Despite 3Q24 revenue (+2% YoY to RMB6.4bn) in-line with previous guidance, adjusted EBITDA of RMB2.1bn (-9.5% YoY) was weaker than expectations, suggesting some operating deleverage. We view the results largely an issue of high base in 2023 and an industry-wide issue of higher hotel supply, and HWG still managed to achieve some outperformance. Such supply issue is expected to moderate in 4Q24, but would still have impacts on its near-term earnings. Hence, HWG’s 4Q24 guidance of achieving revenue YoY growth of 1-5% may arouse some concerns on earnings for the full year of 2024. However, we expect 2025 could be a better year for HWG as industry dynamics bottom out, while HWG itself would also achieve some cost savings through internal reforms. Hence, we view that patience would be needed for the stabilisation of operating metrics and valuation.
　　Key Factors for Rating
　　3Q24 results below expectations as adj. EBITDA dropped 9.5% YoY. Despite revenue growing 2% YoY to RMB6,442m, HWG’s adjusted EBITDA dropped 9.5% YoY to RMB2,113m, below our expectations of flattish performance. The decline of adj. EBITDA reflected: (i) operating deleverage as operating metrics like RevPAR recorded a 8% YoY decline; (ii) higher share- based compensation to attain key staff; (iii) a very high base in 3Q23 due to pent-up demand after re-opening of China, and (iv) an one-off RMB81m restructuring expenses that occurred in the overseas segment Legacy-DH.
　　Near-term outlook still cautious as industry issues unsettled yet. Although there are signs of higher industry supply now being absorbed by the market and the industry room rate is bottoming out in 4Q24, HWG remained cautious in the near-term earnings, expecting 4Q RevPAR to be down mid-S.D., and gave a prudent 4Q24 revenue guidance (+1-5% YoY). It also expected the trend of RevPAR may stabilise in 2025, so 2025 RevPAR level will be at least the same as 2024. We expect this will at least stabilise the same-hotel performance in 2025, also thanks to high base effect no longer in play.
　　Still in the phase of rapid hotel expansion. Although RevPAR and earnings recorded YoY decline in 3Q24, HWG has in fact accelerated its hotel opening. In 3Q24, gross/net opening in China reached 774/557, and total hotel count reached 10,707 by end of 3Q24, an 18,6% YoY increase. Hence, we believe such increase of hotel count would still support earnings growth in the near term if RevPAR stabilises in 2025. On the other hand, mgmt. also raised the gross opening target to 2,400 for FY2024. We estimate that by end of 4Q24, total number of hotels under HWG will reach 11,149, or a 19% YoY increase. With newer hotels taking time to ramp up, we expect the maturing hotels will also contribute to overall RevPAR positively.
　　Restructuring to help cost savings. In 3Q24, HWG conducted a restructuring on Legacy-DH segment, as HQ administrative staff headcount was reduced by 30%. This incurred a one-off cost of RMB81m (equivalent to 3.8% of adj. EBITFA in 3Q24), and the company expected the cost savings would be more visible in 2025. We believe this could at least improve overall expenses ratio in 2025, offsetting some potential impact of industry headwinds in China.
　　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 revise our FY2024-2026 EBITDA forecast by -5%/+2%/+2 to reflect: (i) weakness of RevPAR in 2024; (ii) weaker operating leverage in 2024 as we expect margins may worsen under keen competition, and (iii) likely better performance in 2025-2026 due to faster than expected hotel expansion and also cost savings in Europe and HQ level.
　　Our TP is revised to US$42.9/HK$33.7, which is based on 12.5x 2025E EV/EBTIDA (previous: 12.5x 2024E EV/EBITDA). Our latest target multiple is close to 1 standard deviation below the 5-year EV/EBITDA average of 16.0x
　　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. We also view that 2025 is likely a better year in terms of YoY growth, as 2024 is affected by high base effect. This bottoming out of YoY growth numbers should support valuation, in our view.