Atour Lifestyle Holdings Ltd

NASDAQ:ATAT

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Atour Lifestyle Holdings Third Quarter 2024 Earnings Conference Call. [Operator Instructions]. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Ms. Alison Zhang, Director of Investor Relations. Please go ahead, ma'am.

[Alison Zhang, executive]

Thank you, operator. Good morning, and good evening, everyone. Welcome to our third quarter 2023 earnings call. Joining us today are our Founder, Chairman and CEO, Mr. Haijun Wang; and our Co-Chief Financial Officers, Mr. [indiscernible] and Mr. Wu Jianfeng.

Before we continue, please be aware that today's discussion will include forward-looking statements under federal securities laws. These statements are subject to various risks and uncertainties and actual results may differ significantly from what is stated or implied in our comments today.

The company is not obligated to update any forward-looking statements except as required by applicable laws. Additionally, during this call, our management will discuss certain non-GAAP financial measures solely for comparison purposes. For a clear understanding of these measures and a reconciliation of GAAP to non-GAAP financial results, please refer to the earnings release issued earlier today.

Furthermore, 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, executive]

[Foreign Language]

Thank you, Allison. Hello, everyone, and thank you for joining Atour's Third Quarter 2023 earnings call today. We are delighted to report another robust quarter. Our unremitting pursuit of growing to 2,000 premier hotels nationwide by 2025, while establishing the Chinese experience as the industry benchmark along with the continuous expansion of our brand influence enabled us to capture the growth opportunities arising from both business travel and the peak leisure travel season. As such, we achieved tremendous breakthroughs across each of our business lines. [Foreign Language]

Now I would like to discuss our performance in detail. [Foreign Language]

Let's begin with our hotel business. Travel and accommodation demand maintained solid growth momentum in the third quarter, highlighted by a notable uptick during the summer season. Accordingly, our third quarter's RevPAR increased to a record high of RMB 424 and recovery rate rose to 118% of 2019's level with July, August and September, reaching 122%, 116% and 115%, respectively.

Moreover, our ADR and OCC maintained their robust growth momentum during the mid-autumn festival and the National Day holiday period increasing by 14.6% and 7.2%, respectively, compared with the same period in 2019.

Together, they boosted our RevPARs recovery rate for the period to 123% of 2019's level.

[Foreign Language]

Meanwhile, our mature hotels in operation for more than 18 months sustained their excellent performance. Their same-hotel RevPAR recovery rate reached 118% of 2019 level in the third quarter. In line with the overall performance of our hotel business, highlighting the market's recognition of Atour's brand as well as outstanding efficiency across our business management and operations.

[Foreign Language]

We continued to accelerate our hotel network expansion with 81 new openings in the third quarter, driving our hotel network to reach 1,112 hotels as of the end of September. Meanwhile, propelled by our mounting competitiveness across products and brand, our third quarter's new signings grew rapidly, and our pipeline continued to flourish.

As of the end of September, our pipeline had sort to 577 hotels up by more than 60% year-over-year.

[Foreign Language]

Atour lite 3.0, our mid-scale offering, has continued to gain favor among franchisees since its launch in February. A total of 25 Atour lite 3.0 projects were signed over the quarter, constituting more than 15% of the quarter's total signings. By the end of September, we had opened 13 Atour lite 3.0 hotels, primarily located in core business districts in higher-tier cities. As a new hotel offering in the mid-scale market, Atour 3.0 has won broad market recognition for its stylish design as well as Atour's premier experience, resulting in a strong initial showing. In fact, these hotels have performed exceptionally well across key operating metrics since their openings.

In their fourth week of operation, average OCC reached 78.8% while RevPAR surpassed RMB 340, we believe Atour lite 3.0 is well positioned to meet young business travelers' demand for high-quality accommodation experiences while capturing the opportunities arising from property upgrades in core business districts. Moving forward, we anticipate it will rapidly grow to scale.

[Foreign Language]

Moreover, we remain dedicated to product innovation to better meet our customers' evolving demands. On November 11, we officially launched our brand new upper mid-scale flagship product Atour 4.0 with nature inspired by Yaduo Village, this product revolves around the idea of natural tranquility, providing customers with immersive experiences infused with contentment and relaxation.

[Foreign Language]

Elegantly outfitted with images of the brand's distinctive hallmark, Yaduo Village's tea tree, Atour 4.0 lobby is specially designed to reintroduce nature and serenity into urban settings. Its new chatting room offers a practical, functional open area to work and socialize beyond accommodations.

[Foreign Language]

Additionally, we have fully upgraded Atour 4.0 service standards, amenities and facilities. In our Atour 4.0 hotels, we added a special breakfast area, providing more diverse options for an exceptionally nutritious and healthy breakfast with carefully selected high-quality ingredients, such as non-GMO soybeans from Northeast China, milled from [indiscernible] on the lowest plateau and many other fresh components.

Furthermore, we will cooperate with 2 niche luxury bathing brands to create a comforting experience through their bath products, luxurious textures and sets. We also outfitted our gym with equipment from Precor, one of the world's top exercise facility brands to provide our customers a safer and more effective exercise experience in our well-appointed fitness facilities.

[Foreign Language]

Beyond the enhanced public area design and service standards, we added an innovative, exclusive deep sleep floor to our Atour 4.0 hotels. This debut concept features stylishly designed corridor [indiscernible] with a special lighting guidance system as well as our soft branded fragrance permeating the entire floor to create a serine atmosphere. Each room on the floor is equipped with a stepless dimming system, 1 click to sleep smart light controls and enhanced sound insulation delivering ultimate in serenity for optimal sleep.

Meanwhile, we provide signature products from Atour Planet's deep sleep series in each room to create a perfect balance among support, envelopment and pleasant temperature control, further ensuring users relaxing sleep experience.

[Foreign Language]

In short, the product innovation we have integrated throughout Atour 4.0 is a testament to our relentless pursuit of providing the ultimate accommodation experience. We are confident that Atour 4.0 will set a new industry benchmark for customer experience in the upper mid-scale market, propelling industry developments and further solidifying Atour's market-leading competitiveness.

[Foreign Language]

Moving now to our prime memberships. Through our persistent efforts to upgrade our membership services and exclusive privileges, our A-Card membership program continues to provide outstanding value for our customers. We have progressively expanded our membership network to include hospitality, retail, dining, culture, art, sports and various other premium benefits.

Consequently, our A-Card membership has gained significant recognition and popularity resulting in substantial growth of our member base. As of the end of September, the total number of individuals who have enrolled in our A-Card membership program exceeded RMB 54 million.

[Foreign Language]

We are continuously exploring opportunities for cross-industry collaboration to enhance A-Card's value perception among our members. In October, as an official partner of the Beijing Marathon, Atour extended a series of proprietary rights and the benefits to our members, including direct participant access to the Beijing Marathon and an array of value-added services such as special breakfast and energy supply packs.

Moving forward, we will continue to broaden our membership benefits and cover more diverse vertical interests through cross-industry exploration developing more opportunities while building up our membership ecosystem.

[Foreign Language]

In addition, we also continued to advance our A+ service offerings to better meet our A-Card customers ever growing and diversifying demand and ensure a unique memorable experience during their state at Atour.

Our signature deep sleep experience is top of mind for many A-Card members and our service offerings for achieving deep sleep such as pillow selection and good night milk have witnessed a high levels of demand. Our wide selection of high-quality offerings effectively enhance the users' recognition and stickiness. Significantly boosting the overall usage rate of our A+ services since the beginning of the year.

[Foreign Language]

At the same time, our direct sales channels remained effective and strong even during the peak summer season for leisure travel. Room nights sold through our CRS remained stable, reaching 62.5% in the third quarter. Resilience in both individual and corporate membership channels continued to propel the sustainable growth of our occupancy rate.

[Foreign Language]

Now I'd like to move on to our scenario-based retail business. We achieved another strong quarter with total GMV reaching a record high of RMB 302 million, increasing significantly by 292% year-over-year. Online sales, in particular, sort, contributing approximately 80% of our total GMV. Our retail business also delivered a remarkable performance during the recently concluded Double 11 shopping festival as we topped the pillow sales chart across various third-party e-commerce platforms. Double 11's GMV across third-party online platforms exceeded RMB 250 million, an increase of over 600% compared with the same period last year and an increase of more than 140% from this year's June 18 Shopping Festival. This impressive performance clearly reflects Atour's Planet's continuously strengthening brand awareness and robust growth potential.

[Foreign Language]

We have been consistently promoting innovation across our scenario-based retail business by identifying and exploring our users' evolving demands through their real feedback. Recently, we successfully established an efficient product development mechanism which has enabled us to roll out numerous blockbuster products. Our deep sleep pillow pro has enjoyed great success since its launch in March this year, with total sales volume exceeding 800,000 units as of November 11. Moreover, our deep sleep temperature control quote which is designed to envelope users in a snug and a tranquil environment with its advanced temperature-controlled features recorded an outstanding GMV of over RMB 10 million in September. This remarkable achievement serves as a compelling validation of our outstanding product development capabilities.

[Foreign Language]

Beyond our products themselves, exceptional customer experience is the cornerstone of a tour as a leading lifestyle brand. Our retail business development and success are not only driven by our innovative Deep Sleep series products, but also by the high-quality shopping experience we provide to our customers. Our Atour planet flagship stores have garnered 5-star ratings in terms of customer experience on both Douyin and Tmall, significantly outperforming our industry peers. From accommodation to our retail business, we have been proactively implementing our Chinese experience strategy to great effect further solidifying our brand recognition and propelling our sustainable and quality growth.

[Foreign Language]

Last but not least, we embarked upon a journey to rediscover Atour's original aspirations in October and returned to Inland province to revisit Yaduo Village. Yaduo Village's Spirit has always been our guiding light, inspiring our commitment to creating an intimate ambience where people can warmly connect. In 2018, we helped the village to form a specialized T cooperative, adopting an innovative model to encourage full cooperation among enterprises, vehicle operators, and tea farmers. This initiative has provided a stable income channel for local villagers, ever since and empowered Yaduo village to eradicate poverty village wide as of the end of 2019.

As of September this year, we have increased the planting area of our 3 tea farms in new [indiscernible] to nearly 10,000 more and Chinese unit varies. We believe the promotion of tea farms in Yaduo village will not only help reclaim waste land for agriculture, but can also contribute positively to Rina's ecological development and environmental conservation.

[Foreign Language]

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

[Wu Jianfeng, executive]

Thank you, Haijun. Now I would like to present the company's financial performance for the third quarter of 2023. Our net revenues for the third quarter of 2023 grew by 93.1% year-over-year and 18.4% quarter-over-quarter to RMB 1,294 million. The strong increase in the third quarter was driven by the robust growth in both our hotel and scenario-based retail businesses. Revenues from our miniaturized hotels for the third quarter of 2023 were RMB 781 million, up by 82.9% year-over-year and 24.7% quarter-over-quarter.

These increases were primarily driven by the ongoing expansion of our hotel network and the increase in RevPAR. The total number of miniaturized hotels increased to 1,080 as of September 30, 2023, up by 27.5% year-over-year and 7.9% quarter-over-quarter. While RevPAR supports 2019 level and recovered to RMB 418 for the third quarter of 2023 from RMB 317 for the same period of 2022.

Revenues contributed by our leased hotels for the third quarter of 2023 were RMB 238 million, representing an increase of 49.3% year-over-year and 8.5% quarter-over-quarter. These increases were primarily due to the growth of RevPAR. RevPAR of our leased hotels supports 2019 level and recovered to RMB 571 for the third quarter of 2023 from RMB 384 for the same period of 2022.

Revenues from retail and others for the third quarter of 2023 increased by 229.1% year-over-year and 11.4% quarter-over-quarter to RMB 275 million with scenario-based retail revenues growing by 291.7% year-over-year and 11.1% quarter-over-quarter to RMB 235 million. These increases were attributable to our ongoing efforts to adjust evolving customer needs as well as our efficient product development mechanism, which enabled us to consistently launch the product which are well received by customers.

In addition, we continued to expand our customer base and enhance our brand recognition through a combination of various online and offline distribution channels. Now let's move to costs and expenses. Our hotel operating costs for the third quarter of 2023 increased by 58.4% year-over-year to RMB 617 million, mainly due to the increase in variable costs -- supply chain costs associated with the ongoing expansion of our hotel network.

Total operating costs accounted for 60.5% of total hotel revenues for the third quarter of 2023, compared with 56.3% for the same period of 2022. The decrease was due to the robust growth of RevPAR and the economics of scale brought by our rapid network expansion. Other operating costs for the third quarter of 2023 were RMB 131 million representing an increase of 190.8% year-over-year, driven by increased costs associated with the rapid growth of our narrow-based retail business. Other operating costs accounted for 47.6% of retail revenues and others for the third quarter of 2023 compared with 53.8% for the same period of 2022.

The decrease was attributable to improve the retail business profitability as a result of the increasing contribution from higher-margin online distribution channels. Selling and marketing expenses for the third quarter of 2023 increased by 269.3% year-over-year to RMB 112 million. Selling and marketing expenses accounted for 8.7% of the net revenue for the third quarter of 2023 compared with 4.5% for the same period of 2022. The year-over-year increase was primarily attributable to the rapid growth of the scenario-based retail business, which was particularly driven by online channels.

General and administrative expenses for the third quarter of 2023 were RMB 79 million. Excluding share-based compensation expenses of RMB 9 million. Adjusted general and administrative expenses increased by 53.3% year-over-year to RMB 17 million for the third quarter of 2023. Adjusted general and administrative expenses accounted for 5.4% of net revenues for the third quarter of 2023 compared with 6.8% for the same period of 2022. This decrease was due to the improvement of our management efficiency and operating leverage.

Our technology and development expenses for the third quarter of 2023 were RMB 20 million compared with RMB 16 million for the same period of 2022. Technology and development expenses accounted for 1.6% of net revenues for the third quarter of 2023 compared with 2.5% for the same period of 2022. We will continue to improve our technology and development capability and invest in comprehensive digital infrastructure to facilitate our long-term sustainable goals.

Adjusted EBITDA for the third quarter of 2023 was RMB 380 million, up by 122.4% year-over-year. Adjusted EBITDA margin for the third quarter of 2023 was 29.4%, with an increase of 4 percentage points year-over-year. Adjusted net income for the third quarter increased by 144.7% year-over-year to RMB 272 million. Adjusted net profit margin for the third quarter of 2023 was 21.0%, with an increase of 4 percentage points year-over-year. The improved group's overall net margin was primarily driven by the increase in gross profit margin in both our hotel and scenario-based retail businesses, along with our improved operating leverage.

Operating cash inflow for the third quarter of 2023 was RMB 543 million. Investing cash outflow and financing cash outflow for the third quarter of 2023 were RMB 779 million and RMB 98 million, respectively. Notably, we have maintained a healthy cash position with stable growth momentum. As of September 30, 2023, our cash and cash equivalents totaled RMB 2.2 billion.

Together with bank structured deposits, we have cash and short-term investments totaling RMB 3.0 billion. That concludes our financial highlights for the third quarter of 2023.

With that, let's open for Q&A.

[Operator]

[Operator Instructions]

First question come from the line of Linda Wei from Citi.

[Lydia Ling, analyst]

[Foreign Language]

First, congratulations on a very solid results for the third quarter, including the hotel business and also the retail business. So want to track with the management that based on the fourth quarter-to-date trend, so do you actually have any changes in your full year guidance in terms of the openings like the RevPAR as well as for the top line and the bottom line guidance? And also, as we are into the end of this year, also want to track with the company if you have any guidance or growth outlook for next year? Do you have any like initial expectation to share with us?

[Haijun Wang, executive]

[Foreign Language]

Thank you, Lidia. Let me take your question. As of September 30, we have opened 189 hotels cumulatively this year. The trend shows a quarterly increase, and we are pretty confident that the new hotel openings will accelerate further in the fourth quarter. And that's why we would like to maintain the target of 280 new hotel openings for the full year.

[Foreign Language]

And secondly, in terms of the RevPAR, well, in our last earnings call, we had shared that our full year RevPAR recovery rate was to be in the range of 113% to 117%. Well, now that seeing the overall progress till now is including the performance during the summer and the National Day holidays all remained solid and was in line with our expectations. So we are maintaining the full year guidance unchanged, still within the range of 113% to 117%.

[Foreign Language]

And thirdly, in terms of revenue, as we have achieved many breakthroughs in our retail business, the retail business revenue has continuously exceeded our expectations. Therefore, we will revise up our full year revenue guidance to around RMB 4.4 billion with a year-on-year growth exceeding 90%.

[Foreign Language]

Regarding guidance for the next year, new hotel openings will progress steadily in line with the pace to achieve our goal of opening 2,000 Premier hotels by 2025 and the RevPAR target for next year is to be with some moderate growth based upon this year's fundamental value. And as we are in the middle of internal budgeting for next year 2024, we would like to share more color on the next quarter earnings call. Thank you.

[Alison Zhang, executive]

Thank you, Lidia. Operator, please invite next question.

[Operator]

The question has come from the line of Sijie Lin from CICC.

[Sijie Lin, analyst]

[Foreign Language]

So my question is about Atour 4.0, which we launched recently. I see that there's really a big improvement in overall style and quality compared with previous versions. So how can we control the CapEx at RMB 145,000 per room while shipping this? And could you please share with us your expectation on its future RevPAR and the unit economics, including payback period?

[Haijun Wang, executive]

[Foreign Language]

Well, thank you very much, Sijie, for your questions. Let me answer that. Atour's 4.0 with nature distinguishes itself from our traditional business hotels or others. It incorporates many natural, native elements to create a sense of natural tranquility. And this provides a relaxation and leisurely ambience for our guests who are on the business trips or if they are constantly on the go.

[Foreign Language]

For a mature Atour 4.0 hotel, we would anticipate a RevPAR target of RMB 400. At the same time, with breakthroughs in design, styles and the upgrades in both facilities and amenities, the CapEx per room would be around RMB 145,000 based upon a total number of 140 rooms. Atour 4.0 adopts a large-scale modular design, which not only can help to better ensure the project quality, it also helps us to reduce the material and construction period.

[Foreign Language]

In general, the investment return period for Atour 4.0, will including the renovation period is estimated to be 3 year and a half. That is shorter than our previous version, 3.5. We expect Atour 4.0 will continue to enhance our competitiveness in the upper mid-scale hotel market and also lead our long-term growth.

[Alison Zhang, executive]

Thank you, Sijie. Let's have our next question.

[Operator]

The question comes from the line of Ronald Leung from Bank of America.

[Ronald Leung, analyst]

[Foreign Language]

The performance of the retail business in the third quarter continues to exceed expectations, and there was also another breakthrough during [indiscernible]. Could you please provide insights into company's future plans and growth expectations for the retail business?

[Haijun Wang, executive]

[Foreign Language]

Well, thank you for your question. Our midterm strategy for the retail business revolves around 2 key approaches. The first is to do a subtraction. We aim to focus on concentrating and deepening our presence in the sleep market, and secondly, it is an addition. We are going to leverage our insights into customer behavior and the application of technology to continuously strengthen our product R&D as well as expanding our deep sleep product categories.

[Foreign Language]

Like we have previously introduced, our retail product capabilities are continually improving. Ranging from the popular deep sleep pillow that gained widespread recognition to the deep sleep temperature control quote, which achieved a monthly GMV exceeding tens of millions in September. Additionally, we have other products to be launched soon, demonstrating our effectiveness of our product R&D, especially the robust system for that. The new product in deep sleep series, including the deep sleep mattress, which will be officially launched soon. The deep sleep product line continues to expand, gradually extending from hotel users to a broader consumer base. This expansion has significantly increased Atour Planet's brand influence within the sleep economy.

[Foreign Language]

Our retail revenue was RMB 235 million in the third quarter, increasing significantly by approximately 292% year-over-year, during the recently concluded W11 shopping festival, we topped the pillow sales chart across various third-party e-commerce platforms. The W11 GMV across all third-party e-commerce channels have exceeded RMB 250 million, an increase of over 6x, 600%, when compared with the same period last year and an increase of more than 140% from this year's June 18th Shopping Festival. With all that, we expect retail revenue for this year to reach RMB 900 million with a year-on-year growth exceeding 250%.

[Alison Zhang, executive]

Thank you. We can take our next question.

[Operator]

We are now going to take our next question -- and the questions come from [indiscernible] from Citi.

[Unknown Analyst]

[Foreign Language]

Atour lite 3.0 is making rapid progress on signing and opening. So could you tell us more about the store's current business situation, besides it bring pressure to the group's plan [indiscernible] with the increase in the [indiscernible] of Atour lite.

[Haijun Wang, executive]

[Foreign Language]

Thank you, [indiscernible], for your question. Let me answer this one. As of the end of September, Atour light 3.0 has accumulated 71 signed projects consistently gaining recognition from our franchisees. 13 hotels have been opened, primarily focusing on core business districts in higher-tier cities. These stores aim to set a benchmark for quality in a mid-scale hotel segment.

[Foreign Language]

Looking at those Atour lite 3.0 hotels that are currently open, they had significantly short-term ramping-up period as a new product. Both ADR and RevPAR are highly competitive when compared to the other mid-scale hotels in the same business districts.

[Foreign Language]

And regarding the growth of the overall RevPAR next year despite the structural changes and the pressures brought by the rapid expansion of new hotels and the increasing proportion of Atour lite. We plan to enhance product competitiveness through product upgrades and rejuvenation of the existing hotels. Additionally, the support for new hotels ramp up will continue aiming for a sustained and healthy growth in RevPAR. The goal is to achieve moderate growth compared to this year's RevPAR as a baseline.

[Operator]

[Operator Instructions]. We are now going to wait for a few minutes before taking the next question. [Operator Instructions]. That concludes the question-and-answer session. I would like to turn the conference back over to Alison Zhang for any additional or closing remarks.

[Alison Zhang, executive]

Thank you for joining us today. If you have any further questions, please feel free to contact our IR team. We look forward to speaking with you again next quarter. Thank you, and goodbye.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines. Thank you.