Atour Lifestyle Holdings Limited

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Atour Lifestyle Holdings Limited is a Chinese hospitality company that operates a chain of mid-to-upscale hotels through a “Scene-based Lifestyle” brand. It offers a variety of services, including retail sales of lifestyle products, and operates primarily in China.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Atour Lifestyle Holdings Limited is incorporated in Cayman Islands. Their revenues are primarily RMB. It is very important to consider currency fluctuation between US dollar and RMB.

Business Overview:

Atour Lifestyle Holdings Limited, operating under the ticker symbol ATAT, is a leading hospitality company in China, distinguishing itself through its focus on “Scene-based Lifestyle” hotels. The company operates a diverse portfolio of brands catering to different market segments, including Atour Hotel, Atour Light, and ZHotel, all while also running “Atour S,” an upscale brand with hotels based on themes. Unlike some hotel chains, ATAT does not franchise its hotels, which allows the company greater control over brand and quality.

  • Revenue Streams: Atour generates revenue through several primary avenues:
    • Leased hotels: Revenue from providing hospitality services in properties leased to the company.
    • Managed hotels: Revenue from a combination of fees and operational income based on properties managed by the company but not leased to it.
    • Hotel products and services: While primarily focused on operating hotels, Atour also generates revenue through its e-commerce and retail platform, primarily selling its branded hotel products.
    • Other Revenue: Other revenue primarily comprised of franchising fees and other services provided by company subsidiaries.
  • Industry Trends: The Chinese hotel industry is experiencing a shift towards mid-to-upscale segments as travelers seek unique and brand-focused experiences. The market shows signs of recovery post-COVID, though this is still affected by consumer confidence and regional economic conditions. There has been a steady growth in the hospitality industry, and the sector in China is expected to continue on this trend.

Atour has a unique position in China. Unlike their competitors, ATAT’s focus is a “scene-based” lifestyle, allowing them to develop themed hotels targeted toward specific audiences.

  • Competitive Landscape: The industry is competitive, marked by large international chains, domestic brands, and smaller boutique hotels. The competition for Atour includes major hotel chains such as Hilton, Marriott and others. Competitiveness is also based on pricing, location, and reputation.
  • What Makes Atour Different:
    • Scene-Based Lifestyle: This is ATAT’s primary differentiation point. Each hotel is designed around a specific theme, appealing to a particular traveler segment.
    • Direct Management: Unlike many other chains, ATAT does not franchise its hotels, opting for a direct management model that gives them more control over brand quality and the experience offered.
    • Strong Brand Loyalty: Atour has garnered significant customer loyalty, leading to stable demand and higher occupancy rates.

Financials:

A deep dive into Atour’s financials is crucial to understand its stability and growth potential. Here is the financial profile for ATAT, based on the most recent reports and earnings calls:

  • Revenue Growth: ATAT has shown steady revenue growth over the past few years. Revenue increased to 7,358.7 million in 2023, representing a 52.8% increase YOY.

The increase in revenues was primarily due to the increase in the number of leased and managed properties, from 834 at the beginning of 2022 to 1,134 as at the end of 2023. Occupancy rate also improved for the full-year 2023 by 11.3 percent points to 78.8%.

  • Profitability: ATAT shows signs of profitability after recent investments. Operating profit in 2023 was RMB134.9 million while Net profit for 2023 was RMB320.8 million. The core driver of this was increases in occupancy rates and the higher average prices that the company was able to command. In Q423, net profit was RMB156.5m.
    • The company’s margins have been fluctuating in recent times, although Q423 saw good recovery on these metrics. The full-year figures for 2023 demonstrate improved margin performance on several of its product lines as well.
  • Cash Flow: Despite the fluctuations and recent losses from certain areas, the company remains positive in terms of operational cash flow. Full-year 2023 generated RMB1,575.5m in cash flows. However, it’s also worth noting that the company has a decent level of capital expenditure and other operational expenses.
    • ATAT is planning on a measured pace of expansion.
  • Debt: As of the most recent reports, the company maintains a relatively small level of debt, as much of their investments are through a combination of equity and other credit options, but they are still exploring more long-term borrowings, and this means that the company has low leverage.

A recent report outlined that “cash flows from financing” were negative, meaning that the company was in a net position of paying down debt rather than taking on new debt. This is a positive sign of strong business fundamentals.

  • Future Projections The company plans to continue expanding into the lower tier cities across the Chinese mainland. They are committed to sustainable and long term growth by offering more innovative products, services and customer experience.

Moat Rating: 2 / 5

Atour possesses a narrow moat, with some characteristics of a stronger one, but there are major factors that limit it. The company is trying to develop a brand-oriented hospitality model, but it is not easy to quantify or fully establish a wide moat.

  • Intangible Assets: ATAT’s brands, such as Atour Hotel and Atour Light, offer some level of differentiation, and provide premium pricing and repeat customers. However, the strength of this brand loyalty and the ability to command a premium over long term is still unproven.
  • Switching Costs: There are limited switching costs, primarily for companies that use their services repeatedly. ATAT’s target market, who are generally not brand conscious when they travel, can often easily shift to competing hotels, as well. This lowers their moat significantly.
  • Network Effects: Although the company has its unique “scene-based” system and its own platform, the current market doesn’t exhibit clear network effects. The appeal of their brand can help, but that is limited and is still not as established as other major hotel chains.
  • Cost Advantages: ATAT does not have substantial cost advantages over its competitors. The company’s ability to expand efficiently has helped them in some areas, but others are also capable of cutting down operational costs by virtue of technology, scale, or better operational efficiencies.

Risks to the Moat and Business Resilience:

Atour’s moat is vulnerable to several risks, including:

  • Competition: The hospitality sector in China is intensely competitive. International chains and strong domestic players can easily reduce ATAT’s pricing power and margins. * The company also faces the increased need to improve quality, services, and operational efficiencies.
  • Replicability: Although Atour has a focus on creating unique hotels, the concept of theme-based hotels is not that difficult to imitate. Their focus on customer experiences too is easily imitable. This can potentially reduce the strength of their moats.
  • Economic Slowdowns: Macroeconomic downturns or economic policies that restrict spending can substantially impact demand for hotel stays, reducing their revenue.
  • Reliance on China: The company’s reliance solely on the Chinese market exposes it to regional economic or political risks. Changes in government policies and sudden lockdowns are other key risks.
  • Brand Image: A bad reputation or customer experience can easily affect the brand value, which is a key driver of its ROIC.

However, Atour does have some resilience factors as well. The company’s consistent growth in number of hotels, combined with increased occupancy rates shows that they have an ability to improve business fundamentals. It is also quite unlikely that the current market leaders would drastically change their models, and this puts a buffer into place.

Understandability: 3 / 5

Atour’s business model is moderately complex. While the idea of hotels, especially theme-based hotels, is easily graspable, the financial aspects such as lease arrangements, debt and financial operations, are not particularly simple and straightforward. The presence of non-consolidated subsidiaries also makes understanding their business more difficult than some. Their focus on the Chinese market also poses some language barriers for most outside the region.

Balance Sheet Health: 4 / 5

Atour maintains a healthy balance sheet with enough cash to cover most of its needs and debts. The liabilities, both short-term and long-term are also very manageable, which puts them in a reasonably strong position. While the company is exploring other means to increase their cash balances, such as issuing further equity in the future, they are still very secure. As a result, the company is in a healthy state with a good buffer for future uncertainties.