H World Group Limited (Huazhu Group Limited) — 2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019; filed April 21, 2020. The filing is an annual report, not a standalone fourth-quarter report. It provides selected quarterly hotel operating indicators but no standalone Q4 income statement or cash flow statement. Financial statements are prepared under U.S. GAAP.
Business context
Huazhu operates a multi-brand hotel group, primarily in China, through leased and owned hotels and manachised and franchised hotels. At year-end it operated 5,618 hotels: 688 leased or owned, 4,519 manachised and 411 franchised. Manachised and franchised hotels represented approximately 87.8% of the network. The company completed its acquisition of Deutsche Hospitality on January 2, 2020, after the reporting year.
Key financial and operating metrics
| Metric | 2018 | 2019 | Change/comment |
|---|---|---|---|
| Net revenue | RMB10,063m | RMB11,212m (US$1,611m) | Up 11.4% |
| Income from operations | RMB2,344m | RMB2,108m | Operating margin 23.3% to 18.8% |
| Net income | RMB727m | RMB1,761m | Net margin 7.2% to 15.7% |
| Net income attributable to Huazhu | RMB716m | RMB1,769m | Basic EPS RMB2.54 to RMB6.22 |
| Operating cash flow | RMB3,049m | RMB3,293m | Up 8.0% |
| Investing cash flow | RMB(6,345)m | RMB(285)m | 2019 included investment-sale proceeds; property and equipment purchases rose to RMB1,527m |
| Financing cash flow | RMB4,248m | RMB6,045m | Net financing inflow increased |
| Adjusted EBITDA (non-GAAP) | RMB3,269m | RMB3,349m | Up 2.4% |
Revenue from leased and owned hotels rose 3.3% to RMB7,718m; manachised and franchised revenue rose 32.3% to RMB3,342m. The latter’s share of revenue increased to 29.8%, while the leased-and-owned share declined to 68.8%. Operating costs and expenses rose 16.2% to RMB9,236m; pre-opening expenses nearly doubled to RMB502m, including RMB460m of rent.
Annual RevPAR was RMB198, compared with RMB197 in 2018; average daily rate increased to RMB234 from RMB226, while occupancy declined to 84% from 87%. Same-hotel RevPAR weakened during 2019, with year-over-year change of negative 5.4% in Q4. Q4 total-hotel RevPAR was RMB191, versus RMB196 a year earlier.
At December 31, cash and cash equivalents were RMB3,234m, restricted cash RMB10,765m, and short-term investments RMB2,908m. Restricted cash included RMB5,404m related to the subsequent Deutsche Hospitality acquisition, paid out in January 2020. Short- and long-term debt totaled RMB16,583m, including RMB3,290m of convertible notes classified as current. Operating lease liabilities were RMB21,578m (RMB3,082m current and RMB18,496m noncurrent). The company adopted ASC 842 in 2019, recognizing substantial right-of-use assets and lease liabilities; this makes balance-sheet comparisons with 2018 less directly comparable.
Material changes versus 2018
- Revenue growth was driven mainly by expansion of manachised and franchised hotels; the network grew from 4,230 to 5,618 operating hotels.
- Operating income fell despite revenue growth, with higher selling and marketing, general and administrative, and pre-opening costs. G&A included Deutsche Hospitality acquisition-related costs.
- Attributable net income more than doubled, partly reflecting a swing in unrealized equity-security fair-value results: a RMB316m gain in 2019 versus a RMB914m loss in 2018. These are volatile investment items, not hotel operating performance.
- Interest expense increased to RMB315m from RMB244m, primarily due to higher bank borrowings. The effective tax rate declined to 25.0% from 40.8%.
- Lease accounting adoption added RMB18,940m of right-of-use assets and RMB19,438m of lease liabilities at transition, with reclassifications; management said adoption did not materially affect income or cash flow statements.
Outlook, risks and unusual items
- COVID-19 and liquidity: The filing reports that the outbreak materially disrupted operations beginning in 2020; Huazhu incurred operating losses and negative operating cash flows in Q1 2020. Management identified substantial doubt about continuing as a going concern if conditions persisted, but cited covenant waivers, unused facilities of approximately RMB2.0bn at March 31, 2020, liquid investments, landlord negotiations and potential additional financing. It believed liquidity would cover at least the next 12 months. More than 90% of hotels had reopened by March 31; reported occupancy was above 60% in the financial-statement note and above 65% elsewhere in the filing.
- COVID-related hotel closures and lower occupancy could trigger banking covenant issues; the company said it had obtained required waivers as of the report date. Franchisee financial distress could also lead to defaults, closures or lost fee income. The duration and full financial impact were not determinable.
- The US$475m convertible notes mature in 2022, but holders may require cash repurchase on November 2, 2020. The notes were classified as current at year-end. The filing describes a EUR440m term facility and US$500m revolving facility with financial covenants; amended covenants were agreed in April 2020.
- Deutsche Hospitality was acquired for cash consideration of EUR690m in January 2020, partly financed with a EUR440m term facility. COVID-19 also affected its European operations. The acquisition was not included in 2019 operating results.
- Management cited no numeric 2020 revenue or earnings guidance. Its stated expectation was adequate liquidity for at least 12 months, subject to the assumptions and mitigation measures described above.
- Other notable items: 2019 included RMB316m of unrealized investment gains, RMB331m of other income (including gains on securities sales), RMB148m of government grants, and RMB23m of accrued contingencies. The filing reports no pending proceeding believed likely to have a material adverse effect.
- Auditors issued unqualified opinions on the financial statements and internal controls. The critical audit matter concerned valuation of the Crystal Orange brand name, carried at RMB1,142m; no impairment was recorded.
Most important facts to verify
- Q1 2020 operating losses, negative operating cash flow, hotel reopening and occupancy trends, and the duration of COVID-related disruption.
- Availability and conditions of covenant waivers, unused credit facilities, and the company’s ability to meet the November 2020 note put and other debt obligations.
- Whether the 2019 earnings improvement persists excluding fair-value gains, investment income and other non-core items; monitor operating margin and same-hotel RevPAR.
- Cash availability: distinguish unrestricted cash from restricted cash, including the RMB5,404m acquisition-related amount paid in January 2020.
- Integration costs, funding and performance of Deutsche Hospitality, and the effect of its European exposure.
- Reconcile share-count disclosures: the cover reports 296,327,721 ordinary shares outstanding at period-end, while the audited balance sheet reports 285,902,609 outstanding shares at December 31, 2019.