H World: Focus On Short-Term Outlook And Long-Term Prospects

Core Viewpoint - H World Group Limited (NASDAQ:HTHT) maintains a Hold rating due to a lackluster short-term outlook for Q2 2024, while still having favorable long-term growth potential driven by expansion into new Chinese cities and a shift to a capital-light model for overseas operations [2][7] Short-Term Outlook - H World has guided for Q2 2024 top line growth of +7% to +11% YoY in RMB terms, a decline from +18% YoY growth in Q1 2024 [3] - The company expects "flattish to slightly negative" RevPAR growth for its Mainland Chinese hotel operations in Q2 2024, contrasting with a +3% YoY RevPAR increase in Q1 2024 [3] - The overall performance of the Mainland Chinese hotel industry was weak during the Labor Day holiday, with RevPAR and occupancy rates decreasing by -5% and -430 basis points, respectively [3] - The Chinese hotel sector's Labor Day holiday ADR was -12% lower compared to the previous year, attributed to increased market supply and outbound travel diversion [4] - Selling and marketing expenses rose by +33% YoY to RMB260 million, increasing the S&M costs-to-revenue ratio from 4.4% in Q1 2023 to 4.9% in Q1 2024 [4] Long-Term Growth Potential - Analysts forecast H World's revenue and normalized operating profit to grow at CAGRs of +10% and +18% from FY 2023 to FY 2027, with normalized operating margin projected to improve from 21.5% in FY 2023 to 28.3% in FY 2027 [6] - The company is expanding into lower-tier Chinese cities, with the proportion of hotels in these cities increasing from 39% in Q1 2023 to 40% in Q1 2024, and 54% of hotels in the pipeline located in lower-tier cities [6] - H World aims to have hotels in 2,000 Chinese cities in the long run, having already established a presence in 1,290 cities as of March 31, 2024, up +14% from the previous year [6] - The overseas business is transitioning to a capital-light model, moving from leased and owned hotels to franchised hotels, which is expected to enhance overall operating profitability [6] Valuation Comparison - H World currently trades at 14.4 times consensus next twelve months' EV/EBITDA, comparable to peers such as Hyatt Hotels at 14.3 times and Marriott International at 15.4 times [7]