H World Group (HTHT)
Investment Thesis
I believe Trip.com (TCOM) presents a more compelling investment case than Huazhu (HTHT) due to structural differences in industry competition and bargaining power. The reasoning is straightforward: Trip.com operates in an oligopolistic market with strong pricing power, whereas the hotel industry is highly fragmented and faces intense competition.
Industry Competition: Hotels vs. Online Travel Agencies (OTAs)
Unlike Trip.com, which dominates the online travel agency (OTA) sector in China, the hotel industry is fiercely competitive. There are numerous players, including domestic brands such as Atour (ATAT), Huazhu, and BTG Homeinns, as well as foreign brands like Hilton (HLT) and Marriott (MAR), which are aggressively expanding their mid-tier offerings. Additionally, hotels must compete with local independent properties and short-term rental platforms like Airbnb.
Huazhu’s strategy of “expanding across a thousand cities with tens of thousands of hotels” is concerning. Expanding into lower-tier cities (third- and fourth-tier) is unlikely to generate high returns due to weaker demand. Furthermore, commercial travel remains weak post-pandemic, while leisure travel dominates. Leisure travelers primarily book through OTAs, where Trip.com holds substantial pricing power.
Pricing Power & Margin Pressure in the Hotel Industry
Hotels have significantly weaker bargaining power than OTAs. To attract customers, hotels must offer discounts, which undermines their direct membership pricing models. Unlike OTAs, hotels operate under heavy fixed asset constraints—vacant rooms generate no revenue but still incur costs. As a result, hotels are forced into continuous price wars.
The fundamental issue is that supply keeps increasing, leading to persistent pricing pressure and rising vacancy rates. Even with franchising initiatives, the impact remains limited. In the U.S., real estate investment trusts (REITs) and private equity firms like Blackstone (BX) play a crucial role in restructuring the hotel industry. These institutions acquire physical hotel assets, lease them back to brands like Hilton, which then operate the hotels and pay a fixed rent plus a revenue-sharing fee. This asset-light model allows hotel brands to scale quickly. However, China lacks a comparable institutional framework, and high transaction costs make such restructuring difficult. As a result, Chinese hotel chains must rely on a slow transition to franchise models.
Graph 20: 2019- 2023 China’s Hotel China Penetration Rate
Graph 21: 2022- 2023 Number of Rooms in China’s Chain Hotels and Independent Hotels
Market Dynamics & Structural Challenges
While the pandemic led to industry consolidation, it did not significantly reduce supply. Instead, it accelerated the rise of chain hotels, as most new developments favored branded chains. However, whether this trend will persist remains uncertain. Given the weak macroeconomic environment and intense industry competition, China may face a supply glut in the hotel sector, leading to further price compression.
Huazhu’s loyalty program is often cited as a key competitive advantage, as it helps drive repeat customers and improve brand loyalty. However, its effectiveness is limited—consumers frequently compare prices across platforms and may still use Trip.com or other OTAs for bookings. Moreover, with intense competition, loyalty programs require constant incentives to remain attractive, which ultimately translates to price discounts and margin erosion.
The best investment opportunities in the hotel industry typically emerge during large-scale restructuring or through the successful transition to an asset-light model, as seen with Hilton. However, in China, such a transformation is significantly more challenging due to high competition and macroeconomic headwinds. Given the structural disadvantages in pricing power, supply-side pressures, and the lack of institutional restructuring mechanisms, I believe there are more attractive oppertunities than HTHT.
