Atour glides as economic slowdown fails to dent Chinese travel demand

The mid- to upscale hotel brand’s revenue rose 93% in the third quarter, as nearly all of its major metrics exceeded pre-pandemic levels

Key Takeaways:

• Atour’s revenue nearly doubled and its profit rose by an even stronger 136% in the third quarter, driven by “breakthroughs” in its main business lines
• The hotel operator’s shares are up 70% from their IPO price a year ago, buoyed by strong growth as China’s tourism sector rebounds post-pandemic

By Edith Terry

Chinese consumers may be spending less as their economy slows, but don’t tell that to Shanghai-based Atour Lifestyle Holdings Ltd. (ATAT.US).

The homegrown operator of mid- and upscale hotels continued to rebound strongly in the third quarter as Chinese who are pulling back on big-ticket purchases like cars and smartphones were far more open with their travel budgets. The company is on the way to recording revenue of 4.4 billion yuan ($620 million) this year, higher than its previous guidance, and revenue per available room (revpar) is at 118% of 2019 levels, executives said on the company’s third-quarter earnings call last week.

“We achieved tremendous breakthroughs across each of our business lines,” founder and Chairman Wang Haijun said on the call.  

That seems like no exaggeration, with the company reporting its revenues rose 93.1% year-over-year to 1.29 billion yuan in the third quarter, according to its latest results announcement issued last week. Its net income was up by an even stronger 136% to 262 million yuan.

Occupancy rates stood at 82.4% for the quarter, while the average daily room rate was 495 yuan, both ahead of pre-pandemic levels from 2019. Those two figures drove a 32% year-on-year jump in revpar, a widely watched industry metric, to 424 yuan, also 18% ahead of 2019 levels.

Despite the strong showing, investors were less impressed. Atour’s shares fell 2.5% the day the results came out, and have continued edging downward since then. But we should also note that the stock is still up 70% so far this year, in sharp contrast with most Chinese stocks that are trading lower than where they began 2023.

Atour’s year-on-year gains weren’t completely unexpected, since China’s travel sector went into a tailspin last year due to heavy restrictions under the country’s “zero Covid” policy. But the industry’s sustained rebound has been a slight surprise, especially since many other sectors in China have sagged after rebounding strongly in the first half of the year.

Despite the pandemic, Atour and many of its peers continued to build up their networks in anticipation of an eventual return to more normal conditions. Atour had 1,112 hotels by the end of the third quarter, up 26.4% year-on-year. It had another 577 “manachised” hotels in the pipeline, referring to hotels Atour manages on behalf of third-party owners.

As the “revenge travel” that has powered the hotel sector’s rebound continued, Atour reported its adjusted net income rose 114.7% year-over- year to 272 million yuan in the third quarter, and its adjusted net profit margin rose 4 percentage points to 21.0%.

Two main drivers propelled the company’s growth: sales of its “scenario-based” products, which are typically items in people’s rooms that they can purchase; and a massive surge in pent-up demand for the company’s higher-end hotel rooms with the lifting of Covid restrictions.

On a national basis, hotel occupancy rates across China rose to 68.4% for the first nine months of this year, two percentage points short of 2019 levels, according to real estate agency JLL. Revpar on a national basis was up 4.3% from 2019 levels to 640.4 yuan. The number of mid-range hotels in China expanded by 26.3% during the nine months, according to the China Hotel Association.

Retail component

Atour’s new retail stream sets it apart from its peers by letting guests buy items in their rooms, and has quickly evolved into a major revenue source. Such “scenario-based” revenues nearly quadrupled year-on-year to 235 million yuan in the third quarter. At that level, such sales now account for 18% of Atour’s total revenue, well above the 7.2% in 2019.

According to the prospectus for its IPO a year ago, Atour was the first hotel chain in China to develop an approach that offers products placed in its rooms and facilities for sale online. Guests can scan products in their rooms, taking them to Atour’s own online stores or major e-commerce platforms for purchase.

Its latest initiative in that area was its new Atour 4.0 With Nature campaign, catering to Gen Z travelers who are much more independent than their elders and obsessed with authenticity and exercise.

The new campaign includes offerings like non-GMO soybeans and millet for breakfast, niche bathing products, and Precor gym equipment. Many of the products, like a “Deep Sleep Pillow PRO” and “Deep Sleep Temperature Quilt,” are already for sale and attained gross merchandise value “exceeding tens of millions” of yuan in September, according to CEO Wang.

Like many of its domestic and global peers, Atour is focusing on properties that it manages on behalf of other owners. Such an approach typically carries higher margins and lower costs than self-owned, self-operated hotels.

In the third quarter, the company’s 1,080 “manachised” hotels recorded revenue of 781 million yuan, accounting for 60% of its total. In addition to its latest generation of Atour 4.0 hotels, the company has 71 hotels under its Atour Light 3.0 sub-brand, including three series of themed hotels for music, basketball and a literature hotel with a public area built as a 31-meter-high library.

On the cost side, Atour’s hotel operating costs rose 58.4% year-over-year in the third quarter to 617 million yuan. Sales and marketing expenses jumped by a major 269.3% year-over-year to 112 million yuan, as the company resumed more aggressive marketing in the post-Covid era. Such costs accounted for 8.7% of net revenues in the latest quarter, nearly double the 4.5% in 2022.

So, what does it all this mean for investors? Atour’s latest market cap of $2.4 billion and price-to-earnings (P/E) ratio of 40 trail domestic peer H World Group’s (HTHT.US; 1179.HK) $12 billion market cap and P/E of 78. But Atour far outshines domestic budget hotel peer GreenTree (GHG.US) whose P/E stands at 21. Atour also looks quite strong compared with the P/E of 16 for global giant Accor (AC.PA), operator of the mid-market Sofitel, Pullman and Ibis chains. The analyst community is also quite bullish on the company, with 13 analysts polled by Yahoo Finance all rating Atour a “buy” or “strong buy.”

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