H World: No Surprises

seekingalpha03-22

H World's FY 2023 top line and EBITDA met the market's expectations, as both its actual revenue and EBITDA exceeded the consensus estimates by a modestly low single-digit percentage.HTHT is guiding ...

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In my previous January 4, 2024 update, I wrote about H World's new dividend policy and the company's growth outlook. The current write-up evaluates HTHT's recently disclosed FY 2023 financial performance and its FY 2024 RevPAR (Revenue Per Available Room) guidance. There were no surprises with H World's actual results and the company's forward-looking guidance. I also deem the stock's valuations to be fair based on the growth-adjusted EV/EBITDA valuation metric. As such, I see no reason to change my existing Hold rating for HTHT. HTHT's Actual Fiscal 2023 Results Were Within Expectations H World issued a 6-K filing on March 20, 2024, in the morning revealing the company's financial results for the most recent fiscal year. The top line for HTHT jumped by +57.9% to RMB21,882 million last year, and that was +1.2% higher than the sell side's consensus revenue projection of RMB21,624 million according to S&P Capital IQ data. The company's normalized EBITDA surged from RMB610 million in FY 2022 to RMB6,874 million for FY 2023, which turned out to be +2.1% better than the analysts' consensus non-GAAP adjusted EBITDA forecast of RMB6,730 million (source: S&P Capital IQ). I mentioned in my prior early January 2024 article that \"the Chinese hospitality industry and the company benefited from China's decision to pivot away from the COVID-zero policy towards the end of 2022.\" This was the key factor that led to HTHT delivering significant top line and EBITDA expansion in 2023. H World's FY 2023 RevPAR for its Mainland China business, otherwise referred to as the Legacy-Huazhu segment, was 22% above the RevPAR that its Chinese operations achieved in FY 2019 prior to the pandemic. In its March 20, 2024 6-K filing, HTHT highlighted that its 2023 financial performance was boosted by \"strong demand for leisure travel and the continued recovery for business travel\" in China. It is worth noting that HTHT's shares declined slightly by -1.4% on the March 20, 2024 trading day after the company had announced its FY 2023 financial results in the morning on the same day. As such, it is reasonable to assume that the market wasn't surprised by H World's FY 2023 results which were largely in line with expectations. Both the company's actual revenue and EBITDA for last year were only a low single-digit percentage higher than what the market had anticipated earlier. In the subsequent section, I touch on H World's management guidance. H World's FY 2024 RevPAR Guidance Is Unexciting HTHT guided for a pretty modest \"flattish to low single-digit\" increase in its RevPAR for FY 2024 at the company's FY 2023 earnings briefing (transcript sourced from S&P Capital IQ). The low end of H World's FY 2024 top-line growth guidance at 8% (disclosed at the recent results briefing) is also the same as the market's consensus revenue expansion estimate (+8.0%) for the current year prior to its latest FY 2023 earnings announcement. At its most recent fiscal year earnings call, H World explained that a \"high base\" for FY 2023 and a \"relatively slower recovery\" in \"business travel demand\" (as opposed to leisure travel) were the main factors that the company considered as part of its 2024 RevPAR and top-line guidance. In my January 4, 2024 article, I also cited third-party research and media reports suggesting that China's hotel room supply is expected to rise this year while post-COVID revenge travel for Chinese domestic travelers is likely to fade in the current year. Another factor that has an unfavorable impact on HTHT's future RevPAR is the company's hotel network expansion strategy focused on lower-tier Chinese cities. In its FY 2023 earnings press release, H World emphasized that the Legacy-Huazhu segment or its Mainland Chinese business \"will persist in its streamlined growth strategy\" by \"deepening market penetration in lower-tier cities.\" Separately, the company indicated at the FY 2023 earnings call that \"the impact of new hotels to our RevPAR will be blended\" taking into the positive effects of \"opening more mid upscale hotels (higher RevPAR)\" and the negative impact of an increase in the number of hotels in \"lower-tier cities (lower RevPAR).\" Capital Appreciation Potential For HTHT Is Limited I am of the view that there might be a limit on the potential capital appreciation for H World's shares in the near term. Year-to-date, HTHT's share price rose by +17.2%, which outperformed the S&P 500 by a significant +7.7 percentage points. Also, H World's growth adjusted EV/EBITDA valuation metric is close to 1 (indicative of fair valuation) or 0.96 times (11.2/11.7) to be exact. This is calculated by dividing its consensus FY 2024 EV/EBITDA multiple of 11.2 times by its consensus FY 2025 EBITDA growth forecast of +11.7% as per S&P Capital IQ data. HTHT's share price outperformance in 2024 thus far and its \"fair\" growth adjusted EV/EBITDA valuation ratio indicate that the company's good 2023 results (in absolute terms) have been priced into its shares to a large degree. Final Thoughts  H World's FY 2023 financial performance wasn't a surprise for me and the market (as evidenced by its relatively muted post-results announcement share price reaction). The company's FY 2024 RevPAR outlook is unimpressive, and I think that the stock is fairly valued. Therefore, I have made the decision to retain a Hold rating for HTHT.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2421176868"}