle single-digit year-over-year decline. Thank you.

Okay, I will answer the second question about membership. Since Huazhou has entered more high-end markets and there are a lot of new leisure and tourism markets in the market trend, Huazhou's original membership network penetration and effectiveness So, in regard to your second question about membership,

So as we are penetrating into different regions as well as, you know, break through some of the new segments, so it takes some of the time to creating some of the synergy from our existing membership and the new regions and segment coverage from our membership program. And also there's, you know, a lot of new demands from the leisure market as well. So we are putting a lot of efforts to enhance our membership program. to provide more variety in terms of the products to different groups of customers and to ensure the membership program for the growth.

On the second hand, we are planning to fully upgrade our membership and service system, especially on the lowest price. We will further improve our membership and service capacity through Huazhou's membership and service. We will further improve our membership and service capacity

Okay, we are also working on, you know, improving the membership's benefits and ensure the lowest pricing through our direct sales channel and the membership program. And therefore, we can further improve the, you know, the offline membership conversion as well as, you know, improve the retention rate. 第三,我们正在积极地拓展,例如航空,机箱航空,滴滴,很多锤类的 We are also seeking some of cooperation with cross, you know, different segments, such as, you know, working with the airline company, such as Junyao Airline, as well as, you know, the car-hailing companies, which is DD, to seeking more cooperation among different industries.