Atour Lifestyle Holdings Ltd

NASDAQ:ATAT

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentleman, thank you for standing by and welcome to the Atour Lifestyle Holdings Limited First Quarter 2023 Earnings Conference Call. At this time all participants are in listen-only mode. After the speakers' presentation there will be a Q&A session. Today's conference is being recorded.

At this time, I would like to turn the conference over to Ms. Queenie Chen [ph]. Senior Manager of Investor Relations. Please go ahead, ma'am.

[Unidentified Company Representative]

Thank you, operator. Good morning, and good evening, everyone. Welcome to our first quarter 2023 earnings call. Joining us today are Founder, Chairman and CEO, Mr. Wang Haijun and our CO-CFOs, Mr. Rui and Mr. Wang Shoudong.

Before we start, please note, the discussion today will include forward-looking statements made under Federal Security Laws that are subject to numerous risks and uncertainties. Actual results may differ materially from those stated or implied by our comments today. The company does not undertake any obligations to update any forward-looking statements except as required by applicable laws.

During today's call management, will also discuss certain non-GAAP financial measures for comparison purpose only. For definition of non-GAAP financial measures and the reconciliation of GAAP to non-GAAP financial results, please see the earnings release issued earlier today.

In addition, a webcast replay of this conference call will be available on our website at ir.yaduo.com. Now I will turn the call over to Mr. Wang, our CEO.

[Haijun Wang, Founder, Chairman & CEO]

Thank you Queenie. Hello everyone and thank you for joining Atour's first quarter 2023 earnings call today.

I'm pleased to share with you that Atour commenced the year 2023 on a strong note, achieving solid results in both our hotel and scenario based retail businesses. Our core value proposition to serve people with exceptional experience continues to guide our steps as we refine and polish our hotel services and lifestyle products to deliver Atour experiences to every customer.

These uncompromising efforts, combined with our dedication to excellence, drove a robust recovery in both the hotel and retail businesses during the first quarter. We continue to execute our three year development plan to open 2,000 premier hotels, while establishing the Chinese experience as the industry benchmark, which we believe will solidify our leading position in the upper midscale hotel industry post-pandemic.

Now let me go through our performance details across our business lines. First, our hotel business development. As we enter into the post-pandemic era, we are seeing a rapid market recovery driven by surge in travel and accommodation demand. Embodying our three pronged mantra, high quality, high value and high efficiency, Atour responded quickly to the first quarter's rising market opportunities and achieve parallel growth in ADR and OCC.

Our RevPAR for the first quarter rebounded significantly to 118% of 2019's level for the same period, while both ADR and occupancy rates exceeded 2019's level, demonstrating our exceptional recovery capability.

Looking at the first quarter in greater detail, our RevPAR recovery rate was 102%, 136% and 119% of 2019's level for January, February and March respectively. Furthermore, same hotel RevPAR for mature hotels in operation for more than 18 months recovered to 118% of 2019's level in the first quarter, showcasing a vigorous rebound of our business at the operational level.

For the five day Labor Day holiday explosive demand for travel and hotels stimulated further improvement in RevPAR to 133% of 2019's level. Notably, RevPAR's recovery rates soared to over 160% of 2019 level in various provinces such as Shandong, Fujian and Hubei, among others.

The pandemic during the second half of 2022, combined with the Chinese New Year holiday in the beginning of 2023, slightly impeded our overall progress with respect to new openings in the first quarter. However, alongside the market recovery, franchisees engagement trends have continued to improve. The number of new hotels we signed in the first quarter reached 94, representing a new record high for single quarter signings.

Furthermore, among our newly signed hotels, the repurchase rate from our existing franchisees was more than 40%, highlighting our product competitiveness and brand premium. It's also worth mentioning that our Atour Light 3.0 version has quickly gained market acceptance, achieving a remarkable performance, with a total of 16 new projects signed by the end of Q1 since its released on February the 22 of this year.

Our hotel network continues to grow rapidly. As the end of first quarter this year, we had extended its coverage to 968 hotels, representing a year-over-year increase of 23%. Meanwhile, our pipeline remained healthy and continued to expand. Excitingly, we commenced the operation of our portfolio's 1,000 premier hotel today in Lanzhou officially merged marking the inception of our 1,000 hotel era.

As the end of the first quarter, we had 413 hotels under development. We will continue to peruse and analyze the ever-evolving market prospects alongside opportunities to consolidate the hotel market as we met our course for opening a total of 280 hotels by the end of this year.

Our loyalty program and Central Reservation System, or CRS also maintained their steady growth momentum in the first quarter, benefiting from our high quality services and premier customer experiences. As of the end of Q1, our membership base surpassed 38 million, with an increase of over 2.8 million new members since the end of the previous quarter.

Our members are young and engaged, representing the most energetic and promising consumer group in China. Among those members who stayed with us in the first quarter, about 46% of them were aged 30 to 40, and 25% were younger than 30. Meanwhile, the percentage of our nights sold through our CRS exceeded 60% in the first quarter of 2023, sustaining its healthy growth trend.

Now moving to our scenario-based retail business. As a leading lodging-centric lifestyle brand the retail business is a natural extension of our expertise in hospitality, reaching beyond accommodation to harmoniously complement our value proposition to serve people who have diverse lifestyles. In the past few years, we have successfully developed three product lines, namely Atour Planet, Z To Go [ph] and Soccer, focusing on sleep, travel and aroma aesthetics, respectively.

Through these premium offerings, we deliver Atour's signature experience of comfort, ease and relaxation to our customers when they are at home as well as on the go. These high quality lifestyle products, along with our diversified online and offline distribution channels, and our continuously improving brand awareness, underpinned the robust growth of our innovative scenario based retail business during the first quarter, further solidifying its role as our second growth driver.

GMV increased by almost 200% year-over-year to RMB142 million in the first quarter of 2023 propelled by rapid growth in both our online and offline distribution channels. Revenues from our scenario-based retail business for the quarter reached the RMB100 million milestone, reflecting its powerful growth momentum.

Currently, we are purposefully focused on our sleep category, with Atour Planet products as our cornerstone in the first quarter, Atour Planet contributed the nearly 80% of our retail businesses total GMV. In March, we launched the upgraded 2.0 version of our Atour Planet, R90 deep sleep pillow following a comprehensive user feedback study. We creatively refined the pillow's design and construction to strike the optimal balance between comfort and functionality.

Thanks to these luxurious features the Atour Planet, R90, 2.0 version pillow became a popular product quickly after its release and has garnered enormous user recognition with its sales performance significantly exceeding the level of the 1.0 version for the comparable period.

Our retail business is deeply rooted in our lodging-centric lifestyle brands philosophy. Adhering to our original goal of bringing the Atour Hotel experience into our customers' homes, we remain committed to exploring deep sleep from every angle as we strive to deliver a comfortable and relaxing sleep experience. We are very optimistic about the massive potential and development opportunities in China's sleep market.

Moving forward, we will continue to strengthen our insight into users' evolving needs and push the boundaries of product development, providing our users with premier sleep experiences through a diverse and growing suite of sleep-related products. We believe that our ongoing holistic improvements across our product development capabilities, operational efficiency, and brand awareness will establish Atour as an important player in China's sleep products market.

Since our establishment in 2013, we have consistently endeavored to provide our customers with cultural, inviting, and interesting experiences throughout every step of their journeys, creating an intimate ambience, where people can warmly connect. Meanwhile, we continuously explore new possibilities and expand our consumption scenarios, catering to the refined expectations of those who demand a high quality lifestyle.

Our value proposition originated with a goal to provide an exceptional experience to customers during their stay with us, which we further elevated to serve people who have diverse lifestyles, has not only elevated our strong performance across both our hotel and retail businesses, it has also become the driving force behind Atour's core competitiveness and our key differentiator. As we move forward this value proposition will further empower us to drive long term sustainable growth and create greater value for our customers, franchisees employees and shareholders.

Now I'll turn the call over to our Co-CFO, Mr. Wang Shoudong to discuss our financial results.

[Shoudong Wang, Co-CFO]

Thank you Mr. Wang. Now I would like to present the company's financial performance for the first quarter of 2023.

Our net revenues for the first quarter of 2023 grew by 71.2% year-over-year to RMB774 million. The strong increase in the first quarter was driven by growth in both the hotel business and the scenario-based retail business.

Revenues from our manachised hotels for the first quarter of 2023 were RMB447 million, up by 63.2% year-over-year. This increase was primarily driven by the ongoing expansion of our hotel network and the recovery of RevPAR. As of the end of March this year, the total number of our manachised hotels increased to 935, up by 24.3% year-over-year, while RevPAR of our manachised hotels surpassed the pre-pandemic level in 2019, increasing to RMB331 for the first quarter of 2023.

Revenues contributed by our leased hotels for the first quarter of 2023 were RMB187 million, representing an increase of 67.9% year-over-year. The increase was primarily due to the recovery of RevPAR, driven by increased customer traffic and stronger consumption sentiment since the beginning of 2023. RevPAR of our leased hotels surpassed the pre-pandemic level in 2019, increasing to RMB464 for the first quarter of 2023.

Revenues from retail and others for the first quarter of 2023 increased by 109.5% year-over-year to RMB140 million with scenario-based retail revenue growing by 174.3% year-over-year to RMB113 million. The increase was attributable to the growing recognition of our retail brand and enhanced product capabilities.

Our hotel operating costs for the first quarter of 2023 increased by 18.1% to RMB382 million year-over-year, mainly due to the increase in variable costs associated with the ongoing expansion of our hotel network and recovery of RevPAR. Hotel operating costs accounted for 49.3% of net revenues for the first quarter of 2023 compared to 71.5% of net revenues for the same period of last year.

Other operating costs primarily consist of costs for our scenario-based retail business and costs of other revenues. Other operating costs for the first quarter of this year was RMB72 million, representing an increase of 124.5% year-over-year, driven by increased the costs, in line with the rapid growth of our scenario-based retail business. Other operating costs accounted for 9.3% of net revenues for the first quarter of 2023, compared to 7.1% of net revenues for the same period of 2022.

Selling and marketing expenses for the first quarter of 2023 increased by 135.6% to RMB56 million primarily driven by the increased investment in branding initiatives and distribution channel development associated with our growing scenario-based retail business. Selling and marketing expenses accounted for 7.2% of net revenues for the first quarter of 2023 compared to 5.3% of net revenues for the same period of 2022.

General and administrative expenses for the first quarter of 2023 were RMB193 million. Excluding share-based compensation expenses of RMB141 million, adjusted general and administrative expenses increased by 13.8% year-over-year to RMB52 million for the first quarter of 2023. General and Administrative expenses, excluding the impact from share-based compensation expenses accounted for 6.7% of net revenues for the first quarter of 2023, compared to 10.1% of net revenues for the same period of 2022.

Our technology and development expenses for the first quarter of 2023 were RMB17 million, which were generally in line with the same period of 2022. Adjusted net income for the first quarter increased by 2,114.3% year-over-year to RMB160 million. Adjusted EBITDA for the first quarter of 2023 was RMB231 million, up by 584.8% year-over-year.

Notably, we have maintained a healthy cash position ending Q1 with RMB 2.0 billion in cash and cash equivalents. Among them, net cash was RMB1.8 billion, representing an increase of 24.5% quarter-over-quarter.

That concludes our financial highlights for the first quarter of 2023. With that, now let's head it over to our Q&A session.

[Operator]

Thank you. [Operator Instructions]. Thank you. We'll now take our first question. Please standby, is from the line of Sijie Lin from CICC. Please go ahead.

[Sijie Lin, CICC]

Thank you management, and congrats on the strong results. So I have one question about RevPAR. Our Q1 RevPAR recovery reached 118%. So how's the RevPAR recovery in Q2, and for the full year of high recovery will we adjust our guidance? Thanks.

[Haijun Wang, Founder, Chairman & CEO]

Thank you very much Sijie for that question. In Q1, there were some partially due to the retaliatory rebound factors. And we were not sure whether that trend was going to be long term. So we needed to observe. That's why on last quarterly earnings call we gave a cautiously optimistic guidance which is single-digit positive growth for the whole year.

We Atour always position ourselves in the upper midscale segment in which there are no structural factors benefiting our recovery. As I said in the report in the first quarter of this year, our RevPAR recovery rate for all of our hotels, as well as for those mature hotels in operation for more than 18 months were both 118%, showcasing a vigorous rebound of our business at our operational level and that was a high quality growth.

As for Q2, now that we see in April and the Labor Day holidays in May the RevPAR recovery trend were both quite good. So we are confident to reach 110% recovery rate for the whole year. Thank you.

[Unidentified Company Representative]

Operator, next question please.

[Operator]

Thank you. We'll now take our next question. Please standby. This is from the line of Ronald Leung from Bank of America. Please go ahead.

[Ronald Leung, Bank of America Merrill Lynch]

Okay, let me ask the question in English. So management how to think about the franchisees and even now, do you think there is a good improvement in 2023? And also if the RevPAR can continue to improve and be better than expectations? Do you think there is any chance that the 280 hotels opening, do you think the overall openings can be better than the 280 number of guidance this year? Thank you very much.

[Haijun Wang, Founder, Chairman & CEO]

Thank you very much for that question, Ronald. In first quarter, in terms of signings, we made some rapid progress reaching 94 signings, which is the highest level of a single quarter signings in history. Among those new signings, we found that over 40% of them are actually repurchases from our existing franchisees, and that really gave us a lot of encouragement.

We do believe that with the recovery of the market, and together considering our pipeline reserves, we have already 413 in pipeline in first quarter. And together with the chain hotel opportunities brought by the industry consolidation going on, we will be able to support the new hotel opening target of 280 this year.

We, Atour always prioritize quality over quantity. We believe that quality is a prerequisite for long term healthy development. Also just now you have heard that today marks the landing of our 1,000 hotels in operation that was in Lanzhou, and that marks we officially have entered 1,000 hotel era and we will maintain this expansion speed while ensuring the quality of our products and those hotels and try to be robust and develop with more new hotels of that higher quality.

[Unidentified Company Representative]

Next question please?

[Operator]

Okay. We'll now take our next question. Please standby, is from the line of Lydia Ling from Citi. Please go ahead

[Lydia Ling, Citi]

Hi management. Lydia from Citi. And I have a question regarding the competitive landscape in mid to upscale hotel. So as the hotel industry gradually recovers, many hotel companies shift their model [ph] and invest more in that mid to upscale segment. And with more hotel supply into the mid to upscale segment, do you face more intense competition and how do you purpose to further enhance your competitiveness in this segment. Thank you.

[Haijun Wang, Founder, Chairman & CEO]

The hotel industry has two paths, either cost-oriented or experience-driven. We Atour focus on experience. Since our establishment, our strategy of focusing on exceptional experience has accumulated good reputation among our customers that has enhanced their satisfaction and repurchase.

Our three mantra -- three high mantras, namely high quality, high value, high efficiency has helped us to ensure the long term and stable returns for our franchisees. And that also have enabled us to gradually accumulate recognition and market share among our franchisee partners. According to [indiscernible] Industry Research, in terms of the number of rooms we Atour had been maintaining the first position in the market share of the largest upper midscale hotel chains in China and our leading is still expanding.

Sure, there are competitions. While with the general trend is increasing hotel chain penetration, this industry the hotel industry does not develop as a zero sum game. For those players in this industry, whoever's got strong branding, operational capabilities, better customer experiences as well as better model innovations, they can achieve high quality and sustainable development.

Only when every player in this industry, they do what they want to the extreme and also start to form differentiated products and experiences, that's the time when our industry will develop with more diversification and then a healthy competition pattern shall take place.

[Unidentified Company Representative]

Okay, operator. Next question please?

[Operator]

Thank you. Now take our next question. Please standby. This is from the line of Andy Fu from Blue Lotus. Please go ahead.

[Andy Fu, Blue Lotus Research]

Thank management for taking my question. Congrats on the good earnings performance at the net income in the first quarter. Can management breakdown the reasons behind outperforming earnings? Also consider the quick recovery in the channel, travel consumption, do we have an update on the expectation on earnings for the second quarter and the full year 2023? Thanks.

[Shoudong Wang, Co-CFO]

Thank you for that question. I'll be taking this question. So indeed our company in first quarter did achieve a good performance. Our adjusted net profit was RMB160 million and the adjusted net profit margin was 20%.

First of all in terms of gross margin, our Q1 gross margin was 41%, which was 20% higher compared with Q1 of 2022. Mainly there were two reasons. The first is that with our light asset mode, we benefited from the rapid recovery of RevPAR and economy of scale effect brought by the expensive expansion of our hotel network.

The second reason was due to the continuous development of our relatively higher gross margin retail business. The revenue contribution from our retail business have continued to increase and its gross margin by itself also has increased. And those two reasons also have drove our overall gross margin higher.

In terms of expenses, our three expenses accounted for 16% of revenue in the first quarter this year, down by 3% year-on-year in which marketing expenses accounted for 7% of revenue. That was up by 2% because we increased the investment in branding initiatives and developing distribution channels for our scenario-based retail business. The rest 9% of revenue were administrative and R&D expenses, down by 5% than last year, since we improved on our management efficiency. The increase of -- the increasing of the management and R&D expenses were much smaller than the growth speed of our revenue.

In the future with our continuous expansion of our hotel network, along with the gradual kicking in of the economy of scale effects, plus the continuous development of our retail business, we expect that our overall profitability will maintain a stable growth in the longer term. Thank you.

[Unidentified Company Representative]

Next question, please?

[Operator]

Thank you. We'll now take our next question. Please standby, and this is on the line of Xin Chen from UBS. Please go ahead.

[Xin Chen, UBS]

I'd like to ask the question regarding the revenue [indiscernible]. How does management perceive the growth potential of this scenario with your business? What can we expect from this future divestment, and this will impact Atour's financials? Thanks.

[Haijun Wang, Founder, Chairman & CEO]

So thank you for that question, Mr. Xin Chen. I'll talk about the business condition of our retail business and then we'd like to ask Mr. Wang Shoudong dome to supplement on the financial side. We as a lodging-centric lifestyle brand, our retail business is a very natural extension of our expertise in hospitality, reaching beyond accommodation to harmoniously complement our value proposition to serve people who have diverse lifestyles.

Our offline hotels scenes can provide a natural experience space, which also brings a lot of natural traffic to our retail businesses. Retail on the other hand, can also help to bring our Atour experience back to customers' homes, help to improve their perception of Atour and also bring some back to our hotels for more space in the future. Retail Business and hotel business as you see in this way can form a very nice loop with that kind of synergy.

Product wise, we currently focus on a pan-sleep category, taking Atour Planet as our core product. In first quarter, our Atour Planet contributed nearly 80% to our overall GMV of the retail sales, pillows, mattresses, quilts and four piece sets all sold very well. We are very optimistic about China's sleep product market with massive potential and we believe there are quite a lot of development opportunities. We also believe we Atour will also stand a place in China's sleep economy in the future.

Channelize apart from leveraging our expanding hotel network as both the consumption themes and customer traffic sources we also have been developing online third party channels so that driven from both offline and online these two channels have both been growing very fast. In the future, we'll continue to strengthen our investments on customer insight and product development to create more high quality sleep product to offer first class sleep experiences for our customers and so that we can make more people sleep better.

Now let me hand it over to Mr. Wang Shoudong to talk about scenario-based retails financials.

[Shoudong Wang, Co-CFO]

Our scenario-based retail business in last year have already reached a revenue of $254 million and already achieved a positive bottom line. And for the first quarter of this year, our scenario-based retail revenue have already reached a milestone of 100 million. And we expect our whole year revenue will reach above RMB400 and a RMB1 million with an increase of more than 80% year on year and a profitability will also increase accordingly.

Meanwhile, on the basis of stringent requirements on ROI and reasonable profit, we also will increase the investment in branding initiatives and distribution channel expansions to make sure that our scenario-based retail's contribution to the group's overall profit will increase year-by-year.

[Unidentified Company Representative]

Okay. Operator, next question maybe.

[Operator]

Thank you. That does conclude the question-and-answer session. I would like to turn the conference back over to Queenie Chen for any additional or closing comments.

[Unidentified Company Representative]

Thank you, Operator. Thank you everyone once again for joining us today. If you have any further questions, please feel free to contact us. Have a great day. Goodbye.

[Operator]

Thank you. This does conclude the conference for today. Thank you for participating and you may now disconnect.