La unidad europea en dificultades pisa fuerte el impulso mundial post-Covid

Key Takeaways:

• H World Group’s revenue rose 67% in the first quarter, though the company forecast the growth would slow to about 53% in the current quarter
• The company’s Deutsche Hospitality unit closed a net four hotels during the quarter, and reported an operating loss of 158 million yuan despite strong revenue growth

By Doug Young

The latest quarterly report from leading Chinese hotel operator H World Group Ltd. (NASDAQ:HTHT) contains a few noteworthy elements, many related to China’s post-Covid travel rebound. The operator of the Hanting budget chain and more upscale Ji brand of hotels in China reported its first profit in nearly two years, as Chinese took to the road in a post-Covid wave of “revenge travel.”

But one of the most noteworthy elements, in our view, is the continued underperformance of the company’s European operation, which it acquired in 2019 when it purchased Germany’s Deutsche Hospitality for 720 million euros ($771 million). That deal was part of a broader trend for globally minded Chinese companies to make overseas acquisitions in a bid to extend their success at home.

Such Chinese acquirers often set their sights on financially troubled acquisition targets, believing they have the know-how to turn them around. But too often the problems are far too-entrenched for these relatively inexperienced Chinese companies to tackle. What’s more, the issues are often more difficult to resolve due to unfamiliarity with such a different market as Europe, where, for example, union politics play a big part of managing a company.

One of the few similar examples of such difficulties in the travel sector comes from Fosun Group, which found itself in a mess when it ended up investing in and later taking over Thomas Cook, the former big-name British travel agent that later imploded.

We don’t want to rain too much on H World’s post-Covid comeback parade, as the numbers in its latest report released Monday really do look quite good. But the drag it is feeling from its European operation, which accounted for about a fifth of its revenue in the latest quarter, is something the Chinese company will have to reckon with sooner or later.

The underperformance of H World’s Deutsche Hospitality asset, listed in the report as “DH,” is evident throughout the latest earnings report. The business actually did pretty well revenue-wise, with the figure rising 118% to 886 million yuan ($125 million) year-on-year in the first quarter. That reflects the fact that Europe began reopening in February 2022, meaning the year-ago figure was quite depressed.

More noteworthy was the fact that the DH business opened just two new hotels in the quarter and closed six, meaning the unit is actually contracting in terms of total hotels. And despite its rebound, the DH business is losing money – a sharp contrast to H World’s China business that was quite profitable before the pandemic and returned to profitability in the latest quarter.

Specifically, the DH part of the business reported a loss from operations of 158 million yuan in the latest quarter, though that was an improvement from the 292 million loss it posted a year earlier when it was still feeling the effects of the pandemic. The DH asset also had a negative effect on H World’s net income, dragging the figure down by about 200 million yuan in the first quarter.

Set For Offload?

Granted, it’s only four years since H World made the Deutsche Hospitality purchase, and three of those years included the difficult pandemic period. So perhaps it’s too soon to judge the success of this acquisition. But H World’s obvious reluctance to put more resources into the asset, plus DH’s continued struggles even during the post-pandemic travel boom, lead us to wonder if perhaps H World might not be better off selling this underperformer.

H World’s Hong Kong-listed shares fell by 1% in Tuesday morning trade after publication of the results, indicating investors weren’t too impressed. The stock is down 11% this year – and has lost 28% of its value from a February peak, indicating the market was already expecting this kind of post-Covid rebound.  

Even after that selloff, investors still seem to still quite like H World for its core China business, as well as its strategic tie-up with French hotel giant Accor (ACC.PA). The company currently trades at a price-to-earnings (P/E) ratio of 32, based on its forecast earnings for 2023. That’s higher than the 27 for higher-end Chinese hotel operator Atour (NASDAQ:ATAT), and also quite a bit higher than the P/E of 20 for global giants Accor and Marriott (NASDAQ:MAR).

That leads nicely into H World’s latest results, which were dominated by its 67% year-on-year revenue growth in the first quarter to 4.5 billion yuan. The growth for the company’s China business