ATAT.US
Can pillow sales prop up Atour’s soft stock?

Investors were unimpressed by the hotel operator’s strong first-quarter profit growth, reflecting continued caution about the company’s prospects

Key Takeaways:

  • Atour’s first-quarter profit surged more than 14-fold to nearly 260 million yuan 
  • The hotel operator’s retail business selling in-room items to guests has become a major growth driver, with quarterly sales more than tripling year-on-year

By Lau Chi Hang

China’s domestic tourism industry rebounded sharply with the lifting of Covid restrictions last year, even as skepticism remained that the surge of “revenge travel” might be short-lived. Yet, one year on, the travel fervor is still going strong. The tourism sector remains robust despite growing consumer caution in other areas, with the hotel industry as a major beneficiary.

That strong travel demand lifted Atour Lifestyle Holdings Ltd. (ATAT.US), which straddles both the hotel and retail sectors, to a stellar first quarter, according to its latest financial report released late last month. The company’s revenue increased by nearly 90% year-on-year to 1.47 billion yuan ($203 million), while its profit soared 14.3 times to 258 million yuan. Its adjusted net profit reached 261 million yuan, up 63.4%.

Atour operates six brands of mid-scale hotels: A. T. House, Atour S Hotel, ZHotel, Atour Hotel, Atour X Hotel and Atour Light. The company’s plan to operate 2,000 hotels by 2025 also advanced with its opening of 97 new properties in the first quarter, bringing the total to 1,302 and 148,149 rooms, up 31.6 % year-on-year. As of April, the number of hotels under the Atour brand reached 1,000.

Scenario-based retailing 

Among its various business segments, Atour’s revenue from hotels it manages on behalf of other property owners, which it calls “manachised hotels,” climbed to 836 million yuan, up 87% year-on-year. In contrast, revenue from its own leased hotels, impacted by renovations, fell by 10% to 168 million yuan. But the company’s biggest standout was its somewhat unique retail business, which sees it generate revenue by selling items in its rooms to its guests. Revenue from that segment jumped 3.7 times year-on-year to 417 million yuan.

Atour’s retail operation, frequently touted by the company as “scenario-based retailing” offers products in three main lines: Atour Planet, which focuses on sleep accessories; Savhe, which features fragrances and personal care items; and Z2GO&CO, which deals in travel-related products.

Sales of Atour Planet’s pillows, quilts and mattresses have been particularly brisk. During last year’s Nov. 11 shopping fest, sometimes likened to Black Friday in the U.S., pillows became a blockbuster product with more than 800,000 sold. In March, Atour Planet debuted a deep sleep summer quilt whose sales exceeding 10 million yuan in general merchandise value (GMV) within 21 days of launch. In April, the item topped the sales chart for quilts on JD.com and Douyin, two popular e-commerce sites in China, while also ranking among the top 10 on Tmall, one of Alibaba’s two main e-commerce platforms. 

With such strong merchandise sales, it’s hardly surprising that some industry observers have suggested that Atour’s hotel business is playing second fiddle to its more lucrative pillow sales.

Lackluster stock 

Despite the strong earnings, Atour’s U.S.-traded shares rose just 0.5% to $17.59 following the release of the report. Investors don’t seem too impressed with the company, whose stock price has struggled to rise above the $20 mark over the past six months. The stock is now down more than 10% from a high of $19.80 in February, in contrast with many U.S.-listed Chinese shares that have rallied over that period.

Investor hesitance towards Atour’s stock may reflect ongoing reservations about the outlook for China’s broader tourism industry. After all, the strong post-pandemic recovery is likely to slow down eventually, and whether the trend from last year can continue through the rest of this year remains uncertain as China’s economy slows. 

Even if the industry continues to defy growing consumer caution and growth persists, investors may wonder if the rate of revenge travel spending seen in other parts of the world can be maintained. Accordingly, many investors may be anticipating slowing growth for the sector as enthusiasm for travel stabilizes following the boom.

Falling Revpar

Indeed, Atour’s first-quarter data may show early signs of softening consumer spending. Its average revenue per available room, or revpar, a widely watched industry metric, stood at 328 yuan in the first quarter, down 2.7% from 337 yuan in the same quarter last year, and down 8.4% from 358 yuan in last year’s fourth quarter. The company’s average daily room rate fell 2.9% year-on-year during the quarter to 430 yuan, while its occupancy rate rose slightly – by less than 1 percentage point – to 73.3%.

Chairman and CEO Wang Haijun was candid in his assessment that revpar is facing even greater pressure in the current second quarter due a variety of uncertainties. As such, the company has yet to provide a full-year revpar forecast. Addressing the issue, Atour has prioritized stabilizing its room occupancy rates. “Given the current unpredictability, which exceeds our expectations, our strategy is to stabilize the (occupancy rate) base first while capitalizing on core revenue opportunities,” he said.

That said, Atour retains a competitive edge over its rivals with its scenario-based retailing business, which continues to show growth potential. The company also pointed out that the retail portion of its business is still in a rapid expansion phase, and it plans to further invest in infrastructure, brand promotion, and distribution channels.

Atour’s stock currently trades at a trailing price-to-earnings ratio (P/E) of 18, slightly lower than the 21 for H World Group(1179.HK), China’s largest hotel operator. Unlike Atour, H World recently reported its first-quarter profit fell 33.4% to 659 million yuan. Accordingly, Atour, with its lower P/E ratio and growing profits fueled by its thriving retail business, may offer a more attractive bet for investors.

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