Executive Summary / Key Takeaways

• H World Group is strategically transforming into an asset-light powerhouse, with its manachised and franchised (M&F) business now contributing 64% of gross operating profit, driving stable margins and robust growth despite broader market challenges.
• The company maintains a dominant position in China's economy and middle-scale hotel segments, leveraging its "Golden Triangle" brands (HanTing, JI, Orange) and a technologically advanced supply chain to deliver high-quality, value-for-money offerings and accelerate penetration into lower-tier cities.
• H World's proprietary supply chain capabilities, exemplified by HanTing 4.0, provide a significant competitive moat, reducing CapEx and OpEx by 10% to 20% for key materials and shortening construction periods by 30 days.
• Despite RevPAR pressures from increased supply and macro uncertainties, particularly in business travel, H World is committed to achieving its full-year revenue guidance through high-quality network expansion and strategic product upgrades.
• The company demonstrates a strong commitment to shareholder returns, having declared a USD 250 million interim cash dividend for H1 2025, representing 74% of net profit, alongside ongoing share buybacks.

H World's Strategic Ascent: Redefining Hospitality in a Dynamic Market

H World Group Limited, formerly Huazhu Group, has evolved significantly since its founding in 2005, transforming from a single HanTing hotel into a multi-brand hospitality giant. This journey has culminated in a strategic pivot towards an asset-light model, emphasizing high-quality growth, operational efficiency, and technological differentiation. The company's core business spans China (Legacy-Huazhu) and international markets (Legacy-DH), with a foundational strength in its extensive network and a clear vision to reach 20,000 hotels across 2,000 cities in the near future.

The broader industry landscape presents a mixed picture. Domestic travel demand in China continues to grow steadily, supported by government initiatives promoting tourism. However, a rapid increase in hotel supply over the past two years, coupled with macro uncertainties and weakened consumer spending willingness, has created RevPAR (Revenue Per Available Room) pressures, particularly impacting business travel and high-end consumption. In this environment, consumers increasingly favor value-for-money products and services, a trend H World is uniquely positioned to capitalize on.

H World's competitive positioning is formidable within China, where it stands as a market leader in the economy and middle-scale segments. Its "Golden Triangle" brands—HanTing, JI Hotel, and Orange Hotel—demonstrate significant competitiveness. HanTing, notably, ranks as the world's largest hotel brand by room count. While global players like Marriott (MAR), Hilton (HLT), IHG (IHG), and Accor (AC) offer broader international reach and often cater to more premium segments, H World's deep roots in China provide a distinct advantage in localized execution, cost management, and rapid adaptation to regional trends. The company's extensive network effects and culturally tailored offerings allow it to penetrate markets more effectively and build stronger community ties than its global counterparts.

A critical differentiator for H World is its advanced supply chain capability, which serves as a core technological moat. This is not merely an operational advantage but a strategic pillar enabling high-quality, long-term sustainable growth. The company has comprehensively upgraded its supply chain since 2024, focusing on enlarging its supplier pool, strengthening modular applications, and optimizing product design. These efforts aim to achieve higher product quality, lower operating and capital expenditures, and shorter construction periods. For instance, through supply chain optimization, H World has achieved a 10% to 20% year-over-year cost decline for furniture, furnishings, consumables, and basic materials. The recently launched HanTing 4.0 version, a "revolutionary supply chain reform," exemplifies this, reducing the construction period for new hotels by 30 days through increased modularization. This technological edge translates directly into financial benefits, enhancing capital efficiency and cash flow generation, allowing H World to offer competitive pricing while maintaining healthy margins, particularly against rivals who may face higher operational costs in the Chinese market.

The Asset-Light Imperative: Fueling Sustainable Growth

H World's strategic transformation towards an asset-light model is central to its long-term investment thesis. This involves shifting from owning or leasing properties to a manachised and franchised (M&F) model, which generates fee-based revenue and offers a more stable margin profile, less susceptible to RevPAR fluctuations. In the second quarter of 2025, the M&F business delivered robust growth, with revenue rising 22.8% year-over-year to RMB 2.9 billion and gross operating profit increasing by 23.2% year-over-year to RMB 1.9 billion. Crucially, this segment contributed nearly two-thirds (64%) of the group's total gross operating profit, marking a 7.5 percentage point increase year-over-year. This trend underscores the success of the asset-light strategy in driving profit growth and enhancing overall group margins.

Conversely, the company is actively reducing its exposure to the asset-heavy leased and owned (L&O) business. In Q2 2025, L&O revenue decreased 7.6% year-over-year, and its gross operating profit declined 13.4% year-over-year. To mitigate the impact on existing L&O properties, H World is proactively seeking rental reductions with landlords, securing approximately RMB 390 million in total contract value for rental reductions in the first half of 2025. The company also implements rigorous revenue management, sales and marketing, and cost optimization efforts for these hotels. This strategic reduction in L&O exposure, while impacting revenue in the short term, is a deliberate move to foster more stable and sustainable long-term development with healthier cash flow.

The international Legacy-DH segment is also undergoing a significant asset-light transformation. Legal requirements in Europe, particularly Germany and Central Europe, make dissolving lease contracts challenging, yet H World is actively negotiating with landlords. In Q1 2025, DH revenue decreased 11.3% year-over-year, primarily due to the transformation of 10 leased hotels to franchised hotels. However, these restructuring efforts, which included a 30% reduction in headquarters staff and streamlining processes in the second half of 2024, are expected to yield full-year savings in 2025 and improve profitability over time. The company exited 14 leased hotels in 2024 and another 11 in February 2025, signaling a clear commitment to an asset-light model internationally.

Dominating the Domestic Landscape: Brands, Expansion, and Innovation

H World's domestic Legacy-Huazhu business continues its robust expansion, with a record 2,442 new hotels opened in 2024, 2,430 of which were in China. This expansion is strategically focused on penetrating lower-tier cities, where 54% of its pipeline hotels are located, 11 percentage points higher than the proportion in operating hotels. By Q1 2025, the company covered 1,394 cities and countries, adding 104 new locations in a year. This aggressive yet high-quality expansion is crucial for achieving its mid-term target of 20,000 hotels in 2,000 cities.

The "Golden Triangle" brands—HanTing, JI Hotel, and Orange Hotel—are the core drivers of this growth. HanTing, already the world's largest hotel brand by room count, launched its 4.0 version in Q2 2025, which is expected to further drive penetration into lower-tier cities. JI Hotel has been upgraded to version 5.0, and Orange Hotel, now at version 3.0, recently surpassed the 1,000-hotel milestone, positioning it as the second growth engine in the middle-scale segment alongside JI Hotel. These continuous product upgrades are vital for maintaining market leadership and enhancing competitive edge. However, the rapid introduction of newer, higher-quality products has created some RevPAR pressure on older HanTing versions (2.0-2.5 and below), a challenge management expects to resolve within 1-2 years through active upgrades and rational new hotel positioning.

Beyond the limited service segment, H World has made rapid breakthroughs in the upper-midscale segment. As of Q2 2025, the number of upper-midscale hotels in operation and pipeline exceeded 1,500, a 23.3% year-over-year increase. Brands like Intercity Hotel and Crystal Orange (which launched its 2.5 version in Q3 2024, tailored for elite business travelers) are gaining significant traction. Intercity Hotel, in particular, achieved positive year-over-year growth in its same-hotel RevPAR in Q2 2025, a rare feat in the current market. H World is leveraging the weakness in the real estate market in Tier 1 and Tier 2 cities to secure prime locations for these high-quality upper-midscale products, aiming for Intercity to become a leading brand in this segment within 3-5 years.

The H Rewards membership program and direct sales capabilities are fundamental to H World's sustainable long-term growth. The member base reached nearly 290 million by the end of Q2 2025, with direct bookings through the Central Reservation System (CRS) rising 5.2 percentage points year-over-year to 65.1%. The company is enhancing membership benefits, expanding loyalty point usage, and exploring cross-industry partnerships to boost engagement. Furthermore, H World's B2B capabilities have strengthened, with direct corporate bookings exceeding 7.5 million room nights in Q3 2024, offsetting some of the stagnant individual business travel demand.

Financial Health and Shareholder Value

H World Group's financial performance in Q2 2025 demonstrated resilience amidst challenging market conditions. Group revenue grew 4.5% year-over-year to RMB 6.4 billion, near the high end of its guidance. Adjusted EBITDA rose 11.3% year-over-year to RMB 2.3 billion, and adjusted net income increased 7.6% year-over-year to RMB 1.3 billion. These margin improvements were driven by the asset-light strategy and ongoing cost optimization efforts.

The company maintains a strong liquidity position, generating RMB 2.7 billion in operating cash flow in Q2 2025. As of the quarter-end, H World held RMB 13.7 billion in cash and cash equivalents and a solid RMB 6.2 billion in net cash. This robust cash generation supports its commitment to shareholder returns. For the first half of 2025, the company declared a USD 250 million interim cash dividend, representing 74% of its first-half net profit, complemented by approximately USD 62 million in share buybacks. This aligns with its revised dividend payout policy of no less than 60% of net profit and a three-year shareholder return campaign of up to USD 2 billion.

Risks and the Path Forward

Despite H World's strategic strengths, several risks warrant investor attention. The rapid increase in hotel supply, particularly in China, continues to exert pressure on RevPAR, leading to a projected "very slight year-over-year decline" in Q3 2025 RevPAR and a full-year RevPAR "slightly below our previous guidance." Macro uncertainties, extreme weather, and weakened consumer spending willingness also pose ongoing challenges, especially for business travel. The impact of newer, higher-quality hotels on older properties, particularly HanTing 2.0-2.5, is a short-term pain point expected to take 1-2 years to fully resolve. Furthermore, the asset-light transformation of Legacy-DH in Europe faces complexities due to legal requirements for dissolving lease contracts, and while restructuring costs are not expected to be of the same magnitude as 2024, they remain a factor.

H World's management is proactively addressing these risks. The company's commitment to "high-quality, sustainable growth" involves stricter new signing standards and continuous phasing out of unqualified hotels. Product upgrades, such as HanTing 4.0 and JI 5.0, are designed to enhance competitiveness and meet evolving customer demand. The strategic focus on the value-for-money segment positions H World well against weakened consumer spending. For 2025, the company expects group revenue to grow 2% to 6% (4% to 8% excluding DH's asset-light impact) and M&F revenue to grow 17% to 21%. Unit growth is projected at approximately 2,300 new hotels and 600 closures, representing about 15% year-over-year network growth. Management remains confident that RevPAR for the full year 2025 will at least remain stable, supported by strong leisure demand and government tourism initiatives.

Conclusion

H World Group is executing a compelling transformation, strategically leveraging its asset-light model and technologically advanced supply chain to solidify its market leadership in China's vast hospitality sector. The company's focus on high-quality expansion, continuous product innovation across its "Golden Triangle" brands, and a disciplined approach to capital allocation are driving robust financial performance and significant shareholder returns. While macroeconomic headwinds and industry oversupply present near-term RevPAR challenges, H World's deep operational efficiencies, cost leadership, and expanding direct sales capabilities provide a resilient foundation. Its differentiated supply chain, offering quantifiable benefits in cost and construction efficiency, underpins its competitive advantage and positions the company for sustained growth. As H World continues to refine its brand portfolio and expand strategically, particularly in the promising upper-midscale segment and international markets, its commitment to a high-quality, asset-light model, supported by technological prowess, is poised to unlock long-term value for discerning investors.