Lean growth is the core (Huazhu 22Q4 Conference Call Minutes)

The following is a summary of the telephone conference of Huazhu Group Q4 2022. For detailed financial report evaluation, please refer to "Huazhu: Rising in Both Quality and Quantity, Waiting for Takeoff".

I. Management Speech (Performance Highlights):

1. Huazhu China

Although 2022 is full of difficulties and challenges, Huazhu, as a leading company in the industry, still faces difficulties and makes some progress in business.

First, we adhere to the strategy of lean growth and do not waver. In 2022, we opened 1,244 new hotels and continued to clear unqualified stores and upgrade the hardware products of various brands to ensure a continuous improvement in user experience.

Second, we completed the organizational upgrade and established six regional operating companies, laying a solid organizational foundation for full market penetration and high-quality operation in the future.

Third, we carried out good cost control and achieved a rent reduction of about RMB 300 million and a reduction of 15% in headquarters personnel in 2022.

Finally, even in the most difficult times in the industry, we still insist on treating franchisees as the most important partners of our cause, providing support and reducing franchise fees by about RMB 300 million.

Huazhu China's RevPAR continued to perform well after the open policy. Since announcing the opening in November last year, the recovery of Huazhu China's RevPAR has shown a monthly upward trend compared with 2019, with external release recovery rates of 74%, 78%, 87%, 91%, and finally 96% from October 2022 to January 2023, and a further increase to 140% in February 2023 compared to the same period in 2019. The recovery data in February was to some extent affected by the mismatch of the Spring Festival period, but it also reflects the improvement of Huazhu's proportion of mid-to-high-end hotels and the continuous optimization of price income ability.

Looking forward to 2023, the strategic focus of Huazhu China is still on lean growth. Under the background of lean growth, we have further subdivided three strategic directions--

The first is hotel expansion based on high-quality stores, through the Huazhu flagship store strategy to achieve deep cultivation of China's strategic deployment.

The second is to achieve new breakthroughs in mid-to-high-end brands, especially the product lines such as Orange, Crystal, Hanting and Blossom Hall, which Huazhu has incubated in the past few years.

The third is the overall upgrade of platform organization and digital operation system.

We will continue to expand the hotel network based on high-quality stores, especially in low-tier cities and relatively weak markets. As of 2022, the number of Huazhu's Chinese hotels has reached 8,411, with 705 net additions. Among them, the proportion of operating hotels in low-tier cities has increased by 1% to 38% compared with 2021. The number of pipeline hotels was 2,540, with a proportion of low-tier cities increasing by 1% to 57% compared with 2021. The number of cities covered by operating and pipeline hotels increased from 1,062 at the end of 2021 to 1,126 at the end of 2022.

In terms of new contract signings, due to the epidemic, franchisee confidence declined in 2022, with a total of 2,141 new contract signings throughout the year, significantly lower than the 2,849 in 2021. However, it should also be noted that in 2022, we withdrew from the economy soft brand market. Therefore, if we exclude the data of the economic soft brand, the number of new contract signings in 2022 is 2,123, while in 2021, it was 2,477, a relatively modest decline.

Looking at the new hotel opening data, it is the same as the new contract signings. If we exclude the impact of the economic soft brand, there were a total of 1,236 new hotel openings throughout the year, slightly lower than the 1,293 in 2021.

Looking at the store closure data, there were a total of 539 store closures in 2022. Under the lean growth strategy, we continued to close low-quality economy soft brands and the HanTing 1.0 product. If we exclude the impact of this part, the number of store closures in 2022 was 237, slightly higher than the 175 in 2021. At the same time, please note that last year's closure guidance was over 600 stores, but due to the impact of the epidemic, the closure process of some stores has not yet been completed, so this part will affect the number of store closures this year.

The proportion of China Lodging's low-quality stores is continuously decreasing. In 2022, the proportion of low-quality economic soft brands and the HanTing 1.0 version of stores in the company decreased from 25.9% to 13.4%.

At the same time, our main brand matrix is also continuously solidifying. In the economy and mid-range fields, a main brand echelon has been formed, with HanTing/7 Days Inn as the core and Hi Inn/Orange Hotels as complementary brands. In the future, our main brands will continue to improve.

In terms of the development of high-end brands, we still adopt a multi-brand strategy to seize the market. Through new brand sorting and adjustment, there are now eight brands under our umbrella, including Orange Crystal, Citywide, Meilun Meihuan, Manyi, CitiGo Huange, Meilun, Meiju, and Novotel. As of the end of 2022, there were a total of 523 in-operation hotels and 287 pipeline hotels for high-end brands in China.

Huazhu is also committed to the continuous upgrading of its organizational and operational systems, making comprehensive improvements in talent reserves, digitization, franchisee and customer service, marketing, and member chain sustainable development, improving organizational operational efficiency, and creating value for customers and franchisees. In terms of customer service improvement, the customer network evaluation data shows a gradually rising trend, indicating that customers' satisfaction with our hotels is continuously increasing. From the perspective of the customer complaint rate, it is showing a gradually decreasing trend, which also shows that we are continuously improving the customer experience at the hotel.

We will strengthen the ability of marketing and the membership system through three aspects. First is the optimization of price-profitability, after the organizational restructuring of regional subsidiaries, hotels in various regions can better manage localized and agile price systems, different levels of brands can also form price gradients, and price synergy can be achieved among multiple brands.

Second is the upgrade of Huazhu Club, relying on Huazhu Club's strong membership and traffic, we can further tap its potential, improve member benefits and other aspects continually.

Finally, we will improve the operational capability of Huazhu Business Travel and continuously develop new head enterprise customers. Through digital direct connection, we deepen interaction and collaboration with contracted customers, and improve Huazhu stores in corporate customers, teams, meetings, banquets, and other mice scenes.

Efficiency improvement of direct-operated stores is also an important aspect of the company's profitability.

Firstly, we will continue to optimize the existing direct-operated stores and close some unprofitable ones that fail to meet standards.

Secondly, we will continually improve the operational efficiency of direct-operated stores and reduce the operating costs of direct-operated stores.

Finally, we will use profitability and strategic flagship store effects as important metrics for future newly opened direct-operated stores.

We will further strengthen the building of supply chain capabilities, provide full-chain supply chain services, conduct deep operations for franchisees, and continually improve product iterations. We will achieve higher quality products and more standardized services with lower costs and higher efficiency.

Lastly, the company will also pay more attention to ESG and sustainable development. In addition to the continuous efforts of Huazhu in social welfare and employee care, this year we will also make efforts in three areas of ESG. Firstly, we will continue to improve and optimize the company's ES-level database. Secondly, we will improve the efficiency of energy and water resource use. Thirdly, we will launch more green projects, including green supplier and green live projects.

DH

We are delighted to report that DH business achieved strong recovery in 2022, with adjusted EBITDA reaching RMB 134 million before special impairment losses and unrealized losses.

In addition, we have launched a series of activities to take DH's business to a new level. We have introduced our proprietary digital infrastructure in hotels.

We have upgraded our loyalty program, H-reward international edition, and built a stronger incentive. We have updated the brand positioning and products of intercity hotels and sleep hotels. Finally, but not the least, we have implemented a new management system to attract talents for our hotels and headquarters.

By 2023, DH will focus on four strategic areas. The most important is that we will continue to improve our profit margin. This includes further improving our revenue and continued costs.

Secondly, we will continue to invest in our H-reward incentive program, our reservation system, and direct sales channels for mobile network reservations. We will continue to increase the proportion of direct bookings. Thirdly, we will continue to utilize our powerful brand to expand our hotel network.

Fourthly, we will continue to digitize our core processes.

3. 2023 Guidance

2023 Q1 Revenue vs. Q1 2022

• Increase 61%-65%

• Excluding DH - Increase 53%-57%

2023 Full Year Revenue

• Increase 42%-46%

• Excluding DH - Increase 46%-50%

Plan to open 1,400 stores and close 600-650 stores.

Q&A:

Q1: Regarding revenue guidance, the revenue for Q1 in the China region is expected to increase by 53%-57%, and the revenue for the whole year in the China region is expected to increase by 46%-50%. What is the implied RevPAR recovery assumption?

A1: With the promotion of strong domestic demand in China this year, we have noticed a significant improvement in overall ADR. However, we have also noticed that there is still a gap in rental rates for some mainstream business customers. Therefore, based on the level of recovery in the entire different market sources in China in Q1, we have made an estimate of RevPAR, which is expected to be around 110% of 2019. This revenue guidance was made based on the market test and analysis of different segment markets.

Q2: What is the global development strategy and are you considering mergers and acquisitions to supplement brand resources?

A2: On the one hand, due to the backlog of consumption over the past 3 years, we have seen very good growth in domestic demand in China after the entire epidemic recovery, including during the Spring Festival. This reflects the recovery of the Chinese consumer market during the Spring Festival. Due to the promotion of domestic demand and the firm strategy of economic growth after the two sessions in China, we are very confident in the growth under the cycle of self-circulation in China.

Therefore, there is no doubt that for Huazhu, the primary strategy is to deepen its roots in China. The continuous high-quality development in the Chinese market and the breakthrough in the mid-to-high-end market are still the core focus of Huazhu's work in 2023.

Of course, we do not rule out exploring some development opportunities internationally, especially in solidifying DH's business in Germany, and continuously improving DH's profitability and customer experience in Germany. As a foundation, we will explore and consider some internationalization opportunities.

Q3: What are the prospects for RevPAR trends in 2023 and the long-term?

A3: The growth of RevPAR and revenue mainly comes from two aspects. One is the growth of our business, and the other is the overall growth of RevPAR business. As mentioned earlier, due to the growth of domestic demand, we have significantly seen a clear trend of ADR growth, especially after the policy epidemic relaxation, and the payment ability in the leisure travel and vacation market has significantly recovered and improved. So in 2023, we will give guidance on RevPAR, which will be in the range of 110% to 115% of 2019.

Q4: Regarding the impact of strong new store trends on capex and progress of the South China branch of the company?

A4: In the first quarter, due to the improvement in overall business recovery, we saw a recovery in overall investment. Especially in the first quarter (especially after the Spring Festival), we saw very good performance in the overall growth of our business in China, the number of signings, and the number of pipelines, which should be slightly higher than our own estimates. Then in the weak market in China, not only in the south but also in the relatively weak areas of Central China and Western China, we have supplemented and grown well through the organization, development, and ability tilt of the whole company over the past year. Everyone will soon see our penetration and development around brands, flagship stores, and core brands in these weak markets. We are still very optimistic about this.

Q5: What is the positioning of the You Hao Hotel in the economy hotel segment? Is it similar to Orange's positioning in the mid-range? What are the future plans for expanding stores, room requirements, and the difference in RevPAR with HanTing?

A6: As we further deepen China and the sinking market, we have found that in the original segmentation of HanTing's market, there are a large number of sinking customers known as young people in small towns, and local leisure (such as vacations) that were originally outside HanTing's customer base.

As HanTing already has a scale of more than 3,000 in China and has a very strong business attribute, we quickly incubated the You Hao brand in 2020 and hope to fully occupy the limited-service national market in China. Therefore, You Hao carries a strong supplement to HanTing and will enable China's national people to have more choices in the national market as we upgrade and iterate our products in the sinking and youthful tourism and vacation market. Huazhu hopes to achieve a very good combination through the two brands.

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