Both volume and price are falling! Can Huazhu still squat and jump?

On May 20, 2025, before the U.S. market opened, $HWORLD-S(01179.HK)$H World(HTHT.US) released its Q1 2025 financial report. Overall, against the backdrop of a continued downturn in the hospitality industry, Huazhu's core operational metrics continued to deteriorate. However, the bright spot was the company's effective cost control through organizational streamlining and an increased proportion of the asset-light franchising model.

Key highlights:

1. Declining Volume and Prices: Hospitality Industry Continues to Weaken. The most critical operational metric, Revenue per Available Room (RevPAR), was RMB 208 per night in Q1, down 4% year-on-year, hitting a new low since the post-pandemic recovery in 2023. Both average daily rate (ADR) and occupancy rate declined year-on-year, with price drops being the main driver of the RevPAR decline. According to the company's earnings call, while leisure travel remained strong, weak business demand dragged down overall revenue generation.

In Europe, the hospitality market showed signs of recovery, with occupancy rates improving significantly. Average revenue per room reached €65 per night, up 12% year-on-year, exceeding market expectations. However, overseas operations account for less than 20% of total revenue, so the impact on the group is limited.

2. Rapid Expansion: Continued Market Share Gains. Despite the domestic hospitality downturn, Huazhu's store openings remained aggressive. The company opened 695 new hotels in Q1, well on track to meet its annual target of 2,300 new stores. Given that the chain penetration rate in lower-tier cities remains below 30% (compared to over 70% in Tier 1 cities), Dolphin Research speculates that most new stores are located in Tier 3 and below markets.

Structurally, Huazhu has been closing underperforming owned stores and reallocating resources to higher-return franchised stores, with the franchised store ratio rising to 95% in Q1.

3. Group Revenue Growth Slows to 2%. While Q1 group revenue of RMB 5.4 billion was in line with the company's guidance (0%-4% growth), it slightly missed consensus estimates (RMB 5.5 billion), mainly due to underperformance in owned operations (European owned stores contracted significantly, with owned revenue down 10% year-on-year).

Franchised revenue grew 21% year-on-year to RMB 2.5 billion, maintaining rapid growth. Dolphin Research also notes that Huazhu's franchising monetization rate continues to improve.

4. Franchising Push Drives Slight Margin Improvement. Gross margin improved slightly to 33% in Q1, as the asset-light strategy boosted franchised revenue from 39% to 46% of total revenue, offsetting the drag from lower ADR. (Franchising saves on fixed costs like rent and labor, leading to higher margins.)

5. Significant Cost Control Achievements. Sales expenses remained stable, while management expenses fell to a record low of 9% due to organizational streamlining and supply chain optimization. Adjusted EBITDA rose 27% year-on-year to RMB 1.7 billion, beating consensus (RMB 1.59 billion).

6. Q2 Guidance: 1%-5% Growth. The company guided for Q2 revenue growth of 1%-5% (3%-7% excluding DH). Despite the May Day holiday boost, the lack of sequential improvement suggests management remains cautious about a near-term recovery.

Dolphin Research's View:

Overall, Huazhu's slowing growth was expected given the weak domestic hospitality demand.

While RevPAR, ADR, and occupancy rates all declined, this reflects broader industry weakness rather than company-specific issues. Compared to peers like Jinjiang (-7.6%) and Atour (-8% to -10%), Huazhu's -4% RevPAR decline is relatively mild.

The industry downturn highlights a supply-demand mismatch. Post-2023 recovery, supply expanded rapidly amid homogenized competition. While leisure demand is strong, it cannot fully offset the weakness in higher-value, frequent business travel, leading to widespread declines in key metrics.

From an operational standpoint, Dolphin Research believes Huazhu is moving in the right direction with its asset-light shift and efficiency improvements.

However, we do not recommend buying at current levels. Long-term investors should wait for clearer signs of demand recovery (especially in business travel) before considering entry.

Detailed Analysis:

1. Declining Volume and Prices: Hospitality Industry Continues to Weaken

Before diving into financials, let's examine Huazhu's underlying operational performance.

1.1 Weak Business Demand Drags Domestic Performance

RevPAR fell 4% year-on-year to RMB 208 per night, a post-pandemic low. Both ADR and occupancy declined, with price drops being the primary driver, likely due to consumer focus on value-for-money and weak business demand.

1.2 Overseas Recovery Underwhelms

European operations saw occupancy rise to 61% (+5% year-on-year) and ADR increase 3% to €107, but the segment's small size limits its impact.

1.3 Aggressive Expansion Continues

Huazhu opened 695 new stores in Q1, with most likely in lower-tier cities (chain penetration <30% vs. >70% in Tier 1). Overseas, the company plans to accelerate expansion in Southeast Asia and the Middle East.

2. Slowing Revenue Growth, Improved Efficiency

2.1 Group Revenue Growth Slows to 2%

Q1 revenue of RMB 5.4 billion missed consensus (RMB 5.5 billion) due to owned-store weakness (-10% year-on-year). Franchised revenue grew 21% to RMB 2.5 billion.