Huazhu: Deep Squat and Jump! Huazhu Remains the Industry Leader

Huazhu: A Deep Squat Before the Jump! Huazhu Remains a Top Player in the Industry

On November 17, 2025, before the U.S. stock market opened, Huazhu (1179.HK/HTHT.O) $HWORLD-S(01179.HK) $H World(HTHT.US) released its Q3 2025 financial report. Driven by strong leisure travel demand and the company's asset-light transformation strategy, the overall performance continued to improve, exceeding market expectations. Specifically:

1. RevPAR Shows Sequential Recovery. Looking at the core operating metric, Revenue per Available Room (RevPAR), Huazhu's RevPAR for the third quarter was RMB 256 per night, reversing a five-quarter trend of year-over-year declines, remaining roughly flat compared to the same period last year, and slightly exceeding market expectations. In terms of volume and price breakdown, due to Huazhu's strategic shift in new store openings from budget hotels to mid-range & upper-mid-range brands, the Average Daily Rate (ADR) turned positive, growing by 1% year-over-year. The occupancy rate (OCC) saw a narrower decline on a sequential basis as the industry overall recovered.

In the European market, with the recovery of the international tourism market, RevPAR increased by 6.5% year-over-year to EUR 87 per night. In terms of volume and price contribution, the main driver was an increase in guest traffic, leading to a 4.6% year-over-year increase in occupancy rate (OCC), while ADR remained stable.

2. Proportion of Mid-to-High-End Hotels Further Increases. After the industry accelerated store openings in 2024, although overall franchisee investment willingness cooled, Huazhu's pace of store openings accelerated against the trend. By the end of the third quarter, the company had a net addition of 1,554 hotels, far exceeding the industry average, with the vast majority of new openings belonging to mid-to-high-end and above brands (All Seasons, Orange Select, Manxin, etc.).

3. Franchise Business Accelerates Sequentially. In Q3, Huazhu Group achieved revenue of RMB 6.96 billion, an 8.1% year-over-year increase, exceeding the upper limit of the company's Q2 guidance (2%-6%). Among them, the franchise business benefited from enhanced supply chain integration capabilities, with strong franchisee signings, growing by 27.2% year-over-year, accelerating again sequentially from Q2, and the proportion of group revenue increased by 7.1 percentage points year-over-year to 47.5%. The direct-operated business declined by 5.5% year-over-year, with the core issue being the insufficient competitiveness of older hotels (especially in high-tier markets).

4. Asset-Light Transformation Drives Continuous Improvement in Profitability. Due to the continued advancement of the company's asset-light strategy, it offset the drag on gross margin from declining unit prices, keeping the overall gross margin stable. (The franchise model saves on rigid costs such as rent and labor, resulting in higher gross margins). On the expense side, to support the promotion of new stores and the operation of the membership system, Huazhu increased marketing expenses in the third quarter, but with the improvement in operational efficiency brought by digitalization, the management expense ratio significantly decreased. Ultimately, Huazhu's adjusted EBITDA reached RMB 2.51 billion, an 18% year-over-year increase, exceeding the market consensus expectation (RMB 2.34 billion).

5. Q4 Guidance for 2%-6% Growth. The company guides for a 2%-6% year-over-year increase in total revenue for Q4. Excluding the DH business, the core business growth rate is expected to be 3%-7% year-over-year. Based on information from the conference call, considering the stabilization of RevPAR in Q3, the company management holds a cautiously optimistic attitude towards Q4.

Dolphin Research's Overall View:

Firstly, as a leader in the domestic hotel and travel industry, Huazhu's financial reports often reflect marginal changes in the hotel and travel industry. Through this financial report, we can more confidently confirm two phenomena:

1) The marginal improvement in the supply-demand pattern of the domestic hotel and travel industry in Q3: Firstly, from the demand-side indicator of occupancy rate (OCC), the downward trend in Q3 has significantly narrowed, and Huazhu's Average Daily Rate (ADR), an important indicator of the competitive health of the hotel and travel industry, turned positive for the first time in Q3. Combined with information from the conference call, the domestic hotel supply side is no longer growing rapidly, indicating that in the absence of further deterioration in demand, the supply-demand pattern of the hotel and travel industry is gradually moving towards balance.

2) Industry concentration is accelerating towards the top: Against the backdrop of overall supply slowing down, Huazhu opened a net 564 hotels in Q3, the highest growth rate in nearly three years. Combined with research information, it is clear that in the face of severe market competition (ADR decline, high costs), the market is accelerating the elimination of independent hotels lacking brand, membership, and technical support, while high-quality hotel assets are also accelerating their concentration towards leading chain brands like Huazhu, which have excellent management capabilities.

Reflecting on Huazhu's own financial statements, the significant decline in management expense ratio and the record-high core operating profit margin (29.4%) indicate that with the release of scale effects and operating leverage under the asset-light model, the headquarters' management and technical systems can achieve large-scale expansion at very low marginal costs, continuously strengthening its competitive barriers, which is what Dolphin Research is most satisfied with.

Additionally, combined with conference call content and research information, with the improvement in Huazhu's supply chain integration capabilities and optimization of supplier cooperation, the current brand upgrade progress is also quite impressive. Taking the upgrade of Hanting 3.5-4.0 as an example, the competitiveness of the 4.0 version has significantly improved, with a core focus on higher cost-effectiveness and shorter construction cycles, further enhancing Hanting's competitiveness in the lower-tier markets. This can also be replicated in the brand upgrades of other Huazhu lines.

Finally, in terms of valuation, after a quarter of increase, Huazhu's valuation level has risen from 17x in Q2 to the current 21x, at a historically neutral level. Although not as cost-effective as entering in Q2, if Huazhu can maintain its current strategic determination and execution in the asset-light model, continue to promote high-efficiency franchise models and structural upgrades, and further expand market share, Huazhu's future valuation is expected to further rise to the 25x-30x range, corresponding to HKD 40-48, allowing investors to make their own judgments.

Detailed Analysis Below:

I. RevPAR Shows Sequential Recovery

As usual, before interpreting the financial data, we first observe Huazhu's performance in the first quarter from the more fundamental operating data level.

1.1 Supply Slows, Demand Warms, Supply-Demand Pattern Improves

Looking at the core operating metric, Revenue per Available Room (RevPAR), Huazhu's RevPAR for the third quarter was RMB 256 per night, reversing a five-quarter trend of year-over-year declines, remaining roughly flat compared to the same period last year, and slightly exceeding market expectations. In terms of volume and price breakdown, due to Huazhu's strategic shift in new store openings from budget hotels to mid-range & upper-mid-range brands, coupled with a slowdown in the overall supply-side increase in the industry, the Average Daily Rate (ADR) turned positive, growing by 1% year-over-year to RMB 304 per night. The occupancy rate (OCC) saw a narrower decline on a sequential basis, decreasing by 0.8 percentage points to 84.1%. According to information exchanged during the company's conference call, the domestic leisure travel market showed stable growth in the third quarter, but overall business demand remained weak, although there was some recovery.

1.2 Overseas Market Recovery, Trading Price for Volume

1.3 Store Opening Speed Reaches Three-Year High

After the industry accelerated store openings in 2024, although overall franchisee investment willingness cooled, Huazhu's pace of store openings accelerated against the trend. By the end of the third quarter, the company had a net addition of 1,554 hotels, far exceeding the industry average, with the vast majority of new openings belonging to mid-to-high-end and above brands (All Seasons, Orange Select, Manxin, etc.). Compared to the initial target of 1,700 net new hotels set at the beginning of the year, the progress is far ahead.

The core reflection behind this is still in the face of severe market competition (ADR decline, high costs), the market is accelerating the elimination of independent hotels lacking brand, membership, and technical support, while high-quality hotel assets are also accelerating their concentration towards leading chain brands like Huazhu, which have excellent management capabilities.

Additionally, in terms of overseas business, the company stated in the conference call that it will accelerate its layout in Southeast Asia and the Middle East, cooperating with local property resources, with the goal of forming a scale in 3-5 years, which is worth looking forward to.

II. Franchise Business Accelerates Sequentially

2.1 Group's Overall Revenue Exceeds Guidance Upper Limit

In Q3, Huazhu Group achieved revenue of RMB 6.96 billion, an 8.1% year-over-year increase, exceeding the upper limit of the company's Q2 guidance (2%-6%). Among them, the franchise business benefited from enhanced supply chain integration capabilities, with strong franchisee signings, growing by 27.2% year-over-year, accelerating again sequentially from Q2, and the proportion of group revenue increased by 7.1 percentage points year-over-year to 47.5%. The high growth of the franchise business is the key to the company's outperformance.

The direct-operated business declined by 5.5% year-over-year, with the core issue being the insufficient competitiveness of older hotels (especially in high-tier markets).

2.2 Asset-Light Transformation Drives Continuous Improvement in Profitability

Due to the continued advancement of the company's asset-light strategy, it offset the drag on gross margin from declining unit prices, keeping the overall gross margin stable. (The franchise model saves on rigid costs such as rent and labor, resulting in higher gross margins)

Specifically, compared to the same period last year, apart from the increase in rent proportion dragging down the gross margin, the proportion of water and electricity costs, labor costs, depreciation, and material costs to direct-operated revenue remained basically flat.

2.3 Expense Ratio Significantly Declines

On the expense side, to support the promotion of new stores and the operation of the membership system, Huazhu increased marketing expenses in the third quarter, but with the improvement in operational efficiency brought by digitalization, the management expense ratio significantly decreased. Ultimately, Huazhu's adjusted EBITDA reached RMB 2.51 billion, an 18% year-over-year increase, exceeding the market consensus expectation (RMB 2.34 billion).