Business context and reporting period
Huazhu Group Limited (now H World Group) filed this Form 20-F for the fiscal year ended December 31, 2018. It is an annual report, not a standalone fourth-quarter filing; the filing provides quarterly operating indicators but no clear standalone Q4 income statement or cash-flow figures. Amounts below are RMB unless stated otherwise; financial statements use U.S. GAAP.
The company operates a multi-brand hotel network in China through leased and owned hotels, manachised hotels (franchised and managed) and franchised hotels. At year-end it had 4,230 hotels in operation and 1,105 under development. About 83.5% of operating hotels were manachised or franchised.
Key financial and operating metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Net revenue | RMB10,063 million | RMB8,229 million |
| Income from operations | RMB2,344 million | RMB1,426 million |
| Net income attributable to Huazhu | RMB716 million | RMB1,228 million |
| Operating cash flow | RMB3,049 million | RMB2,453 million |
| EBITDA (non-GAAP) | RMB2,272 million | RMB2,348 million |
| Adjusted EBITDA (non-GAAP) | RMB3,269 million | RMB2,379 million |
| Cash and cash equivalents | RMB4,262 million | RMB3,475 million |
| Total debt, current and long-term | RMB9,760 million | RMB5,053 million |
Operating margin was approximately 23.3% versus 17.3%; net margin attributable to Huazhu was approximately 7.1% versus 14.9%. Year-end restricted cash was RMB622 million. Current assets of RMB6,974 million exceeded current liabilities of RMB5,969 million. Contractual operating lease obligations totaled RMB29,372 million, including RMB2,854 million due in 2019.
Operating indicators improved: total network RevPAR rose to RMB197 from RMB180; leased-and-owned RevPAR was RMB237 versus RMB211, and manachised RevPAR was RMB186 versus RMB171. In Q4, total network RevPAR was RMB196 versus RMB181 a year earlier; same-hotel RevPAR growth was 3.9%. Approximately 76% of 2018 room nights were sold to HUAZHU Rewards members.
Material changes versus 2017
- Revenue increased 22.3%, supported by network growth, higher RevPAR and a larger share of midscale and upscale hotels. Manachised and franchised revenue grew 36.6% to RMB2,527 million and rose to 25.1% of revenue.
- Operating costs and expenses grew more slowly than revenue, up 15.6%; hotel operating costs fell to 64.4% of net revenue from 69.0%. Operating income increased, while operating income also included higher other operating income.
- Attributable net income fell 41.7%, despite higher operating income. A RMB914 million unrealized loss on equity securities, primarily related to Accor and other marketable investments, and a RMB144 million foreign-exchange loss weighed on results. Income tax expense rose to RMB569 million, with a 40.8% effective tax rate versus 22.4%.
- Operating cash flow increased to RMB3,049 million. Investing outflow remained high at RMB6,345 million, including RMB4,959 million of long-term investment purchases; financing inflow was RMB4,248 million, principally reflecting new borrowings.
- Debt increased materially, alongside investment activity and hotel expansion. The company issued US$475 million of convertible senior notes in 2017; notes mature in November 2022, carry 0.375% interest and may be put by holders in November 2020. In 2018 it also drew bank facilities, including EUR241 million secured by Accor shares.
Outlook, commentary, risks and unusual items
- Management said operating cash flow, cash balances and available credit facilities were expected to cover working-capital needs for at least 12 months. It expected approximately RMB1,499 million of capital expenditures for recently completed improvements and development of 42 leased and owned hotels. No specific 2019 revenue or earnings guidance is provided.
- Management expects continued network expansion and growth in manachised and franchised revenue. A planned annual dividend of approximately US$100 million was described as moderate; the declared 2018 dividend was US$0.34 per ordinary share/ADS, approximately US$100.1 million, paid in January 2019.
- Adoption of the leases standard on January 1, 2019 was expected to add RMB19–22 billion of right-of-use assets and RMB20–23 billion of lease liabilities to the balance sheet. Management did not expect a material income-statement or cash-flow effect.
- Other operating income included RMB106 million of government grants, RMB67 million of leased-hotel termination compensation, a RMB25 million reversal of contingent loss and RMB35 million of Crystal Orange acquisition settlement compensation. Property and equipment impairment was RMB35 million; a zoning-related leased-hotel demolition resulted in an RMB8 million loss. Seven additional leased hotels had been identified as potentially subject to demolition; 22 manachised hotels were demolished in 2018.
- Property and regulatory exposure is significant: lessors lacked ownership and/or land-use certificates for 100 leased properties, and lessors for approximately 33% of executed leases subject to approval requirements had not obtained the required governmental approvals. The company also cited lease renewal, franchisee standards, competition, economic slowdown, cost inflation, data security and foreign-exchange risks.
- Accrued contingencies were RMB20 million at year-end. A proposed U.S. securities class action relating to a possible 2018 data breach was voluntarily dismissed in February 2019. Management reported effective internal control over financial reporting, but excluded the acquired Blossom Hill business from its assessment.
- 2018 results reflect accounting changes: revenue-recognition comparisons for prior periods were restated retrospectively, and changes in equity-investment fair-value accounting contributed to volatility in reported earnings.
Most important facts for investors to verify
- How much of the RMB914 million investment fair-value loss is nonrecurring, and how sensitive the investment portfolio remains to Accor’s share price and currency movements.
- The composition, maturity schedule, interest costs and covenant headroom of RMB9,760 million of reported debt, alongside the substantial lease commitments and expected 2019 lease-accounting liability recognition.
- Whether hotel growth and RevPAR gains can continue while same-hotel RevPAR growth moderated to 3.9% in Q4 and a large development pipeline is brought online.
- Resolution of property-title, lease-approval and zoning issues, including the seven potential additional demolitions and the enforceability of lessor indemnities.
- The sustainability of operating cash flow, planned capital expenditure and dividends, given investment spending, debt growth and restrictions on transferring PRC subsidiary funds; RMB3,279 million was not available for distribution to the parent as dividends, loans or advances.