Business context and reporting period
This is China Lodging Group, Limited’s audited Form 20-F for the fiscal year ended December 31, 2015—not a standalone 2015 fourth-quarter report. The company operated a multi-brand hotel group in China through leased, manachised and franchised hotels. The filing identifies the registrant as China Lodging Group, Limited; it does not use the requested name H World Group Ltd.
At year-end, the group had 2,763 hotels in operation and 677 under development. About 77.7% of operating hotels were manachised or franchised. Financial statements are prepared under U.S. GAAP; amounts below are RMB unless otherwise noted.
Financial and operating metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | RMB6,110.9m | RMB5,265.2m | +16.1% |
| Net revenue | RMB5,774.6m | RMB4,964.7m | +16.3% |
| Operating income | RMB601.2m | RMB389.4m | +54.4% |
| Net income attributable to the company | RMB436.6m | RMB307.3m | +42.1% |
| Diluted EPS | RMB1.70 | RMB1.21 | — |
| Operating cash flow | RMB1,749.7m | RMB1,454.0m | +20.3% |
| Investing cash flow | (RMB1,550.4m) | (RMB1,063.2m) | Greater outflow |
| Cash and cash equivalents at year-end | RMB1,237.8m | RMB808.9m | +53.0% |
Operating margin was 10.4% of net revenue and net margin was 7.6% (calculated). Non-GAAP EBITDA was RMB1,271.7m and adjusted EBITDA RMB1,324.2m; the company cautions these measures are not U.S. GAAP measures and do not reflect capital expenditures.
At year-end, current assets were RMB2,962.0m and current liabilities RMB2,790.9m, a calculated current ratio of approximately 1.06. Restricted cash was RMB360.5m; short-term debt was RMB324.7m. Total liabilities were RMB4,252.8m and total equity RMB3,440.7m. The filing reports RMB499.3m of available borrowing under a credit facility. It also reports RMB19,785.3m of future minimum operating lease payments, including RMB1,872.8m due in 2016.
Hotel operating costs were 78.1% of net revenue, unchanged from 2014. Leased-hotel RevPAR rose to RMB172 from RMB169; manachised-hotel RevPAR declined to RMB145 from RMB153. Total portfolio RevPAR fell to RMB153 from RMB159, while total occupancy declined to 85% from 89%.
Material changes versus prior year
- Manachised and franchised revenue grew 51.3% to RMB1,124.0m and increased to 18.4% of total revenue; leased-hotel revenue grew 10.3% to RMB4,986.9m.
- Hotel count rose from 1,995 to 2,763, driven principally by manachised expansion. Management attributed lower overall RevPAR to a soft market and growth in lower-tier cities.
- Operating income and attributable net income increased substantially. Pre-opening expenses fell to RMB110.0m from RMB186.3m, while selling and marketing expenses decreased 4.2%.
- Investing cash outflow increased, including purchases of short-term investments and a rise in restricted cash. Property and equipment purchases were RMB640.2m; total capital expenditures were RMB655.4m.
- Year-end balance-sheet liquidity included RMB533.2m of short-term investments, including marketable securities. The company purchased Homeinns shares and held an approximately 4.7% stake at year-end.
Outlook, commentary, risks and unusual items
Management said existing cash, operating cash flow and credit facilities were expected to meet working-capital needs for at least 12 months. It expected continued hotel-network expansion and growth in operating cash flow, but gave no specific revenue or earnings guidance. Planned capital expenditures included approximately RMB609.1m for recently completed improvements and 21 leased hotels under development.
- Accor transaction: Completed in January 2016, after the reporting period. The alliance included hotel-brand rights and a 29.3% interest in an Accor luxury/upscale operating platform; China Lodging issued 24,895,543 ordinary shares, approximately 9% of shares after issuance.
- Dividend and repurchases: The company declared its first dividend, a special US$0.17 per ordinary share (US$0.68 per ADS), totaling US$42.5m, paid by March 31, 2016. It repurchased 774,191 ADSs during the reported program in 2015. The filing states the program was later amended to authorize up to US$80m.
- Impairments and zoning: The company recorded RMB93.2m of impairment on property and equipment and RMB2.4m of goodwill impairment in 2015. One leased hotel was demolished, producing a reported RMB5.5m gain; two additional leased hotels were identified as likely demolition candidates. Three manachised hotels were also demolished due to zoning.
- Taxes: The effective tax rate rose to 30.9% from 27.2%, including accrued withholding tax related to the special dividend. China’s VAT reform was to take effect for the group from May 2016; management said the impact remained uncertain.
- Principal risks: Economic weakness, competition, declining RevPAR, fixed lease costs, execution of rapid and multi-brand expansion, franchisee service quality, lease/property title and permit deficiencies, regulatory changes, currency and cash-transfer controls, and cyber/data security. The company reported that some leased properties lacked ownership or land-use certificates and that required approvals had not been obtained for approximately one-quarter of executed leases subject to the approval requirement.
- The company reported effective disclosure controls and internal control over financial reporting as of December 31, 2015; the auditor issued unqualified opinions on the financial statements and internal controls. The filing also notes that the PCAOB could not inspect the China-based auditor at that time.
Most important facts for investors to verify
- Whether hotel expansion and fee growth can offset lower manachised RevPAR and portfolio occupancy.
- How much of reported operating cash generation depends on non-cash depreciation, deferred rent, deferred revenue and working-capital movements.
- The availability and restrictions on cash, pledged deposits, short-term debt maturities, and the substantial long-term operating lease commitments.
- Exposure to lease documentation, required governmental approvals, zoning demolitions, and the recoverability of related compensation.
- The financial and dilution effects of the Accor alliance, dividend, share repurchases, investments and acquisitions.
- The effect of the May 2016 VAT change and future withholding taxes on earnings, cash transfers and distributions.