Elevator Pitch
I have a Hold investment rating awarded to H World Group Limited (NASDAQ:HTHT) (1179:HK) shares. H World’s recent quarterly operating metrics were pretty good, but the company’s decent Q2 2023 operating performance is already reflected in its stock price and valuations. HTHT’s share price has gone up by close to 10% since its second quarter operating performance disclosure, and H World appears to be fairly valued considering its mid-single-digit price-to-revenue valuation multiple. As such, my Hold rating for HTHT stays unchanged.
H World’s Second Quarter Operating Performance
HTHT revealed its Q2 2023 operating performance with a 6-K filing issued in late July. There are two key metrics that investors should consider in assessing H World’s Q2 2023 operating performance.
The first key metric for HTHT is the company’s number of hotels.
In the second quarter of 2023, H World achieved new hotel openings and net new additions (taking into account hotels shut down) of +374 and +158, respectively. As a comparison, HTHT’s Q1 2023 new hotel openings and net new additions were inferior at +262 and +53, respectively.
More importantly, the company opened 636 new hotels (262 for Q1 and 374 for Q2) in the first half of this year, which accounted for a reasonably good 45% of its 1,400 gross new hotel openings goal for 2023. H World has a pretty good chance of meeting its full-year target, considering that its new hotel pipeline grew strongly by +22% QoQ from 2,304 as of March 31, 2023 to 2,808 at the end of June this year.
With respect to the hotel portfolio mix, the number of midscale and upscale hotels for HTHT expanded by +5% QoQ from 3,584 as of end-Q1 2023 to 3,766 as of end-1H 2023. Also, the proportion of midscale and upscale hotels within H World’s new hotel pipeline increased from 60.8% in the first quarter of the current year to 61.6% in the most recent quarter. A greater percentage of midscale and upscale hotels (as opposed to economy hotels) will naturally translate into higher Revenue Per Available Room or RevPAR for H World in the future as a result of a more favorable portfolio mix.
H World’s second key metric is RevPAR.
HTHT’s RevPAR for the company’s domestics hotels (grouped under the Legacy-Huazhu segment) jumped by +77% YoY from RMB141 in Q2 2022 to RMB250 for Q2 2023, and this was +21% better than what it achieved in Q2 2019 prior to the COVID-19 pandemic. Similarly, RevPAR for H World’s foreign hotels (grouped under the DH segment) rose by +18.5% YoY to EUR78 in the second quarter of this year, which was +11% higher than HTHT’s DH segment RevPAR for Q2 2019.
In comparison, the company’s Q1 2023 RevPAR for its Legacy-Huazhu segment was +18% higher than its pre-pandemic level, while its Q1 2023 RevPAR for the DH segment came in -6% lower than this segment’s RevPAR in Q1 2019. In other words, H World’s recovery from the COVID-19 pandemic continued to get better in the recent Q2 2023.
HTHT’s Recent Stock Price Performance
My earlier March 28, 2023 write-up was focused on analyzing H World’s Q4 2022 financial results and the company’s FY 2023 management guidance.
HTHT’s share price performance following the publication of my previous update was poor. As per Seeking Alpha price data, H World’s share price declined by -2.1% between March 28, 2023 and August 10, 2023, while the S&P 500 went up by +12.5% during the same time period. In my prior late March article, I had already mentioned that HTHT’s valuations were unattractive as compared to the stock’s peers.
But HTHT’s stock price rose by +9.7% from $42.77 as of July 24, 2023 to $46.93 at the end of the August 10, 2023 trading day, after it revealed its Q2 2023 operating performance (as discussed in the prior section) on July 25 before trading hours.
The sell-side analysts have become more bullish on H World’s financial prospects for the current year after HTHT disclosed its key second quarter operating metrics, as evidenced by the change in the company’s consensus financial figures sourced from S&P Capital IQ. Between July 24 and August 10 this year, HTHT’s consensus fiscal 2023 topline forecast was increased from RMB20,317 million to RMB20,493 million. In the same time frame, the consensus FY 2023 GAAP EPS estimate for H World was revised upwards from RMB10.05 to RMB10.58.
It is clear that there were positive read-throughs from H World’s recent quarterly operating performance which led analysts to raise their financial projections for the company, which in turn drove HTHT’s share price higher.
H World’s consensus forward next twelve months’ price-to-sales valuation multiple also re-rated from 4.61 times as of July 24 to 4.92 times (source: S&P Capital IQ) as of August 10. HTHT used to register revenue growth rates (in local currency or RMB terms) of +25.0% and +23.2% for FY 2017 and FY 2018 prior to the pandemic, respectively. But the company’s consensus FY 2023-2027 topline expansion CAGR estimate is +13.2% as per S&P Capital IQ data.
A mid-single-digit price-to-revenue multiple for H World seems fair at best, taking into account the company’s more modest revenue growth prospects for the medium to long term. As a reference, HTHT was trading at 6-8 times consensus forward price-to-sales, when the company was delivering topline expansion rates in the mid-twenties percentage range.
Closing Thoughts
H World’s reasonably strong Q2 2023 operating performance has already been factored into the company’s recent share price run and positive valuation re-rating. Therefore, I see limited upside for HTHT at current price levels, which justifies a Hold rating.
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