HTHT’s 1Q25 results are largely in line with its guidance and market expectations, as revenue/adj. EBITDA increased by 2%/5% YoY respectively. The results reflected two issues: (i) in China, the increase of hotel supply still weighs on RevPAR, and (ii) its overseas business Legacy-DH is still under pressure despite the new asset-light strategy. We believe these will ease over time and so the worst is over. In order to protect same-store earnings, HTHT is also adjusting its strategy to restrain hotel opening and so it reiterates its full-year hotel opening target of 2,300 and emphasises on the expansion of upper midscale segment. Hence, while we expect the near growth numbers may remain unexciting, we believe the gradual improvement of industry numbers should also help HTHT to re-rate. Maintain BUY.
　　Key Factors for Rating
　　1Q25 results largely in line as numbers affected by mix change. HTHT’s 1Q25 revenue/adj. EBITDA were up 2%/5% YoY to RMB5,395m/1,496m respectively, in line with their revenue guidance (+0-4% YoY). Aside from weaker room rate in China under industry supply woes, the overall revenue was also impacted by the transformation of leased and owned (L&O) hotels to manachised and franchised (M&F) hotels, a mix change where HTHT receives less room fee in return for franchising fee. Excluding this, the overall performance of M&F hotels (+21%) is slightly above our expectations, reflecting strong demand from leisure and new hotel openings (YoY: +1,880 or 19%).
　　2Q25 guidance still cautious, but we expect potential upside in 3Q. HTHT guided that 2Q revenue would increase by 1-5% YoY, while maintaining full-year hotel opening target of 2,300. Given 694 hotels were already opened in 1Q25, this suggests some tapering of openings in 2Q-4Q, and mgmt. explained this is to ensure the profitability of their hotels. Overall, we believe this prudent guidance is largely anticipated already, as higher new hotel room supply still takes time to solve. However, according to data provider STR, recent industry figures suggested that RevPAR decline during May Labour Day holiday has narrowed sequentially, and we believe this could mean 3Q guidance could be better if RevPAR trend continues to improve.
　　Stronger leisure performance may offset weakness in business travel under new strategy. While 1Q25 RevPAR was also weighed by weak business travel demand, mgmt. also commented that demand from leisure has remained strong, as suggested by industry performance during holiday. We believe this will drive HTHT to focus more on upper midscale segment through brands such as Intercity, Novotel and Mercure. In fact, hotel in operation of this segment grew 36% YoY to 933 in 1Q25, and we expect this will be one of the focuses for HTHT to lift its overall blended RevPAR. So far, this strategy has worked as HTHT outperformed the industry in 1Q25, and we expect the same for the rest of 2025.
　　Key Risks for Rating
　　Key downside risks to our views 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 FY2025-27 EBITDA forecasts by +3.6%-4.2% to reflect better- than-expected M&F performance of Legacy-Huazhu segment in 1Q25.
　　Our TP is revised to US$41.80/HK$32.80 which is based on 12.5x 2025E EV/EBTIDA (unchanged). Our latest target multiple is close to 0.6 standard deviation below the 5-year EV/EBITDA average of 14.7x.