The company’s key performance indicators are approaching pre-pandemic levels, but Covid-related restrictions in China continue to hamper its return to profitability

Key Takeaways

•      H World said its revpar is at 90% of 2019 levels, and occupancy rates are rising across its 8,402 hotels

•      The company remains bearish for the near-term due to the threat of further Covid restrictions that are discouraging travel in China


By Andrew Curran

Did rising room rates propel hotelier H World Group Ltd. (HTHT.US; 1179.HK) back into the black in this year’s third quarter? We’ll soon see, with the company set to release its financials for the period in the next few weeks. But in the meantime, the company has offered a preview in the form of third-quarter hotel operations data that hints it might be heading in the right direction.

Formerly known as Huazhu Group, H World was operating 8,402 hotels with 797,489 rooms as of Sept. 30, representing growth of 226 hotels and 23,591 rooms since June 30. While H World says that it has operations in 17 countries, well over 95% of its hotels are in China, making the company particularly susceptible to local market forces and the government’s strict Covid-control measures that have sent a chill through the domestic travel market.

While having nearly 1 million hotel rooms available every night might sound impressive, what really matters is how many of those are actually occupied and at what price.

The preliminary data shows average occupancy in the third quarter was 76.0%, representing a big improvement on 64.6% in the previous three months when Covid controls were at a peak. Last year the average daily occupancy rate was 72.2%. But if you skip back to 2019 before the pandemic, average occupancy was 84.4%.

Occupancy rates are important, and the latest numbers show they are trending in the right direction. But there is clearly still much room for improvement, so to speak. Unfortunately for H World, discretionary spending within China in the travel and tourism sectors remains heavily contingent on Covid and how the Chinese government responds to it.

But occupancy aside, it’s all about average revenue per room, or revpar, in the accommodation game, a measure that takes both occupancy and room prices into account. In that regard, the latest data released last week showed H World’s revpar was 193 yuan ($26.50) in the third quarter, around 90% of levels for the full-year 2019.

That figure may look relatively low to many westerners because H World counts the budget Hanting brand as its mainstay. But it’s trying to raise the bar by moving into higher-end properties, notably through a major strategic tie-up that has given it China rights for many of the brands owned by France’s Accor (AC.PA), including Ibis and Mercure.

Notably, revpar was higher at 215 yuan for the company’s directly operated hotels in the third quarter, and lower, at 190 yuan, for hotels it manages on behalf of third-party property owners. Unfortunately, H World has far more hotels in the latter category, which make up more than 90% of its total.

The overall third-quarter revpar represented an impressive 25.8% jump from the 141 yuan figure for the second quarter, and was also a significant improvement from 163 yuan for all of 2021. But flick back to the end of 2019, when H World’s average revpar for the year was 198 yuan.

Shareholders unimpressed

H World’s New York-listed shares tumbled nearly 15% the day the third-quarter operating data came out last week. But they have regained most of that since then, including an 11% gain on Tuesday as U.S.-listed China shares rallied on reports that China was considering easing some of its Covid restrictions.

All that said, the latest operating data contain a few important takeaways. Firstly, H World has kept growing throughout the pandemic, mostly in its home China market, despite Covid restrictions. Secondly, occupancies and revpar across the company’s hotels dipped but are increasing again and approaching pre-pandemic levels. But H World is well aware all that could change with new restrictions in the last quarter of the year, which is why it struck a relatively bearish tone.

“We remain cautious on the recovery path in (the fourth quarter) as we are seeing more sporadic resurgences of Covid in various provinces and cities in China recently,” the company said.

The initial share selloff after the latest announcement indicates investors remain unconvinced that the Covid-related problems for H World are over. Four U.S. analysts expect the company to generate $558.24 million in revenue for the third quarter when it releases its full results.

Hong Kong-based analysts are expecting H World to generate HK$15.63 billion ($2 billion) in revenue this year, which would be up 13% from HK$13.85 billion last year. They also see big growth next year, with the figure forecast to reach HK20.28 billion.

The company has been operating in the red lately, including losses last year and in this year’s first two quarters. While lockdowns and travel restrictions within China have eased since their nadir, and H World’s operational statistics are improving, it remains highly unlikely that the company will announce a profit for the third quarter.

But the company is expected to return to profitability next year as the pandemic eases, and has a forward price-to-earnings (P/E) ratio of about 22, indicating where the market sees it going. The company is a relative investor favorite among its domestic peers with a price-to-sales (P/S) ratio of 4.7, higher than the 1.5 for GreenTree (GTH.US) and 4.5 for BTG Hotels (600258.SH).

Right now, the plan seems to be aimed at positioning the company’s various chains for China’s reopening and a potential travel wave as people make up for lost time. The company’s management and long-term investors are betting that when China finally relaxes its travel restrictions, domestic and international travelers will return in droves.

Underscoring that view, H World said it has 2,274 new hotels in the pipeline, including 950 budget properties and 1,324 midscale and upscale properties. All but 17 will be franchised or managed on for third-party property owners.

The company’s senior executives aren’t saying when they expect China’s tourism and travel market to reboot because they – like everyone else – has tried to do that before and each time had to revise their outlook after new Covid flareups. But they are obviously expecting a rebound to come sooner or later. And when it does, investors might finally start to see the company’s financials sparkle – and its stock rebound.

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