Edgeworth's Q2 revenue up 4.5% as asset-light strategy drives 22.8% growth in managed and franchise business, while RevPAR outlook remains cautious.

OPERATOR - (00:00:01)

Forward looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the sec. H World Group does not undertake any obligations to update any forward looking statements except as required and applicable laws on the call today. We will also mention adjusted financial measures during the discussion of our performance. Reconciliations of those measures to comparable GAAP information can be found in our earnings release that was distributed earlier today. As a reminder, this conference call is being recorded. Part of this conference call as well as supplementary slide presentation is available@ir.edgeworld.com with that, now I will hand over the call to our CEO Mr. Jinghui to discuss our business performance in the second quarter of 2025. Mr. Jin Dear investors and Analysts, Good day. Thank you for joining our second quarter 2025 earnings conference call. First, I'd like to share some observations on the overall market. On the demand side, domestic number of travelers continues to grow steadily according to the data released from Railways, airlines and tourism statistics. However, due to the rapid increase in hotel supply over the past two years, coupled with the negative impacts of various macro factors on business traveling and consumer spending readiness, the hotel industry is still facing some challenges. Sangan Shattan Suha Mandian Tongsu the Huyong despite the current challenging market condition, we remain committed to focus on the long term business development emphasizing on high quality growth, securing prime locations in the major cities, further deepening our presence in the lower tier cities and optimizing the location and quality of our existing hotels in the second quarter. By breaking through into more new cities and regions and further penetrating into the lower tier cities, we we achieved another quarter of high quality network expansion driven by an 18.3% year over year increase in the number of rooms in operation. Our group Hotel GMV grew by 15% year over year to RMB 26.9 billion. Meanwhile, along with our hotel network expansion and continuous enhancements of our H Rewards membership program, our member base also grew by 17.5% year over year to nearly 290 million in the second quarter, while the number of room nights booked by members exceeded 60 million nights representing a 28.8% year over year growth. More importantly, our ethanolite monetized and franchise business delivered robust growth in hotel network revenue and profit. Mnf revenue rose 22.8% year over year to RMB 2.9 billion in the second quarter, while its gross operating profit increased by 23.2% year over year to RMB 1.9 billion, contributing nearly two thirds of the group's total gross operating profit. Shajang Macro uncertainties and weakened consumer spending wellness should have more pronounced impacts on high end consumption. H World Group remains steadfast in our strategic focus on economy and middle skill segments to serve the mass market. Against the backdrop of consumers favoring value for money, products and services, H World Group is well positioned to demonstrate even stronger competitive advantages. By enhancing our brand, optimizing and upgrading our products and improving our services, we will further solidify our core competitiveness, earn long term customers loyalty and achieve resilience while navigating through cycles. Manda Hanting by Hotels Sudan Bandi we are delighted that after 20 years of development, our Hanqing brand ranked number one on the latest Hotels magazine's World's Top 50 Hotel Brands list, becoming the world's largest hotel brand by room count. However, we believe this is just the beginning and we continue to refine and upgrade our product to improve product quality and to better meet customers demand. Recently we officially launched Hanqing 4.0 version. This is not just a simple product upgrade but a revolutionary supply chain reform. Through systematic optimization across capex construction, maintenance and operations, we have successfully developed a benchmark product with lower cost, higher quality and greater efficiency. Hunting will serve as a key driver for our further penetration into the lower tier cities. Hanqing Hotel has undoubtedly become the leading hotel brand in the economy segment while G Hotel has been leading the middle scale segment. Nevertheless, we are more excited to see our Orange Hotel recently surpassing the 1000 hotels milestone. With its industry leading products, cost competitiveness and operational capabilities, Orange Hotel is well positioned to become our second growth engine in the middle skill segment. Together, Hunting, GE and Orange 4 form the golden Triangle brand of our limited service segment, demonstrate a formidable competitiveness and serve as the core driver to reach over 20,000 hotels in 2000 cities. Strategic target in Midton Tongi at The same time, S1 has made rapid breakthroughs in the upper midscale segment. As of the second quarter, the number of upper midscale hotels in operation and in pipeline exceeded 1,500, up 23.3% year over year. In particular, our Intercity hotel has been rapidly gaining traction among both franchisees and consumers and achieving remarkable growths in the recent quarters thanks to its clear brand positioning, exceptional product quality and a strong operational performance. In the second quarter, Intercity achieved a positive year over year growth in at Sam Hotel Revpar we're going and father Whether it's the limited service or the upper midscale segment, continuously product optimization and upgrades relies on strong supply chain capabilities. We firmly believe that supply chain strength is a critical pillar of high quality development. Therefore, we continue to innovate and optimize our supply chain through enlarging our supplier pool, strengthening modular applications and and optimizing product design to achieve higher product quality, lower OPEX and Capex and a shorter construction period which is in turn further strengthening our core competitiveness. Hoyan, Sudan Sudan lastly, we remain focusing on our direct sales capability through H Rewards Membership program. Our membership and direct sales are vital to our sustainable long term business growth. As we expand our hotel network and enter more new cities, our membership base continuously to grow. By the end of the second quarter, H Rewards membership reached nearly 290 million members with direct bookings through CRS rose 5.2 percentage points year over year to 65.1%. Recently we introduced the price guarantee features in our H Rewards app, ensuring our members get the best room rate. Going forward, we will further enhance membership benefits, expand loyalty points usage scenarios and exploring cross industry partnership to improve member engagement and stickiness and further boost our direct sales capability. This concludes the business Updates for H World Group second quarter 2025. Now I will hand over the call to our CFO Ms. Cheng Hui to present the group's financial performance for the quarter.

Cheng Hui - Chief Financial Officer - (00:15:10)

Thank you Jinghui. Good evening and good morning everyone. Let me walk you through our second quarter financial overview. During the quarter our Group revenue grew 4.5% year over year to RMB 6.4 billion near the high end of our previous guidance of which Mexico's revenue increased 5.7% year over year. We are glad to report that as we continue carrying out S&L strategy and the cost optimization efforts, we we saw year over year margin improvements from both Legacy Huazhu and Lodgis. As a result, our group adjusted EBITDA rose by 11.3% year over year to RMB 2.3 billion. Adjusted net income increased 7.6% year over year to RMB 1.3 billion. More importantly as we may notice that we started providing revenue and gross operating profit breakdown for our managed franchise and lease and owned business in our presentation, we believe it could be better demonstrate our future business development strategy especially on the profit growth driver during our asset life transformation period. Looking into the numbers in the second quarter, our managers and franchise business revenue reported a robust 22.8% year over year growth to RMB 2.9 billion and the gross operating profit growth by 23.2% year over year to RMB 1.9 billion. In the second quarter respectively. The robust growth in both revenue and profit was mainly driven by hotel network expansion. More importantly, given the nature of asset light business model, Merchise and franchise margin profile is relatively stable and is less impacted by REVPAR movement compared to lease and owns on lease and own business front, we continue reducing the exposure. In the second quarter, our lease on own revenue and lease on gross operating profit decreased 7.6% year over year and 13.4% year over year respectively. Our S&L transformation resulted in further enlarged profit contribution franchise business. In the second quarter, our managed and franchise business contributed to 64% of our total gross operating profit up 7.5 percentage points year over year. Moving to the cash flow and liquidity position in the second quarter we generated RMB 2.7 billion operating cash flow and as a quarter end The Group had RMB 13.7 billion cash and cash equivalent and RMB 6.2 billion net cash on the balance sheet. We are committed to pay out dividend consistently and stick to our shareholder return plan for the first half of 2025. We are glad to declare a US$250million interim cash dividend which represents 74% of our first half net profit and together with roughly 62 million share buyback. Lastly, on our guidance for the third quarter of 2025 we expect our group revenue to grow 2% to 6%, 6% compared to the same quarter last year and 4% to 8% excluding DH. The managed and franchise revenue in the third quarter of 2025 is expected to grow in a range of 20% to 24% compared to the third quarter last year. With that, we are ready to take your questions. Operator, please open the line for Q and A.

OPERATOR - (00:20:28)

Thank you. As a reminder to ask a question, you will need to press Star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press Star one one again. Please stand by while we compile the Q and A roster. We will take our first question and the question comes from the line of Ronald Leung from Bank of America. Please go ahead. Your line is open.

Ronald Leung - Equity Analyst - (00:21:53)

Hi, good evening management. Thank you for taking my question. So I have two questions. My first question is about RevPAR. So what is your expectation for the RAF PAR in 3Q and also 2025 and is there any change to the full year revenue Guidance? This is my first question. My second question is about any potential impact impact on RevPAR from new hotel openings. So do you see any potential cannibalization when new hotels open and ramp up and that could affect the old hotels. If yes, are there any initiatives that management can take to address this conflict? Thank you very much.

Jinghui - Chief Executive Officer - (00:24:02)

Z Woman okay, let me translate. So I understand you guys are still very much looking at the RevPAR movements. First of all, we hope you can focus more on a long term edgeworth performance in terms of the market share gaining our improvements in terms of the products and the brands as well as a lot of improvements from different different fronts to create our core competency. In terms of the RevPAR guidance for the third quarter and the full year for the third quarter, especially during the summer holiday we observed that, you know, a lot of, you know, local governments are promoting, you know, the tourism industry for example by providing deep discounts in terms of the tickets, you know, even free tickets giving, you know, just trying to boost the demand for the leisure traveling. However, in some regions and areas was affected by some extreme weather, extreme weather conditions plus some of the macro uncertainties, you know, some of the weakened consumer spending, wellness, you know the overall performance till now for the summer holiday are slightly below our previous expectation. Therefore we seeing the third quarter's RevPAR well still have a very slight year over year decline. However, it's going to be quite significantly narrowed on a sequential basis in terms of the full year revpar. Again because of some of the macro uncertainties especially as I mentioned previously, there was quite a lot of supply increased over the last two years is still creating some of the challenges. Currently combining the performance for the first half as well as the current summer holiday performance, we are currently expecting the RevPAR for the full year performance will be slightly below our previous guidance. But however as I mentioned we have been putting a lot of efforts in terms of to improve our products, our sales capability, our supply chain capability just to make sure that we can be much resilient even under this kind of challenging market conditions. Therefore, in terms of the revenue we will strive to achieve our previous guidance. Jiangdian in terms of the impacts from the new hotels to the old hotels, we have to admit over the past 20 years of development, especially in those Tier 1 to Tier 2 where we have higher market share year we have a much higher basis. You know, there are a lot of, you know, old version of the products which has been running for many, many years. You know, of course in the current, you know, environment this kind of product's competitiveness is quite low. So as you may notice that we have been constantly, you know, introducing new products. For example, we upgraded you know, G hotels from previous 3.5, 3.0 to currently 5.0, the orange from 1.0 to the current 3.0 and hunting from previous maybe 2.0 to the latest 4.0. You know, all the products itself, the quality has been improved massively. Of course that we are adding some of the pressures to the older products. And also in addition to this in the tier 1, tier 2 cities because of the real estate market weakness, there's a lot of, you know, high quality properties are coming out to the market which we can, you know, have much better property to open new hotels with much higher quality products. That's why, I mean we have to admit that going to create some of the negative impacts to the existing old hotels. But we do believe it is a short term pain and we have to go through this because our target is not only gaining market share but we want gaining market share with high quality products. Desktoply has solutions to solve this kind of problem. Firstly, we are actively looking for upgrades for the existing hotels and secondly we will be more rationally in terms of positioning for the new hotel openings. Thank you.

OPERATOR - (00:31:56)

Thank you. We will take our next question. Your next question comes from the line of Dan Chi from Morgan Stanley.

Dan Chi - Equity Analyst - (00:32:05)

Please go ahead. Your line is open.

Jingi Bojang - (00:32:36)

Jingi Bojang thank you management for this opportunity. We saw the company break down the gross operating profit between the lease and owned and franchise and managed business segments. What's the key message behind the new disclosure in terms of strategic focus between these two business segments, is there any change we should expect in the future? Another follow up question on this topic is Asset Light franchise and Managed segment is now 64% of total GOP with its segment revenue growing 23% this quarter. So GOP margin increased slightly. But the GOP for asset heavy lease and own declined by 13%. Legacy China Huazhu Business lease and owned GOP down by 20%. GOP margin also declined. So going forward, what's the outlook look for the margin of this segment and is there any operation adjustment we can expect to support the margin of this lease and own business? Thank you.

Cheng Hui - Chief Financial Officer - (00:35:19)

Thanks Dan for the questions. As you may notice that over the past several years we have been quite actively doing the asset line transformation for the group. Over the last few quarters, our managers and franchise departments business have been growing quite rapidly driven by high quality network expansion and also drive the revenue growth as well. In terms of the leased and owned business, you have been seeing that the exposure for the leased and owned business has been gradually reducing. Of course the stable, the managed and franchise, the franchise business has much stable Gross margin and also it shows a real business development and strategy for the group going forward. So that's why since starting from this quarter, we started to giving a breakdown between our asset line business and asset heavy business. So for the margin performance for our leased and owned business, as you said, you know, the margins declined on a year over year business. This was mainly because you know that we are gradually exceeding the exposure or reducing the exposure for the leased and owned. Therefore, you know, no matter from the volume or you know, no matter from the margin or from the absolute dollar amount in terms of the profit, it's in a declined trend. But however, in order to maintain a relatively healthy and stable margin performance for the leased and owned business, we are doing several key measures. One is we are actively seeking for the rental reduction with the landlord. For example, in the first half of this year we actually signed up around 390 million RMB in total for the contract value for the rental reduction. And secondly, in terms of the revenue management as well as sales and marketing and cost optimization, we are doing a lot of work for our leased and owned business as well. Even though that we are, you know, gradually reducing the exposure for our lease and own business. But we are still putting a lot of efforts for the existing properties trying to improve their performance. Not only the top line, but also the bottom line as well. Thank you.

OPERATOR - (00:38:59)

Thank you. Thank you. We will take our next question. Your next question comes from the line of Lydia Ling from Citi.

Lydia Ling - Equity Analyst - (00:39:10)

Please go ahead. Your line is open.

Jinghui - Chief Executive Officer - (00:39:40)

Now. Hi management. I have two questions and the first one is on the stock extension. And so we saw some deceleration in the second quarter. So given current macro bank runs. So how about franchise sentiment over the openings and any adjustment in your planning for the new openings for this year. And if possible, could you share with us some color on the new starting momentum? And then my second question is on the margin side and so at group level and do you have any further optimization in terms of the cost? And so could you actually give some items on the full year margin trend? Thank you.

Cheng Hui - Chief Financial Officer - (00:41:40)

Okay, so as you may notice that over the past several years we have been implementing high quality sustainable growth strategy. We are not only looking for a scale growth, I mean the quality is much important than the scale itself. So we're going to continuously doing this, you know, implementing this strategy. So you know, going forward we will be even more strict on, you know, new signings in terms of the, you know, property, in terms of the, you know, location as well as, you know, we have to make sure that our franchisees can make a profit and the hotel product itself has a high quality. So under this kind of standards we think we still can maintain a relatively healthier pace of the new openings in the near future. Thank you. So in terms of the margin performance, so in the second quarter benefiting from our asset line transformation and we have more revenue and profit contributing from the asset line business as well as our cost optimization, leveraging our supply chain capability as well as our CRS contribution increase and also a little bit apart from the rental reduction. So putting them together help US to achieve 11.3% adjusted EBITDA growth for the group despite the Revpar decline. In terms of the SGNA, if you're excluding the SBC, actually the SGA declined by roughly 1% for the second half. Of course we could make some of the investment but definitely we cannot consider a rational ROI when we do some of the investment. But in a longer term perspective we believe along with more Ethelon line contribution we could achieve stable or gradual margin improvements in the future. Thank you.

OPERATOR - (00:44:56)

Thank you. We will take our next question. Your next question comes from the line of Simon Chang from Goldman Sachs. Please go ahead. Your line is open.

Simon Chang - Equity Analyst - (00:45:37)

Tak, let me translate that into English. So I have two questions. The first question in relation to the Revpar same store Revpar performance of the company that has been somewhat affected by some of the old store under the hunting brand that management mentioned about wondering how long would it take them to kind of resolve the issue in such a way that we would starting to see stabilization on the same store and then secondly just on the mid upscale segments particularly the upscale segments for the Crystal Orange as well as the intercity brand has done very well in the last I think a couple quarters. Just wondering how management think about the long term growth potential as well as the market share expectation. Thank you.

Jinghui - Chief Executive Officer - (00:47:54)

Teacher Tongues on the changing. So in terms of your question regarding to the Hunting brand. So currently as we discussed previously, currently we launched Hunting 4.0 version and you know over the last several years we have been consistently upgrading Hunting brand and we believe you know the 4.0 should be a relatively matured product. You know the product itself not only probably not only in China but also globally and in terms of its design its hotel quality should be at the leading position. It's definitely leveraging on our strong capability from the supply chain because it's creating a much lower capex, lower opex and a shorter construction and also a better performance in regarding to the pressures from the new new hotels to the older Hotels as I said previously, you know we noticed that and especially you know our observation internally that you know those hunting 2.5 version and below are facing the biggest pressure, you know, in terms of the you know, Revpar performance and we're probably going to take you know one or two years to solve this problem because it's because of the large basis over the past 20 years but however we are very glad to see the new signings for the Hanting brand actually in this year has been very very strong. So there's two major things that we are going to do is one is we keep signing new contracts and opening new hotels in different area but also we have to do some of the major substitutions by using the new products to replace the old products or continuously upgrading the existing hotel to improve the competitiveness. Thank you. Sanding time in the Babu Panji Zongo okay, in terms of our Orange Hotel brand and Intercity Hotel brands I'm very happy to share something with you. In terms of the Orange Hotel brand after launching the 3.0 version we have been getting a lot of traction from the franchisees and customers and we want the Orange Hotel brand becomes a back to back brand for Ji Hotel and we just achieved 1000 milestone for the Orange Hotel brand recently and in terms of the Ji Hotel currently the hotel in operation and in pipeline putting them together has been already exceeded around 4,000 hotels. So we definitely hope the Orange Hotel could be the second growth driver in our middle skill segment and together with Ji Hotel to become a number one and a number two hotel brands in the middle school segment for the overall market and in terms of the Intercity Hotel hotel because of the high quality and very accurate brand and product positioning we have been achieving quite rapid development of this Intercity Hotel hotel over the past several quarters. More importantly Intercity Hotel achieved a positive growth in terms of the like for like or same hotel Revpar in the second quarter which is probably quite less other brands can achieve the positive revpar growth. Therefore in the next probably three to five years we definitely want our Intercity Hotel brand to become a leading brand in the upper mid scale segment and because of we are also taking the benefits from the weakness of the real estate market because we do see a lot of A grade office building has been out in the market especially in the tier 1, tier 2 cities in some of the prime locations that definitely creating or give us a lot of opportunity to build a very nice and high quality hotel product and it's going to be a new standard or a new generation Intercity Hotel going to be a new standard and new generation or new definition of the upcoming upper midscale segment hotel in the near future. Thank you.

OPERATOR - (00:55:52)

Thank you. We will take our next question. Your next question comes from the line of Shilin from cicc. Please go ahead. Your line is open.

Shilin - Equity Analyst - (00:56:33)

So thank you. Management. I have two questions so first is on the supply chain. So how do we strengthen our supply chain capability in detail? Could you please explain more about this and to what extent will this contribute to future decrease of operating costs? And my second question is about D Edge. So what will be the pace of the future shift towards slight model for D Edge? Thank you.

Sanji Tendon - (00:57:35)

Sanji Tendon Form Sujian Chujianga Changa. In. Terms of our supply chain capability, obviously as we always said, the supply chain capability becomes a very core competency for us to maintain or to achieve high quality long term sustainable growth. Since 2024 we have been comprehensively upgrading our supply chain capabilities many through enlarging and attracting a lot of top tier suppliers and corporations with them closely as well as increasing more modularization application and optimizing some of the products design and increase the quality standard and the reviewing system as well in order to achieve higher quality product products and lower CAPEX and OPEX as well as shorter construction period. I can share with you some of the data as of now in terms of e.g. furniture and furnishing the consumables, some basic material, we have achieved around 10 to 20% cost decline on a year over year basis and also in terms of the construction period, taking Hunting 4.0 as an example because we are applying more modularization that actually helped the construction period for hunting 4.0 products by 30 days. Therefore you know the strong and strengthening the supply chain capability could definitely help our help us to grow in a longer term with definitely a cost leadership and as well as the high efficiency. Thank you.

Jihong - (01:00:26)

This is Jihong. I can address the DH asset light business model and the development in Europe, especially in Germany or Central Europe. The legal requirement it's not as easy to dissolve any lease contract so we are working hard on discussing and negotiating with the landlord. Not everything would turn out exactly as we expected so we continue to try this out. We are continuously screening the profitability of our lease hotels especially for low performing or non performing hotels. We are constantly engaged in a discussion and we cannot disclose anything yet. But some of the lease negotiation and some of the change of the lease are in the works. We will report as soon as we have any information about that and in the future we are also trying very hard to go on asset light model and we are very, very careful in signing any potential lease contracts. We really need to look at the commitment and also the return in the longer term as well.

OPERATOR - (01:02:01)

Thank you. This concludes today's question and answer session. I will now hand back to Jason Chen for closing remarks.

Jason Chen - (01:02:11)

Thank you everyone for taking your time with us today and we look forward to see you in upcoming quarter. Thank you and bye bye.

OPERATOR - (01:02:20)

This concludes today's conference call. Thank you for participating. You may now disconnect.