Expanding Into Lower-Tier Cities Will Drive Market Share And Operational Efficiency

Key Takeaways

• Focusing on high-quality growth and an asset-light strategy could enhance brand value and optimize operational efficiency.
  
• Expanding into lower-tier cities and the upper-midscale segment may drive market share and improve revenue.
  
• Declining RevPAR, increased expenses, and a strategic shift to an asset-light model present challenges, potentially affecting revenue growth and margins for H World Group.

Catalysts

Develops leased and owned, manachised, and franchised hotels in the People’s Republic of China.

• H World Group is focusing on high-quality growth by expanding its hotel network and phasing out low-quality hotels, which should enhance the overall brand and improve future revenue streams.
  
• Increasing presence in lower-tier and underpenetrated cities in China, where 42% of current hotels and 53% of hotels in the pipeline are located, which could drive revenue growth and market share expansion.
  
• Expansion into the upper-midscale segment, with a 33% increase in hotels year-over-year, and strong recognition among customers, which could improve revenue-per-available-room (RevPAR) and margins.
  
• Strengthening B2B capabilities and focusing on membership growth, with a 41% increase in room nights booked through direct sales, potentially leading to higher revenue and improved earnings through direct sales channels.
  
• Ongoing asset-light strategy and restructuring efforts, such as streamlining headquarters and exiting low-performance assets, could improve net margins by reducing costs and enhancing operational efficiency.

H World Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming H World Group's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.0% today to 19.8% in 3 years time.
• Analysts expect earnings to reach CN¥5.6 billion (and earnings per share of CN¥17.51) by about December 2027, up from CN¥3.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CN¥4.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 3.4x on those 2027 earnings, down from 20.7x today. This future PE is lower than the current PE for the US Hospitality industry at 24.3x.
• Analysts expect the number of shares outstanding to grow by 0.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.63%, as per the Simply Wall St company report.

H World Group Future Earnings Per Share Growth

Risks

• The RevPAR (revenue per available room) for H World Group has shown a decline and is expected to continue facing pressure, influenced by high bases from the previous year and stagnant business travel recovery. This could negatively affect overall revenue growth.
  
• The company is facing increased SG&A expenses, partly due to restructuring costs and share-based compensation, which might impact net margins and operating income.
  
• Despite expanding their hotel network, H World Group is experiencing decreasing RevPAR and adjusted EBITDA, suggesting that rapid expansion may not immediately translate to proportional earnings growth.
  
• There is a strategic shift toward an asset-light model by closing owned and leased hotels, potentially reducing revenue in the short term due to the immediate impact of these closures.
  
• The intensified focus on midscale and upper-midscale segments signifies potential competitive pressures in these areas, which might lead to pricing challenges and affect future revenue streams.

Valuation

• The analysts have a consensus price target of CN¥44.72 for H World Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CN¥50.78, and the most bearish reporting a price target of just CN¥34.97.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CN¥28.1 billion, earnings will come to CN¥5.6 billion, and it would be trading on a PE ratio of 3.4x, assuming you use a discount rate of 9.6%.
• Given the current share price of CN¥34.01, the analyst's price target of CN¥44.72 is 24.0% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.