HTHT - H World Group: Still A Hold After Reviewing Guidance And Valuations

2023-03-28 09:53:25 ET

Summary

• H World Group Limited's revenue grew by +10.6% YoY in Q4 2022, which was at the high end of its prior top line growth guidance.
• But H World Group's 2023 revenue and net new hotel openings guidance didn't impress me, and the stock trades at a premium to its peers based on the forward EV/EBITDA metric.
• I maintain my Hold rating for H World Group Limited stock, following an analysis of the company's financial performance, forward-looking guidance, and peer valuations.

Elevator Pitch

My rating for H World Group Limited's ( HTHT ) [1179:HK] stock stays as a Hold. I previously wrote about HTHT's capital raising activities in my prior article for the company published on January 12, 2023.

H World is trading above peer valuations, which limits its capital appreciation potential. HTHT's 2023 performance might not be as strong as anticipated, due to slower than expected business travel recovery and substantial hotel supply in China. Taking into account the above-mentioned factors, my Hold rating for H World is left unchanged.

HTHT's Q4 2022 Financial Performance Was Reasonably Good

H World released the company's financial results for the final quarter of the previous year on March 27, 2023, after the market closed.

Revenue for HTHT increased by +10.6% YoY to RMB3,706 million in Q4 2022, and this was roughly on par with H World's +9.1% top line expansion for Q4 2021 on a YoY basis. H World's actual Q4 2022 top line turned out to be just slightly or -1% below the sell-side analysts' consensus revenue estimate of RMB3,749 million (source: S&P Capital IQ ). Also, the company's fourth quarter YoY revenue growth of +10.7% came in at the high end of its prior top line growth guidance of +7%-11% .

HTHT's China business saw a -0.7% YoY decline in segment revenue to RMB2,757 million in Q4 2022, but this was more than offset by a +65.9% YoY growth in top line for H World's international business to RMB949 million for the recent quarter. Although H World's domestic operations were affected by a surge in COVID-19 cases in China towards the end of last year, HTHT performed well in foreign markets (which benefited from a faster pace of reopening vis-à-vis China) to achieve decent double-digit revenue growth for the company as a whole in Q4 2022.

With regards to operating profitability, H World reported a normalized adjusted EBITDA of RMB607 million for the most recent quarter which was +11% above than the market's consensus EBITDA projection of RMB545 million as per S&P Capital IQ data.

H World's above-expectations Q4 2022 EBITDA was mainly driven by good expense optimization efforts. At its most recent quarterly results briefing on March 27, 2023, HTHT specifically mentioned about its "disciplined cost control measures such as rental reduction and streamlining of our headquarter costs."

H World's Guidance Wasn't As Good As Expected

HTHT expects the revenue for its China business to grow by +48% in 2023 based on the mid-point of its guidance. On the surface, H World's top line growth guidance for the current year seems to be pretty good in absolute terms. But it is necessary to note that this assumes that HTHT's 2023 RevPAR (Revenue Per Available Room) for the Chinese market only gets to 110% of 2019 levels prior to COVID-19, and the company's 2023 unit growth target isn't very encouraging.

H World noted at the company's Q4 2022 earnings call that the expected RevPAR improvement for the China market in 2023 should be largely attributable to "ADR (Average Daily Rate) growth" and the recovery in the "leisure market." In other words, HTHT is suggesting that business travelers aren't returning to China as fast as what it previously expected, which also leads to lower occupancy rate expectations for this year.

The increase in supply of hotels in China might have also been a factor which led to HTHT guiding for lower than expected RevPAR in 2023. At H World's fourth quarter investor briefing, a sell-side analyst from Goldman Sachs ( GS ) mentioned that there is "investor concern about the oversupply situation (for hotels) in China." The market's worries regarding unfavorable supply dynamics for the Chinese hospitality market appears to be validated by recent industry data. According to research published by Lodging Econometrics in February 2023, the number of "upscale (key segment for HTHT) projects in China's hotel construction pipeline" is at a historical peak as of end-2022.

Separately, H World is guiding for net new hotel openings of between 700 and 750 units in 2023, which is equivalent to a low-teens percentage increase in the number of hotels in operation for HTHT. HTHT had RMB5.1 billion ($740 million) of cash on its books as of end-2022; it recently secured fresh funds of $300 million from a public offering in January 2023 and received EUR300 million ($325 million) in divestment proceeds for non-core investments. With its cash balance projected to have grown to $1.37 billion (or 9% of market capitalization), the market would have expected much stronger unit growth for H World.

HTHT's Valuations

H World's current valuations are not particularly appealing, especially when compared with peers.

The market currently values HTHT at 16.4 times consensus forward FY 2024 EV/EBITDA as per S&P Capital IQ data. In contrast, H World's peers, Shanghai Jin Jiang International Hotels Co., Ltd. [600754:CH] and BTG Hotels (Group) Co., Ltd. [600258:CH] are now trading at relatively lower consensus forward FY 2024 EV/EBITDA multiples of 12.9 times and 6.8 times, respectively.

HTHT isn't justified trading at a much higher valuation multiple as compared to its peers, when the expected revenue growth rates for the three companies are similar. According to valuation data sourced from S&P Capital IQ , the consensus FY 2024 top line expansion rates for H World, Shanghai Jin Jiang International Hotels, and BTG Hotels are +15.4%, +14.4%, and 15.0%, respectively.

Concluding Thoughts

H World Group Limited's Q4 2022 results were good, and the company expects to report robust top line growth this year. But H World Group Limited's guidance wasn't as good as what I would have expected, and the stock's valuations aren't as enticing as that of its peers. My opinion is that a Hold rating for H World Group Limited is warranted.

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