Huazhu: With solid internal strength, is Huazhu ready to 'squat and jump'?

$HWORLD-S(01179.HK) $H World(HTHT.US) On August 20, 2025, before the U.S. stock market opened, Huazhu (1179.HK/HTHT.O) released its Q2 2025 financial report. Overall, the most notable aspect is the company's asset-light transformation strategy, which has significantly improved the company's core operating profit.

Specifically:

1. RevPAR remains under pressure. Looking at the core operating metric, Revenue per Available Room (RevPAR), Huazhu's RevPAR for the second quarter was RMB 235 per night, a year-on-year decrease of 3.7%, in line with market expectations. In terms of volume and price breakdown, although the Average Daily Rate (ADR) remained weak amid oversupply and pressure on business travel, the decline narrowed compared to the first quarter due to successful upgrades of mid-to-high-end brands (such as Hanting and Orange), with a year-on-year decrease of 2%. However, in terms of Occupancy Rate (OCC), due to increased competition from new stores, there is still no sign of improvement quarter-on-quarter, with a year-on-year decrease of 1.6%.

In the European market, as the tourism market stabilizes, RevPAR increased by 7.3% year-on-year to EUR 88 per night. In terms of volume and price contribution, the main driver was an increase in customer flow, leading to a 5.6% year-on-year increase in OCC, while ADR remained stable.

2. Accelerated pace of store openings. After the industry accelerated store openings in 2024, although the overall investment willingness of franchisees cooled, Huazhu's pace of store openings did not slow down. In the first half of the year, Huazhu net opened 991 new hotels, completing more than half of the annual target of 1,700 net new stores. The openings were mainly concentrated in mid-to-high-end and budget brands, while closures focused on inefficient and outdated stores (such as Hanting versions below 2.5), optimizing the overall store network structure. According to research information, the accelerated closure of domestic independent hotels in the second quarter significantly increased Huazhu's market share.

3. Franchise business continues high growth. In Q2, Huazhu Group achieved revenue of RMB 6.43 billion, a year-on-year increase of 4.5%, close to the upper limit of the previous guidance (1%-5%), slightly exceeding market consensus. Among them, the direct-operated business declined by 7.6% year-on-year, with the core issue being the insufficient competitiveness of old hotels (especially in high-tier markets).

Meanwhile, the franchise business benefited from the group's comprehensive shift to an asset-light model, achieving revenue of RMB 2.87 billion, a year-on-year increase of 22.8%, still in high growth, with its proportion of group revenue increasing by 6.6 percentage points year-on-year to 44.6%.

4. Asset-light transformation drives continuous improvement in gross margin. In terms of gross margin, due to the continued advancement of the company's asset-light strategy, it offset the drag on gross margin from the decline in unit price, leading to a 2.3 percentage point increase in gross margin to 41.6%. (The franchise model saves on rent, labor, and other fixed costs, resulting in higher gross margins)

5. Expense ratio remains stable. Despite the decline in RevPAR, the expense ratio remained stable overall. Ultimately, Huazhu's adjusted EBITDA reached RMB 2.28 billion, a year-on-year increase of 11%, exceeding market consensus (RMB 2.07 billion).

6. Third-quarter guidance growth of 2%-6%. The company guides for a year-on-year total revenue growth of 2%-6% in the third quarter. Excluding the DH business, the core business growth is expected to be 4%-8% year-on-year. According to the company's conference call information, although many local governments actively promoted tourism during the summer vacation through ticket discounts and other means, the overall summer performance was slightly below previous expectations, so management is not particularly optimistic about the overall recovery in the third quarter.

Dolphin Research's overall view:

Overall, although in the second quarter, under the backdrop of industry-wide oversupply and weak demand recovery, the core operating data ADR and OCC are still declining, Huazhu's asset-light transformation strategy is currently proving effective, which is the most satisfying aspect for Dolphin Research.

The most direct reflection on the financial statements is that as the contribution of the franchise business to group revenue increases, the company's core operating profit margin is also gradually rising. This also means that, as Huazhu's asset-light transformation continues to accelerate, even if the demand-side recovery falls short of expectations, Huazhu's profitability will gradually improve through business structure adjustments.

Additionally, based on the conference call content and research information, with the improvement of Huazhu's supply chain integration capabilities and optimization of supplier cooperation, the current brand upgrade progress is also quite impressive. Taking the upgrade of Hanting 3.5-4.0 as an example, the competitiveness of the 4.0 version has significantly improved, with the core reflected in a higher quality-price ratio and a shorter construction cycle, further enhancing Hanting's competitiveness in the lower-tier markets.

For the franchise business, the most important aspect is actually empowering franchisees in multiple dimensions, allowing them to make money and shortening the payback period as much as possible. The core behind this is actually the supply chain capability, which Dolphin Research has already discussed in detail when analyzing the tea industry. Therefore, the popularity of Huazhu 4.0 signings actually reflects the improvement of Huazhu's supply chain capabilities, which can also be applied to brand upgrades in other lines of Huazhu.

However, it should also be noted that since the current low-end versions of Hanting 2.0/2.5 and below still occupy a significant proportion in China, replacement and upgrades will take at least 1-2 years. Therefore, Dolphin Research speculates that the release of profits will not happen overnight, but the marginal improvement trend is relatively certain.

Finally, from a valuation perspective, if we estimate the full-year net profit based on the first half, corresponding to a net profit of RMB 4.8 billion in 2025, with a 17x valuation, it is at a historically low level. Considering the improvement in Huazhu's current supply chain capabilities, the smooth asset-light transformation is expected to drive the company's profitability to continue to rise, further boosting valuation. Therefore, Dolphin Research believes that entering at the current position offers a good cost-performance ratio.

Below is a detailed interpretation:

I. Overall RevPAR remains under pressure

As usual, before interpreting the financial data, we first observe Huazhu's performance in the first quarter from the more fundamental operating data level.

1.1 Oversupply + pressure on business travel, domestic hotel and travel sentiment remains weak

Looking at the core operating metric, Revenue per Available Room (RevPAR), Huazhu's RevPAR for the second quarter was RMB 235 per night, a year-on-year decrease of 3.7%, in line with market expectations. In terms of volume and price breakdown, although the Average Daily Rate (ADR) remained weak amid oversupply and pressure on business travel, the decline narrowed compared to the first quarter due to successful upgrades of mid-to-high-end brands (such as Hanting and Orange), with a year-on-year decrease of 2%. However, in terms of Occupancy Rate (OCC), due to increased competition from new stores, there is still no sign of improvement quarter-on-quarter, with a year-on-year decrease of 1.6%.

According to the company's conference call information, although private leisure travel demand was strong in the second quarter, the overall revenue-generating capacity of the hotel business continued to weaken due to weak business demand under macroeconomic pressure.

1.2 Overseas market recovery, trading price for volume

In the European market, as the tourism market stabilizes, RevPAR increased by 7.3% year-on-year to EUR 88 per night. In terms of volume and price contribution, the main driver was an increase in customer flow, leading to a 5.6% year-on-year increase in OCC, while ADR remained stable.

1.3 Accelerated pace of store openings

After the industry accelerated store openings in 2024, although the overall investment willingness of franchisees cooled, Huazhu's pace of store openings did not slow down. In the first half of the year, Huazhu net opened 991 new hotels, completing more than half of the annual target of 1,700 net new stores. The openings were mainly concentrated in mid-to-high-end and budget brands, while closures focused on inefficient and outdated stores (such as Hanting versions below 2.5), optimizing the overall store network structure. According to research information, the accelerated closure of domestic independent hotels in the second quarter significantly increased Huazhu's market share.

In addition, in terms of overseas business, the company stated in the conference call that it will accelerate its layout in Southeast Asia and the Middle East, cooperating with local property resources, with the goal of forming a scale in 3-5 years, which is worth looking forward to.

II. Franchise business continues high growth

2.1 Group's overall revenue slightly accelerates quarter-on-quarter

In Q2, Huazhu Group achieved revenue of RMB 6.43 billion, a year-on-year increase of 4.5%, close to the upper limit of the previous guidance (1%-5%), slightly exceeding market consensus. Among them, the direct-operated business declined by 7.6% year-on-year, with the core issue being the insufficient competitiveness of old hotels (especially in high-tier markets).

Meanwhile, the franchise business benefited from the group's comprehensive shift to an asset-light model, achieving revenue of RMB 2.87 billion, a year-on-year increase of 22.8%, still in high growth, with its proportion of group revenue increasing by 6.6 percentage points year-on-year to 44.6%.

2.2 Asset-light strategy advancement, continuous improvement in gross margin

In terms of gross margin, due to the continued advancement of the company's asset-light strategy, it offset the drag on gross margin from the decline in unit price, leading to a 2.3 percentage point increase in gross margin to 41.6%. (The franchise model saves on rent, labor, and other fixed costs, resulting in higher gross margins)

Specifically, compared to the same period last year, apart from the increase in the proportion of rent dragging down the gross margin, the proportion of water and electricity costs, labor costs, depreciation, and material costs to direct-operated revenue remained basically flat.

2.3 Expense ratio remains stable

Despite the decline in RevPAR, the expense ratio remained stable overall. Ultimately, Huazhu's adjusted EBITDA reached RMB 2.28 billion, a year-on-year increase of 11%, exceeding market consensus (RMB 2.07 billion).

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Dolphin Research's past analysis of "Huazhu":

Financial Report Commentary

May 21, 2024, Financial Report Commentary "Price and Volume Both Decline! Can Huazhu Still Make a Comeback?"

August 21, 2024, Conference Call "Huazhu: How to View Demand and Store Opening Pace in the Second Half"

August 21, 2024, Financial Report Commentary "Domestic Hotel and Travel Continue to Cool, but Huazhu Accelerates Store Openings?"

May 20, 2024, Conference Call "Huazhu: Grasping Both the Lower-Tier Market and High-End"

May 20, 2024, Financial Report Commentary "A Noisy Holiday, a Quiet Huazhu"

March 20, 2024, Financial Report Commentary "Huazhu: Profits Fluctuate Wildly, Too Dependent on External Factors?"

November 24, 2023, Financial Report Commentary "Huazhu: A False Alarm, Still a Top Player in the Industry"

April 25, 2023, Financial Report Commentary "Huazhu: Room Prices "Soar", Sentiment Rebounds"

March 28, 2023, Conference Call "Lean Growth is the Core (Huazhu 22Q4 Conference Call Minutes)"

March 28, 2023, Financial Report Commentary "Huazhu: Volume and Price Rise, Poised for Takeoff"

In-depth Analysis

December 23, 2022, "Can Huazhu at $43 Still Reach the Peak?"

December 14, 2022, "A 75% Surge, How Was Huazhu's Faith Built? (Part 1)"

This article's risk disclosure and statement: Dolphin Research Disclaimer and General Disclosure