Chinese hotel group Huazhu says it expects revenues to reach around 85% of 2019 levels, before the end of the year.
The group has a close eye on both the Chinese market and, through its acquisition of Deutsche Hospitality, on post-covid progress in Europe. It said first quarter revenues were down by 35%, and it expects a similar reduction in the second quarter.
With Chinese hotels well into recovery, and German properties largely reopened, it is now pressing ahead with system integration as well as planning the launch of DH brands into the Chinese market.
Call it a tick, a Nike swoosh or something else, Huazhu chairman Ji Qi was confident recovery is well under way, and will not be knocked seriously off course by local resurgence of the coronavirus. “Room nights sold to the local market as a percentage of room nights available has reached the same level as last year, while room nights sold to the non-local market as a percentage of room nights available is still catching up.”
He said there had been a fresh focus on efficiencies, with a streamlining head office functions, decentralising, a new talent programme to attract and retain the best people, and a split to allow for further growth outside China. “China is our home market, and a most important market, we will use Singapore as a base for international expansion.”
Jin Hui, CEO of Huazhu China, said the group started to see recovery in China from the second half of February: ”In the second quarter, 97% of our hotels resumed operations. We still 157 hotels under government requisition.” Occupancy continues to recover, with Huazhu hitting 74% occupancy in the week June 14-20, against 47% for the industry as a whole in China. The recovery has been thrown off track by a resurgence of the virus in the Beijing area, which the company said local government is effectively corralling. By 28 June, said Hui, revpar was back to 65% of 2019 levels.
In China, he said, “there’s a clear trend of penetration into the lower tier cities, the majority of hotels are still in the economy and midscale segment.” Franchisees remain confident, such that 2020 signings are at almost exactly the same level as last year.
“Consolidation and further penetration of chain hotels is inevitable. Huazhu is quite famous for high operating efficiency and low-cost structure, converting to higher profitability. Huazhu has a very strong membership system, and the organisation is very agile and responded to covid-19 very quickly.” He promised that the Intercity, Steigenberger and Maxx, from the DH stable, would soon be joining the group’s Joya and Blossom Hill in the midscale and upscale segments of the Chinese market.
Co-president Xinxin Liu said direct bookings were leading the recovery. The company has seen a sharper rebound of direct bookings, with the contribution from OTAs reduced by around 4% to 11% in April and May. The group refocused on direct offline sales, growing local sales, while also pushing corporate sales, which have already recovered to similar sales volumes to 2019.
The move to integrate DH, into a single operating platform, is under way. “We adopted a one IT system strategy, and planned a 500 day programme to empower the transformation so that DH can deliver a seamless experience. This afternoon we will officially launch our global loyalty programme in Germany, and customers can book DH hotels in Germany through the Huazhu app. Eventually we will introduce 42 in-house products to DH.”
At DH, rates fell by 6% in March, and dropped further in April but began to recover in May. DH occupancy has recovered to 23% and revpar has recovered to EUR23 at the end of June.
In Q1 revenue contributed by our asset light improved 7% to 35% “We expect the contribution from our manachised business in China will continue to increase going forward.”
Group CFO Nee Chuan Teo said a number of one-offs would flow through in future quarters.
“The effect of our cost cutting efforts has not been fully reflected in our Q1 results.” Severance pay costs, and timing of payments from governments for furlough will only be received after the period. “We will also slow down our pace in the mid and operated hotels openings, and focus more on the development of the manachised business.” The company also provided a one-off fee waiver for some hotels, reckoned to have cost around USD74m.
“We recorded a positive EBITDA in June,” reported Teo, warning: “The pandemic is not over yet, there is still uncertainty over the pace of recovery.”
At DH, landlords have been responsive to discussions around deferring rentals on hotels, while government furlough cash will also be paid in due course. By end June 79% of hotels there were open, with occupancy up to 23% and revpar EUR23. “In Q2, the impact on our Europe business will be a low point. Based on our experience in China, we expect the recovery in occupancy will start in Q3 and particularly the summer, going into the autumn.”
Meanwhile Hilton is preparing a fresh assault on the Chinese market, with a plan to launch its Home2 Suites extended stay brand in the country. It has signed an agreement with local partner Country Garden, via its Funyard Hotels division, aiming to open more than 1,000 properties across the country.
Hilton has its eye on the growing spending power of the Chinese consumer, with the midscale brand aiming to get into the eyeline of the country’s expanding middle class.
The upper midscale brand currently is currently in the US and Canada, with 400 sites open and a further 450 in the pipeline. Country Garden currently has six Chinese sites open or in development managed by Hilton.
Hong Kong listed Country Garden lays claim to being the world’s biggest residential developer, with projects across China as well as in Malaysia, Australia and the UK. Currently, under Funyard, it has more than 30,000 rooms across eight principal brands of its own, with properties in 50 cities.
The pair started working together in 2018, when six Country Garden hotels were converted to Hilton flags. At the time, the Chinese partner had around 120 hotels built or in the pipeline.
HA Perspective [by Andrew Sangster]: Huazhu’s confidence in a tick-shaped recovery is based on it continuing to outperform the rest of the industry.
Right now, revpar stands at about 65% of where it was last year. Even if it does hit 85% by the end of the year, profitability is still going to be a challenge.
Huazhu’s response has been to cut costs. It is taking RMB137m (EUR17m) out of rental payments (or at least it hopes to, these negotiations have yet to complete). Much of this number is presumably the Deutsche Hospitality estate. Even bigger chunks are coming from “discretionary spending” at RMB163m (EUR21m) and head office plus unit level staff cuts at RMB403m (EUR51m).
The bigger picture though is one where Huazhu takes market share over the next three years. It has convincingly outperformed the industry average on the recovery. This ability to attract customers needing brand security will in turn attract owners.
A question also hovers over the Accor relationship. With the Deutsche brands now under Huazhu’s wing, why do they also need to act as a master franchisee for Accor? The process of unwinding the cross shareholding is already underway and a further distancing of the relationship looks inevitable. For the moment, Sebastien Bazin, Accor CEO, remains on the Huazhu board but with the Deutsche Hospitality acquisition this looks an uncomfortable position.