HTHT - H World: Consider Q3 Outlook And Future Dividends

2023-10-19 10:12:44 ET

Summary

• HTHT's Q3 2023 financial performance will be revealed in the later part of next month, and I am expecting in line results at best.
• H World hasn't committed to a specific dividend policy for now, even though the company has substantial cash on its books.
• I maintain a Hold rating for HTHT, after I have previewed H World's third quarter results and assessed the outlook for the company's future dividends.

Elevator Pitch

My rating for H World Group Limited (HTHT) [1179:HK] stock is a Hold.

With my prior article written on August 11, 2023, I reviewed H World's key operating metrics for the second quarter of this year.

In the current update, I outline my expectations for HTHT's Q3 2023 financial performance and touch on H World's shareholder capital return. HTHT has yet to put in place a formal dividend policy, and the company's third-quarter results are unlikely to surprise the market in a positive way. As such, I make no changes to my existing Hold rating for H World.

Negative Read-Throughs From Industry RevPAR Data

STR , a research firm focused on the hospitality sector, noted that "China recovery softens" in its recent September 27, 2023 write-up . In this article, STR highlighted a number of data points to support its point of view on the Chinese hospitality market.

Firstly, China's overall RevPAR (Revenue Per Available Room) for the 28-day period ended September 16 this year was lower than pre-COVID levels during the same part of the year in 2019.

Secondly, China was among a handful of markets that registered RevPARs at the $100 or below levels, alongside countries such as Brazil and Indonesia, in the four weeks leading up to mid-September.

Thirdly, hotels in key Chinese cities like Beijing and Guangzhou didn't perform well in the four-week time frame preceding September 16, 2023. One notable example is Shenzhen, which achieved an average RevPAR that was only 73% of pre-pandemic levels.

Listed Chinese Hospitality Peer Recently Issued Positive Profit Alert

BTG Hotels (Group) Co., Ltd. [600258:CH] shared the company's 9M 2023 financial guidance in an announcement issued on October 17.

BTG Hotels (Group) has guided for a turnaround from a normalized net loss of -RMB390 million in the first nine months of last year to achieve a positive normalized net income in the RMB600-640 million range for the first nine months of the current year.

Based on my calculations, this implies BTG Hotels' bottom line is projected to improve significantly from RMB39 million for Q3 2022 to between RMB367 million and RMB407 million in Q3 2023. This also suggests that BTG Hotels' Q3 2023 core net income (as per management guidance) will be +4%-15% higher than what the company earned for Q3 2019 prior to the COVID-19 outbreak.

In BTG Hotels' October 17, 2023 announcement (translated using Google Translate), the company noted that "the demand for domestic business travel and leisure travel recovered steadily" in Q3 2023, and mentioned that "the demand for vacation travel has increased since the summer." These are the key factors that led to the company's positive profit guidance as per BTG Hotels' opinion.

I Expect HTHT's Q3 Financial Performance To Be In Line With Expectations

H World will be releasing the company's Q3 2023 financial results in late November , and I hold the view that there won't be major positive surprises associated with HTHT's third-quarter business performance.

In the preceding sections of this article, I have evaluated the Chinese hospitality market's recent metrics and BTG Hotels' profit alert. This leads me to the conclusion that Chinese hotel operators in general, including HTHT, should have performed reasonably well in Q3 2023 based on BTG's earnings guidance, but the pace of recovery might have slowed towards the later part of the prior quarter as evidenced by STR's industry RevPAR data.

The positive profit alert issued by BTG Hotels and the unfavorable read-throughs from industry metrics highlighted by STR are aligned with H World's latest management guidance.

At the company's Q2 2023 earnings call in late August, H World outlined its guidance of a pretty strong +43%-47% YoY expansion in its top line for the third-quarter, but this already takes into account "some good effects" (hotel bookings made in advance of this major holiday) relating to China's "October Golden Week" holiday.

I don't expect HTHT's actual Q3 2023 revenue to beat the analysts' expectations, considering that a key travel metric for the Golden Week came in slightly below official projections made by the state. Specifically, tourist spending in Mainland China during the Golden Week period turned out to be -4% lower than official forecasts.

No Clarity On Future Dividends

According to Seeking Alpha data , H World last distributed regular dividends in February 2020 which was for fiscal 2019. Notably, HTHT did pay out a special dividend in April last year. But this means that H World hasn't committed to any official dividend policy or paid out regular ordinary dividends since the COVID-19 outbreak.

At its most recent quarterly results briefing in August, H World only indicated that it would "decide on a dividend policy" at "an appropriate time", even though the company acknowledged the "cash accumulation" on its books. As a reference, HTHT had around $1 billion of cash on the company's balance sheet as of the end of June this year.

In the absence of a formal policy, there is limited visibility regarding H World's future dividend payouts, and this will deter income-focused investors from initiating a new position in HTHT's shares.

Concluding Thoughts

I will consider upgrading my rating for H World to a Buy in the future if there is more visibility regarding HTHT's future dividends and there are indicators pointing to above-expectations results for the company. At this point in time, I view a Hold rating for H World as appropriate.

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