Thank you for standing by and welcome to the H World Q3 2023 Earnings Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Jason Chen, Senior IR Director. Please go ahead.

Thank you. Good morning and good evening, everyone. Thanks for joining us today. Welcome to H World Group 2023 Third Quarter Earnings Conference Call. Joining us today is our Chairman, Mr. Ji Qi; our CEO, Mr. Jin Hui; our CFO, Ms. He Jihong; and our President Ms. Liu Xinxin. Following their prepared remarks, management will be available to answer your questions. Before we continue, please note that the discussion today will include forward-looking statements made under the safe harbor provision of the United States Private Securities Litigation Reform Act of 1995. 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 under 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 last Friday. As a reminder, this conference call is being recorded. The webcast of this conference call, as well as supplementary slide presentation is available at ir.hworld.com. With that, now I will hand over the call to our CFO, Ms. He Jihong for the opening speech. Ms. He, please.

Good morning and good evening, ladies and gentlemen. Thank you for joining H World third quarter 2023 earnings call today. We are delighted to report that H World delivered another strong quarterly financial result, reflecting the continuous healthy recovery of lodging market in China. In today's call, H World Group CEO, Jin Hui, will first elaborate on the business performance and highlight our achievements. I will then go through the key financial numbers. As usual, we will have the Q&A session after the management presentation. With this, I will hand over to Mr. Jin Hui.

[Foreign Language] [interpreted] Thank you, Jihong. Please turn to Page 3. As usual, let's go through Legacy-Huazhu's RevPAR recovery in the recent months. In the third quarter, we maintained our market-leading performance since the year beginning. Our RevPAR recovered to 129% of the 2019 level. The RevPAR recovery continued to be supported by ADR growth, which was mainly driven by our product mix change. Meanwhile, occupancy rate recovery also improved sequentially in this quarter. Breaking down into monthly numbers, our RevPAR in July, August, and September recovered to 132%, 128% and 128% of the 2019 levels in the corresponding months respectively. This strong set of number was benefited from the strong leisure travel demand during the summer holiday season, as well as the continuous business travelling recovery. In addition, our RevPAR performance reflected our hotels' superior product quality and brand power, which should continue to support our industry-leading position in operational performance. This year, the rebound of China's leisure traveling demand was better than our previously expected in the year beginning. Nevertheless, we keep our cautiously optimistic view on the market outlook unchanged. We certainly saw some pent-up leisure travel demand during some of the peak seasons, such as the Chinese New Year, May holidays, and the summer holiday. But the structural changes in Chinese consumers' consumption structure post the COVID should not be ignored. Especially, the demand for experience-related activities were growing rapidly with the government's efforts on stimulating the domestic demand. After the strong summer holiday season, our RevPAR recovered to 123% of the 2019 level during the Golden Week holiday. For the entire month of October, our RevPAR still recovered to 120% of that in 2019. In the short term, although the macro condition could possibly remain volatile and uncertain, we will continue executing company's long-term strategies…

Thank you, Jin Hui. I will now elaborate DH's activity so far this year. Please turn to Page 11. Despite Germany's slow economic recovery post COVID, RevPAR of DH portfolio outperformed the overall German market using relevant [RGI] (ph) data. In third quarter 2023, year-over-year cost growth is in line with revenue growth, despite inflationary pressure in Europe after excluding one-off adjustment and restructuring costs. Our priority remains to control and reduce costs through business restructuring as well as leveraging on technology. At the same time, we are repositioning the current hotel product design to reflect demand of the modern travelers. We are also spending effort in strengthening our presence in Middle East and exploring new international markets such as Asia Pacific. I'm now going to highlight the financial performance in the next section. Please turn to Page 13. Our hotel network continued to expand in the third quarter 2023. Total number of rooms in operation increased 11% year-over-year and reached 885,756. Hotel turnover increased 55% year-over-year and reached RMB23.5 billion. Please turn to Page 14. Legacy-Huazhu blended RevPAR recovered to 129% of 2019 and achieved RMB278. This was primarily driven by ADR increase, which was 33% over Q3 2019 and 27.7% of Q3 2022. Occupancy still lags Q3 2019 by 1.8 percentage point. Nevertheless, the occupancy of 86% is quite a high benchmark for the size of our total portfolio. Please turn to Page 15. Legacy-DH blended RevPAR increased 4.5% year-over-year and achieved EUR79. ADR remained flat compared to third quarter 2022, but occupancy increased by 2.9 percentage point. Please turn to Page 16. Total revenue of H World increased 54% year-over-year achieving RMB6.3 billion. Legacy-Huazhu revenue increased 62% year-over-year, achieving RMB5.1 billion. This achievement was possible through; first, strong domestic travel demand, especially during the summer holiday; second,…

Hi, operator. We can start the Q&A session, please.

Thank you. [Operator Instructions] Your first question comes from Mr. [Dan Chi] (ph) from Morgan Stanley.

[Foreign Language] Good morning, management. First of all, congratulations on a very strong third quarter result. I have a question regarding the recent announcement of Board resolution on cash dividend. I'm wondering if the company can share a bit more details on this dividend payment. For example, timing, what to expect, size of the dividend that is proposed, and whether is it regular or special dividend?

[Foreign Language] [interpreted] Let me answer your question first. Yes, our Board is considering a cash dividend and once we get the approval from the Board resolution, we will immediately release to the market in terms of the exact policy and the payout ratio. And I want to add another point is as the H World business is going to be more asset-light, we definitely want to be well management on the cash and net profit going forward.

Just a little bit to add to Mr. Jin Hui's comment. Huazhu, especially Huazhu China has recovered very well. We are very confident that especially Chinese lodging market will continue to recover. So we expect a very stable cash flow in our future operations. And with this kind of stable cash flow and net earnings, we would like to return some of our earnings back to our investors. So we will resume our continuous stable base dividend policy, as well as special dividend policy from time to time if our cash flow shows very strong performance. And please just be patient, we have a couple of days until the Board resolution is decided and we will announce it in time. As for the cash payment, we will expect it around early next year.

[Foreign Language]

Your next question comes from Ronald Leung from Bank of America. Please go ahead.

[Foreign Language] Let me ask my questions in English. My first question is about the outlook for 2024. So would management have any preliminary forecast for the RevPAR growth and hotel openings for 2024? My second question is about balance sheet. So right now the company has a very strong balance sheet and cash flow. So what do you think is the optimal capital structure for the company? Thank you very much.

[Foreign Language] [interpreted] Let me translate the first answer. So in terms of the expectation for next year, in terms of the RevPAR and the new openings, we will be giving the guidance to the market when we release our fourth quarter earnings probably next year. But I just want to add, we are still keeping our conservatively optimistic view for the China business given we think we are still having the best product for market-leading position and we should still getting benefits from the continuously [indiscernible] improvements and further consolidation of the market. So again, we keep our conservatively optimistic view unchanged. Thank you.

Okay. I will take over the question about the capital structure. As you can see Ronald, from our balance sheet for the third quarter, we have a very strong net cash position. And I'm very confident that with the business improving quarter-by-quarter, year-by-year, our cash position will remain very strong. So as a part of the effort to reward our investors, we already announced our dividend payout policy and this policy will continue. And we also do not exclude the possibility to do some share buyback at appropriate time as well. From a debt and the equity position, you can see that we still have $500 million convertible bonds at this moment and this will still take some time to mature. We will continue to leverage some of the bank facilities for our short-term working capital because the Chinese interest rate is very low. So pleased to be assured that the financial management team of H World will look into our cash position very diligently, manage our cash, and manage our reward program to our investors and at the same time, also leverage the lower interest environment in China and we will also continue to manage the overall debt positions so that we do not fall into any potential issues.

[Foreign Language]

Your next question comes from Simon Cheung from Goldman Sachs.

[Foreign Language] So I have two questions. The first question is in relation to the hotel opening. I've noticed that H World actually been able to achieve a much faster hotel opening than a lot of the peers. Wondering what are the reasons and whether management could share with us what's the latest update with the Southern China strategies? And then the second question is in relation to the fourth quarter RevPAR. We have noticed quite a bit of a meaningful downward trend in October. Wondering whether it's technical or structural. And what is the outlook going into November and December, and whether there is any reasons in relation to business versus leisure [indiscernible]? Thanks a lot.

[Foreign Language] [interpreted] Okay. To answer your first questions, post the COVID, since this year, we achieved quite good progress in terms of the new signings and the pipeline increase. This was mainly attributed to several reasons. Firstly is for our market-leading brands especially, in the limited service segment including Hanting and JI Hotel. Over the last several years, we keep enhancing our product quality and doing a lot of product upgrades and further enhance our brand reputation and awareness. That definitely benefits us for the -- increasing in the new signings. And also especially, in the middle-scale segment, last year we tried to use the Orange to become our second main brand in this particular segment and since the first quarter when we launched Orange 3.0 version, the product itself has been very much well accepted by the market and franchisees, hence achieved quite good new signings since then. Certainly, it's because of the lower tier cities penetration as well as further enhance our presence in our previously weak market, including the southern part of China, western part of China, and the middle part of China. This is the benefits from our organizational restructuring and further strengthening our business development capability on the ground. Currently, these three previously weak regions contributed more than 40% of our new signings year to date. And lastly, it is further breaking through into the upper mid segment and mainly because of the InterCity brand, as well as the Crystal Orange brand as I mentioned previously in our prepared remarks and also presentation. And we are strongly confident on the further breakthrough and increased market share for this particular segment. In terms of the second questions on the RevPAR trend. So for the October, this is pretty normal seasonality, because normally post the Golden Week holiday, there was a low season following. So this is a normal seasonality impact. And for the entire fourth quarter, we are expecting the RevPAR recovery to be in range of 115% to 120% compared to the same period of 2019.

[Foreign Language]

The next question comes from Sijie Lin from CICC. Please go ahead.

[Foreign Language] So, thank you management. You have been to some low-tier cities to do some field research. So could you please share with us your main observations which make you feel that there are lots of opportunities in low-tier cities? And in order to seize the low-tier market opportunity, we have established regional headquarters and is there any other capability that we need to strengthen? Thank you.

[Foreign Language] [interpreted] Okay. So clearly, despite the urbanization rate have already achieved over 65% this year, we're still seeing that there's further urbanization progressing in the lower-tier cities and we're also seeing the population actually is also increasing in the lower-tier cities. Addition to that, the high-speed railway trend further development, as well as the highway networks further expanding, and we were seeing the number of passengers transported by the high-speed railway trend this year achieved a historical high. This is mainly supported by a lot of government efforts on stimulating the domestic demand which increased a lot of population mobilities demand. And for the lower-tier cities, we also observed that it is really a high resilient market and more importantly, the lower-tier cities contain over 1 billion population. We think still there is a lot of huge opportunities to further discover. And as a leading company, H World is striving to further providing good products and service to match the demand for better accommodations in the lower tier cities. Okay. So the organizational restructuring is definitely creating some of the benefits and in line with our lower-tier cities penetration strategy. So basically, we want to be more close to our customers and more close to our franchisees and to be more localized. Because especially for the franchisees side, we are seeing a lot of new franchise -- new type of franchisees. Basically, some of them are self-owned properties, some of them are local small and middle property developers, as well as some of the business owners. We want to be close enough to them and understanding their demand as well as our customers.

[Foreign Language]

Your next question comes from [Duvai Lui] (ph) from [Citi] (ph). Please go ahead.

[Foreign Language] Let me translate my question in English. We notice in the city it's gaining traction among franchisees. So could you tell us more about the current business situation such as ADR, RevPAR? Besides, can you share what cities are the distribution of InterCity in the pipeline? And what are the features of franchisees? Thank you.

[Foreign Language] [interpreted] Okay, thank you. Just to answer your questions, thanks for focusing on our InterCity brand. Since we launched last year and opened several leased InterCity hotels in several cities, so for this already opened hotel, given the scale is relatively small, we don't think it is suitable for now to compare or to release the ADR or RevPAR to the market at this moment because it is quite selective and we have only several InterCity hotels in operation. But if you really want to talk about these hotel's operational data, so all the ADRs and RevPARs have been already doing better than our competitors. But we are very confident to see the brand is getting more accepted and [award] (ph) by our franchisees and the market. And for the franchisees, we are seeing definitely a different type of franchisees compared to our limited service segment. There are two type of franchises. One is definitely the industry-leading franchisee because the IntercityHotel requires a relatively big amount of CapEx investment. So a single InterCityHotel requires around RMB30 million to RMB50 million in CapEx. So only those very much leading position -- leading franchisees can afford that much CapEx. And second, we also see a lot of property developers or local property developers and property owners which used to doing business with those international brands are now finding us -- as InterCity to be a substitute, because we are definitely leading in terms of the operational capability.

[Foreign Language]

There are no further questions at this time. I will now hand back to Mr. Chen for closing remarks.

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

That does conclude our conference for today. Thank you for participating. You may now disconnect.