H World (HTHT) Cleared Its $2B Promise Early, Then Topped It

On August 17, H World Group (NASDAQ:HTHT) completed its 2024 promise to return $2 billion to shareholders ahead of schedule. But the company did not stop there. It introduced an even larger plan, aiming to distribute $2.5 billion over the next three years through dividends and stock buybacks. This strategic move demonstrates the company's confidence, especially considering the robust performance seen in the second quarter of 2024.

The standout aspect of the quarter was the source of growth. Revenue increased by 10.8% compared to the previous year, reaching RMB 7.1 billion. Adjusted EBITDA also saw a significant rise of 20.0% to RMB 2.7 billion, indicating that profit margins are expanding at a faster rate than revenue. This growth is primarily fueled by the company's managed and franchised hotel segment, where revenue climbed by 25.2% to RMB 3.6 billion.

Additionally, the gross operating profit in this segment increased by 18.5% to RMB 2.2 billion, highlighting that the rising sales are translating into actual earnings.

The asset-light approach employed by H World is paying dividends. The network continues to expand, with 13,539 hotels in operation as of June 30, 2024, and an additional 3,089 under contract. This pipeline of new hotels is larger than both the previous year and the quarter before. During the quarter, H World expanded its portfolio by opening 498 hotels across China, and management is confident about hitting its annual target of 2,200 to 2,300 gross openings.

Hotel GMV (gross merchandise value) rose by 13.2% to RMB 30.5 billion, indicating that more revenue is flowing through the system, not just the addition of more physical locations.

Despite the strong performance, there are areas of concern. The blended average daily rate in China has only increased by 2.6%, while the blended revenue per available room has grown by a more modest 1.1%. This suggests that the company's growth is largely driven by the expansion of its hotel portfolio and ancillary fees, rather than significant increases in guest spending.

Consequently, H World appears to be relying on a constant influx of new hotel openings to sustain its momentum. Furthermore, the company's commitment to return more value to shareholders is evident in the early completion of the payout plan, showcasing the business's ability to generate substantial cash flows.

However, the room for improvement lies in maximizing the revenue generated from each room. In China, the blended average daily rate has risen by 2.6%, while the blended revenue per available room has only grown by 1.1%. This disparity indicates that the primary driver of the company's growth is the addition of new hotels and associated fees, rather than a substantial increase in guest spending.

Despite this, H World's strategy of expanding its hotel network remains a solid foundation for future growth. The company's decision to announce a broader payout plan without specifying the split between dividends and buybacks suggests a commitment to returning value to shareholders in a flexible manner.

Hedge fund ownership has decreased from 32 funds to 23, indicating that major investors are gradually reducing their holdings, even as the company's profitability surpasses its revenue growth. The short interest stands at 4.69% of the float, suggesting a modest level of bearish sentiment in the market. While some of this could be hedging risk rather than genuine skepticism, it is something to monitor closely.

Investors looking at H World's valuation may find the forward P/E ratio of 35.34 at September 18 to be a point of consideration. At this multiple, the stock is priced for continued growth, implying that any short-term setbacks could have a significant impact on the share price. Nevertheless, the company's growth strategy, anchored in expanding its hotel portfolio and generating strong cash flows, positions it well for long-term success.