China’s 2023 government work report states that the country will focus on expanding domestic demand and prioritize restoring and expanding consumption. The Ministry of Commerce has declared 2023 as the “Year of Consumption Boost,” proposing ways to improve consumption conditions, create innovative consumption scenarios, cultivate a consumption atmosphere, and boost consumer confidence. With tourism being a critical aspect of post-pandemic consumption, the hotel industry will play a significant role in restoring and expanding consumption.
After the lifting of pandemic lockdowns, the market rebounded exceptionally quickly. According to Horwath HTL’s “China Hotel Market Sentiment Survey Report for First Quarter of 2023,” released in February of the same year, the overall market sentiment index has returned to positive territory for the first time in three years. In addition, the domestic hotel market has demonstrated a clear trend toward recovery, with many operators maintaining optimistic attitudes about the market.
Maintaining resilience in the face of pandemic challenges and achieving an 8.4% increase in 2022 revenue
H World Group Limited managed to overcome pandemic-related difficulties in 2022, maintaining its resilience and achieving excellent financial results. H World Group Limited (NASDAQ: HTHT)(HKEX:1179) (“H World” or the “Group”) recently released its financial results for the fourth quarter of 2022 (“Q4-22”) and the entire year of 2022 (“FY22”). Revenue increased by 10.7% year-over-year to RMB3.7 billion in Q4-22, in line with the previously announced revenue guidance of a 7% to 11% increase compared to Q4-21 and increased 8.4% year-over-year to RMB13.9 billion for FY22. Hotel turnover surged by 10.5% year-over-year to RMB13.1 billion in Q4-22 and increased 9.3% year-over-year to RMB49.6 billion for FY22.
He Jihong, the Group’s Chief Financial Officer, stated, “Despite the challenges posed by the Covid-19 pandemic in China, the Group was able to achieve Adjusted EBITDA of RMB 610 million, Adjusted EBITDA before non-cash impairment and forex loss was RMB 1.74 billion. This accomplishment can be attributed to the strong recovery of our international business, as well as rigorous cost reduction efforts across the Group implemented both at the hotel level and within our headquarters.”
H World Group’s Europe-based business experienced a great recovery since its reopening in February 2022. Deutsche Hospitality (DH) saw a 22.9% increase in Average Daily Rate (ADR) and a 96.2% increase in full-year blended revenue per available room (RevPAR) compared to 2021. In the fourth quarter, Steigenberger hotels located in Qatar and Egypt drove the rebound of the blended RevPAR to 110% of 2019’s performance. Additionally, the Legacy-DH segment’s revenue in 2022 reached RMB3.2 billion, reporting a 108.5% year-over-year increase with an adjusted EBITDA of RMB134 million before impairment and unrealized losses.
Jin Hui, the CEO of H World, stated the Group displayed resilience while expanding its portfolio of new hotels in the face of pandemic challenges. The Group remained committed to its “Sustainable Quality Growth” strategy, opening 1,244 new hotels in 2022 while continuing to upgrade its existing brands’ facilities to enhance the user experience. Additionally, Legacy-Huazhu established six regional branches as part of its organizational upgrade, strengthening its foundation for full market penetration and high-quality operations in the future. The Group exercised reasonable cost control measures, achieving a rental reduction of about RMB300 million in 2022. Even in the most challenging times in the industry, H World prioritized its franchisees as crucial partners of the Group’s business. As such, the Group waived the franchise fee of around RMB 300 million for its franchisees.
China’s consumption and economic recovery are strong; H World is confident in the potential of the Chinese market
The tourism and hotel industry in China has experienced a remarkable rebound following the lifting of the pandemic lockdown, with popular tourist cities becoming crowded, hotel occupancy rates rising, market investment transactions becoming active, and brands actively upgrading and expanding.
Jin Hui highlighted the hotel industry’s recovery following the easing of the pandemic lockdown. Especially during the Spring Festival, the recovery of China’s entire consumer market, especially the travel and vacation market, was highly robust. Moreover, the recovery is noticeable in economy-class, upper-midscale, and resort markets.
According to the Business Travel Outlook Survey for the first quarter of 2023 published by the Global Business Travel Association (GBTA), corporate travel spending is expected to increase in 2023, with many companies sending more employees on business trips. Additionally, sectors such as finance, insurance, professional services, and consulting are expected to experience robust growth in travel spending. A new GBTA survey of more than 600 travel buyers, travel suppliers, and industry professionals worldwide indicates that the business travel industry will continue to recover. Although business leaders have had to face a recessionary situation, three-quarters (78%) of respondents expect their companies to do very much (22%) or more (55%) business travel in 2023 compared to 2022. Only 15% anticipated the same level of business travel compared to the previous year, while 7% expected to travel less. Furthermore, 90% of respondents believed their employees were willing to travel for work, and 88% of respondents were more optimistic about the recovery of the business travel industry than the previous month.
Despite the economic slowdown in China in 2022 due to the pandemic and other factors, the international community generally believes that China’s economic and social dynamics will be further released as the pandemic enters a new phase of prevention and control. As such, China is expected to continue being a “stabilizer” and “engine” of growth for the world’s economic recovery. The American Chamber of Commerce in China, the British Chamber of Commerce, the German Chamber of Commerce, and many other foreign chambers of commerce in China said that China’s adjustment of its pandemic prevention policy would help restore the flow of people and business travel between China and abroad and restore market optimism and that China would continue to be a priority investment destination for foreign investors. The World Bank’s latest China Economic Briefing concluded that with the deterioration of global demand growth, the aggregate demand structure of China’s economy is expected to shift gradually towards domestic demand. As consumer confidence improves and suppressed consumer demand is released, consumption will gradually recover, while infrastructure investment spending and rebounding investor sentiment will drive investment growth to pick up.
The World Travel & Tourism Council (WTTC) predicts that China will have the world’s largest tourism market by 2032, and China was also one of the largest markets before the pandemic. The 14th Five-Year Plan for Tourism Development in China clearly outlines the government’s efforts to improve the tourism product supply system, stimulate the vitality of the tourism market, and create a new situation of multi-industry integration and development. The Chinese government will also expand the public tourism consumption system, improve tourism consumption services, and better cater to the multi-level and diversified needs of the people.
China has long been a top destination for inbound tourism and a significant source of outbound tourism, generating substantial revenue for the international tourism industry. As per relevant platform data, the volume of air tickets for some popular overseas destinations has increased significantly, and the demand for inbound tourism, visiting relatives, and business is being released. The Ministry of Commerce of China aims to collaborate with all stakeholders to create better conditions for the safe, healthy, and orderly movement of Chinese and foreign personnel, making positive contributions to developing international tourism and the world economy’s recovery.
Regarding the post-pandemic era’s prospects for China’s hotel industry, Jin Hui is confident in the Chinese market, given the overall supply’s rise due to China’s long-term economic growth. The Group still holds optimistic expectations for the market in 2023, especially after the pandemic, and investor confidence is rising in the industry’s overall recovery. In 2023, the Group aims to strengthen its foothold in the Chinese market and strive to maintain a positive development trend. Jin Hui acknowledges that hotel operations are in a long cycle, and companies need to maintain resilience during that period. He believes that on the one hand, the Group must continue to enhance the core competitiveness of enterprises. On the other hand, companies should innovate and adapt to different times and changes, matching the environment and challenges, to constantly pursue innovation and breakthroughs around customer needs.
Insisting on “Sustainable Quality Growth”, with a network of high-quality hotels, upper-midscale brands layout, and digital management improvement progressing together.
In 2023, H World aims to strengthen its foothold in the Chinese market with a strategic focus on “Sustainable Quality Growth.” To achieve this, the Group has identified three key areas: expanding its network of high-quality hotels, empowering upper-midscale brands, and upgrading its platform organization and digital operating system.
First, the Group will continue to expand its network of high-quality hotels. As the development of lower tier cities lags behind that of first and second-tier cities in China, the regional distribution of the hotel industry is relatively uneven. However, with China’s economic development, urbanization, infrastructure construction, and logistics systems improving along with the increase of disposable income of residents in lower-tier cities, the lower-tier cities are developing unprecedented consumption potential. Thus, the Group will focus on developing and penetrating the lower-tier cities in China.
As of 2022, the number of Legacy-Huazhu hotels in China was 8,411, which is a net increase of 705. The number of hotels operating in lower tier cities increased to 38%, compared to 2021’s 37%. The number of hotels under development was 2,544, of which 57% were lower tier cities compared to 56% in 2021. The number of cities covered by hotels in operation and under development increased from 1,062 at the end of 2021 to 1,126 at the end of 2022.
Second, the Group plans to accelerate the deployment of upper-midscale hotels as consumers increasingly demand more and better experiences and quality offerings. To meet these demands, the Group aims to gradually form leading brands in the entire upper-midscale market in China by sorting and adjusting its current brands like Crystal Orange Hotel, IntercityHotel, MAXX, Manxin Hotel, Mercure, and Novotel. By the end of 2022, the Group has 523 upper-midscale hotels in operation and 287 upper-midscale hotels under development. The resort market is also a great concern to the Group. The Group has initiated comprehensive cooperation with many real estate enterprises and many government cultural tourism enterprises in China. The development of the resort market, its growth, and the establishment of the brand are all of great importance. Brands like Blossom House will be given good market placement and development opportunities.
Third, the Group recognizes that the digital economy represents the future direction of industrial development. In the highly competitive hotel industry, hotels can only maintain the leading position in the market by providing differentiated services. The application and popularization of digital technology in hotels can help the hotels build a younger, more convenient, and more fashionable image, with the hotels’ service, marketing, and management mode more in line with the needs of mainstream customers.
The H World Group aims to build on the strong membership and traffic of H Rewards by exploring its potential and enhancing the benefits and services available to its members. As part of this plan, version 4.0 of the H Rewards program was launched in 2022, providing customers with new features such as intelligent laundry services, remote reservation options, and real-time updates on laundry status. This digital system offers increased convenience and value to customers. The percentage of online services has increased from 21% in 2021 to 71% in 2022. Additionally, the Group is utilizing digital and intelligent management tools to increase efficiency and reduce costs, including reducing the employee-to-guest ratio and streamlining operations.
International business is enjoying a strong recovery while the Group will continuously recruit top talent worldwide
In February of 2022, the European pandemic policy was released, providing new possibilities for overseas business development. He Jihong mentioned that the progress of the Legacy-DH business has increased rapidly due to the gradual resurgence of the market, with a significant upturn in RevPAR and revenue. The profit margin of the Legacy-DH business has significantly improved owing to the cost management and efficiency enhancements, indicating a shift from a loss to profit from operations. In the future, the Group will strive to enhance its member movement strategy, increase investment in the direct channel sales, and additionally better management efficiency while reducing operating costs via Group Digitalization.
Jin Hui highlighted that the Group would seek to integrate the Deutsche Hotels business more effectively and establish this business as the core of its overseas operations. The Group would also focus on creating a recognizable brand image for this business and maintaining its profitability in Germany, Europe, and the Middle East.
Furthermore, attracting high-end talents can effectively enhance the competitiveness of enterprises. Jin Hui noted that the Group constantly emphasizes cultivating a team of exceptional talents. In the era of change, building an agile and efficient organization and talent reserves to ensure a high-quality customer experience is the most vital challenge. The hotel industry needs numerous outstanding managers to lead it. Therefore, the Group recognizes the importance of recruiting talented individuals capable of providing first-rate service and adapting to the changing times.
Currently, the Group has emerged as the leading hotel chain in China. Jin Hui stated that the next phase of the Group’s management goal would be to bring China’s hotel industry to global standards and heights. To accomplish this, the Group must keep up with world-class companies in terms of management philosophy, talent requirements, and organizational capabilities.
The Group has always accorded significant importance to the growth and training of front-line staff and actively participated in school-enterprise cooperation initiatives. In 2021, the Group achieved the distinction of being one of the school-enterprise cooperative partners recognized by the Chinese Ministry of Education, with their cases featured in the syllabus of various universities. Furthermore, the Group plans to scour Asia and the world to find exceptionally talented professionals with diverse backgrounds and expertise. The Group is confident that continuous innovation in business models and products can help it overcome any challenges and generate sustainable and high-quality growth for investors and the ecosystem at large. He Jihong also expressed her anticipation for the Group’s future development, estimating a 61-65% growth in net revenue for Q1 2023 compared to Q1 2022, with the gross hotel opening target estimated at 1,400 hotels. Ji Qi, the Group’s Executive Chairman, affirmed that the Group would further strengthen the Group’s core competencies in operations and various platforms to build overall resilience.
