SHANGHAI—Huazhu Hotels Group broke a number of development records during the third quarter, executives said during the company’s recent earnings call.
Huazhu’s development pipeline maintained a steady increase over the last four quarters, CFO Teo Nee Chuan said. The company opened 235 hotels and closed 83 during the quarter, he said, and it is on track to achieve its full-year opening targets. The pipeline hit a historical high of 924 hotels by the end of the quarter.
“With the gradual maturity of a number of our younger and newly acquired brands, we continue to attract increasing interest from our franchisees to join our hotel network,” he said. “Therefore, we are not only confident in achieving our operating target for 2018, but also to further accelerate our opening target in the coming 2019.”
By the end of the quarter, Huazhu Hotels’ midscale and upscale room inventory grew by 39% year over year, CEO Jenny Zhang said, and they account for 36% of the total number of rooms in operation. The pipeline for the midscale and upscale rooms accounts for about 80% of the total number of rooms in the pipeline, she said, which was at 66% a year ago.
The midscale JI Hotel brand has passed its 500-hotel milestone, she said, and operates in 125 cities throughout China. The brand has 250 hotels in the pipeline, and will also open its first location outside of China next year in Singapore.
“Since its inception, (the) JI brand has been continuously delivering excellent results in hotel profitability, RevPAR growth and hotel expansion,” she said. “It takes time to build a brand, to fine-tune the design and to improve profitability.”
Huazhu’s younger brands have built their own momentum for faster expansion, she said, and she believes they will follow JI’s growth trajectory.
There are about 400 cities in China that are suitable for midscale hotels, Zhang said, and their estimated hotel market size is more than 200 million Chinese yuan ($28.8 million) each. The cities are above prefecture level, which means they are huge markets and above what Huazhu Hotels has already penetrated with its midscale brands.
“Based on our current hotel operations and the trends in those markets, we become more confident for our midscale hotel expansion,” she said. “In the future, we aim to have two or more midscale brands to reach or exceed 2,000 hotels for each. In addition, a few midscale brands will grow above 500 hotels for each. We remain optimistic on the industry prospects and confident in our quality brands to outperform in market share and gains.”
Huazhu Hotels has 4,055 hotels with 409,516 rooms in operation, according to the company’s earnings release. However, given the size of the China, the company’s penetration of the country is limited, Zhang said, accounting for only 3% of the total rooms in China. The company’s top priority is domestic expansion, she said, but it is interested in learning more about other markets andhas started a few tests in different countries and areas in Asia.
Financial performance
The company’s net revenue grew by 16%, which was above guidance, Zhang said, and its operating income margin grew to 28%, up 3.6 percentage points from a year ago.
Same-hotel revenue per available room grew 4.2% during the quarter, she said, driven by a 6.7% increase in average daily rate while occupancy dropped 2 percentage points. The drop in occupancy was because of a slowdown in demand during the first weeks of July as summer vacations started later and last week of September during the Moon Festival.
“If we take a step back, our same-hotel RevPAR grew by 0.5% and 9.5% in Q3 2016 and Q3 2017, respectively,” she said. “So the average growth during the past two years has been around 5%. Compared to that trend, we believe this quarter has demonstrated a very healthy performance.”
Group RevPAR grew by 7.1% during the quarter, Teo said, which was driven by a 9.8% year-over-year increase in ADR due to an increasing mix of midscale and upgraded hotels, economy hotels and strong domestic travel demand.
Net revenue increased by nearly 16% year over year to 2.7 billion yuan ($389.2 million), he said. Net revenue from leased and operated hotels grew by 11% year over year, while net revenue from managed and franchised hotels grew by 33% for the same period of time.
As of press time, Huazhu Hotels’ stock was trading at $29.60, down 15.2% year to date. The Baird/STR Hotel Stock Index was down 8.9% for the same time period.