H World Group Limited

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

H World Group Limited is a hotel operator primarily based in China, but also with operations internationally, operating three different types of hotels across different markets.

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.

Business Overview

H World Group Limited, formerly known as Huazhu Group Limited, is a significant player in the Chinese hotel industry, with a growing international presence. The company operates a multi-brand hotel portfolio ranging from economy to upscale segments, aiming to cater to a diverse customer base. They operate through various models, including leased-and-operated, franchised-and-managed, and manachised hotels.

  • Revenues

    H World’s revenue streams primarily come from the following:

    • Leased and Owned Hotel Revenue: This segment generates revenue directly from hotels the company leases or owns, offering consistent operating performance.
    • Manachised and Franchised Hotel Revenue: The revenues from these sources are generated from fees and commissions collected from franchisees, offering a lighter-capital model.
    • Other Revenues: Primarily from services and goods sold through hotels.

The company has three key brands, Hi Inn, Han Tang, and Ji Hotel, which represent 78% of its revenue. Other brands are mostly focused in China, and a new mid-range brand, Man Xin, is being developed, focusing on the experience for Chinese customers.

  • Geographical Distribution

While its core market is China, the company has been actively expanding into other parts of Asia and Europe, including countries like Singapore, Germany, and Indonesia, creating diversification from a geographic perspective. Their largest market outside China is Germany.

  • Industry Trends and Competitive Landscape

    The hotel industry in China, as in many other places, has seen a resurgence after the COVID-19 pandemic, with domestic travel recovering faster than international. Growth in the Chinese domestic travel market was very impressive in 2023. However, it faces challenges from macroeconomic headwinds, potential resurgence in the pandemic, geopolitical instability, and increasing competition from lower-priced brands.

    The competitive landscape is intense, with H World competing against a mix of domestic and international chains as well as independent hotels.

    • Competitive differentiators: They try to differentiate through a localized menu/brand and digital tools aimed at a young audience, using their “China DNA” for better understanding of those markets.

    • They are expanding into lower-tier cities, which is an advantage because they will get the growth in their smaller markets.
    • Focus on chain penetration, which is key to maintain market share.

  • Financial Performance

    While the most recent annual report is not available yet, we can take some information from the third quarter 2023 (released on November 14th, 2023) earnings call and their 6K filed on September 28th, 2023:

    • Revenues reached a record of RMB 5.6 billion, with a 40% YoY growth.
    • EBITDA reached RMB 1.9 Billion, with a margin of 32%.
    • They’ve been proactively optimizing operations and boosting profits by streamlining supply chain and focusing on higher-quality hotels.
    • They are rapidly expanding and opening new hotels in both china and globally. * They have 8,795 hotels open, and 2,700 hotels in pipeline.
    • They have increased their presence in the mid-scale market to serve more customers who are traveling for business, particularly in China.

The latest 6k filing from November 2023 notes: * Revenues were 5.4 Billion RMB * EBITDA was 2 Billion RMB * Net operating income was 1.25 Billion RMB * Total assets were 26.88 Billion RMB * Total liabilities were 17.97 Billion RMB

  • Recent Concerns/Controversies

There were mentions in the last earnings call about potential financial risks, specifically uncertainty surrounding the Chinese economy. It is important to keep in mind, however, that their expansion plans and growth projections take into consideration the market uncertainty, and they are working to streamline their financial operations.

They are also having an increase in labor costs, which is why the focus is on increasing occupancy levels and operational efficiency.

The geopolitical landscape and regulatory issues in China were touched upon, and though are a source of uncertainty, the business is confident in continued growth in the China market.

  • What makes HTHT different

    • H World uses a multi-brand strategy spanning the entire lodging industry and can therefore cater to a larger user base.
    • The scale of its network allows it to capture higher brand recognition and attract more clients.
    • The company focuses on digitization and technology to improve customer experience and reduce operating costs.

  • Moat Analysis

    While H World has some advantages, these do not add up to a durable economic moat. The hospitality sector is known for its intense competition and low switching costs, therefore their brand strength (for now) and scale (with many hotels, in various tiers) does not create a robust wide moat.

  • Intangible assets: They have created strong brands in China and have local insights, but are not enough for a wide moat.

*   **Switching costs:** The barrier to switch from one of these hotel chains to another is generally quite low.

*   **Network effects:** The network effects of hotels are generally quite small. They benefit very little from adding new hotels.

*   **Cost advantages:** They haven't shown a meaningful advantage over their peers.

The moat is therefore deemed as: Narrow - as it does benefit from some advantages but is not durable.

  • Moat rating: 2 / 5 - Narrow moat, but likely to be eroded in the future.

  • Risks to Moat and Business Resilience

    • Intensified Competition: Increased competition from domestic and international players may erode H World’s competitive advantages, potentially reducing occupancy and pricing power.
    • Economic Downturn: A severe downturn could reduce consumer spending, thereby impacting the hotel industry and potentially causing significant losses for HTHT.
    • Regulatory Changes: Changes to regulatory policies such as in taxes, wages, and data privacy in China and other markets could put a significant strain on the company.
    • Pandemic Disruptions: Ongoing or new waves of pandemics may reduce travel, therefore decreasing hotel bookings and causing operational and financial difficulties.
    • Brand value erosion: The company has built itself by acquiring multiple hotels. If their existing brands fall out of favor or their new brands fail to perform, their growth will be severely affected.
  • Understandability Rating H World Group Limited’s business model is fairly straightforward, focused on operating hotels, a service that is easy to understand. However, given the varying brands, locations, and partnerships, along with some more complex financial reporting techniques like tax credits, the investment is more complicated than others, but not too difficult to grasp.
    • Understandability: 3 / 5
  • Balance Sheet Health Rating

Given their high debt-to-equity levels in the industry, they are somewhat more risky than others. However, they are able to generate free cash flow, and are still managing for stability. That, combined with high cash on hand (over RMB 10 Billion), gives them some resilience to market turbulence. Therefore, the business seems relatively financially healthy, but has room to improve. * Balance Sheet Health: 3 / 5

In conclusion, H World group Limited has a presence in the market as a mid-tier international player, which has a narrow moat due to switching costs. It has good growth potential with a presence in different markets and growth prospects in developing economies, but is under increased scrutiny from international regulatory bodies.