The 2Q24 earnings of HTHT were largely in-line with expectations, as revenue (+11% YoY) reached the upper-end of the guidance. However, we believe the market would become more concerned about worsening industry figures since June 2024. The 3Q24 revenue guidance of +2-5% YoY could be underwhelming, reflecting problems of softening room rates amid a spike of hotel supply of the industry. However, HTHT also raised the gross opening target for 2024 from 1,800 hotels to 2,200, which reflects confidence by its franchisees. We hence believe HTHT would still outperform the overall industry in both short and long term. While we expect the industry issue could weigh on near-term earnings and valuations, HTHT’s initiatives to enhance shareholders’ return could provide some downside protection.
　　Key Factors for Rating
　　2Q24 earnings largely in-line as adj. EBITDA +15 % YoY. The revenue of HTHT increased 11% YoY to RMB6,148m in 2Q24, reaching the high-end of its guidance provided in May 24 and in-line with market expectations. While reported net profit only grew 5% YoY, we believe adj. EBITDA of RMB2,040m (+15% YoY) is a better reflection of its improving operations in group level, thanks to higher contribution from assert-light manachised & franchised hotels while operating expenses were also well controlled despite rapid expansion. Overall, the 2Q24 earnings reflected: (i) a high base in 2Q23 due to pent up demand in China somewhat weighed on the YoY numbers, and (ii) a slightly better-than-expected performance in overseas segment Legacy-DH, as the Euro 2024 event helped lifted the RevPAR of the hotels in Europe.
　　Cautious 3Q24 guidance could also imply weak 4Q24. Given worsening industry landscape since late 2Q24 as nationwide room rate continues to decline YoY, HTHT provides a rather conservative 3Q24 guidance: overall revenue to be up +2-5% YoY. As the total number of hotels in operations grew 18% YoY to 10,286 in 2Q24, this would imply a rather notable YoY decline in RevPAR in China. Mgmt. commented that it is already down mid-single digit YoY QTD, and we believe there could be more downside if the economy further deteriorates. This could also imply 4Q24 would remain subdued, and could weigh on valuation.
　　More upbeat full-year hotel openings to offset some weakness. However, on the bright side, HTHT raised its full year hotel gross openings from 1,800 to 2,200. This is supported by higher hotels in pipeline of 3,266, reflecting the confidence of franchisees. We now expect the total number of hotels under HTHT would reach 10,949 by end of 2024, or up 17% YoY. This should offset some softness in RevPAR as the company could generate more income from franchisees with scaling effect in 2H24 and 2025.
　　Measures to enhance shareholders’ return could limit some downside. On 23 July 2024, HWG announced a new shareholder return plan, which consists of: (i) lifting the dividend payout ratio to not less than 60% (previous: 45%), and (ii) a share repurchase programme for the ADS, which lasts for 5 years effective from 21 Aug 2024, and the aggregate amount would be up to US$1bn. We expect the buybacks would at least provide some cushion in the near term till the industry has become more normalised (i.e. better demand-supply balance after some increase of hotel room supply post-pandemic is to be eliminated).
　　Key Risks for Rating
　　Key downside risks to our view and forecasts include: (1) weaker-than expected recovery of tourism in China; (2) weaker-than-expected spending power in China; (3) slower-than-expected expansion due to the financial problems of franchisees; (4) keen competition among China hotel groups; and (5) highly volatile exchange rates leading to unexpected losses.
　　Valuation
　　We cut our FY2024-2026 EBITDA forecast by 3-8% to reflect: (i) some softness of RevPAR in 2H24 and 2025, and (ii) weaker operating leverage as we expect margins may worsen under keen competition.
　　Our TP is lowered to US$38.5/HK$30.2, which is based on 12.5x EV/EBTIDA (previous: 14x). Our latest target multiple is equivalent to 1 standard deviation below the 5-year EV/EBITDA average of 16.0x, which reflects worse investor sentiment towards hospitality and tourism industry in China, as well as worsening earnings visibility as industry faces oversupply issues.
　　We maintain BUY as we believe HTHT’s ability to generate high ROE and operating cash flow with its asset-light model, together with the latest shareholder return plan could provide revisit opportunities.