1Q26 cost control slightly beat expectations, confirming HTHT's profitability

Overview

This report is Morgan Stanley's commentary on H World Group Ltd (HTHT.US) 1Q26 results. The core conclusion is that, against a backdrop of 3% YoY RevPAR growth, the company delivered strong growth in adjusted EBITDA and core net profit, cost-side improvement has begun to show through, and profitability has been further confirmed. The report maintains a bullish view on HTHT, arguing that if FY26 RevPAR can still grow by more than 2%, core net profit growth could exceed 20%.

Core views

The report's core views are: first, 1Q26 margins beat Morgan Stanley and consensus expectations, mainly driven by lower rent and a stable SG&A ratio; second, HTHT has high operating leverage when RevPAR grows positively, with 1Q26 adjusted EBITDA (ex-SBC) and core net profit rising 24% and 39% YoY, respectively; third, leisure demand remains resilient, and the impact of rising energy costs on domestic and overseas businesses is limited; fourth, the accounting reorganization separates the business into HWC and HWI, but the substantive impact is small; fifth, although there was no buyback in 1Q26, the company continues to maintain its commitment to shareholder returns.

Analysis framework

The report uses a framework that combines earnings review, peer and industry RevPAR comparison, margin decomposition, management guidance interpretation, and valuation methodology explanation, focusing on the impact of revenue growth, cost control and operating leverage on FY26 earnings growth.

Methodology notes

• Valuation methodsdiscounted cash flow

  DCF valuation

  The base case uses the discounted cash flow method, with key assumptions including a 10.5% WACC for covered U.S.-listed Chinese hotel companies, an 8% mid-cycle growth rate for 2029-2036, and a 2% perpetual growth rate.

• research_modelMorgan Stanley ModelWare

  internal model framework

  Unless otherwise stated, financial metrics in the report are based on the Morgan Stanley ModelWare framework, and consensus data are from Refinitiv Estimates.

• rating_systemMorgan Stanley relative rating system

  relative rating system

  Morgan Stanley uses relative ratings such as Overweight, Equal-weight, Not-Rated and Underweight, typically measuring risk-adjusted total return versus the covered universe over the next 12-18 months.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• H World Group Ltd (HTHT.US)

  Research target; U.S.-listed Chinese hotel company

  Strengths

  Strong operating leverage when RevPAR is positive; 1Q26 margins beat expectations; franchise and management hotel room growth; strong shareholder return track record.

  Weaknesses

  1Q26 RevPAR growth lagged the overall industry; short-term demand and industry pricing may fluctuate; no buyback in 1Q26.

  Comparison

  1Q26 RevPAR rose 3% YoY, above ATAT's 2% but below the industry's 5%; the industry was supported by continued strength in luxury hotels.

  Risks

  Industry RevPAR turning negative YoY, rising supply and competition in low-end and midscale hotels, and failure in cost control preventing margin improvement.

• Hong Kong/China leisure and hotel industry

  Covered industry and relative rating benchmark

  Strengths

  Industry RevPAR rose 5% YoY in 1Q26, with continued strong demand in luxury hotels.

  Weaknesses

  Rising supply in low-end and midscale hotels may pressure industry pricing and margins.

  Comparison

  HTHT 1Q26 RevPAR +3%, below industry +5%, but earnings performance was more driven by cost control and operating leverage.

  Risks

  Industry RevPAR returning to YoY decline in 2026, intensifying competition, and demand volatility.

Key data

• 1Q26 adjusted EBITDA (ex-SBC)+24% YoYAchieved despite 3% YoY RevPAR growth.
• 1Q26 core net profit+39% YoYReflects earnings growth capability and operating leverage.
• 1Q26 RevPAR+3% YoYCompared with ATAT +2% and industry +5%; the industry was supported by continued strength in luxury hotels.
• Franchise and management hotel room growth+16%Original text: F&M room growth +16%.
• FY26 core net profit growth expectation>20%Assumes FY26 RevPAR can still grow by more than 2%.
• FY26 P/E17xThe report views the valuation as attractive.
• Annual shareholder returnsabout US$800mnTotal annual returns were about US$800mn in FY25 and FY24.
• Target priceUS$65The rating history chart shows the target price was 65 on 2026-02-09 and remained through 2026-05.

Impact & implications

The report reinforces the investment thesis that HTHT, as a leading China hotel operator, can still unlock earnings flexibility in a modest RevPAR growth environment. In the near term, lower rent and stable expense ratios help improve margins; in the medium term, if RevPAR stays positive and is combined with store expansion, structural upgrades and shareholder returns, valuation attractiveness may continue to support share price performance.

Risks

• Industry RevPAR turning negative YoY in 2026.
• Rising supply and intensified competition in low-end and midscale hotels.
• Cost control falling short of expectations, preventing margin improvement.
• Leisure demand or the macro consumer environment weakening more than expected.
• The impact of rising energy costs on domestic or overseas businesses exceeding management's assessment.
• Morgan Stanley has investment banking and other service relationships with H World Group Ltd, and investors should note potential conflicts of interest.

What to watch

• Whether FY26 RevPAR can sustain growth above 2%.
• Whether lower rent and stable SG&A ratio can continue to translate into margin improvement.
• Growth and profitability of each business after the new HWC and HWI accounting split.
• Whether franchise and management hotel room growth can maintain a high pace.
• Whether the company resumes buybacks or continues annual shareholder returns of about US$800mn.
• Supply, competition and pricing trends in the low-end and midscale hotel segment.
• Whether the US$65 target price and Overweight rating are revised alongside earnings forecast changes.