My investment rating for H World Group Limited (NASDAQ: HTH) (1179:HK) remains a Hold. On the positive side, HTHT offers potential shareholder returns in the mid-single digits. On the negative side, H World’s third-quarter revenue guidance is below expectations. suggests that there are near-term headwinds for the company. Therefore, I continue to view HTHT as neutral.

The outlook for HTHT in the short and long term was the subject of my article from June 9, 2024. In the current article, I go into more detail about H World’s forecasts and return on investment.

Sales forecast for Q3 2024 is disappointing

H World recently announced the company’s revenue forecast for the third quarter of 2024 in its second quarter earnings release published on August 20. The company expects revenue growth in local currency or RMB conditions are expected to slow from +11.2% YoY in Q2 2024 to +3.5% (mid-range) for Q3 2024.

Sell-side analysts’ consensus estimate for HTHT’s full-year fiscal year 2024 revenue was cut from RMB24,129 million to RMB23,948 million, according to S&P Capital IQ, after the company released its revenue guidance for Q3 2024. This suggests that H World’s Q3 revenue guidance was a negative surprise. Additionally, according to its management commentary at the Q3 earnings call, HTHT expects its RevPAR (revenue per available room) to decline by a mid-single-digit percentage for Q3 2024.

A difficult year-on-year comparison and unfavorable supply and demand dynamics are likely to be the main reasons why H World’s third-quarter revenue forecast is below expectations.

HTHT’s revenue in RMB increased by +53.6% year-on-year in Q3 2023, making it a difficult comparison to the company’s revenue performance in Q3 2024. H World stated at its Q3 earnings call that Q3 2023 was the “peak season right after the post-COVID reopening.”

On the other hand, when releasing its third-quarter results, HTHT acknowledged that China’s hospitality sector was facing headwinds due to “oversupply” and “weak demand for business travel.”

Recent industry data and HTHT’s competitor’s outlook suggest that China’s hotel industry is under pressure in the near term. As highlighted in HTHT’s Q2 analyst conference, the mainland Chinese hotel industry saw a year-on-year decline in RevPAR of about -10% in the July-early August period. Marriott International (MAR) has separately announced that its Greater China business is expected to experience a decline in RevPAR in the second half of 2024.

However, the medium-term prospects for a return on capital for shareholders are positive

Investors who have invested in H World shares can expect a significant return of excess capital to shareholders in the medium term.

HTHT’s new $1 billion share repurchase plan will be for a period of five years, beginning on August 21, 2024.

In the first seven months of this year, H World has allocated $143 million to share repurchases, representing an annual repurchase volume of $245 million. Therefore, H World should have no problem completing its new $1 billion share repurchase program within the next five years (an average of $200 million per year), assuming it continues a similar pace of share repurchases in the future.

The potential return on H World’s future share repurchase is approximately 2.2 percent on an annualized basis, assuming the company completes its $1 billion repurchase plan in five years.

In addition, H World has announced that it will pay out at least 60% of its profits as dividends over the next three years.

The stock’s consensus dividend yields for fiscal years 2024, 2025 and 2026 currently stand at 3.7%, 4.0% and 4.4%, respectively. The market’s consensus dividend forecasts for HTHT assume dividend payout ratios of 53%, 56% and 54% for fiscal years 2024, 2025 and 2026, according to data from S&P Capital IQ. The current consensus dividend forecasts for H World appear quite conservative, as the implied dividend payout ratios are below the company’s guidance of 60%.

At its analyst briefing for the second quarter of 2024, HTHT emphasized that “we are committed to rewarding our shareholders through dividends and buybacks” as “we asset-light (my emphasis) and cash rich.” In my previous update on June 9, 2024, I noted that “HTHT intends to gradually shift its overseas hotel business from leased and owned hotels to franchised hotels.” Therefore, it is very likely that H World will be able to distribute a significant portion of its capital to shareholders in the future as the company transitions to an “asset light” model with a focus on “franchised hotels.”

In the medium term, according to my analysis presented above, H World could potentially offer an annualized shareholder return (dividend yield + buyback yield) in the mid-single-digit percentage range.

Conclusion

As the third-quarter guidance shows, HTHT’s near-term outlook is negative. However, given the stock’s potential shareholder return in the mid-single digits, it is worth it for investors to wait for the recovery.

I also believe H World shares are fairly valued. The stock’s consensus EV/EBITDA multiple for the next twelve months of 12.3 and its consensus EBITDA CAGR forecast for fiscal year 2024-2026 of +11.9% based on S&P Capital IQ data are both in the low double digits.