Despite still facing the industry-wide problem of hotel rooms oversupply, HTHT still managed to achieve an 11% YoY growth in adj. EBITDA. Together with a US$250m dividend declared for 1H25 (payout ratio: 73.5%), we see this a positive sign reflecting the Company’s strong capability to navigate through a down cycle. While HTHT has tuned down the expectation of full year’s RevPAR trajectory (down LSD YoY instead of flattish), it reiterated its unchanged full-year revenue guidance of +2-6% YoY thanks to strong franchise network expansion. Against this backdrop, we expect EBITDA growth would remain resilient as it continuously pushes for cost optimisation and transformation towards asset-light model. Reiterate BUY as we believe the recent share price weakness due to unfavourable weather in 3Q could provide a better entry point for HTHT.
　　Key Factors for Rating
　　2Q25 performance slightly above expectations and its guidance. 2Q25 revenue was up +4.5% YoY to RMB6,426m, reaching the high-end of its previous guidance (+1%-5% YoY). This is achieved by the better-than-expected performance of China operations Legacy-Huazhu, with its segment revenue up +23% YoY, slightly above its guidance. In the meantime, with the scaling down of asset-heavy leased & owned hotels (L&O) and strong control of SG&A, 2Q25 adj. EBITDA increased by 11% YoY to RMB2,270m, which is slightly above our expectations, given a challenging environment in 2Q25. HTHT also announced US$250m interim dividend, which is equivalent to 73% of the reported 1H25 NP, as well as a US$62m buybacks, which we see as confidence boost to investors.
　　Industry still not out of the woods, and hence a guidance tune-down. In 2Q25, Legacy-Huazhu’s blended RevPAR declined by 3.8% YoY. It still suffered from the industry-wide issue of oversupply of hotel rooms, and hence both ADR and occupancy rate declined by 1.9/1.6ppts. Considering the adverse weather since July and weak macroeconomic environment, HTHT still expected RevPAR in 3Q25 to be negative, despite some QoQ improvement. It also expected full year RevPAR to be down LSD YoY, and this is a tune-down when its previous judgment in Mar 2025 (flattish to slight improvement) is considered. However, with the introduction of 3Q25 revenue guidance (+2-6% YoY), HTHT maintained its full year revenue guidance (+2-6% YoY) intact. Together, we believe the overall impact to share price is neutral.
　　Accelerating the transformation towards asset-light model. HTHT for the first time disclosed its profit mix, where L&O hotels’ share of gross operating profit declined by 7ppts YoY to 31% in 2Q25, a sign of HTHT tilting towards manachised and franchised model (M&F, 64% in 2Q25). We expect HTHT will accelerate its exit of L&O hotel contracts in both China and Europe to ensure its profit to be more stable, less vulnerable to industry cycles and RevPAR shocks.
　　Operations-wise, more breakthroughs to grab market share. HTHT has achieved significant progress in its product development during 2Q25, including: (i) the launch of Hanting 4.0, with a more modern stylish look but a more affordable hotel investment for franchisees, and (ii) InterCity, the upper midscale product, achieved 57% YoY growth of hotel count to 187 while achieving +ve RevPAR growth, a rare case in the industry. We see these compelling signs of HTHT being competitive in the hotel market, where it could lure more franchises to join its network. We still expect HTHT to have a gross opening of 2,300 in 2025 and the total hotel count could reach 12,820 by end of 2025, implying a 15% YoY increase, and this could also support its M&F revenue to achieve >20% in full year basis.
　　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 slightly adjust up our EBITDA forecasts by 4%/2%/2% for FY25/26/27 after 2Q25 results as HTHT’s initiatives in cost savings exceeded our expectations.
　　Our TP is revised to US$42.90/HK$33.70 which is based on 12.5x 2025E EV/EBTIDA (unchanged). Our latest target multiple is close to 0.4 std below the 5-year EV/EBITDA average of 14.1x.
　　We reiterate BUY as we believe HTHT’s valuation has turned more attractive (<10x 2025 EV/EBITDA) while its dividend yield of c.4% could be more appealing to investors. We also expect HTHT to be among the best positioned in the industry for the upcoming industry turnaround thanks to its competitive products.