Although most operating metrics were slightly ahead of our expectations, HTHT 4Q24 reported EBITDA of RMB974m (-28% YoY) was below our expectation, due to one-off RMB420 impairment loss of the overseas business unit Steigenberger Hotels (DH). HTHT will transform more hotels under DH from leased and owned model to light asset model. Hence, while 2025 revenue guidance of 2-6% YoY may seem low, we do expect the shift of business model will translate into stronger earnings due to lower overheads. The guidance for the domestic business is also upbeat, as net opening of 1,900 (+17% YoY) is very strong, and we expect the company will enjoy both rapid expansion and a rebound of room rate/RevPAR in 2H25.
　　Key Factors for Rating
　　4Q24 disappointed due to one-off restructuring cost. Although 4Q24 revenue of RMB6,023m (+7.8% YoY) is better than our expectation and its guidance of +1-5% YoY, reported EBITDA of RMB974m (-28% YoY) is a disappointment, mainly on the RMB417m impairment loss on the Legacy-DH segment, reflecting challenges of the overseas business. Excluding this, we view that the domestic business Legacy-Huazhu is above expectations, as shown in the adjusted EBITDA of RMB1,493m (+17.6 YoY), showing some cost resilience despite the headwind of softer room rate in 4Q24 (-3.2% YoY).
　　A big transformation of overseas business model. Because of the ongoing underperformance of Legacy DH unit, HTHT had conducted an overhaul on the business model: (i) laying off admin staff by 30%, and (ii) removing 14 leased and owned (L&O) hotels from the portfolio and transformed into asset light manachised and franchised (M&F) hotels. It has further removed 11 L&Os in Feb 2025, and we expect 47% of the 122 hotels under DH will be M&F model. We believe this will be a rather positive move if executed properly, as the HQ of HTHT will no longer bear the overheads of overseas hotels, which could be burdened by higher inflation in Europe.
　　2025 guidance seems weak, but actually is not. Because of the removal of L&O hotels (which records higher revenue but could be less profitable), HTHT expects 1Q25 revenue to be +0-4% YoY, while full year 2025 will be +2-6%. This may seem weak at first glance, but it also stated that revenue from M&F revenue to grow by 18-22%/17-21% YoY in 1Q25/2025. This change of revenue mix is likely positive in the long run, as we expect the revenue from M&F will have more direct impact on overall EBITDA and earnings.
　　Upbeat hotel openings in China. HTHT also expected a gross opening of 2,300 hotels and closure of 600 in 2025, representing a net opening of 1,900 hotels, a YoY of 17% over the 11,025 hotel network in China. We believe this is stronger than expected, reflecting a bullish sentiment of its franchisees. This will also translate into stronger revenue if room rate improves in 2H25, in our view.
　　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 FY2025-26 EBITDA forecasts by -3.3%/+0.4% mainly on the adjustment of its business models to focus more on M&F hotels overseas, and also the latest guidance.
　　Our TP is revised to US$40.90/HK$32.10 which is based on 12.5x 2025E EV/EBTIDA. Our latest target multiple is close to 0.6 standard deviation below the 5-year EV/EBITDA average of 14.9x.