Business context and reporting period
Huazhu Group Limited (now H World Group; the filing uses “Huazhu”) filed this audited Form 20-F for the fiscal year ended December 31, 2021. This is a full-year report, not a standalone fourth-quarter filing. The hotel group operates in China and internationally through leased and owned, manachised, and franchised hotels. Results include Deutsche Hospitality, acquired in January 2020, so 2021 and 2020 are not fully comparable with 2019.
At year-end, the group operated 7,830 hotels with 753,216 rooms and had 2,608 hotels under development. Approximately 90.6% of operating hotels were manachised or franchised.
Key financial and operating metrics
Unless indicated otherwise, financial amounts below are RMB millions; U.S. dollar equivalents are as presented in the filing.
| Metric | 2021 | 2020 | Change / context |
|---|---|---|---|
| Revenue | 12,785 (US$2,006m) | 10,196 | Up 25.4% |
| Operating income (loss) | 164 | (1,686) | Returned to positive operating income |
| Net income (loss) attributable to Huazhu | (465) (US$73m) | (2,192) | Loss narrowed |
| Adjusted EBITDA (non-GAAP) | 1,571 (US$247m) | (244) | Improved with business recovery |
| Cash provided by operating activities | 1,342 (US$210m) | 609 | More than doubled |
| Cash and cash equivalents at year-end | 5,116 (US$803m) | 7,026 | Down from prior year |
Total operating costs and expenses were RMB13,607m, or 106.4% of revenue; hotel operating costs were RMB11,282m (88.3% of revenue). Other operating income was RMB986m, mainly reflecting COVID-related subsidy income for legacy Deutsche Hospitality. Revenue growth reflected recovery in China; leased and owned hotel revenue rose 17.5%, while manachised and franchised revenue rose 40.4%.
For legacy Huazhu hotels, excluding hotels under requisition, 2021 RevPAR was RMB172 versus RMB149 in 2020 and RMB198 in 2019. Occupancy was 72% versus 71% in 2020 and 84% in 2019; average daily room rate was RMB239 versus RMB210 and RMB234, respectively. Deutsche Hospitality’s 2021 RevPAR was EUR32, versus EUR31 in 2020.
At December 31, 2021, current assets were RMB9,553m and current liabilities RMB15,279m, a working-capital deficit of RMB5,726m (US$898m). Short- and long-term debt totaled RMB9,797m; operating lease liabilities were RMB31,640m. Debt classified as current included the US$475m convertible notes due November 2022 and EUR338m of bank borrowing due December 2022. Short-term investments totaled RMB2,589m (US$406m).
Material changes versus prior periods
- Revenue recovered from 2020’s pandemic-depressed level but remained below 2019’s RMB11,212m only in the sense that 2021 exceeded it; 2021 revenue was RMB12,785m. Acquisition of Deutsche Hospitality affects comparability with 2019.
- Net loss narrowed from RMB2,192m to RMB465m, and adjusted EBITDA improved from negative RMB244m to positive RMB1,571m.
- Operating cash flow rose from RMB609m to RMB1,342m, while cash and cash equivalents declined by RMB1,910m year over year.
- Short-term debt rose to RMB6,232m from RMB1,142m, substantially reflecting the reclassification of maturing obligations. Long-term debt declined to RMB3,565m from RMB10,856m.
- The company recorded RMB245m of intangible-asset impairment in 2021, including RMB160m for a Deutsche Hospitality brand name; it recorded no goodwill impairment in 2021, compared with RMB437m in 2020.
Outlook, risks and unusual items
The filing gives no specific numerical revenue or earnings guidance. Management said it expected cash generation and performance to improve as COVID-19 effects eased, but emphasized continuing uncertainty. COVID-19 restrictions and resurgences affected travel and hotel operations; by March 2022, legacy Huazhu occupancy excluding requisitioned hotels had fallen to about 59%, and 1,299 legacy Huazhu hotels were under governmental requisition. Deutsche Hospitality’s March 2022 RevPAR had recovered to 65% of its 2019 level.
Management identified substantial doubt related to the working-capital deficit and 2022 debt maturities. Its mitigation plans included selling short-term investments, drawing available credit facilities (about RMB2,994m unused as of March 31, 2022), and seeking long-term financing to replace the EUR440m facility. The refinancing had not received final approval at the filing date; management believed it was likely to be obtained. The financial statements were prepared on a going-concern basis without adjustments that might be necessary if the group could not continue as a going concern.
Other material risks include China regulatory and data-security uncertainty, potential PCAOB inspection restrictions and U.S. trading prohibition under the HFCA Act, foreign-exchange exposure, reliance on PRC subsidiaries for distributions, lease and franchise risks, and hotel demand sensitivity to economic conditions. The Cayman holding company uses VIE contractual arrangements for certain restricted activities; the filing says VIEs contributed less than 1% of revenue and assets. The auditor issued unqualified opinions on the financial statements and internal controls. Management reported effective controls and no material weakness, but disclosed significant control deficiencies at legacy Deutsche Hospitality that were being remediated. The audit’s critical matter was impairment testing of Deutsche Hospitality goodwill and brand names.
Important facts for investors to verify
- Whether the company refinanced or repaid the US$475m notes due November 2022 and the EUR338m bank borrowing due December 2022, and whether liquidity improved after year-end.
- Whether COVID-19 restrictions, requisitions, and occupancy weakness persisted or reversed after March 2022, separately for China and Deutsche Hospitality.
- How much of 2021 other operating income was recurring versus pandemic-related subsidies, and how subsidy changes affect underlying operating performance.
- Progress in remediating legacy Deutsche Hospitality control deficiencies and the sensitivity of its brand values and goodwill to operating assumptions.
- Developments in PCAOB audit access, PRC cybersecurity and data rules, and any resulting implications for the ADS listing or overseas financing.