Huazhu Group: Threats From OYO And Negative Same-Store RevPAR Growth Trend Can't Be Ignored

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About: Huazhu Group Limited (HTHT)
by: Snowball Investing
Summary

Huazhu Group is led by QI JI, a visionary founder, an artist, and an excellent product manager.

It is a long-term buy given the positive industry tailwind and top-tier management team.

The competitive threats from OYO and the declining trend of same-store revPAR growth cannot be ignored.

Founder-led business

Huazhu Group Limited (HTHT) is led by a visionary founder Qi Ji. He was a co-founder of three successful public companies, each of these three companies has achieved more than $10B market cap. Qi Ji still owns 8.9% of Huazhu Group and the management team collectively owns 37.3%. If you want to get a deeper understanding of Huazhu Group, I highly recommend you read Qi Ji 's book (unfortunately, an English version is not currently available).

This book collects a series of short memos written by Huazhu Group's founder Qi Ji. Like Steve Jobs, Qi Ji is an artist and an excellent product manager. He is extremely customer-centric and detail oriented. For example, the biggest pain point for travelers is the convoluted hotel check-in process. Huazhu invested heavily in the automation and facial recognition technology, allowing a customer to simply check in and unlock room through Huazhu Mobile app. Huazhu's hotel economy hotel eliminates many amenities (such as swimming pool, business center, lobby bar, etc.) that are rarely used by Chinese travelers. Instead, the company re-invest these savings to comfortable mattresses and high-quality shower equipment. Huazhu's customer-centric culture leads to one of the best customer ratings in the industry.

Industry Tailwinds

The Chinese hotel market is still less penetrated compared to the developed countries. In terms of the number of hotel rooms per 1000 capita, China is at still 1/5 of the U.S.'s level. As the Chinese middle class continues to grow rapidly, the hotel industry in China has a long runway to grow. Additionally, only 20% hotels in China are branded hotels. The majority of hotels in China are small independent hotels. It is a huge market for a market leader like Huazhu to consolidate small hotels and gain market shares.

Independent hotel vs Branded hotel in China

https://lh4.googleusercontent.com/5usvw8EEaI8Dac9a-S-Hq1MRZ24z4GKnv0_DPDSF12DM8PSNldI2XFLFasAQd-i-2KGpYrL_W26Z3gbLnQA-BDavS9P6DklABer_cjrY8AFEuiFMtd6Mohn3IcCuCpsJLlRREuQD

Source: AT. Kearney (Article - A.T. Kearney)

OYO Threats

OYO, an Indian hotel unicorn funded by Sequoia, Lightspeed, Greenoaks and Softbank, has become the second-largest hotel group in China within 18 months of its foray into the country, with a presence in 320 cities and nearly 10,000 OYO-branded hotels with 450,000 rooms. OYO has secured a $150-$200M funding from Airbnb at a valuation of $5billion in March 2019. With a batch of deep-pocket investors in its cap table, OYO will expand into China more aggressively. 68% of hotels in China have less than 70 rooms, which fit squarely into OYO's target market. Huazhu's management team quickly realized the threats from OYO and launched H Brand in May 2019 to compete directly with OYO. Investors should closely monitor the growth of OYO and its impact on the occupancy rate of Huazhua's economy hotel segment.

Source: AT. Kearney (Article - A.T. Kearney)

Same-Store RevPAR Growth

The most alarming KPI of Huazhu Group is same-store revPAR growth. There is a no clear catalyst that will reverse the declining trend in the short term. The management team blames the declining growth rate to the weaker macro condition, which leads to a lower occupancy rate. I think the best entry point to buy the stock is when the same store revPAR shows signs of stabilization.

Source: Company Data 20-F 2019

Valuation

Huazhu's valuation is high compared to its domestic peers and global peers. The stock is currently trading at a 19.8x forward EV/EBITDA multiple. As the hotel business is cyclical in nature, Huazhu's stock price could drop further if earning continues to decline and multiple got re-rated.

Source: Bloomberg

Conclusion

I believe Huazhu Group is a long-term buy as it has one of the best management team in the industry and the company will enjoy a positive industry tailwind. However, the negative same-store revPAR trend and rich valuation make the stock not a good buy at the current price.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.