China’s Huazhu Hotels Group continues to see success in hotel performance and portfolio growth through its long-term strategic plan.
SHANGHAI—Huazhu Hotels Group continued pushing forward with its strategic focus through the second quarter of 2018, achieving a pipeline record and showing strong overall hotel performance.
During the company’s second-quarter earnings call, CEO Jenny Zhang said blended revenue per available room continued to grow at 13% and net revenue increased by 26% as a result. The company’s operating income margin extended by 4 percentage points up to 26.6%, she said, and its adjusted earnings before interest, taxes, depreciation and amortization margin reached 38.3%, an increase from 35.7% in Q2 2017.
The company’s hotels achieved 89.6% occupancy during the quarter, down from 90.1% the same period of time in 2017, according to the company’s earnings release. Average daily rate reached 226 Chinese yuan ($32.86), up from 199 yuan ($28.94) in Q2 2017. Likewise, RevPAR grew to 203 yuan ($29.52) from 179 yuan ($26.03) in the second quarter of 2017.
Consumers’ domestic travel spending has grown faster than consumer retail sales in China from 2012 to 2017, Zhang said. From 2016 to 2017, domestic travel spending “significantly outperformed” consumer retail sales growth, she said.
“Therefore, we are confident that the travel demand has driven by general economy, increased affluence in the society and the lifestyle change in this country will continue to grow robustly and exceed the growth rate in retail sales,” she said. “Therefore, we are not significantly concerned about some of the recent trends in the consumer retail sales growth fluctuation.”
The company’s same-hotel RevPAR performance has grown in line with Chinese domestic travel spending growth, Zhang said.
The main factor behind ADR growth is the company is attracting guests who are willing to pay a bit more for better-quality products, she said.
Occupancy has been consistently high, with some seasonal fluctuation, ranging from 86% to 96% over the past few years, she said, whereas the Chinese hotel industry overall has had occupancy levels ranging from 63% to 72%.
“We are confident that we will be able to maintain a very strong occupancy trend as well as growing our ADR going forward,” she said.
As of press time, Huazhu Hotels’ stock was trading at $32.30 per share, down 10.6% year to date. The Baird/STR Hotel Stock Index was down 2.5% for the same time period.
During the second quarter, Huazhu Hotels opened 147 hotels, including seven leased hotels and 140 managed-and-franchised hotels, according to the company’s earnings release. It closed 61 hotels, including seven leased and 54 manachised, mainly due to brand and operating standards as well as some property-related issues—such as rezoning—and operating losses.
By the end of the quarter, the company had 673 leased hotels, 3,024 manachised hotels at 206 franchised hotels, the release states. The total number of rooms in operation reached 393,417, a 9.4% year-over-year increase. Its pipeline has reached 839 hotels, a record high.
Huazhu Hotels’ pipeline for midscale and upscale rooms accounts for about 80% of the total number of rooms in the company’s pipeline, Zhang said, which is an increase from 57% a year ago. The company has successfully relaunched Mercure since acquiring the master franchise rights to the brand in 2016, she said. At the time, the brand had only seven franchised and manachised hotels in operation with two in the pipeline, but it currently has 28 Mercure hotels in operation and 44 in the pipeline.
“We opened five Mercure hotels in August, and then we'll open one more before the end of August, giving our total hotel openings of six within this month alone,” she said.
The number of hotels in the Crystal Orange brand pipeline grew from 65 a year ago to 113 by the end of the second quarter, Zhang said.
Exploration of upscale
The innovation and exploration of the upscale segment has been part of the company’s strategic focus, Zhang said, and its acquisition this month of Blossom Hill Hotels & Resorts fits squarely in there.
“Blossom Hill provides luxury, boutique hotels and resorts with aesthetic decor and cultural touch,” she said. “We see this acquisition as a win-win combination for both Huazhu and Blossom Hill. With the addition of Blossom Hill to our hotel portfolio, we are able to offer more diversified choices to over 100 million Huazhu Rewards members. At the same time, this acquisition will improve Blossom Hill's occupancy levels, cost efficiency, and will also accelerate their expansion.”
The company has observed a clear trend in consumption upgrade in China, Zhang said. In turn, the company has been moving its portfolio and expanding in the midscale and upscale segments.
“So we are really following our consumers in that growth strategy,” she said.
The purchase valuation for the entire stake in the company was about 650 million Chinese yuan ($94.5 million), CFO Teo Nee Chuan said. The company expects EBITDA multiples will be about 13 times, he said.
Huazhu Hotels would typically acquire a brand that complements its existing portfolio and then use the strength in development and operational excellence to further improve the new brand and grow it into a meaningful player in the market, Zhang said.
“We have found that for quite a few brands already,” she said. “If you look back, we see that for Ibis and Ibis Styles, we talk about them in earlier quarters. We successfully did that for Mercure. We also achieved very good results with Crystal Orange. So we will repeat in that practice for Blossom Hill, which today is still very small. But we see a lot of potential in this brand.”