From leading the “quality improvement” process in the hotel industry, talk about why Huazhu (HTHT.US,01179) should enjoy a definitive premium

Recently, the Central Office and the State Office issued the “Special Action Plan to Boost Consumption”. Among them, “improving the quality of service consumption” was highlighted. Judging from the latest official setting, it is gradually becoming a top-down consensus to create effective demand and enhance consumer willingness through high-quality supply and optimizing the consumption environment.

As an important part of service consumption, the hotel industry is also experiencing a historic process of supply-side structural optimization, and “improving the quality” of products and services has become the main theme in the development of the industry at this stage. From an overall perspective, at present, the chain rate of low-tier cities in China is still at a low level, and the lack of supply of high-quality hotel products has led to huge unfinished demand that needs to be met urgently; at the same time, in high-tier cities, a large number of established star hotels and low-quality single hotels also have extensive “quality improvement” needs.

Supply-side reforms and optimization of the industry are at the cutting edge. Amidst this trend, the trend of leading hotel groups is particularly noteworthy.

Take Huazhu (HTHT.US, 01179), which just revealed financial results for the fourth quarter and full year of 2024. As a large hotel group with 11,025 hotels and 1,062,329 hotel rooms (up to the end of 2024), Huazhu, on the one hand, is strongly advancing towards the goal of “thousands of stores in a thousand cities”, bringing high quality supply to consumers in low-tier cities; on the other hand, by eliminating and updating low-quality stores and flopping star hotels, Huazhu has also created a “sample” for improving the quality and optimization of the hotel stock in the market.

Huazhu's experience in “improving quality” in the hotel industry

This year, Huazhu turned 20. “Youth” Huazhu successfully achieved the “Thousand Cities, Ten Thousand Stores 1.0” milestone in the past 2024. This year, the number of Huazhu stores operating in China surpassed 10,000. By the end of 2024, the number of operating hotels in 19 countries worldwide reached 11,147, with 1,088,218 guest rooms.

Behind the “bright” performance of store expansion, Huazhu continued to play a key role in the historic process of increasing the chain rate of hotels in low-tier cities, thanks first of all to its clear strategy of focusing on budget and mid-range hotels and deepening the mass market.

By the end of 2024, Huazhu China had covered 1,380 cities in China, a figure significantly higher than 1,257 at the end of 2023. At the same time, Huazhu China's share of active hotels in third-tier cities rose to 42%, an increase of 2 percentage points over the previous year; while the proportion of hotels in preparation in third-tier cities and below reached 54%, 12 percentage points higher than the share of active hotels, the company's determination to continue penetrating low-tier cities can be seen.

The incremental market “adds up,” while in high-tier cities, Huazhu China changed its mind and focused on “improving the quality” of stocks. In 2024, Huazhu China's newly launched All-Season Qingdao May Fourth Square Seaview Hotel, Hanting Wenzhou Lucheng Guanghuaqiao Hotel, Orange Shanghai Xujiahui Tianlin Road Hotel, and Orange Chengdu Chunxi Road Tianfu Plaza Hotel were all flooded from established star hotels. Through precise market positioning and spatial function optimization, Huazhu not only reshaped the value of the hotel, but also pioneered a new model of landmark hotel asset operation.

Picture: Orange Tianfu Plaza Hotel, Chunxi Road, Chengdu

Picture: Hanting Hotel Wenzhou Lucheng Guanghua Bridge

Generally speaking, in the process of rapid expansion of the service consumer industry, it is not easy to maintain a high level of service quality and operational efficiency. However, judging from Huazhu China's data, the company seems to be proficient in “balancing techniques.” In 2024, Huazhu China's occupancy rate was 81.2%, an increase of 0.2 percentage points over the previous year. This is even more invaluable in the context of the entire industry facing the challenge of declining occupancy rates.

Zhitong Finance believes that the reason Huazhu China is able to cover everything has an important relationship with both soft and hard power to “lead the brand.”

In terms of hardware, Huazhu's core brands have continued to be iterated and upgraded over the years, laying the groundwork for the company to “capture” the hearts of increasingly demanding consumers. In 2024, Huazhu China successively launched Hello 2.0, Haiyou 6.0, and Orange Crystal 2.5; at the same time, the proportion of the company's Golden Triangle brand Hanting 3.5 and above products, full-season 4.0 and above products, and Orange 2.0 and above products rose to 36%, 76%, and 66%, respectively.

In terms of soft power, on the one hand, Huazhu independently innovates and develops digital technology to empower the accommodation experience and internal operations; on the other hand, it upholds the concept of putting the customer first and takes multiple measures to guarantee the value of the Huazhukai membership system. Reflected in the data, Huazhu's excellent service has achieved remarkable results. By the end of last year, the number of Huazhu members had reached nearly 270 million, while central reservations accounted for 66.4%, up 4.1 percentage points and 2.2 percentage points from year to month, respectively.

Talking about Huazhu's “deterministic premium” from the perspective of high-quality supply

In economics, high-quality supply often creates effective demand, and evidence of this can also be found in some recent cases. For example, people in the movie industry were still discussing “The Cold Winter of Film and Television” last year, but in a blink of an eye, Nacha 2 reached the 5th place in the world in the box office. Coincidentally, phenomenal products and brands in the consumer sector, such as Fat Donglai and Xiaomi Auto, all rely on high-quality supply to win the market.

Looking back at the company, Huazhu built excellent service around “brand leadership”. The core logic is actually to export high-quality supply to the market to pursue lean growth.

Needless to say, due to factors such as the industry's own cycle, the hotel industry is currently facing some structural challenges. However, judging from Huazhu's latest financial report, the company still withstood the challenge in 2024. Looking at the full year, the company's turnover increased 15.5% year over year to 92.8 billion yuan; revenue increased 9.2% year over year to 23.9 billion yuan. Among them, Huazhu China's revenue increased 9.2% year-on-year in the fourth quarter, exceeding the guideline.

Due to one-time disruptions such as overseas business restructuring and depreciation, Huazhu's net profit in 2024 was 3 billion yuan. However, if you look at adjusted EBITDA data that focuses more on core business capabilities, Huazhu still achieved positive growth, reaching 6.8 billion yuan for the whole year, compared to 6.3 billion yuan in the same period last year. Given that the asset-light transformation of Huazhu's international business has progressed in stages, future asset-light conversion will inevitably bring stronger, healthier, and more stable cash flow to Huazhu's overseas business, and the company's overall profit potential will also be further unleashed at that time.

Looking at the long term, with the government intensively introducing a package of policies to boost consumption, and with favorable resonances such as leading hotel groups represented by Huazhu exporting high-quality supply to effectively stimulate market demand, the return to normal hotel industry is expected to gather new upward momentum. And in this historic process, Huazhu is likely to be able to obtain a “definitive premium” from the capital market.

In the author's opinion, Huazhu's certainty first comes from the fact that the hotel is a long-term business, and Huazhu has already accumulated brand advantages and scale advantages. Next, the “brand-led” company can expand steadily in an asset-light model. This is an advantage that is difficult for latecomers to compare.

Furthermore, the number of Huazhu members approaching 270 million, and the characteristics of these hundreds of millions of members with high stickiness and high activity, have also made Huazhu's development not too dependent on external OTAs. “Huazhuhui”, which brings its own traffic, has not only occupied the minds of users, but also made the company's basic market more stable.

Finally, it is worth mentioning that Huazhu, which has identified a long-term growth path, is also devoting more energy to giving back to shareholders and boosting capital market performance. In 2024, Huazhu gave back a total of 770 million US dollars to shareholders through cash dividends and share repurchases, and has completed one-third of the upper limit of the three-year plan. Next, as the company continues to pay high dividends and vigorously repurchases of shares, Huazhu's future stock price performance, which is expected to receive a “definitive premium” from the market, is naturally worthy of investors' optimistic expectations.