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(Mark One)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Date of event requiring this shell company report
Commission file number: 001-34656
H World Group Limited
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s name into English)
CAYMAN ISLANDS
(Jurisdiction of incorporation or organization)
No. 1299 Fenghua Road
Jiading District
Shanghai 201803
People’s Republic of China
+86 (21) 6195-2011
(Address of principal executive offices)
Jihong He
Chief Financial Officer
H World Group Limited
11 Penang Lane
Singapore 238485
+65 8655-0278
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Ordinary Shares, par value US$0.00001 per share
American Depositary Shares, each representing
ten ordinary shares
1179
HTHT
The Stock Exchange of Hong Kong Limited
NASDAQ Global Select Market
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
3,112,413,730 Ordinary Shares.
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☒ No ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
Yes ☐ No ☒
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
from their obligations under those Sections
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐ Non-accelerated filer ☐
Emerging growth company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to
use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.
☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting
Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its
audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing
reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by
any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
☒ U.S. GAAP
☐ International Financial Reporting Standards as issued by the International Accounting Standards Board
☐ Other
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Item 17 ☐ Item 18
Yes ☐ No ☒
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes ☐ No ☐
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CERTAIN CONVENTIONS
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
ITEM 3. KEY INFORMATION
3.A. Selected Financial Data
3.B. Capitalization and Indebtedness
3.C. Reason for the Offer and Use of Proceeds
3.D. Risk Factors
ITEM 4. INFORMATION ON THE COMPANY
4.A. History and Development of the Company
4.B. Business Overview
4.C. Organizational Structure
4.D. Property, Plants and Equipment
ITEM 4A. UNRESOLVED STAFF COMMENTS
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
5.A. Operating Results
5.B. Liquidity and Capital Resources
5.C. Research and Development, Patents and Licenses, etc.
5.D. Trend Information
5.E. Critical Accounting Policies and Estimates
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A. Directors and Senior Management
6.B. Compensation
6.C. Board Practices
6.D. Employees
6.E. Share Ownership
6.F. Disclosure of Action to Recover Erroneously Awarded Compensation
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7.A. Major Shareholders
7.B. Related Party Transactions
7.C. Interests of Experts and Counsel
ITEM 8. FINANCIAL INFORMATION
8.A. Consolidated Statements and Other Financial Information
8.B. Significant Changes
ITEM 9. THE OFFER AND LISTING
9.A. Offering and Listing Details
9.B. Plan of Distribution
9.C. Markets
9.D. Selling Shareholders
9.E. Dilution
9.F. Expenses of the Issue
ITEM 10. ADDITIONAL INFORMATION
10.A. Share Capital
10.B. Memorandum and Articles of Association
10.C. Material Contracts
10.D. Exchange Controls
10.E. Taxation
10.F. Dividends and Paying Agents
10.G. Statement by Experts
10.H. Documents on Display
10.I. Subsidiary Information
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
12.A. Debt Securities
12.B. Warrants and Rights
12.C. Other Securities
12.D. American Depositary Shares
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
ITEM 15. CONTROLS AND PROCEDURES
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
ITEM 16B. CODE OF ETHICS
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
ITEM 16G. CORPORATE GOVERNANCE
ITEM 16H. MINE SAFETY DISCLOSURE
ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
PART III
ITEM 17. FINANCIAL STATEMENTS
ITEM 18. FINANCIAL STATEMENTS
ITEM 19. EXHIBITS
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CERTAIN CONVENTIONS
Unless otherwise indicated, all translations from U.S. dollars to RMB in this annual report were made at a rate of US$1.00 to RMB
6.8972, the exchange rate as set forth in the H.10 statistical release of the U.S. Federal Reserve Board on December 30, 2022. No
representation is made that the RMB amounts referred to herein could have been or could be converted into U.S. dollars at any particular rate
or at all. On April 21, 2023, the exchange rate was US$1.00 to RMB6.8920. Any discrepancies in any table between totals and sums of the
amounts listed are due to rounding.
Unless otherwise indicated, in this annual report,
● “ADRs” are to the American depositary receipts that may evidence our ADSs;
● “ADSs” are to our American depositary shares, each representing ten ordinary shares;
● “China” or the “PRC” are to the People’s Republic of China, excluding, for purposes of this annual report, Hong Kong, Macau and
Taiwan;
● “Consolidated Affiliated Entities” are to Tianjin Jizhu Information Technology Co., Ltd. (“Tianjin Jizhu”), Huanmei Information
Technology (Shanghai) Co., Ltd. (“Shanghai Huanmei”) and its wholly owned subsidiary Huanmei International Travel Agency
(Shanghai) Co., Ltd. (“Huanmei Travel”), and Ningbo Futing Enterprise Management Co., Ltd. (“Ningbo Futing”), each of which is a
Consolidated Affiliated Entity;
● “Consolidated Fund” are to Ningbo Hongting Investment Management Center (LLP) (“Ningbo Hongting”) and its subsidiary;
● “Deutsche Hospitality” or “legacy DH” refers to Steigenberger Hotels GmbH (formerly known as Steigenberger Hotels
Aktiengesellschaft), a subsidiary of our company established under the laws of Germany on September 12, 1985, and its subsidiaries;
● “EUR” and “Euro” refers to the legal currency of European Union;
● “HKD” refers to the legal currency of Hong Kong;
● “Hong Kong” or “HK” refers to the Hong Kong Special Administrative Region of the PRC;
● “Hong Kong Listing Rules” are to the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited;
● “Hong Kong Stock Exchange” are to The Stock Exchange of Hong Kong Limited;
● “Huanmei Travel” are to Huanmei International Travel Agency (Shanghai) Co., Ltd.;
● “leased hotels” are to leased-and-operated hotels;
● “legacy Huazhu” refers to our company excluding Deutsche Hospitality;
● “manachised hotels” are to franchised-and-managed hotels;
● “Ningbo Futing” are to Ningbo Futing Enterprise Management Co., Ltd.;
● “Ningbo Hongting” are to Ningbo Hongting Investment Management Center (LLP);
● “occupancy rate” refers to the number of rooms in use divided by the number of available rooms for a given period;
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● “RevPAR” refers to revenue per available room, calculated by room revenue during a period divided by the number of available
rooms of such hotel during the same period;
● “ordinary shares” or “Shares” are to our ordinary shares, par value US$0.00001 per share;
● “RMB” and “Renminbi” are to the legal currency of China;
● “Shanghai Huanmei” are to Huanmei Information Technology (Shanghai) Co., Ltd.;
● “Tianjin Jizhu” are to Tianjin Jizhu Information Technology Co., Ltd. (formerly known as Tianjin Mengguang Information
Technology Co., Ltd.);
● “US$” and “U.S. dollars” are to the legal currency of the United States;
● “VIEs” are to the Consolidated Affiliated Entities and the Consolidated Fund; and
● “We,” “us,” “our company,” “our” and “Huazhu” are to H World Group Limited (formerly known as Huazhu Group Limited and
China Lodging Group, Limited), a Cayman Islands exempted company with limited liability, its predecessor entities and its
subsidiaries and, in the context of describing our operations and consolidated financial information, the VIEs.
When calculating the number of cities in China with our hotel network coverage in this annual report, we include the number of
municipalities, cities and counties with at least one hotel under our operation or under development.
In June 2021, we effected a share split that each issued and unissued ordinary share with a par value of US$0.0001 was sub-divided into
ten ordinary shares with a par value of US$0.00001 each (the “Share Subdivision”). Concurrent with the Share Subdivision, the ratio of ADS
to ordinary share was adjusted from one (1) ADS representing one (1) ordinary share to one (1) ADS representing ten (10) ordinary shares.
Except otherwise stated, the Share Subdivision has been retrospectively applied for all periods presented in this annual report.
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FORWARD-LOOKING STATEMENTS
This annual report on Form 20-F contains forward-looking statements that are made under the “safe harbor” provisions of the U.S. Private
Securities Litigation Reform Act of 1995. All statements other than statements of historical fact contained in this annual report, including those
regarding our future financial position, strategies, plans, objectives, goals and targets, future developments in the markets where we participate
or are seeking to participate and any statements preceded by, followed by or that include the words “aim,” “anticipate,” “believe,” “could,”
“estimate,” “expect,” “going forward,” “intend,” “may,” “ought to,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “will,”
“would,” “vision,” “aspire,” “target,” “schedules,” “goal,” “outlook” and the negative of these words and other similar expressions, as they
relate to us or our management, are intended to identify forward-looking statements. Such statements reflect the current views of our
management with respect to future events, operations, liquidity and capital resources, some of which may not materialize or may change.
These statements are subject to certain known and unknown risks, uncertainties and assumptions, including the risk factors as described in this
annual report. You are strongly cautioned that reliance on any forward-looking statements involves known and unknown risks and
uncertainties. The risks and uncertainties facing us which could affect the accuracy of forward-looking statements include, but are not limited
to, the following:
● our anticipated growth strategies, including developing new hotels at desirable locations in a timely and cost-effective manner and
launching a new hotel brand;
● our future business development, results of operations and financial condition;
● expected changes in our revenues and certain cost or expense items;
● our ability to attract customers and leverage our brand;
● trends and competition in the lodging industry;
● the status of the relevant regulatory and legislative developments in the countries we operate;
● natural disasters, health epidemics, pandemics and similar outbreaks, including COVID-19; and
● general economic, business and socio-political conditions globally, including recent Russia-Ukraine war.
By their nature, certain disclosures relating to these and other risks are only estimates and should one or more of these uncertainties or
risks, among others, materialize, actual results may vary materially from those estimated, anticipated or projected, as well as from historical
results. Specifically but without limitation, sales could decrease, costs could increase, capital costs could increase, capital investment could be
delayed and anticipated improvements in performance might not be fully realized.
We would like to caution you not to place undue reliance on these forward-looking statements and you should read these statements in
conjunction with the risk factors disclosed in “Item 3. Key Information—3D. Risk Factors.” Other sections of this annual report include
additional factors that could adversely affect our business and financial performance. Moreover, we operate in an evolving environment. New
risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties,
nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these
cautionary statements.
You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise.
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PART I
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3.
KEY INFORMATION
H World Group Limited is a holding company incorporated in the Cayman Islands. As a holding company, it has no material operations of
its own and conducts substantially all its operations through its subsidiaries. China is one of our major markets and we also have operations in
Europe as well as other countries.
Permits and Permission Required from the PRC Authorities for Our Operations
As advised by our PRC counsel, JunHe LLP, as of the date of this annual report, none of our PRC subsidiaries or VIEs are required to
obtain any further permission or approval from China Securities Regulatory Commission (the “CSRC”), Cyberspace Administration of China
(the “CAC”), or other PRC regulatory authorities to approve our contractual arrangements with the VIEs and their respective shareholders
other than the permissions related to certain businesses operated by the Consolidated Affiliated Entities, or the renewal of the permission or
approval we have already obtained (if applicable).
JunHe LLP is of the view that:
(a) pursuant to the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies (the “Trial
Measures”) and its relevant notes and five supporting guidelines (each, “Supporting Guideline”), which came into effective on March 31,
2023, PRC-based companies that seek to offer and list securities in overseas markets, either through direct or indirect means, are required to
conduct relevant filings with the CSRC.
Furthermore, pursuant to the Circular on the Arrangements for the Filing-based Administration of Overseas Securities Offering and
Listing by Domestic Companies (the “Trial Measures Circular”), companies that have already offered or listed securities overseas prior to the
implementation of the Trial Measures be are considered as “Stock Enterprises”, and these Stock Enterprises are not required to apply for filings
immediately with CSRC until a re-financing event takes place and then a filing for such re-financing is required.
As our company is considered as a Stock Enterprise, our PRC subsidiaries or the VIEs are not subject to immediate filing requirements
under the Trial Measures. However, in the event of our future re-financing in an overseas market (whether on Nasdaq, Hong Kong Stock
Exchange or in other overseas market), we will be subject to relevant filing requirements of the CSRC; and
(b) with respect to the regulatory requirements for cyber security and data protection, according to the Cybersecurity Review Measures,
which became effective in February 2022, a company is subject to cybersecurity review if it affects or may affect national security and falls
under any of the following circumstances: (i) it is a critical information infrastructure operator (“CIIO”), who purchases network products and
service, or (ii) it is a network platform operator who carries out data processing activities. In addition, any network platform operator
possessing over one million users’ individual information must apply for a cybersecurity review before listing abroad. Relevant PRC
regulatory authorities may also initiate cybersecurity review if they determine that certain network products, services, or data processing
activities affect or may affect national security.
As of the date of this annual report, none of our company, our subsidiaries or the VIEs has received any notice from the CAC or other
PRC regulatory authorities that identifies any of these entities as a CIIO under the Cybersecurity Review Measures, or has been required to go
through a cybersecurity review by any PRC authorities. Also, none of our company, our subsidiaries or the VIEs has received any notice from
the CAC or other PRC regulatory authorities that investigate our data processing activities or accuses our data processing activities affecting
national security.
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In November 2021, the CAC promulgated the Draft Administrative Regulations on Cyber Data Security, or the Draft Cyber Data Security
Regulations, for public comment. These draft regulations set forth different scenarios under which data processors would be required to apply
for cybersecurity review, including, among others, (i) merger, reorganization or division of Internet platform operators with significant data
resources related to national security, economic development or public interests that affects or may affect national security; (ii) overseas listing
of issuers who process over one million users’ personal information; (iii) Hong Kong listing that affects or may affect national security; or (iv)
other data processing activities that affect or may affect national security. In addition, data policies and rules and any material amendments
thereof of large Internet platform operators with over 100 million daily active users would be evaluated by a third-party organization
designated by the CAC and be approved by the respective local branch of cyberspace and telecommunication at the provincial or above level.
However, there is no definite timetable as to when these draft regulations will be enacted. As such, none of our company, our PRC subsidiaries
or the VIEs is required to obtain approval from CAC.
On July 7, 2022, the CAC issued the Measures for the Security Assessment of Data Cross-border Transfer, or the Security Assessment
Measures, which became effective on September 1, 2022. In accordance with the Security Assessment Measures, a data processor should apply
to the CAC for a security assessment under certain circumstances, including, among others, (i) where a data processor provides important data
abroad; (ii) where a critical information infrastructure operator or a data processor processing personal information of over one million people
provides personal information abroad; (iii) where a data processor has provided personal information of 100,000 people or sensitive personal
information of 10,000 people in total abroad since January 1 of the previous year; and (iv) other circumstances prescribed by the CAC.
Moreover, the Security Assessment Measures provide that for non-compliant cross-border data transfers that had been carried out before this
regulation came into effect, rectification must be completed within six months from the effective date of the regulation. The said rectification
includes, among others, a self-assessment on the risks of cross-border data transmission. After the completion of rectification, the data
processor should file an application with the CAC by submitting materials including, (i) a declaration form; (ii) a self-assessment report on the
risks of cross-border data transmission; (iii) the legal documents to be concluded by the data processor and the overseas recipient; and (iv)
other materials necessary for security assessment. Since the Security Assessment Measures are relatively new, it remains uncertain whether
relevant regulatory authorities will implement this regulation in ways that may negatively affect us.
As of the date of this annual report, we have conducted the self-assessment on the risks of the cross-border data transmission pursuant to
the regulation and have filed an assessment filing with the CAC within six months from the effective date of the regulation. As of the date of
this annual report, we have received a written confirmation from CAC regarding their receipt of our assessment filing, and we have been
informed by the CAC that our filings are conformed to required formalities. However, CAC has not granted us a final written decision on our
assessment filing.
On February 22, 2023, the CAC issued the Measures for the Standard Contract for Outbound Transfer of Personal Information, which will
become effective on June 1, 2023. Pursuant to PRC law and such regulation, entering into a CAC-formulated Standard Contract with the
overseas data recipient is a pre-requisite for a data processor to transfer data abroad, if such data processor meets all the following conditions:
(i) it is not a CIIO; (ii) it processes personal information of fewer than one million individuals; (iii) it has cumulatively transferred personal
information of fewer than 100,000 individuals abroad since January 1 of the previous year; and (iv) it has cumulatively transferred sensitive
personal information of fewer than 10,000 individuals abroad since January 1 of the previous year. Within ten (10) working days after the
Standard Contract takes effect, the data processor should file the executed Standard Contract with the CAC. Since such regulation was recently
released, it remains uncertain whether relevant regulatory authorities will implement this regulation in ways that may negatively affect us.
There remains uncertainty as to how current or future relevant rules published by the CSRC and the CAC will be interpreted or
implemented, and the opinions summarized above are subject to new laws, rules and regulations and/or detailed implementations and
interpretations. In addition, PRC laws and regulations governing the conditions and the requirements of such approval are uncertain, and the
relevant regulatory authorities have broad discretion in interpreting these laws and regulations. Accordingly, the PRC regulatory authorities
may take a different view than what is described above. PRC regulatory authorities that regulate our business and other participants in our
industry may not agree that our corporate structure or any of the above contractual arrangements comply with PRC licensing, registration or
other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future.
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Furthermore, under current PRC laws, regulations and regulatory rules, our PRC subsidiaries or VIEs may be required to obtain
permissions from the CSRC, and may be required to go through cybersecurity review by the CAC, in connection with any offering and listing
in an overseas market. If we fail to obtain the relevant approval or complete other review or filing procedures for any future offshore offering
or listing, we may face sanctions by the CSRC or other PRC regulatory authorities, which could include fines and penalties on our operations
in China, limitations on our operating privileges in China, restrictions on or prohibition of the payments or remittance of dividends by our
subsidiaries in China, restrictions on or delays to our financing transactions offshore, or other actions that could have a material adverse effect
on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs.
The PRC regulators have recently indicated an intent to exert more oversight over offerings that are conducted overseas and/or foreign
investment in China-based issuers. For more detailed information, see “—D. Risk Factors—Risks Related to Doing Business in China—
Recent regulatory developments in China may subject us to additional regulatory review and disclosure requirements, expose us to government
influence, or otherwise restrict or completely hinder our ability to offer securities and raise capital outside China, which could adversely affect
our business operations and cause the value of our securities to significantly decline or become worthless.”
Risks and Uncertainties Relating to Doing Business in China
We are a foreign private issuer within the meaning of the rules under the Securities Exchange Act of 1934 (the “Exchange Act”), and as
such we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic
issuers. Moreover, the information we are required to file with or furnish to the Securities and Exchange Commission (the “SEC”) will be less
extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. In addition, as a company incorporated
in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ
significantly from the Nasdaq corporate governance standards. These practices may afford less protection to shareholders than they would
enjoy if we complied fully with the Nasdaq corporate governance standards.
We face various legal and operational risks and uncertainties as China is one of our major markets. We are subject to risks arising from the
uncertainty in the interpretation and the enforcement of the PRC laws and regulations. In addition, rules and regulations in China can change
quickly with little advance notice. In recent years, Chinese regulators have announced regulatory actions targeting certain sectors of China’s
economy, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed
overseas, adopting new measures to extend the scope of cybersecurity reviews, adopting new laws and regulations related to data security, and
expanding the efforts in anti-monopoly enforcement. Although the lodging industry does not appear to be the focus of these regulatory actions,
we cannot guarantee that the Chinese regulators will not in the future take regulatory actions that materially adversely affect the business
environment and financial markets in China as they relate to us, our ability to operate our business, our liquidity and our access to capital.
Our Holding Company Structure and Operations in China
Holders of our ADSs do not hold equity interest in our operating subsidiaries, the Consolidated Affiliated Entities or the Consolidated
Fund, but instead hold equity interest in H World Group Limited, a Cayman Islands holding company whose consolidated financial results
include those of the Consolidated Affiliated Entities and the Consolidated Fund under U.S. GAAP. Our securities that are listed on the
NASDAQ Global Select Market and the Hong Kong Stock Exchange are securities of our Cayman Islands holding company, not of our
operating subsidiaries or the VIEs.
H World Group Limited is a Cayman Islands holding company that conducts its business primarily through its subsidiaries, a majority of
which are based in China and Europe, and for some businesses (including internet-based and international travel agency businesses), the direct
holding of which is restricted by PRC law, through the Consolidated Affiliated Entities. Neither H World Group Limited nor its subsidiaries
directly own any equity interest in the Consolidated Affiliated Entities. Instead, H World Group Limited relies on contractual arrangements
among one of its PRC subsidiaries, the Consolidated Affiliated Entities and the Consolidated Affiliated Entities’ respective nominee
shareholders, which allow H World Group Limited, to the extent permitted by PRC law, to:
(i) direct the activities of the Consolidated Affiliated Entities that most significantly impact the Consolidated Affiliated Entities’
economic performance;
(ii) receive substantially all of the economic benefits of the Consolidated Affiliated Entities; and
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(iii) have an exclusive option to purchase all or part of the equity interests in the Consolidated Affiliated Entities.
In addition, we serve as the general partner and the fund manager of the Consolidated Fund, which comprises an investment fund and its
subsidiary established in the PRC that operate hotel businesses and invest in companies in the hotel industry. While we have a minority equity
ownership in the Consolidated Fund, the Consolidated Fund’s partnership arrangement enables us to direct the activities that most significantly
affect the economic performance of the entities comprising the Consolidated Fund, as well as receive significant economic benefits of these
entities.
As a result of these arrangements, we have control over and are the primary beneficiary of the VIEs (composed of the Consolidated
Affiliated Entities and the Consolidated Fund) for accounting purposes and, therefore, we have consolidated the financial results of the VIEs in
our consolidated financial statements in accordance with U.S. GAAP. Any references to control or benefits that accrue to us because of the
VIEs in this annual report are limited to, and subject to conditions for consolidation of, the VIEs under U.S. GAAP.
The contractual arrangements underlying our VIE model, including our arrangements with the Consolidated Affiliated Entities and
Consolidated Fund, have not been tested in court. There is no entry restriction on foreign investment in the business operated by the
Consolidated Fund. However, the Special Administrative Measures for Access of Foreign Investment, or the Negative List (2021 Edition) (as
issued by the National Development and Reform Commission, or the NDRC, and the Ministry of Commerce, or MOFCOM, and amended
from time to time), and other applicable PRC laws and regulations (including the Regulations on Travel Agencies (Revised in 2020)), prohibit
direct foreign investment in certain international travel agency businesses and restrict direct foreign investment in certain internet-based
businesses. Due to these regulatory restrictions on direct foreign investment, we conduct relevant operations through contractual arrangements
with the Consolidated Affiliated Entities, which hold the licenses, permits and approvals that are necessary for operating relevant restricted
businesses in the PRC.
The financial impacts of these VIEs were immaterial to our historical consolidated financial statements. The VIEs in aggregate contributed
an insignificant portion (less than 1%) of our total revenues and total net profit (loss) in each of the fiscal years ended December 31, 2020,
2021 and 2022 and the impact of the VIEs to our consolidated balance sheets as of December 31, 2020, 2021 and 2022 were also immaterial
(in aggregate contributing less than 1% of our total assets as of these respective dates). If the PRC regulatory authorities deem that any of our
business operations carried out through the VIEs do not comply with PRC regulatory restrictions, especially the restrictions on foreign
investment in the relevant industries, or if the relevant regulations or their interpretation change in the future, the PRC regulatory authorities
could disallow this structure, which could result in us being subject to penalties or being forced to relinquish its interests in the affected
operations. Additionally, potential future actions by the PRC regulatory authorities could affect the legality and enforceability of the
contractual arrangements underlying the VIE model, which, consequently, would affect our ability to consolidate the financial results of the
VIEs. If any of these happens, there would likely be changes in our operations and/or changes in the value of the securities of the investors. In
the worst circumstances, if the contribution from VIEs becomes significant to our operations and the VIE model does not comply with PRC
laws and regulations, such changes could cause the value of our securities to significantly decline or become worthless. For more information,
see “—D. Risk Factors—Risks Related to Our Corporate Structure” below in this annual report.
For our corporate structure as of the date of this annual report, including our significant subsidiaries and the VIEs, see “Item 4.
Information on the Company—4.C. Organizational Structure” below in this annual report.
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Recent Regulatory Developments
Cyber Security Review and Data Privacy Regulations
Recently, the PRC regulatory authorities have promulgated, among others, the Personal Information Protection Law of the PRC, the Data
Security Law of the PRC and the Draft Amendment to Cyber Security Law of the PRC for public comments to ensure cybersecurity, data and
personal information protection. These new laws, as well as other proposed regulations, demonstrate that relevant laws and regulations
governing these areas are developing along with the enforced and constantly tightening of relevant regulatory supervision. The State Council
of the PRC promulgated the Regulations on the Protection of the Security of Critical Information Infrastructure on July 30, 2021, which took
effect on September 1, 2021. This regulation requires, among other things, that certain competent authorities identify and protect critical
information infrastructures. In addition, in November 2021, the CAC promulgated the Draft Cyber Data Security Regulations for public
comments, which set forth different scenarios where data processors should apply for cybersecurity review. The CAC and a number of other
departments under the State Council promulgated the Cybersecurity Review Measures on December 28, 2021, which became effective on
February 15, 2022. According to this regulation, critical information infrastructure operators purchasing network products and services and
network platform operators carrying out data processing activities, which affect or may affect national security, are required to conduct
cybersecurity review. On July 7, 2022, the CAC issued the Security Assessment Measures, which became effective on September 1, 2022 and
require a data processor to apply to the CAC for a security assessment under certain circumstances. On February 22, 2023, the CAC issued the
Measures for the Standard Contract for Outbound Transfer of Personal Information, which requires a data processor to enter into Standard
Contracts under certain circumstances. See “—Permits and Permission Required from the PRC Authorities for Our Operations” above in this
annual report for more information.
On September 1, 2021, the Data Security Law of the PRC became effective, which imposes data security and privacy obligations on
entities and individuals conducting data-related activities, and introduces a data classification and hierarchical protection system. In addition,
the Standing Committee of the National People’s Congress promulgated the Personal Information Protection Law of the PRC (the “PIPL”) on
August 20, 2021, and this law took effect on November 1, 2021. The PIPL further emphasizes processors’ obligations and responsibilities for
personal information protection and sets out the basic rules for processing personal information and the rules for cross-border provision of
personal information. Furthermore, the Standing Committee of the National People’s Congress promulgated the Draft Amendment to Cyber
Security Law (the “CSL”) for public comments on September 12, 2022. The proposed amendments of CSL imposed more severe and
comprehensive fines and other penalties for offences under CSL, among others, the director, supervisor, or senior executive of a company that
is in violation of the CSL would be prohibited from continuing to serve as a director, supervisor, or senior executive of that company. Under
the Draft Cyber Data Security Regulations for public comments, critical data processors or foreign-listed data processors are required to carry
out annual data security evaluations and submit evaluation reports to the municipal cyberspace administration authority. We have implemented
comprehensive cybersecurity and data protection policies, procedures and measures to safeguard personal information and ensure secured
storage and transmission of data and prevent unauthorized access or use of data. However, we cannot guarantee that the regulators will agree
with us or will not in the future adopt new laws and regulations that restrict our business operations.
There are uncertainties as to the interpretation and application of these cybersecurity and data privacy laws, regulations and standards, and
they may be interpreted and applied in a manner that is inconsistent with our current policies and practices or require changes to the features of
our data systems. If the CAC or other regulatory agencies later deem us to be a CIIO and require that we obtain their approvals for our future
offshore offerings, we may be unable to obtain such approvals in a timely manner, or at all, and such approvals may be rescinded even if
obtained. Any such circumstance could significantly limit or completely hinder our ability to continue to offer securities to investors and cause
the value of our securities to significantly decline or be worthless. In addition, implementation of industry-wide regulations affecting our
business operations could limit our ability to attract new customers and/or users and cause the value of our securities to significantly decline.
Therefore, investors of our company and our business face potential uncertainties from actions taken by the PRC regulatory authorities
affecting our business.
Potential CSRC Filings on Overseas Listing
On February 17, 2023, the CSRC promulgated the Trial Measures and relevant notes and Supporting Guidelines, which came into
effective on March 31, 2023.
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The Trial Measures seek to regulate all types of overseas offerings and listings by PRC based companies, including: (a) direct overseas
listings, i.e. overseas listings by joint-stock companies which are established in PRC (such as H shares, N shares, GDRs); and (b) indirect
overseas listings, i.e. overseas listings by PRC based companies in the names of an overseas entity (such as red-chip listings), if such issuers
meets both of the following conditions: (i) more than 50% of its audited financial indicators (either operating revenue, profits, total assets or
net assets) for the most recent accounting year is accounted for by its PRC-based companies, and (ii) major business activities or operations are
conducted within the territory of PRC; main places of business are located within the territory of the PRC; or the majority of senior
management staff domicile in the PRC or are Chinese citizens.
The Trial Measures does not only govern initial public offerings (the “IPOs”), but also governs spin-off listings, single or multiple
acquisitions of domestic assets, share swaps or transfer of shares, reverse takeovers, SPAC listings, subsequent issuances of securities,
secondary listings or dual listing, etc. In addition to offering and listing of shares, offering and listing of depository receipts, corporate bonds
convertible to shares, and other equity securities by PRC-based companies shall also be subject to the filing requirements under the Trial
Measures.
The Trial Measures and Supporting Guidelines require PRC-based companies that seek overseas offerings and listings to fulfill the filing
procedures with and report relevant information to the CSRC, specifically: (a) for an IPO, the filing with CSRC shall be conducted within
three (3) working days following the submission of the application; (b) for a subsequent issuance of securities, the filing shall be conducted
within three (3) working days following the completion of the offering; (c) for the listings in other stock markets (e.g. secondary listings or
dual listings), the same filing timeline applied to an IPO shall apply; (d) for the listing of assets via multiple acquisitions, share swaps, transfers
of shares (e.g. reverse takeover), the same filing timeline applied to an IPO shall apply; (e) for the unlisted shares of PRC Companies applying
for conversion to listed shares trading on overseas market, the filings shall be conducted pursuant to the other regulations.
Furthermore, an overseas offering and listing would be prohibited under the following circumstances: (a) it is explicitly prohibited under
applicable laws and administrative regulations; (b) there exists national security concerns as reviewed and determined by competent authorities
under the State Council; (c) a crime has been committed by the issuer’s PRC-based company, its controlling shareholder(s) or actual
shareholder(s) in the last three (3) years (e.g. corruption, bribery, embezzlement, misappropriation of property or undermining the market
economy orders); (d) the issuer’s PRC-based company is under investigations for criminal acts or major violations of applicable laws and
regulations, and no conclusion of the investigation has yet been made; and (e) there exists material ownership disputes over equity interests
held by controlling shareholders (or by shareholders who are controlled by the controlling shareholder or actual controllers). If there exists any
of the aforementioned circumstances, the overseas offerings and listings shall be postponed or even terminated.
Specifically, if an issuer adopts a VIE structure for the purpose of overseas offering and listing, it shall disclose relevant contractual
arrangements to the CSRC through fillings. The Supporting Guidance also provides that PRC counsel needs to verify the following issues,
including (i) the participation of foreign investors in the issuer management operation, for example, the appointment of directors; (ii) whether
there exist situations where PRC laws and administrative regulations expressly prohibit the use of contractual arrangements to retain business
licenses and qualifications, etc.; (iii) whether there exist situations where the PRC operating entity of the issuer falls under the scope of foreign
investment security review, or within the restricted or prohibited sectors of foreign investment.
Despite the foregoing, pursuant to the Trial Measures Circular, companies that have already offered shares or been listed overseas prior to
the implementation of the Trial Measures will be considered as “Stock Enterprises”. Stock Enterprises are not required to apply for filings until
a subsequent re-financing event occurs.
As our company is considered as a Stock Enterprise, our PRC subsidiaries and the VIEs are not subject to the immediate filing
requirements under the Trial Measures. However, in the events of any re-financing in the future, such as subsequent share issuance, our
company will be subject to the relevant filing requirements pursuant to the Trial Measures.
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As of the date of this annual report, we have not received any inquiry, notice, warning, sanctions or regulatory objection from the CSRC or
the CAC. Because these regulatory actions are relatively new, it is uncertain how soon legislative or regulatory bodies will respond and what
existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any, or the potential
impact such modified or new laws and regulations will have on our daily business operation, our ability to accept foreign investments and
listing on a U.S. or other overseas exchanges. PRC laws and their interpretations and enforcement continue to develop and are subject to
change, and the PRC regulators may adopt other rules and restrictions in the future. See “—D. Risk Factors—Risks Related to Doing Business
in China” below for more details.
The Holding Foreign Companies Accountable Act
Our financial statements contained in this annual report have been audited by Deloitte Touche Tohmatsu Certified Public Accountants
LLP, an independent registered public accounting firm that is headquartered in Shanghai, China with offices in other cities in China. It is a firm
registered with the U.S. Public Company Accounting Oversight Board, or PCAOB, and is required by the laws of the U.S. to undergo regular
inspections by the PCAOB to assess its compliance with the laws of the U.S. and professional standards. According to Article 177 of the PRC
Securities Law which became effective in March 2020, the securities regulatory authority of the State Council may establish a regulatory
cooperation mechanism with the securities regulatory authorities of another country or region, to implement cross-border supervision and
administration, or the Regulatory Cooperation Mechanism; no overseas securities regulator is allowed to directly conduct investigation or
evidence collection activities within the territory of the PRC. Accordingly, without a Regulatory Cooperation Mechanism or the consent of the
competent PRC securities regulators and relevant authorities, no organization or individual may provide the documents and materials relating
to securities business activities to overseas parties.
The Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. The HFCA Act states if the
SEC determines that a company has filed audit reports issued by a registered public accounting firm that has not been subject to inspection by
the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit such securities from being traded on a national securities
exchange or in the over the counter trading market in the U.S. The SEC has adopted rules to implement the HFCA Act and, pursuant to the
HFCA Act, the PCAOB issued a report notifying the SEC of its determinations on December 16, 2021 that it was unable to inspect or
investigation completely accounting firms headquartered in mainland China or Hong Kong, including our auditor Deloitte Touche Tohmatsu
Certified Public Accountants LLP. We were also conclusively identified as a “Commission-Identified Issuer” under the HFCA Act on May 26,
2022 in respect of our Annual Report for 2021 on Form 20-F filed on April 27, 2022. Further, on December 29, 2022, the Accelerating
Holding Foreign Companies Accountable Act, or the AHFCA Act, was signed into law by the U.S. president as part of the fiscal year 2023
omnibus spending legislation, which reduced the number of consecutive non-inspection years required for triggering the prohibitions under the
HFCA Act from three years to two. As a result, the risk has been heightened.
On August 26, 2022, the PCAOB signed a Statement of Protocol with the CSRC and the Ministry of Finance of the PRC, taking a first
step toward opening access for the PCAOB to inspect and investigate registered public accounting firms headquartered in Mainland China and
Hong Kong. On December 15, 2022, the PCAOB announced its determination that it has been able to inspect and investigate audit firms in
mainland China and Hong Kong completely for purposes of the HFCA Act, and the PCAOB vacated its December 16, 2021 determinations.
Based on this announcement, we do not expect to be a Commission-Identified Issuer in respect of this annual report for 2022 on Form 20-F.
However, the PCAOB stated that should PRC authorities obstruct the PCAOB’s ability to inspect or investigate completely in any way and at
any point in the future, the PCAOB Board will act immediately to consider the need to issue new determinations consistent with the HFCA
Act. While we currently do not expect the HFCA Act or the AHFCA Act to prevent us from maintaining the trading of our ADSs in the U.S.,
uncertainties exist with respect to future determinations of the PCAOB in this respect and any further legislative or regulatory actions to be
taken by the U.S. or Chinese regulatory authorities that could affect our listing status in the U.S.
The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. See “—
D. Risk Factors—Risks Related to Doing Business in China—If the PCAOB is unable to inspect our auditors as required under the HFCA Act,
the SEC will prohibit the trading of our ADSs, which may materially and adversely affect the value of your investment” in this annual report
for more details.
3.A. Selected Financial Data
[Reserved]
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3.B. Capitalization and Indebtedness
Not applicable.
3.C. Reason for the Offer and Use of Proceeds
Not applicable.
3.D. Risk Factors
An investment in our ADSs involves risks. You should carefully consider the risks described below, as well as the other information
included or incorporated by reference in this annual report, before making an investment decision. Our business, financial condition or results
of operations could be materially adversely affected by any of these risks. The market or trading price of our ADSs could decline due to any of
these risks, and you may lose all or part of your investment. In addition, the risks discussed below also include forward-looking statements and
our actual results may differ substantially from those discussed in these forward-looking statements. Please note that additional risks not
presently known to us, that we currently deem immaterial or that we have not anticipated may also impair our business and operations.
Risk Factor Summary
Risks Related to Our Business
● Our operating results are subject to conditions affecting the lodging industry in general;
● Our business is sensitive to Chinese, European and global economic conditions. A severe or prolonged downturn in the Chinese,
European or global economy could materially and adversely affect our revenues and results of operations;
● The lodging industries in China and Europe are competitive, and if we are unable to compete successfully, our financial condition and
results of operations may be harmed;
● The COVID-19 outbreak has adversely affected, and may continue to adversely affect, our financial and operating performance;
● Seasonality of our business and national or regional special events may cause fluctuations in our revenues, cause our ADS or ordinary
share price to decline, and adversely affect our profitability;
● We may not be able to manage our planned growth, which could adversely affect our operating results;
● Failure to comply with data protection laws or maintain the integrity of internal or customer data could result in harm to our
reputation or subject us to costs, liabilities, fines or lawsuits; and
● We, our directors, management and employees may be subject to certain risks related to legal proceedings filed by or against us, and
adverse results may harm our business.
Risks Related to Doing Business in China
● We are subject to many of the economic and political risks associated with emerging markets due to our operations in China;
● Inflation in China may disrupt our business and have an adverse effect on our financial condition and results of operations;
● Developments in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you
and us;
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● Recent regulatory developments in China may subject us to additional regulatory review and disclosure requirements, expose us to
government influence, or otherwise restrict or completely hinder our ability to offer securities and raise capital outside China, which
could adversely affect our business operations and cause the value of our securities to significantly decline or become worthless;
● If the PCAOB is unable to inspect our auditors as required under the HFCA Act, the SEC will prohibit the trading of our ADSs,
which may materially and adversely affect the value of your investment; and
● Proceedings instituted by the SEC against the Big Four PRC-based accounting firms, including our independent registered public
accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange
Act.
Risks Related to Our Corporate Structure
● H World Group Limited is a Cayman Islands holding company. As a result, you may experience difficulties in effecting service of
legal process, enforcing foreign judgments or bringing actions in China against us or our management based on foreign laws;
● Revenue and assets contributions from the Consolidated Affiliated Entities have not been material. Nonetheless, if the PRC
regulatory authorities deem that the contractual arrangements in relation to the Consolidated Affiliated Entities do not comply with
PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing
regulations change in the future, our ordinary shares and ADSs may decline in value if we are unable to assert our contractual control
rights over the assets of the Consolidated Affiliated Entities;
● We rely in part on contractual arrangements with each of the Consolidated Affiliated Entities and their respective nominee
shareholders to operate certain restricted business. These contractual arrangements may not be as effective as direct ownership in
providing operational control and otherwise have a material adverse effect as to our business;
● If we exercise the option to acquire equity ownership of the Consolidated Affiliated Entities, the ownership transfer may subject us to
certain limitations and substantial costs;
● The nominee shareholders of the Consolidated Affiliated Entities may have potential conflicts of interest with us, which may
materially and adversely affect our business and financial condition;
● If the custodians or authorized users of our controlling non-tangible assets, including chops and seals, fail to fulfill their
responsibilities, or misappropriate or misuse these assets, our business and operations may be materially and adversely affected; and
● Uncertainties exist with respect to the interpretation and implementation of the Foreign Investment Law and its implementing rules
and how they may impact our business, financial condition and results of operations.
Risks Related to our ADSs, ordinary shares and Our Trading Market
● The market prices for our ADSs and/or ordinary shares has been and may continue to be volatile;
● An active trading market for our ordinary shares on the Hong Kong Stock Exchange might not be sustained and trading prices of our
ordinary shares might fluctuate significantly;
● If securities or industry analysts do not continue to publish research or if they publish inaccurate or unfavorable research about our
business, the market prices and trading volume for our ADSs and/or ordinary shares could decline;
● Techniques employed by short sellers may drive down the market prices of the ADSs and/or ordinary shares;
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● We may need additional capital, and the sale of additional ADSs, ordinary shares or other equity securities could result in additional
dilution to our shareholders and the incurrence of additional indebtedness could increase our debt service obligations;
● As our founder and co-founders collectively hold a controlling interest in us, they have significant influence over our management
and their interests may not be aligned with our interests or the interests of our other shareholders; and
● There is uncertainty as to whether Hong Kong stamp duty will apply to the trading or conversion of our ADSs.
Risks Related to Our Business
Our operating results are subject to conditions affecting the lodging industry in general.
Our operating results are subject to conditions typically affecting the lodging industry, which include:
● changes and volatility in national, regional and local economic conditions in China, Europe and other countries and regions where we
operate;
● competition from other hotels, the attractiveness of our hotels to customers, and our ability to maintain and increase sales to existing
customers and attract new customers;
● adverse weather conditions, natural disasters or travelers’ fears of exposure to contagious diseases and social unrest;
● changes in travel patterns or in the desirability of particular locations;
● increases in operating costs and expenses due to inflation and other factors;
● local market conditions such as an oversupply of, or a reduction in demand for, hotel rooms;
● the quality and performance of managers and other employees of our hotels;
● the availability and cost of capital to fund construction and renovation of, and make other investments in, our hotels;
● seasonality of the lodging business and national or regional special events;
● the possibility that leased properties may be subject to challenges as to their compliance with the relevant government regulations;
and
● maintenance and infringement of our intellectual property.
Changes in any of these conditions could adversely affect our occupancy rates, average daily room rates and RevPAR, or otherwise
adversely affect our results of operations and financial condition.
Our business is sensitive to Chinese, European and global economic conditions. A severe or prolonged downturn in the Chinese,
European or global economy could materially and adversely affect our revenues and results of operations.
Our business and operations are primarily based in China as well as in Europe. We depend on domestic business and leisure travel
customers in China for a significant majority of our revenues, and we also derive a relatively large portion of our revenues from Europe
following our acquisition of Deutsche Hospitality on January 2, 2020. Accordingly, our financial results have been, and we expect will
continue to be, affected by developments in the economies and travel industries primarily of China as well as those of Europe.
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As the travel industry is highly sensitive to business and personal discretionary spending levels, it tends to decline during general
economic downturns. A prolonged slowdown in the Chinese economy could erode consumer confidence which could result in changes to
consumer spending patterns for travel and lodging-related products and services. The European hotel industry is also significantly affected by
European countries’ economic growth. While the European hotel industry demonstrated stable growth from 2015 to 2019, its growth rate
slowed down from 2020 to 2021 due to the impact of COVID-19 and gradually recovered since early 2022.
The global financial markets experienced significant disruptions in 2008 and the United States, Europe and other economies went into
recession. The recovery from the lows of 2008 and 2009 was uneven and it is facing new challenges, including sanctions against Russia over
the Ukraine crisis since 2014, shadows of international terrorism spread by Islamic State of Iraq and al-Sham, which has been particularly
intensified since the Paris terror attacks in November 2015, the impact of the election of Donald Trump as former President of the United
States and the tax reform that he subsequently signed into law, the trade war between the United States and China and the Syrian airstrike in
2018, the tension between the United States and Iran in 2019, the impact of the United Kingdom leaving the European Union (the “EU”), the
outbreak of COVID-19, and the tension between China and the United States over the Taiwan strait due to the U.S House Representative’s
visit to Taiwan in August 2022. In addition, conflicts between the United States and China have extended to multiple areas, which could place
further pressure on China’s economic growth. For example, the U.S. government imposed economic and trade sanctions directly or indirectly
affecting China-based technology companies. Such laws and regulations are likely subject to frequent changes, and their interpretation and
enforcement involves substantial uncertainties, which may be heightened by national security concerns or driven by political and/or other
factors that are out of our control. In addition, the SEC has issued statements primarily focused on companies with significant China-based
operations, such as us. All of these events have introduced uncertainties to the geopolitical situations and the global economic outlook. There is
considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies that have been adopted by China. On the
other hand, after a sustained period of low interest rates, interest rates have risen significantly in the U.S. and Europe since 2022. There are
expectations that interest rates will continue to rise in 2023 as the U.S. Federal Reserve seeks to combat inflation. The combination of rising
interest rates and inflation has resulted in significant market volatility and economic uncertainty. There have also been concerns over unrest in
the Middle East and Africa, which have resulted in significant market volatility, and over the possibility of a war involving Iran or North
Korea. Furthermore, eruptions of regional tensions, such as the ongoing military conflict involving Ukraine and Russia, and the related
sanctions against Russia have resulted in major economic shocks worldwide and substantial volatility across global financial markets.
Moreover, there have been concerns about the economic effect of the earthquake, tsunami and nuclear crisis in Japan and the tensions between
Japan and its neighboring countries. Economic conditions in China and Europe are sensitive to global economic conditions.
It is unclear whether the above challenges will be contained or resolved and what effects they may have. Any prolonged slowdown in the
Chinese, European or global economy may have a negative impact on our business, results of operations and financial condition, and continued
turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs.
The lodging industries in China and Europe are competitive, and if we are unable to compete successfully, our financial condition and
results of operations may be harmed.
The lodging industries in China and Europe are highly fragmented. As a multi-brand hotel group, we believe that we compete primarily
based on location, room rates, brand recognition, quality of accommodations, geographic coverage, service quality, range of services, guest
amenities and convenience of the central reservation system. We primarily compete with other hotel groups as well as various independent
hotels in each of the markets in which we operate, including Chinese hotel groups such as BTG Homeinns and Jinjiang, as well as international
hotel groups such as Marriott, Intercontinental, Accor and Hilton. We also face competitions from lodging products offered on platforms such
as Airbnb and service apartments. New and existing competitors may offer more competitive rates, greater convenience, services or amenities
or superior facilities, which could attract customers away from our hotels and result in a decrease in occupancy rates and average daily room
rates of our hotels. Competitors may also outbid us for new leased hotel conversion sites, negotiate better terms for potential manachised or
franchised hotels or offer better terms to our existing franchisees in connection with our manachised or franchised hotels, thereby slowing our
anticipated pace of expansion. Furthermore, our typical guests may change their travel, spending and consumption patterns and choose to stay
in other kinds of hotels, especially given the increase in our hotel room rates to keep pace with inflation. Even if our peers cannot outcompete
us, any increasing supply of hospitality assets in the areas we operate could negatively affect our operational and financial results. Any of these
factors may have an adverse effect on our competitive position, results of operations and financial condition.
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The COVID-19 outbreak has adversely affected, and may continue to adversely affect, our financial and operating performance.
In December 2019, COVID-19 was reported to have surfaced in Wuhan, China, which subsequently spread throughout China. On January
31, 2020, the World Health Organization declared COVID-19 as a Public Health Emergency of International Concern. The travel industry has
been severely affected by the outbreak of COVID-19 since the beginning of 2020 due to the reduced traveler traffic. During the COVID-19
pandemic, government authorities around the world have imposed widespread lockdowns, closure of workplaces and restrictions on mobility
and travel to contain the spread of the virus. These containment measures negatively affected occupancy rates and revenue of our hotels
(including both leased and owned hotels and manachised and franchised hotels). Since the outbreak of COVID-19, we have taken various cost
and cash flow mitigation measures to counter the negative impact of COVID-19 on our results of operations. Despite these efforts, our
business operations and results in 2020, 2021 and 2022 were adversely affected by COVID-19. Due to the impact of COVID-19, we
experienced operating losses and closed down certain of our hotels in 2020, 2021 and 2022.
China has significantly eased its COVID-19 control measures. While we believe that these actions have boosted consumers’ willingness to
travel and demand for lodging, uncertainties still exist with respect to the effect of these measures on our business and results of operations. In
addition, we cannot guarantee that the regulatory authorities in jurisdictions where we operate will not re-adopt control measures, such as
travel restrictions and quarantine requirements, to combat the pandemic (including any new variant), which could slow down the recovery of
our industry. Any significant decline in revenues for our hotels also increases the probability that franchisees will be unable to fund working
capital and to repay or refinance indebtedness, which may cause our franchisees to declare bankruptcy. Such bankruptcies may result in
termination of our franchise agreements and eliminate our anticipated income and cash flows. Moreover, bankrupted franchisees may not have
sufficient assets to pay termination fees, other unpaid fees, reimbursements or unpaid loans owed to us.
As the COVID-19 pandemic continues to develop worldwide, its overall impact on our business, liquidity and results of operations
remains uncertain. Moreover, COVID-19 has not been eliminated and new variants may develop. While vaccines for COVID-19 are being and
have been developed, there is no guarantee that vaccines will continue to work as expected or be made available or will be accepted on a
significant scale and in a timely manner. Furthermore, future variants of COVID-19 could also prove to be more resistant to vaccines and other
mitigation measures. The potential downturn brought by and the duration of the COVID-19 pandemic may be difficult to assess or predict
where actual effects will depend on many factors beyond our control. To the extent COVID-19 adversely affects our business, financial
condition and results of operations, it may also heighten some of the other risks described under the heading “Risk Factors” in this annual
report.
Seasonality of our business and national or regional special events may cause fluctuations in our revenues, cause our ADS or ordinary
share price to decline, and adversely affect our profitability
The lodging industry is subject to fluctuations in revenues due to seasonality and national or regional special events. The seasonality of
our business may cause fluctuations in our quarterly operating results. Generally, the first quarter, in which both the New Year and Spring
Festival holidays fall, accounts for a lower percentage of our annual revenues than other quarters of the year. Our hotels in China typically
have a lower RevPAR in the fourth quarter, as compared to the second and third quarters, due to reduced travel activities in winter, though
some of our European hotels may recognize higher sales in the fourth quarter as a result of more trade fairs and corporate events. In addition,
national or regional special events that attract large numbers of people to travel may also cause fluctuations in our operating results in
particular for the hotel locations where those events are held. Therefore, you should not rely on our operating or financial results for prior
periods as an indication of our results in any future period. As our revenues may vary from quarter to quarter, our business performance is
difficult to predict and our quarterly results could fall below investor expectations, which could cause our ordinary share and/or ADS prices to
decline. Furthermore, the ramp-up process of our new hotels can be delayed during the low season, which may negatively affect our revenues
and profitability.
Our relatively limited operating history makes it difficult to evaluate our future prospects and results of operations.
Our operations commenced in 2005, when we launched our HanTing Hotel brand. See “Item 4. Information on the Company — A.
History and Development of the Company.” Accordingly, you should consider our future prospects in light of the risks and challenges
encountered by a company with a relatively limited operating history. These risks and challenges include:
● continuing our growth while trying to achieve and maintain our profitability;
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● preserving and enhancing our competitive position in the lodging industry in China, Europe and other countries and regions where we
operate;
● offering innovative products to attract recurring and new customers;
● implementing our strategy and modifying it from time to time to respond effectively to competition and changes in customer
preferences and needs;
● increasing awareness of our brands and products and continuing to develop customer loyalty;
● attracting, training, retaining and motivating qualified personnel;
● renewing leases for our leased hotels on commercially viable terms after the initial lease terms expire; and
● continuing to attract franchisees to our network.
If we are unsuccessful in addressing any of these risks or challenges, our business may be materially and adversely affected.
Our new leased and owned hotels typically incur significant pre-opening expenses during their development stages and generate
relatively low revenues during their ramp-up stages, which may have a significant negative impact on our financial performance.
The operation of each of our leased and owned hotels goes through three stages: development, ramp-up and mature operations. During the
development stage, leased and owned hotels do not generate any revenue, and incur pre-opening expenses generally ranging from
approximately RMB1.5 million to RMB20.0 million per hotel. During the ramp-up stage, when the occupancy rate is relatively low, revenues
generated by these hotels may be insufficient to cover their operating costs, which are relatively fixed in nature. As a result, these newly
opened leased and owned hotels may not achieve profitability during the ramp-up stage. As we continue to expand our leased and owned hotel
portfolio, the significant pre-opening expenses incurred during the development stage and the relatively low revenues during the ramp-up stage
of our newly opened leased and owned hotels may have a significant negative impact on our financial performance. Moreover, we plan to
develop more midscale and upscale leased and owned hotels in the future with relatively higher pre-opening expenses, especially rent, which
may lead to a more evident negative impact on our financials. In addition, we must maintain our hotels’ conditions and may upgrade a certain
number of our hotels, which requires renovation and other improvements to our hotels from time to time. Hotels under renovation may need to
be closed partially or entirely or otherwise be seriously disrupted due to the renovations, which could adversely affect the hotels’ revenues.
A significant portion of our costs and expenses may remain at the same level or increase even if our revenues decline, which would
adversely affect our net margins and results of operations.
A significant portion of our operating costs, including rent and depreciation and amortization, is fixed. Accordingly, a decrease in
revenues could result in a disproportionately higher decrease in our earnings because our operating costs and expenses are unlikely to decrease
proportionately. For example, the New Year and Spring Festival holiday periods generally account for a lower portion of our annual revenues
than other periods. However, our expenses do not vary as significantly with changes in occupancy and revenues as we need to continue to pay
rent and salary and to make regular repairs, maintenance and renovations and invest in other capital improvements throughout the year to
maintain the attractiveness of our hotels. Our property development and renovation costs may increase as a result of increasing costs of
materials. However, we may have a limited ability to pass increased costs to customers through room rate increases. Therefore, our costs and
expenses may remain constant or increase even if our revenues decline, which would adversely affect our net margins and results of
operations.
We may not be able to manage our planned growth, which could adversely affect our operating results.
Our hotel group has been growing rapidly since we commenced our business of operating and managing a multi-brand hotel group.
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We intend to continue developing and operating additional hotels in different geographic locations in China and overseas. Such expansions
have placed, and will continue placing, substantial demands on our managerial, operational, technological and other resources. Our planned
expansion will also require us to maintain the consistency of our products and the quality of our services to ensure that our business does not
suffer as a result of any deviations, whether actual or perceived, in our quality standards. In order to manage and support our growth, we must
continue improving our existing operational, administrative and technological systems and our financial and management controls, and recruit,
train and retain qualified hotel management personnel as well as other administrative and sales and marketing personnel, particularly as we
expand into new markets. We cannot assure you that we will be able to effectively and efficiently manage the growth of our operations, recruit
and retain qualified personnel and integrate new hotels into our operations. Our inability to anticipate the changing demands that expanding
operations will impose on our management and information and operational systems, or our failure to quickly adapt our systems and
procedures to the new markets, could result in declines of revenues and increases in expenses or otherwise harm our results of operations and
financial condition.
In addition, our expansion within existing markets may affect our existing hotels in those markets and, as a result, negatively affect our
overall results of operations. While expansion into new geographic markets, especially overseas, and addition of new hotel products for which
we may have limited operating experience and brand recognition may present operating and marketing challenges that are different from those
we currently encounter in our existing markets. Those new markets may have different regulatory requirements, competitive conditions,
consumer preferences and discretionary spending patterns as compared to our existing markets. As a result, any new hotels we open in those
markets may be less successful than hotels in our existing markets. Guests and franchisees in any new market may not be familiar with our
brands and we may need more time to build brand awareness in that market through greater investments in advertising and promotional
activities than we anticipated. We may find it more difficult in new markets to hire, motivate and retain qualified employees who share our
vision, passion and culture. Hotels operated in new markets may also have lower average revenues or higher operating costs than hotels in
existing markets. Revenues at hotels operated in new markets may take longer than expected to ramp up and reach expected revenues and
profit levels, and may never do so, thereby affecting our overall profitability.
There can be no assurance that any expansion, new hotel products or brands we introduce will be well received by our customers and
become profitable in a timely fashion, or at all. If a new product or brand is not well received by our customers and our expansion into new
geographic markets is not successful, we may not be able to generate sufficient revenue to offset related costs and expenses, and our overall
financial performance and condition may be adversely affected.
Our multi-brand business strategy exposes us to potential risks and if any of the new hotel brands are not well received by the market, we
may not be able to generate sufficient revenue to offset related costs and expenses, and our overall financial performance and condition
may be adversely affected.
We launched our hotel brand HanTing Hotel in 2005, our economy hotel brand Hi Inn in 2008 and our midscale hotel brand JI Hotel in
2010. In 2012, we acquired the Starway Hotel brand. In addition, we launched Manxin Hotels & Resorts in October 2013, which was
subsequently rebranded as Manxin Hotel, an upper midscale hotel brand; Joya Hotel, a hotel brand targeting the upscale market, in December
2013 and Elan Hotel, an economy hotel brand, in September 2014. We acquired Crystal Orange in May 2017, which holds hotels under the
brands of Crystal Orange Hotel and Orange Hotel. In August 2018, we completed the acquisition of a majority stake in Blossom Hotel
Management which holds hotels under the brand of Blossom Hill Hotels & Resorts (currently Blossom House). We launched the Madison
Hotel brand and Grand Madison Hotel brand in 2019. In 2020, Grand Madison Hotel was merged into Madison Hotel brand. In January 2020,
we completed the acquisition of Deutsche Hospitality, which operates in Europe, the Middle East, Asia and Africa, with hotels under brands of
Steigenberger Hotels & Resorts, MAXX by Steigenberger, Jaz in the City, IntercityHotel, and Zleep Hotels. In 2020, we acquired the Ni Hao
Hotel brand, and started to develop and operate hotels under this brand. In May 2021, we completed the acquisition of CitiGO, which operates
hotels under the brand of CitiGO Hotel. In July 2021, Steigenberger Hotels GmbH and Porsche Lizenz- und Handelsgesellschaft mbH & Co.
KG signed a license agreement to jointly develop a luxury lifestyle brand named Steigenberger Porsche Design Hotels. Steigenberger Porsche
Design Hotels are expected to be launched in selected international metropolises. We also launched our luxury hotel brands Steigenberger Icon
and Song Hotels in 2021. We are still in the process of developing our various brands, such as the Joya Hotel, Manxin Hotel, Starway Hotel, Hi
Inn, Crystal Orange Hotel, Orange Hotel, Blossom House, Madison Hotel brands and Ni Hao Hotel. In addition to the hotel brands owned by
us, we entered into strategic alliance transactions with Accor in January 2016, and are developing Accor’s certain number of hotel brands in
PRC, Taiwan and Mongolia under our brand franchise agreements.
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We cannot guarantee the size and profitability of the various market segments that each new brand is targeting. The business models of
these new brands are not proven and we cannot guarantee that they can generate return comparable to the established brands. The process of
developing new brands may divert management attention and resources from our established brands. We may not be able to find competent
management staff to lead and manage the execution of the multi-brand business strategy. If we are unable to successfully execute our multi-
brand strategy to target various market segments, we may be unable to generate revenues from these market segments in the amounts and by
the times we anticipate, or at all, and our business, competitive position, financial condition and prospects may be adversely affected.
We may not be able to successfully identify, secure and develop in a timely fashion additional hotel properties under the lease and
ownership model or develop hotel properties in a timely or cost-efficient manner, which may adversely affect our growth strategy and
business.
We plan to open more hotels to grow our business. Under our lease and ownership model (other than Deutsche Hospitality) and the lease
model of Deutsche Hospitality, we may not be successful in identifying and leasing or acquiring additional hotel properties at desirable
locations and on commercially reasonable terms or at all. Even if we are able to successfully identify and acquire new hotel properties, new
hotels may not generate the returns we expect. We may also incur costs in connection with evaluating hotel properties and negotiating with
property owners, including properties that we are subsequently unable to lease or own. In addition, we may not be able to develop additional
hotel properties in a timely fashion due to construction or regulatory delays. If we fail to successfully identify, secure or develop in a timely
fashion additional hotel properties, our ability to execute our growth strategy could be impaired and our business and prospects may be
materially and adversely affected.
We develop a substantial majority of our leased and owned hotels directly. Our involvement in the development of properties presents a
number of risks, including construction delays or cost overruns, which may result in increased project costs or lost revenue. We may be unable
to recover development costs we incur for projects that do not reach completion. Properties that we develop could become less attractive due to
market saturation or oversupply, and as a result we may not be able to recover development costs at the expected rate, or at all. Furthermore,
we may not have available cash to complete projects that we have commenced, or we may be unable to obtain financing for the development
of future properties on favorable terms, or at all. If we are unable to successfully manage our hotel development to minimize these risks, our
growth strategies and business prospects may be adversely affected.
Our leases could be terminated early, we may not be able to renew our existing leases on commercially reasonable terms and our rents
could increase substantially in the future, which could materially and adversely affect our operations.
The lease agreements between our lessors and us typically provide, among other things, that the leases could be terminated under certain
legal or factual conditions. If our leases were terminated early, our operation of such properties may be interrupted or discontinued and we may
incur costs in relocating our operations to other locations. Furthermore, we may have to pay losses and damages and incur other liabilities to
our customers and other vendors due to our default under our contracts. As a result, our business, results of operations and financial condition
could be materially and adversely affected.
We plan to retain the operation of our leased hotels upon lease expiration through (i) renewal of existing leases or (ii) execution of
franchise agreements with the lessors. We cannot assure you, however, that we will be able to retain our hotel operation on satisfactory terms,
or at all. In particular, we may experience an increase in our rent payments and cost of revenues in connection with renegotiating our leases. If
we fail to retain our hotel operation on satisfactory terms upon lease expiration, our costs may increase and our profit generated from the hotel
operation may decrease in the future. If we are unable to pass the increased costs on to our customers through room rate increases, our
operating margins and earnings could decrease and our results of operations could be materially and adversely affected.
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We may not be able to successfully compete for franchise agreements and, as a result, we may not be able to achieve our planned growth.
Our growth strategy includes expanding through manachising and franchising, by entering into franchise agreements with our franchisees.
We believe that our ability to compete for franchise agreements primarily depends on our brand recognition and reputation, the results of our
overall operations in general and the success of the hotels that we currently manachise and franchise. Other competitive factors for franchise
agreements include marketing support, capacity of the central reservation channel and the ability to operate hotels cost-effectively. The terms
of any new franchise agreements that we obtain also depend on the terms that our competitors offer for those agreements. In addition, if the
availability of suitable locations for new properties decreases, or regulatory planning or other local regulations change, the supply of suitable
properties for our manachise and franchise models could be diminished. If the hotels that we manachise or franchise perform less successfully
than those of our competitors or if we are unable to offer terms as favorable as those offered by our competitors, we may not be able to
compete effectively for new franchise agreements. As a result, we may not be able to achieve our planned growth and our business and results
of operations may be materially and adversely affected.
We may have disputes with our franchisees and they may terminate the franchise agreements with us earlier if the franchised hotels’
performance is worse than they expected.
We may have disputes with our franchisees with respect to the performance of the franchise agreements. For example, we have in the past
closed certain manachised and franchised hotels as a result of disputes with the franchisees regarding our measures to avoid competition
between the franchisees, including keeping appropriate distances between the manachised and franchised hotels. Some franchisees were not
satisfied with the performance of the hotel managers we appointed for our manachised hotels or generally the manachised or franchised hotels’
profitability or growth rates. Some franchisees complained that our loyalty program and other marketing efforts did not bring sufficient
customers for their hotels. Our franchisees may also have disputes with us regarding other matters, such as the amount and settlement of fees
payable by them and the adequacy of our operational support to them. In addition, our franchise agreements with franchisees typically provide
that the franchise agreements could be terminated under certain circumstances. If franchise agreements are terminated early, we lose the
franchise fees and related management fees. Furthermore, we may have to pay losses and damages to our guests, and our brand image may be
adversely impacted. As a result, our business and results of operations and financial conditions may be adversely affected by early termination
of our franchise agreements.
We plan to renew our existing franchise agreements upon expiration. However, we may be unable to retain our franchisees on satisfactory
terms, or at all. If a significant number of our existing franchise agreements are terminated early or are not renewed on satisfactory terms upon
expiration, our revenue and profit may decrease in the future. If we cannot secure new franchisees to replace those expired or terminated
franchises and compensate for the loss of business, our results of operations could be materially and adversely affected.
Acquisitions, financial investments or strategic investments may have an adverse effect on our ability to manage our business and harm
our results of operations and financial condition.
If we are presented with appropriate opportunities, we may acquire or invest in businesses or assets. For example, we invested in Beijing
Qingpu Tourism Culture Development Co., Ltd. in 2015, in AAPC Hotel Management Limited, China Young Professionals Apartment
Management Limited and Chengjia (Shanghai) Investment Co., Limited in 2016, and in Blossom Hotel Management, Oravel Stays Private
Limited and some securities in the hotel industry in 2017. We completed the acquisition of all of the equity interests in Crystal Orange in May
2017. In January 2018, we announced to have formed a joint venture with TPG. Hitone later also invested in this joint venture. In August
2018, we completed the acquisition of a majority stake in Blossom Hotel Management in steps. From 2017 to 2019, we also acquired shares of
Accor and other companies from open market, and invested in a certain number of hotel related funds. In January 2020, we completed the
acquisition of all of the equity interests in Deutsche Hospitality. We also jointly established a company named Yongle Huazhu Hotel & Resort
Group with a wholly-owned subsidiary of Sunac China Holdings Limited (“Sunac”) and Chengdu Global Times Exhibition and Travel
Development Company Limited to develop and operate hotels. We will provide hotel operational services to the joint venture and the joint
venture will develop and operate hotels under the brands of Blossom House, Steigenberger Hotels & Resorts and Sunac’s own brands.
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The existing and future acquisitions or investments may expose us to potential risks, including risks associated with unforeseen or hidden
liabilities, risks that acquired or invested companies will not achieve anticipated performance levels, diversion of management attention and
resources from our existing business, difficulty in integrating the acquired businesses with our existing operational infrastructure, and inability
to generate sufficient revenues to offset the costs and expenses of acquisitions or investments. In addition, following completion of an
acquisition or investment, our management and resources may be diverted from their core business activities due to the integration process,
which diversion may harm the effective management of our business. Furthermore, it may not be possible to achieve the expected level of
benefits after integration and the actual cost of delivering such benefits may exceed the anticipated cost. Potential risk exposures associated
with acquisition or investments, difficulties in business integration, requirements of cost, expenses and management attention may be more
severe and unpredictable if international acquisitions and investments are involved. Any difficulties encountered in the acquisition or
investment and integration process may have an adverse effect on our ability to manage our business and harm our results of operations and
financial condition. In addition, if we purchase shares from the open market, we may experience volatility in our investments as the prices of
such shares fluctuate frequently. For example, we incurred unrealized loss from fair value changes of equity securities associated with shares
we purchased from the open market in the past. If a financial or strategic investment is unsuccessful, then in addition to the diversion of
management attention and resources from our existing business we may lose the value of our investment, which could have a material adverse
effect on our financial condition and results of operations.
Our legal right to lease certain properties could be challenged or affected adversely by property owners or other third parties or subject to
government regulation.
A substantial part of our business model relies on leases with third parties who either own or lease the properties from the ultimate
property owners. We also grant franchises to hotel operators who may or may not own their hotel properties. The land use rights and other
property rights with respect to properties we currently lease, manachise or franchise for our existing hotels could be challenged. For example,
our lessors have failed to provide the property ownership certificates and/or the land use rights certificates for certain properties that we lease
for our hotel operations. While we have performed due diligence to verify the rights of our lessors to lease such properties, including
inspecting documentation issued by competent regulatory authorities evidencing these lessors’ land use rights and other property rights with
respect to these properties, our rights under those leases could be challenged by other parties including regulatory authorities. If the properties
are deemed to be illegal constructions or the landlords do not have the rights to lease the properties to us for hotel operations purposes, the
landlords (instead of us, as the lessee) may be subject to monetary penalties and the lease agreements may be invalidated. We may therefore be
required to relocate our relevant hotels. We also cannot assure you that we can always keep good title of the properties we lease currently or
will lease in the future, free and clear of all liens, encumbrances and defects. If the ultimate owner of the property changes after the original
owner of such property mortgages such property to any third party, our legal rights under the lease agreement may be affected adversely and
we may not rank senior in the right of continuing occupying the property.
Under PRC law, lease agreements related to buildings and houses constructed on state-owned land and within urban zoning areas are
required to be registered with the local housing bureau. While the majority of our standard lease agreements require the lessors to make such
registrations, some of our leases have not been registered as required, which may expose both our lessors and us to potential monetary fines.
Some of our rights under the unregistered leases may also be subordinated to the rights of other interested third parties. In addition, in some
instances where our immediate lessors are not the ultimate owners of hotel properties, no consents or permits have been obtained from the
owners, the primary lease holders or competent regulatory authorities, as applicable, for the subleases of the hotel properties to us, which could
potentially impact the enforceability of our leases or lead to the renegotiation of such leases that result in terms less favorable to us or even
relocation of our relevant hotels. In addition, even if such aforementioned consents or permits have been obtained, we cannot rule out any
possible default by our immediate lessors (as sub-lessors) to the primary lease holders, which may lead to the termination of lease agreements
between the sub-lessors and the primary lease holders. As a result, it could render the lease agreements between us and the sub-lessors
unenforceable. Some of the properties we lease from third parties were also subject to mortgages at the time the leases were signed. Where
consent to the lease has not been obtained from the mortgage holder in such circumstances, the lease may not be binding on the transferee of
the property if the mortgage holder forecloses on the mortgage and transfers the property. Moreover, the property ownership or leasehold in
connection with our manachised and franchised hotels could be subject to similar third-party challenges.
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In Germany, our hotels are operated on the legal basis of lease, management or franchise agreements. Some agreements for hotels located
in Germany are concluded subject to conditions precedent or require a consent by a third party, such as authorities in case of local
measurement areas (for example, re-development) or ground owners in case of a hereditary building right. There are no indications that these
requirements have not been fulfilled; however, if not met, failure to meet these requirements could potentially invalidate the respective
agreements or lead to the renegotiation of these agreements which could result in less favorable terms. Furthermore, provisions or parts of
lease, management or franchise agreements may not be effective or may lead to legal disputes. This could lead to additional cost burdens for
our hotel operations. In addition, some of our leases, management or franchise agreements contain break rights and rescission rights entitling
the landlords to terminate the agreements on a certain date or upon the occurrence of certain events. Further, in case of a fixed lease period of
more than one year, German law provides for a written-form requirement regarding material terms of leases and therefore excludes an ordinary
termination right prior to the lapse of the lease period. However, in case of a written-form defect, the lease agreement is not considered void
but will be deemed to have an unlimited lease period with an ordinary termination right by law. Some of our leases may have a written-form
defect, which effectively leads to a statutory termination right with a notice period. Such legal notice – in general – has to be given at the
beginning of a calendar quarter with the termination being effective at the end of the following calendar quarter (i.e. the notice period is
between six and nine months, depending on the date of the termination notice). Similar issues, except for the written-form defect, may occur in
connection with our managed and franchised hotels.
Any challenge to our legal rights to the properties used for our hotel operations, if successful, could impair the development or operations
of our hotels in such properties. We are also subject to the risk of potential disputes with property owners or third parties who otherwise have
rights to or interests in our hotel properties. Such disputes, whether resolved in our favor or not, may divert management’s attention, harm our
reputation or otherwise disrupt our business.
Any failure to comply with land- and property-related PRC laws and regulations may negatively affect our ability to operate our hotels
and we may suffer significant losses as a result.
Our lessors are required to comply with various land- and property-related laws and regulations to enable them to lease effective titles of
their properties for our hotel use. For example, before any properties located on state-owned land in China with allocated or leased land use
rights or on land owned by collective organizations may be leased to third parties, lessors should obtain appropriate approvals from the
competent regulatory authorities. In addition, properties used for hotel operations and the underlying land should be approved for commercial
use purposes by competent regulatory authorities. Some of the lessors of our executed lease agreements have not obtained the required
regulatory approvals, including approvals of the properties for commercial use purposes. Such failure may subject the lessors to monetary fines
or other penalties and may lead to the invalidation or termination of our leases and relocation of our relevant hotels, and therefore may
adversely affect our results of operations. While some lessors have agreed to indemnify us against our losses resulting from their failure to
obtain the required approvals, we cannot assure you that we will be able to successfully enforce such indemnification obligations against our
lessors or that such indemnification can cover losses from all the property defects. As a result, we may suffer significant losses resulting from
our lessors’ failure to obtain required approvals to the extent that we are not fully indemnified by our lessors.
Our success could be adversely affected by the performance of our manachised and franchised hotels and defaults or wrongdoings of
our franchisees may affect our reputation, which would adversely affect our results of operations.
Our success could be adversely affected by the performance of our manachised and franchised hotels, over which we have less control
compared to our leased and owned hotels. As of December 31, 2022, we manachised and franchised approximately 91.8% of our hotels, and
we plan to further increase the number of manachised and franchised hotels to increase our presence in China and our overseas markets. Our
franchisees for both our manachised and franchised hotels may not be able to develop hotel properties on a timely basis, which could adversely
affect our growth strategy and may impact our ability to collect fees from them on a timely basis. Furthermore, given that our franchisees are
typically responsible for the costs of developing and operating the hotels, including renovating the hotels to our standards, and all of the
operating expenses, the quality of our manachised and franchised hotel operations may be diminished by factors beyond our control.
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Our franchisees may not successfully operate hotels in a manner consistent with our standards and requirements. Our manachised and
franchised hotels are also operated under our brand names. If our brands are misused by any of our franchisees, there may be an adverse
impact on our business reputation and brand image. In addition, like any operators in service-oriented industries, we are subject to customer
complaints and we may face complaints from unsatisfied customers who are unhappy with the standard of service offered by our franchisees.
Any complaints, regardless of their nature and validity, may affect our reputation, thereby adversely affecting our results of operations. We
may also have to incur additional costs in placating any customers or salvaging our reputation. For example, in 2022, we closed 149
manachised and franchised hotels that did not comply with our brand and operating standards.
If any of our franchisees defaults or commits wrongdoing, there could be situations where the franchisee is not in a position to sufficiently
compensate us for losses which we have suffered as a result of such defaults or wrongdoings. While we ultimately can take action to terminate
our franchise agreements that do not comply with the terms of our franchise agreements or commit wrongdoing, we may not be able to identify
problems and make timely responses and, as a result, our image and reputation may suffer, which may have a material adverse effect on our
results of operations.
If we are unable to access funds to maintain our hotels’ condition and appearance, or if our franchisees fail to make investments
necessary to maintain or improve their properties, the attractiveness of our hotels and our reputation could suffer and our hotel
occupancy rates may decline.
In order to maintain our hotels’ condition and appearance, ongoing renovations and other leasehold improvements, including periodic
replacement of furniture, fixtures and equipment, are required. In particular, we manachise and franchise properties leased or owned by
franchisees under the terms of franchise agreements, substantially all of which require our franchisees to comply with standards that are
essential to maintaining the relevant product integrity and our reputation. We depend on our franchisees to comply with these requirements by
maintaining and improving properties through investments, including investments in furniture, fixtures, amenities and personnel.
Such investments and expenditures require ongoing funding and, to the extent we or our franchisees cannot fund these expenditures from
existing cash or cash flow generated from operations, we or our franchisees must borrow or raise capital through financing. We or our
franchisees may not be able to access capital and our franchisees may be unwilling to spend available capital when necessary, even if required
by the terms of our franchise agreements. If we or our franchisees fail to make investments necessary to maintain or improve the properties,
our hotel’s attractiveness and reputation could suffer, we could lose market share to our competitors and our hotel occupancy rates and
RevPAR may decline.
Interruption or failure of our information systems or our business partners’ systems could impair our ability to effectively provide our
services, which could damage our reputation and subject us to penalties.
Our ability to provide consistent and high-quality services and to monitor our operations on a real-time basis throughout our hotel group
depends on the continued operation of our information technology systems, including our web property management, central reservation and
customer relationship management systems. Certain damage to or failure of our systems could interrupt our inventory management, affect the
manner of our services in terms of efficiency, consistency and quality, and reduce our customer satisfaction.
Our technology platform plays a central role in our management of inventory, revenues, loyalty program and franchisees. We also rely on
our call center and mobile application to facilitate customer reservations. Our systems remain vulnerable to damage or interruption as a result
of power loss, telecommunications failures, computer viruses, fires, floods, earthquakes, interruptions in access to our toll-free numbers,
hacking or other attempts to harm our systems, and other similar events. Our servers, which are maintained in Shanghai, may also be
vulnerable to break-ins, sabotage and vandalism. Some of our systems are not fully redundant, and our disaster recovery planning does not
account for all possible scenarios.
Furthermore, our systems and technologies, including our website and database, could contain undetected errors or “bugs” that could
adversely affect their performance, or could become outdated and we may not be able to replace or introduce upgraded systems as quickly as
our competitors or within budgeted costs for such upgrades. If we experience frequent, prolonged or persistent system failures, our quality of
services, customer satisfaction, and operational efficiency could be severely harmed, which could also adversely affect our reputation. Steps
we take to increase the reliability and redundancy of our systems may be costly, which could reduce our operating margin, and there can be no
assurance that any increased reliability may be achievable in practice or would justify the costs incurred.
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In addition, we collaborate with various business partners in our day-to-day operations, and our ability to provide satisfactory services to
customers also depends on the maintenance and efficacy of such business partners’ systems, such as the maintenance of networks with
necessary speed, bandwidth, and stability. If any of our business partners’ systems encounter errors, “bugs” or other problems, our ability to
effectively provide our services may be adversely affected, our reputation may be harmed, and we may also face customer complaints and be
subject to fines and other penalties from competent authorities.
Failure to comply with data protection laws or maintain the integrity of internal or customer data could result in harm to our reputation
or subject us to costs, liabilities, fines or lawsuits.
Our business involves collecting and retaining large volumes of internal and customer data, including personal information as our various
information technology systems enter, process, summarize and report such data. We also maintain information about various aspects of our
operations as well as regarding our employees. The integrity and protection of our customer, employee and company data is critical to our
business. Our customers and employees expect that we will adequately protect their personal information. We are required by applicable laws
to keep strictly confidential the personal information that we collect, and to take adequate security measures to safeguard such information.
The PRC regulatory and enforcement regime regarding privacy and data security is evolving and tightening:
● The PRC Criminal Law, as amended by its Amendment 7 (effective on February 28, 2009) and Amendment 9 (effective on
November 1, 2015), prohibits institutions, companies and their employees from selling or otherwise illegally disclosing a citizen’s
personal information obtained during the course of performing duties or providing services or obtaining such information through
theft or other illegal ways.
● On November 7, 2016, the Standing Committee of the PRC National People’s Congress, or the NPC Standing Committee, issued the
Cyber Security Law of the PRC, which became effective on June 1, 2017. Pursuant to the Cyber Security Law of the PRC, network
operators must not, without users’ consent, collect their personal information, and may only collect users’ personal information
necessary to provide their services. Providers are also obliged to provide security maintenance for their products and services and
shall comply with provisions regarding the protection of personal information as stipulated under the relevant laws and regulations. In
addition, pursuant to the Cyber Security Law of the PRC, personal information and important data collected and generated by a
critical information infrastructure operator in the course of its operations in China must be stored in China, and if a critical
information infrastructure operator purchases internet products and services that affects or may affect national security, it should be
subject to cybersecurity review by the Cyberspace Administration of China, or the CAC.
● In June 2021, the NPC Standing Committee promulgated the Data Security Law of the PRC, which took effect in September 2021.
The Data Security Law of the PRC applies to data handling activities carried out within the territory of the PRC. The Data Security
Law of the PRC further provides that data processing activities carried out outside of China, which harm national security, public
interest or legal interests of Chinese citizens and organizations, should be subject to legal liabilities. Pursuant to the Data Security
Law of the PRC, those conducting data handling activities should, in accordance with laws and regulations, establish and perfect a
data security management system across their entire workflow and adopt the corresponding technical measures and other necessary
measures to ensure data security.
● The Civil Code of the PRC (effective since January 1, 2021) provides the main legal basis for privacy and personal information
infringement claims under the Chinese civil laws.
● The Personal Information Protection Law, which took effect on November 1, 2021, outlines the main system framework and
comprehensive requirements for personal information processing.
● On July 2, 2020, the CAC announced that it had launched a cybersecurity review of DiDi Global, a company with its principal
operations in China that had recently listed on the NASDAQ to prevent the risk of national data security breach and protect national
security and public interest. The CAC then ordered the removal of DiDi’s app from China’s smartphone app stores. On July 5, 2021,
the CAC announced the commencement of cybersecurity review of “Yunmanman,” “Huochebang” and “BOSS Zhipin” and
suspended their registration of new users.
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● On July 30, 2021, the State Council promulgated the Regulations on the Security Protection of Critical Information Infrastructure,
which came into effect on September 1, 2021. Under such Regulations, critical information infrastructure refers to the important
network facilities and information systems in crucial industries and fields such as public telecommunications, information services,
energy, transportation, water conservancy, finance, public services, e-government and national defense science, technology and
industry, as well as other important network facilities and information systems which, in case of destruction, loss of function or leak
of data, may result in serious damage to national security, national economy, the people’s livelihood and public interests. According
to such Regulations, a CIIO is required to perform certain obligations to protect the critical information infrastructure’s security,
including but not limited to, conducting network security tests and risk assessments at least once a year. The security protection
departments are responsible for organizing the identification of CIIOs in their respective industries and areas in accordance with the
identification rules, and shall inform the identification results to the operators of network facilities and information systems in a
timely manner and in the meanwhile report such results to the public security department of the State Council. As of the date of this
annual report, none of our company, or our operating subsidiaries has been identified as a CIIO by the CAC or other PRC regulatory
authorities. Nevertheless, PRC regulatory authorities have wide discretion in the interpretation and enforcement of these laws. As a
hotel management group operating a large hotel booking internet, we are still exposed to risks of being deemed to be a CIIO. If we
are identified as a CIIO, we would be required to fulfill various obligations as required under applicable PRC laws for CIIOs,
including, among others, setting up a special security management organization, organizing regular cybersecurity education and
training, formulating emergency plans for cyber security incidents, and conducting regular emergency drills.
● In December 2021, the CAC and related authorities promulgated the Cybersecurity Review Measures, or the Cybersecurity Measures,
which took effect on February 15, 2022. According to the Cybersecurity Measures, a company is subject to cybersecurity review if it
affects or may affect national security and falls under any of the following circumstances: (i) it is a critical information infrastructure
operator who purchases network products and service, or (ii) it is a network platform operator who carries out data processing
activities. In addition, any network platform operator possessing over one million users’ personal information must apply for a
cybersecurity review before listing abroad. Relevant PRC regulatory authorities may also initiate cybersecurity review if they
determine certain network products, services, or data processing activities affect or may affect national security.
● On July 7, 2022, the CAC issued the Measures for the Security Assessment of Data Cross-border Transfer, or the Security
Assessment Measures, which became effective on September 1, 2022. In accordance with the Security Assessment Measures, a data
processor should apply to the CAC for a security assessment under certain circumstances, including (i) where a data processor
provides important data abroad; (ii) where a critical information infrastructure operator or a data processor processing personal
information of over one million people provides personal information abroad; (iii) where a data processor has provided personal
information of 100,000 people or sensitive personal information of 10,000 people in total abroad since January 1 of the previous year;
and (iv) other circumstances prescribed by the CAC. Moreover, the Security Assessment Measures provide that for non-compliant
cross-border data transfers that had been carried out before this regulation came into effect, rectification must be completed within six
months from the effective date of the regulation.
● On September 12, 2022, the Standing Committee of the PRC National People’s Congress promulgated the Draft Amendment to
Cyber Security Law of the PRC for public comments. Pursuant to the draft amendment, the CAC imposed more severe and
comprehensive fines and other penalties for the offences under CSL, among others, the director, supervisor, or senior executive of a
company that is in violation of CSL would be prohibited from continuing to serve as a director, supervisor, or senior executive of that
company.
● On February 22, 2023, the CAC issued the Measures for the Standard Contract for Outbound Transfer of Personal Information, which
will become effective on June 1, 2023. Pursuant to such regulation, entering into a CAC-formulated Standard Contract with the
overseas data recipient is a pre-requisite for a data processor to transfer data abroad, if such data processor meets all of the following
conditions: (i) it is not a CIIO; (ii) it processes personal information of fewer than one million individuals; (iii) it has cumulatively
transferred personal information of fewer than 100,000 individuals abroad since January 1 of the previous year; and (iv) it has
cumulatively transferred sensitive personal information of fewer than 10,000 individuals abroad since January 1 of the previous year.
Within ten (10) working days after the Standard Contract takes effect, the data processor should file the executed Standard Contract
with the CAC.
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We have implemented comprehensive cybersecurity and data protection policies, procedures and measures to safeguard personal
information and ensure secured storage and transmission of data and prevent unauthorized access or use of data. As of the date of this annual
report, except for receiving the confirmation from CAC regarding our assessment filing of cross-border data transmission, we have not
received any notice of and are not currently subject to any proceedings initiated by the CAC or any other PRC regulatory authority. However,
we cannot guarantee that the regulators will agree with us. As there remains significant uncertainty in the interpretation and enforcement of
China’s laws and regulations in relation to data security and cross-border transfer of personal information, we cannot assure you that we will be
able to comply with such regulations in all respects. Any non-compliance with these laws and regulations may subject us to fines, orders to
rectify or terminate any actions that are deemed illegal by regulatory authorities, other penalties, including reputational damage, legal
proceedings against us, which may affect our business, financial condition and results of operations.
PRC regulators, including the NPC Standing Committee, the CAC, the Ministry of Industry and Information Technology and the Ministry
of Public Security, have been increasingly focused on the regulation of data security and data protection. The interpretation, application and
enforcement of these laws, rules and regulations evolve from time to time and their scope may change continually through new legislation,
amendments to existing legislation and changes in enforcement. We expect that these areas will receive greater and continued attention and
scrutiny from regulators and the public going forward, which could cause us to incur substantial compliance costs and subject us to heightened
risks and challenges associated with data security and protection. If we are unable to manage these risks, we could become subject to civil
litigation brought by relevant individuals; administrative penalties, including fines, suspension of business, website closure, and revocation of
prerequisite licenses; and our reputation and results of operations could be materially and adversely affected.
In addition, after our acquisition of Deutsche Hospitality, the European Union has become an important region for our data protection
compliance. European data protection laws, in particular the Regulation (EU) 2016/679 of 27 April 2016 on the protection of natural persons
with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (GDPR)
(complemented by EU Member States Law on data protection such as the German Federal Data Protection Act), include strict rules on the
processing of personal data, including the transfer of data from the European Union to China. Under the GDPR, any personal data may be used
only if there is a legal justification (which could be a consent or an express statutory justification set out in the GDPR or other applicable EU
laws), and the use must be restricted to legitimate purposes. Deutsche Hospitality has taken various technical and organizational measures,
which are regularly reviewed and updated, to stay compliant, including appointment of a data protection officer and a special data protection
working group, regulation of data processes, risk management assessment, preparation of relevant documentation and training. We also put
high emphasis on proper dealing with data subject rights requests, i.e. the requests of customers, employees and other natural persons
regarding our use of their data. We, including Deutsche Hospitality, take GDPR requirements and, in particular, data subject rights requests
very seriously. However, we cannot guarantee that we are fully compliant in this complex area where many items are still unclear. This
includes, in particular, international data transfers which have become even more complex and unclear under the Judgment of the European
Court of Justice of 16 July 2020 (C-311/18 Data Protection Commissioner v Facebook Ireland Limited and Maximillian Schrems).
Theoretically, fines for a violation of the GDPR can amount up to 4% of the global turnover of the whole group.
There is no guarantee that our current security measures and those of our third-party service providers may always be adequate for the
protection of our customer, employee or company data; and like all companies, we have experienced data incidents from time to time. In
addition, given the size of our customer base and the types and volume of personal data on our system, we may be a particularly attractive
target. Unauthorized access to our proprietary internal and customer data may be obtained through break-ins, sabotage, breach of our secure
network by an unauthorized party, computer viruses, computer denial-of-service attacks, employee theft or misuse, breach of the security of the
networks of our third-party service providers, or other misconduct. Because the techniques used by computer programmers who may attempt
to penetrate and sabotage our proprietary internal and customer data change frequently and may not be recognized until launched against a
target, we may be unable to anticipate these techniques. Unauthorized access to our proprietary internal and customer data may also be
obtained through inadequate use of security controls. For instance, in August 2018, online reports alleged that we had become the subject of
potential information leak and a proposed class action complaint was filed against us and our management, which was voluntarily dismissed by
the plaintiffs in February 2019. We may face similar litigation in the future. Any of such proceedings may harm our reputation and adversely
affect our business and results of operations. Besides proceedings, we may be subject to negative publicity about our security and privacy
policies, systems, or measurements from time to time.
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The laws and regulations applicable to security and privacy are becoming increasingly important globally. Complying with any additional
or new regulatory requirements on a jurisdiction-by-jurisdiction basis would impose significant burdens and costs on our operations. Any
failure to prevent or mitigate security breaches, cyber-attacks or other unauthorized access to our systems or disclosure of our customers’ data,
including their personal information, could result in loss or misuse of such data, interruptions to our service system, diminished customer
experience, loss of customer confidence and trust, impairment of our technology infrastructure, and harm our reputation and business, resulting
in significant legal and financial exposure and potential lawsuits.
If the value of our brand or image diminishes, it could have a material adverse effect on our business and results of operations.
We offer multiple hotel products that are designed to target distinct segments of customers. Our continued success in maintaining and
enhancing our brands and image depends, to a large extent, on our ability to satisfy customer needs by further developing and maintaining our
innovative and distinctive products and maintaining consistent quality of services across our hotel group, as well as our ability to respond to
competitive pressures. If we are unable to do so, our occupancy rates may decline, which could in turn adversely affect our results of
operations. Our business may also be adversely affected if our public image or reputation were to be diminished by the operations of any of our
hotels, whether due to unsatisfactory service, accidents or otherwise. If the value of our products or image is diminished or if our products do
not continue to be attractive to customers, our business and results of operations may be materially and adversely affected.
Failure to protect our tradenames and trademarks as well as other intellectual property rights could have a negative impact on our
brands and adversely affect our business.
The success of our business depends in part upon our continued ability to use our brands, trade names and trademarks to increase brand
awareness and to further develop our products. The unauthorized reproduction of our trademarks could diminish the value of our brands and
their market acceptance, competitive advantages or goodwill. In addition, we consider our proprietary information systems and operational
system to be key components of our competitive advantage and our growth strategy. As of December 31, 2022, we had received copyright
registration certificates for 153 software programs developed by us. However, none of our other proprietary information systems have been
patented, copyrighted or otherwise registered as our intellectual property.
Monitoring and preventing the unauthorized use of our intellectual property is difficult. The measures we take to protect our brands, trade
names, trademarks and other intellectual property rights may not be adequate to prevent their unauthorized use by third parties. Furthermore,
the application of laws governing intellectual property rights in China and other jurisdictions is evolving and could involve substantial risks to
us. In particular, the laws and enforcement procedures in the PRC are uncertain and do not protect intellectual property rights to the same
extent as do the laws and enforcement procedures in the United States and other developed countries. If we are unable to adequately protect
our brands, trade names, trademarks and other intellectual property rights, we may lose these rights and our business may suffer materially.
We may also be subject to claims for infringement, invalidity, or indemnification relating to third parties’ intellectual property rights.
Regardless of their merits, such third party claims may be time-consuming and costly to defend, divert management attention and resources, or
require us to enter into licensing agreements, which may not be available on commercially reasonable terms, or at all.
If we are not able to retain, hire and train qualified managerial and other employees, our business may be materially and adversely
affected.
Our managerial and other employees manage our hotels and interact with our customers on a daily basis. They are critical to maintaining
the quality and consistency of our services as well as our established brands and reputation. In general, employee turnover, especially in lower-
level positions, is relatively high in the lodging industry. As a result, it is important for us to retain as well as attract qualified managerial and
other employees who are experienced in lodging or other consumer-service industries. There is a limited supply of such qualified individuals in
cities where we have operations and other cities into which we intend to expand. In addition, we need to hire qualified managerial and other
employees on a timely basis to keep pace with our rapid growth while maintaining consistent quality of services across our hotels in various
geographic locations. We must also provide training to our managerial and other employees so that they have up-to-date knowledge of various
aspects of our hotel operations and can meet our demand for high-quality services. If we fail to do so, the quality of our services may decrease,
which in turn, may have a material adverse effect on our business.
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Our current employment practices may be adversely impacted under the applicable labor laws.
The PRC National People’s Congress promulgated the Labor Contract Law of the PRC (the “Labor Contract Law”) in 2007, which took
effect in 2008, and amended it on December 28, 2012. The Labor Contract Law imposes requirements concerning, among others, the execution
of written contracts between employers and employees, the time limits for probationary periods, and the length of fixed-term employment
contracts. Because the PRC regulatory authorities have introduced various new labor-related regulations since the effectiveness of the labor
contract law, and the interpretation and implementation of these regulations are still evolving, our employment practices could violate the
Labor Contract Law and related regulations and could be subject to related penalties, fines or legal fees. If we are subject to severe penalties or
incur significant legal fees in connection with labor law disputes or investigations, our business, financial condition and results of operations
may be adversely affected. In addition, a significant number of our employees are dispatched from third-party human resources companies,
which are responsible for managing, among others, payrolls, social insurance contributions and local residency permits of these employees.
According to a regulation on labor dispatch, which was promulgated in January 2014 to implement the provisions of the labor contract law, a
company is permitted to use dispatched employees for only up to 10% of its labor force after February 29, 2016. To comply with the labor
dispatch regulation, we have reduced the percentage of dispatched employees since January 2014 by using service outsourcing arrangement.
Under the service outsourcing arrangement, we have entered into service outsourcing agreements with a service outsourcing firm and relevant
employees are deemed as employees of this service outsourcing firm. However, since the current labor dispatch regulation does not clearly
define the distinction of labor dispatch and service outsourcing, our service outsourcing arrangement may be considered as labor dispatch by
the relevant PRC regulators.
In addition, according to the Labor Contract Law and its implementing rules, if we intend to enforce the non-compete provision with our
employees in the employment contracts or confidentiality agreements, we have to compensate our employees on a monthly basis during the
term of the restriction period after the termination or ending of the employment contract, which may cause extra expenses to us.
In Germany, our business is subject to various labor-related statutory regulations. For example, there are restrictions regarding the
assignment and use of temporary agency workers under the German Temporary Agency Work Act (Arbeitnehmerüberlassungsgesetz) which
was substantially amended with effect from April 1, 2017. The interpretation of the amended regulations is still evolving. It is possible that we
may be responsible for non-compliant assignments of temporary-agency workers, even if the root cause of the non-compliance lies with the
temporary-work agency engaged by us. We could therefore be subject to related fines or temporary-agency workers could be deemed to be our
employees by fiction. If we are subject to severe fines or incur significant legal fees in connection with labor law disputes or investigations, our
business, financial condition and results of operations may be adversely affected.
In addition, our employment practices in other jurisdictions are also subject to changes in applicable labor law. If we are found to have
violated any other applicable labor law requirements, we may be subject to fines or other penalties, which could in turn negatively affect our
reputation and results of operations, and disputes with our employees could interrupt our business operations.
Failure to retain our management team could harm our business.
We place substantial reliance on the experience and the institutional knowledge of members of our current management team. Mr. Qi Ji,
our founder and chairman of the board, Mr. Hui Jin, our chief executive officer, Ms. Xinxin Liu, our president, Ms. Jihong He, our chief
financial officer, and other members of the management team are particularly important to our future success due to their substantial
experiences in lodging and other consumer-service industries. Finding suitable replacements for Mr. Qi Ji, Mr. Hui Jin, Ms. Xinxin Liu, Ms.
Jihong He and other members of our management team could be difficult, and competition for such personnel of similar experience is intense.
The loss of the services of one or more members of our management team due to their departures or otherwise could hinder our ability to
effectively manage our business and implement our growth strategies.
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We are subject to various laws and regulations, including franchise, hotel industry, construction, hygiene, health and safety
environmental, anti-monopoly and advertising laws and regulations that may subject us to liability.
Our business is subject to various compliance and operational requirements under PRC laws. For example, we are required to complete the
filing and submit annual reports with, the PRC Ministry of Commerce, or the MOC, to engage in the hotel franchising business. In addition,
each of our hotels in China is required to obtain a special industry license from the local public security authority and complete fire prevention
safety inspection/commitment with the local fire and rescue department, to have hotel operations included in the business scope of its business
license, to obtain hygiene permits, and to comply with license requirements and laws and regulations with respect to construction permit,
zoning, fire prevention, public area hygiene, food safety, public safety and environmental protection. We are also subject to anti-monopoly,
advertising and other laws and regulations. See “Item 4. Information on the Company — B. Business Overview — Regulation — Regulations
on Hotel Operation.” If we fail to comply with any applicable construction, hygiene, health and safety, environmental, fire prevention and
advertising laws and regulations related to our business, we may be subject to potentially significant monetary damages and fines or the
suspension of our operations or development activities. Furthermore, new regulations could also require us to retrofit or modify our hotels or
incur other significant expenses.
New zoning plans or regulations applicable to a specific location may cause us to relocate our hotel(s) in that location, or require
additional approvals and licenses that may not be granted to us promptly or at all, which may adversely affect our operating results. Any failure
by us to control the use of, or to adequately restrict the discharge of, hazardous substances in our development activities, or to otherwise
operate in compliance with environmental laws could also subject us to potentially significant monetary damages and fines or the suspension
of our hotel development activities or hotel operations, which could materially adversely affect our financial condition and results of
operations. Some of our hotels are not in full compliance with all of the applicable requirements. Such failure to comply with applicable
construction permit, environmental, fire prevention, health and safety laws and regulations related to our business and hotel operation may
subject us to potentially significant monetary damages and fines or the suspension of operations and development activities of our company or
related hotels. We could be subject to any challenges or other actions with respect to such non-compliance.
Our manachised and franchised hotels are subject to these same permit and safety requirements. Although our franchise agreements
require these franchisees to obtain and maintain all required permits or licenses, we have limited control over these franchisees. Any failure to
obtain and maintain the required permits or licenses by any franchisee of a manachised or franchised hotel may require us to delay opening of
the manachised or franchised hotel or to forgo or terminate our franchise agreement, which could harm our brand, result in lost revenues and
subject us to potential indirect liability.
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In particular, the implementation of our strategy of investing in a competing business could be adversely affected by uncertainties in the
implementation and enforcement of the amended PRC Anti-Monopoly Law, which came into effect on August 1, 2022. Under the Anti-
Monopoly Law, any mergers, acquisitions, establishment of joint ventures, or other transactions resulting in change of control may be deemed
as “concentrations of undertakings” in China and the relevant undertaking(s) must notify the State Administration for Market Regulation, or
the SAMR, with the transaction before implementing the transaction if certain turnover thresholds are met. The SAMR will consider numerous
factors in determining “control” based. In practice, any newly established joint venture under the joint control of at least two undertakings also
constitutes a concentration of undertakings. Because of the uncertainties in interpretation, implementation, and enforcement of the Anti-
Monopoly Law, we cannot assure you that the SAMR will not regard our past or future acquisitions or investments, to have met the filing
thresholds, or investigate or demand a filing for merger control review, or otherwise take enforcement actions. The amended Anti-Monopoly
Law has significantly increased the penalties for failing to notify with SAMR. On March 24, 2023, the SAMR issued four implementing rules
of the Anti-Monopoly Law, including the Provisions on the Review of Concentration of Undertakings, which has come into effect on April 15,
2023. The new implementing rules strengthen the enforcement of merger control reviews but still remain silent on the specific factors to be
considered in determination of “control”, which gives the SAMR great discretion and may result in investigations into our acquisition or
investment transactions conducted in the past and make our acquisition transactions in the future more difficult. Our strategic investments,
including our past and future transactions, may be subject to SAMR’s scrutiny from the anti-monopoly perspective from time to time. There
can be no assurance as to whether the SAMR will impose any administrative penalties or other restrictive measures on us or any relevant
parties for our strategic investments. If we are deemed to have carried out a concentration of undertakings in violation of the Anti-Monopoly
Law, in each incident, we could be subject to a fine of up to RMB5,000,000 where such concentration does not have the effect of excluding or
restricting competition, or penalties of being ordered to cease the concentration and unwind the transaction and being imposed with other
restrictive measures to restore the pre-concentration market status, or be subject to a fine of up to 10% of our sales revenue from the previous
year where such concentration has had or may have the effect of excluding or restricting competition. Our businesses in Europe and other
jurisdictions are also subject to local anti-monopoly requirements and the business activities have to comply with various compliance and
operational requirements, including inter alia, regulations for customer and data protection, as well as regulations with respect to health, safety
and fire protection and hygiene requirements. Compliance with these regulations and adaptions to new regulations could potentially increase
the cost of operating our business and lead to additional expenses.
Our businesses in Europe and other jurisdictions are subject to similar requirements and the business activities have to comply with
various compliance and operational requirements, including inter alia regulations for customer and data protection, as well as regulations with
respect to health, safety and fire protection and hygiene requirements. Compliance with these regulations and adaptions to new regulations
could potentially disturb our business and lead to additional expenses.
We could suffer impairment losses for our intangible assets.
We had net intangible assets of RMB5,385 million and RMB5,278 million (US$765 million) as of December 31, 2021 and 2022,
respectively. Our intangible assets consist primarily of brand names, master brand agreements, non-compete agreements, franchise or
manachise agreements and our purchased software.
Brand names and master brand agreements are considered to have indefinite lives. We test indefinite life intangible assets at least annually
for impairment, and more frequently if events or changes in circumstances indicate that they might be impaired. Our other intangible assets are
considered to be finite life intangible assets. We evaluate finite life intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable. If such an adverse event occurs and has the effect of changing one of
the critical assumptions or estimates related to the fair value of our intangible assets, an impairment charge could result.
We recorded impairment loss of RMB245 million and RMB170 million (US$25 million) for the years ended December 31,2021 and 2022,
respectively. The extent, magnitude and duration of COVID-19 and other factors, such as market conditions, changes in business factors and
adjustments to our strategies, may change the assumptions and estimates used in the indefinite life intangible assets valuation, which could
result in future impairment charges. There can be no assurance that future reviews of intangible assets will not result in significant impairment
charges. Although it does not affect cash flow, an impairment charge will have the effect of decreasing our earnings, assets and shareholders’
equity.
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We may suffer impairment losses for our goodwill.
We have acquired businesses from time to time, which have resulted in the recognition of goodwill on our financial statements. We had
goodwill of RMB5,132 million and RMB5,195 million (US$753 million) as of December 31, 2021 and 2022, respectively. Goodwill is tested
for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. Factors that could lead to
impairment of goodwill include significant adverse changes in the business climate, unanticipated changes in the competitive environment,
adverse legal or regulatory actions or developments, changes in clients’ perception and the reputation of our brands, changes in interest rates,
unfavorable changes in our stock price and market capitalization, and deterioration in our financial condition.
Due to the negative impact of COVID-19, we incurred goodwill impairment loss of RMB437 million in 2020, which was related to legacy
DH. We did not recognize any goodwill impairment in 2021 or 2022. However, as the extent, magnitude and duration of COVID-19 is still
uncertain, we may need to change our assumption, which could result in future impairment charges.
Our financial and operating performance may be adversely affected by epidemics, adverse weather conditions, natural disasters and
other catastrophes.
Our financial and operating performance may be adversely affected by epidemics, adverse weather conditions, natural disasters and other
catastrophes, particularly in locations where we operate a large number of hotels.
Our business could be materially and adversely affected by the outbreak of swine influenza, avian influenza, severe acute respiratory
syndrome, COVID-19 or other epidemics. The whole world has suffered from the impact of COVID-19. Any prolonged recurrence of such
contagious disease or other adverse public health developments in China, Europe and other countries and regions may have a material adverse
effect on our operations. For example, if any of our employees or customers are suspected of having contracted any contagious disease while
he or she has worked or stayed in our hotels, we may under certain circumstances be required to quarantine our employees that are affected and
the affected areas of our premises. Any contraction by our employees or customers could also affect the safety reputation of the relevant hotels,
which in turn could undermine customers’ willingness to stay in such hotels.
In recent years, there have also been reports on the occurrences of avian influenza in various parts of China, Europe and other countries
and regions that we operate, including hundreds of confirmed human deaths. Any prolonged recurrence of such contagious disease or other
adverse public health developments in China, Europe and other countries and regions that we operate may have a material adverse effect on
our operations. For example, if any of our employees or customers is suspected of having contracted any contagious disease while he or she
has worked or stayed in our hotels, we may under certain circumstances be required to quarantine our employees that are affected and the
affected areas of our premises.
Losses caused by epidemics, adverse weather conditions, natural disasters and other catastrophes, including earthquakes or typhoons, are
either uninsurable or too expensive to justify insuring against in China, Europe and other countries and regions that we operate. In the event an
uninsured loss or a loss in excess of insured limits occurs, we could lose all or a portion of the capital we have invested in a hotel, as well as
the anticipated future revenues from the hotel. In that event, we might nevertheless remain obligated for any financial commitments related to
the hotel.
Similarly, war (including the potential of war), terrorist activity (including threats of terrorist activity), social unrest and heightened travel
security measures instituted in response, travel-related accidents, as well as geopolitical uncertainty and international conflict, will affect travel
and may in turn have a material adverse effect on our business and results of operations. In addition, we may not be adequately prepared in
contingency planning or recovery capability in relation to a major incident or crisis, and as a result, our operational continuity may be
adversely and materially affected and our reputation may be harmed.
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Our limited insurance coverage may expose us to losses, which may have a material adverse effect on our reputation, business, financial
condition and results of operations.
We carry all mandatory and certain optional commercial insurance, including property, business interruption, construction, third-party
liability, public liability, product’s liability and employer’s liability insurance for our leased and owned hotel operations. We also require our
lessors, franchisees and contractors to purchase customary insurance policies. Although we require our franchisees to obtain the requisite
insurance coverage through our franchisees management, we cannot guarantee that our franchisees will adhere to such requirements. In
particular, there are inherent risks of accidents or injuries in hotels. One or more accidents or injuries at any of our hotels could adversely affect
our safety reputation among customers and potential customers, decrease our overall occupancy rates and increase our costs by requiring us to
take additional measures to make our safety precautions even more visible and effective. In the future, we may be unable to renew our
insurance policies or obtain new insurance policies without increases in cost or decreases in coverage levels. We may also encounter disputes
with insurance providers regarding payments of claims that we believe are covered under our policies. Furthermore, if we are held liable for
amounts and claims exceeding the limits of our insurance coverage or outside the scope of our insurance coverage, our reputation, business,
financial condition and results of operations may be materially and adversely affected.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our
financial results or prevent fraud.
We are subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, or the SEC, as required
by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every public company to include in its
annual report a management report on such company’s internal control over financial reporting containing management’s assessment of the
effectiveness of its internal control over financial reporting. In addition, an independent registered public accounting firm must attest to and
report on the effectiveness of such company’s internal control over financial reporting except where the company is a non-accelerated filer. We
currently are a large accelerated filer.
In connection with the preparation of this annual report, we carried out an evaluation of the effectiveness of our internal control over
financial reporting. Based on this assessment and evaluation, our management has concluded that our internal control over financial reporting
was effective as of December 31, 2022. Our independent registered public accounting firm has issued an attestation report as of December 31,
2022. See “Item 15. Controls and Procedures—Attestation Report of the Registered Public Accounting Firm.” However, if we fail to maintain
effective internal control over financial reporting in the future, our management and our independent registered public accounting firm may not
be able to conclude that we have effective internal control over financial reporting. This could in turn result in the loss of investor confidence
in the reliability of our financial statements and negatively impact the trading prices of our ADSs and/or ordinary shares. Furthermore, we have
incurred and anticipate that we will continue to incur considerable costs, management time and other resources in an effort to continue to
comply with Section 404 and other requirements of the Sarbanes-Oxley Act.
We, our directors, management and employees may be subject to certain risks related to legal proceedings filed by or against us, and
adverse results may harm our business.
We cannot predict with certainty the cost of defense, the cost of prosecution or the ultimate outcome of litigation and other proceedings
filed by or against us, our directors, management or employees, including remedies or damage awards, and adverse results in such litigation
and other proceedings may harm our business or reputation. Such litigation and other proceedings may include, but are not limited to, actions
relating to intellectual property, commercial arrangements, leased properties, share transfer, employment, non-competition and labor law,
fiduciary duties, personal injury, death, property damage or other harm resulting from acts or omissions by individuals or entities outside of our
control, including franchisees and third-party property owners. For example, as of December 31, 2022, we had some pending legal,
administrative and arbitration proceedings, including real estate lease terminations and disputes and management agreement disputes.
Moreover, in the case of intellectual property litigation and proceedings, adverse outcomes could include the cancellation, invalidation or other
loss of material intellectual property rights used in our business and injunctions prohibiting our use of business processes or technology that is
subject to third- party patents or other third-party intellectual property rights.
We generally are not liable for the willful actions of our franchisees and property owners; however, there is no assurance that we would be
insulated from liability in all cases.
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Risks Related to Doing Business in China
We are subject to many of the economic and political risks associated with emerging markets due to our operations in China.
With global presence, we conduct a substantial portion of our business and operations in China. As the lodging industry is highly sensitive
to business and personal discretionary spending levels, it tends to decline during general economic downturns. Accordingly, our results of
operations, financial condition and prospects are subject to a significant degree to economic developments in China. The PRC regulatory
authorities have implemented various measures to encourage economic development and guide the allocation of resources. While some of
these measures benefit the overall PRC economy, they may also have a negative effect on us. For example, our results of operations and
financial condition may be adversely affected by regulatory control over capital investments or changes in environmental, health, labor or tax
regulations that are applicable to us.
As the PRC economy is increasingly intricately linked to the global economy, it is affected in various respects by downturns and
recessions of major economies around the world, such as the global financial crisis and sovereign debt crisis in Europe. Stimulus measures
designed to help China weather the global financial crisis may contribute to higher inflation, which could adversely affect our results of
operations and financial condition. For example, certain operating costs and expenses, such as employee compensation and hotel operating
expenses, may increase as a result of higher inflation. Measures to control the pace of economic growth may cause a decrease in the level of
economic activity in China, which in turn could adversely affect our results of operations and financial condition. In addition, the PRC
regulators exercise influence over China’s economic growth through its allocation of resources, control of payment of foreign currency-
denominated obligations, monetary policy, and preferential treatment for particular industries or companies where the regulators deem
appropriate to further regulatory, political and societal goals. Certain measures adopted by the PRC regulatory authorities, such as changes of
the People’s Bank of China’s statutory deposit reserve ratio and lending guideline imposed on commercial banks, may restrict loans to certain
industries. The State Administration of Foreign Exchange, or “SAFE”, and the relevant Chinese banks where our operating subsidiaries or
VIEs in China opened bank accounts may adopt restrictions on the cross-border payment obligations and dividends repatriation made by these
subsidiaries or VIEs by way of “window guidance” measures. These actions, as well as future actions and policies, could materially affect our
liquidity and access to capital and our ability to operate our business. There have also been concerns about the relationships among China and
other Asian countries, the relationship between China and the United States, as well as the relationship between the United States and certain
Asian countries such as North Korea, which may result in or intensify potential conflicts in relation to territorial, regional security and trade
disputes.
Any adverse changes in economic conditions in China, or in the laws and regulations and the policies in China could have a material
adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, leading
to reduction in demand for our services and solutions and adversely affect our competitive position. An economic downturn, whether actual or
perceived, a further decrease in economic growth rates or an otherwise uncertain economic outlook in China could have a material adverse
effect on business and consumer spending and, as a result, adversely affect our business, financial condition and results of operations.
Inflation in China may disrupt our business and have an adverse effect on our financial condition and results of operations.
The Chinese economy has experienced rapid expansion together with rising rates of inflation and increasing salaries. Salary increases
could potentially increase discretionary spending on travel, but general inflation may also erode disposable incomes and consumer spending.
Furthermore, certain components of our operating costs, including personnel, food, laundry, consumables and property development and
renovation costs, may increase as a result of an increase in the cost of materials and labor resulting from general inflation. However, we cannot
guarantee that we can pass increased costs to customers through room rate increases. This could adversely impact our business, financial
condition and results of operations.
Developments in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and
us.
Most of our operations are conducted in the PRC through our PRC subsidiaries, and are governed by PRC laws, rules and regulations. The
PRC legal system is based on written statutes. It is a system in which prior court decisions have limited value as precedents. Our PRC
subsidiaries and the VIEs are subject to various PRC laws and regulations generally applicable to companies in China. However, these laws
and regulations are relatively new and the PRC legal system continues to rapidly evolve.
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In particular, PRC laws and regulations concerning the lodging industry are developing and evolving. The PRC governmental authorities
may promulgate new laws and regulations regulating the lodging industries. We cannot assure you that our business operations would not be
deemed to violate any such new PRC laws or regulations. Moreover, developments in the lodging industry may lead to changes in PRC laws,
regulations and policies or in the interpretation and application of existing laws, regulations and policies, which in turn may limit or restrict us,
and could materially and adversely affect our business and operations.
Besides, the PRC is geographically large and divided into various provinces and municipalities and, as such, different laws, rules,
regulations and policies may have different and varying applications and interpretations in different parts of the PRC.
From time to time, we may have to rely on administrative and court proceedings to enforce our legal rights. However, since the PRC
administrative and court authorities have discretion in interpreting and implementing statutory and contractual terms, these types of
uncertainties, including uncertainty over the scope and effect of our contractual, property (including intellectual property) and procedural
rights, and any failure to respond to changes in the regulatory environment in China, could materially and adversely affect our business and
impede our ability to continue our operations, and may further affect the legal remedies and protections available to investors, which may, in
turn, adversely affect the value of your investment.
Recent regulatory developments in China may subject us to additional regulatory review and disclosure requirements, expose us to
government influence, or otherwise restrict or completely hinder our ability to offer securities and raise capital outside China, which
could adversely affect our business operations and cause the value of our securities to significantly decline or become worthless.
As our business is primarily conducted in China, we are exposed to legal and other risks associated with our operations in China. The PRC
regulators have authority to exert influence on the ability of a company with operations in China, including us, to conduct its business, and
may exert influence over the manner our operations. Any actions by the PRC regulators to exert more oversight over offerings that are
conducted overseas or foreign investment in companies having operations in China, including us, could significantly limit or completely hinder
our ability to offer or continue to offer securities to investors, and cause the value of our securities to significantly decline or become
worthless. Recently, the PRC regulators initiated a series of regulatory actions and statements to regulate business operations in China,
including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas,
adopting new measures to extend the scope of cybersecurity reviews, adopting new laws and regulations related to data security, and
expanding the efforts in anti-monopoly enforcement. While we do not believe that these regulatory changes would have any material impact on
us, we cannot guarantee that the authorities will agree with us or will not promulgate new regulations that restrict our business operations or
access to capital.
On August 8, 2006, six PRC regulatory agencies, namely the Ministry of Commerce, the State Assets Supervision and Administration
Commission, the State Administration of Taxation, the State Administration for Industry and Commerce, the CSRC and the SAFE, jointly
adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rule, which became
effective on September 8, 2006. This New M&A Rule, as amended on June 22, 2009, purports, among other things, to require offshore special
purpose vehicles, or SPVs, formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled by PRC
companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange. On
September 21, 2006, the CSRC published a notice on its official website specifying documents and materials required to be submitted to it by
SPVs seeking the CSRC approval of their overseas listings.
On July 6, 2021, the General Office of the Central Committee of the Communist Party of China and the General Office of the State
Council jointly issued the Opinions on Severe and Lawful Crackdown on Illegal Securities Activities. These opinions emphasized the need to
strengthen the administration over illegal securities activities and the supervision of overseas listings by China-based companies. These
opinions proposed to take effective measures, such as promoting the construction of relevant regulatory systems, to deal with the risks and
incidents facing China-based overseas-listed companies and the demand for cybersecurity and data privacy protection. These opinions and any
related implementation rules to be enacted may subject us to additional compliance requirement in the future. There are still uncertainties
regarding the interpretation and implementation of these opinions, and further explanations or detailed rules and regulations with respect to
these opinions may be issued in the future that could impose additional requirements on us. Therefore, we cannot assure you that we will
remain fully compliant with all new regulatory requirements of these opinions or any future implementation rules on a timely basis, or at all.
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On February 17, 2023, the CSRC promulgated the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic
Companies (which came into effective on March 31, 2023) and its relevant notes and five supporting guidelines. Pursuant to these regulations,
if the offering and listing of securities in an overseas market are made in the name of an offshore entity based on equity, assets, earnings of
PRC companies that operate the offshore entity’s main businesses, such offering or listing of securities is subject to filing requirements of the
CSRC. These regulations apply to various types of overseas equity offerings and listings, including re-financing, secondary or dual primary
listings, listing through special purchase acquisition companies, issuance of equity incentive awards, issuance of equity securities or securities
convertible into or exchangeable for equity securities. Issuers conducting these transactions will need to make filings with the CSRC.
According to the Circular on the Arrangements for the Filing-based Administration of Overseas Securities Offering and Listing by Domestic
Companies, for companies that have already offered shares or been listed overseas prior to the implementation of such new regulations, these
companies qualify as “Stock Enterprises”, and Stock Enterprises are not required to apply for the filing immediately until a subsequent re-
financing event occurs. These new regulations and their future developments could potentially complicate our future equity offerings and
require us to incur significant compliance costs.
In addition, these new rules or regulations impose additional requirements on our future re-financing activities and will subject us to
relevant CSRC filings or other regulatory authorization or requirements. We cannot assure you that we would be able to obtain such fillings,
approval or meet such requirements in a timely manner or at all. Any failure may subject us to fines, penalties or other sanctions which may
have a material adverse effect on our business and financial condition as well as our ability to complete this or other future offerings.
Rapid urbanization and changes in zoning and urban planning in China may cause our leased and owned hotels to be demolished,
removed or otherwise affected and our franchise agreements to terminate.
China is undergoing a rapid urbanization process, and zoning requirements and other regulatory mandates with respect to urban planning
of a particular area may change from time to time. When there is a change in zoning requirements or other regulatory mandates with respect to
the areas where our hotels are located, the affected hotels may need to be demolished or removed. We have experienced such demolition and
relocation in the past and we may encounter additional demolition and relocation cases in the future. For example, in 2022, we were obligated
to demolish one leased hotels due to local government zoning requirements. In addition, as of December 31, 2022, we were notified by local
regulatory authorities that we may have to demolish three additional leased hotels due to local zoning requirements. Our franchise agreements
typically provide that if the manachised or franchised hotels are demolished, the franchise agreements will terminate. In 2022, six manachised
hotels were demolished due to local zoning requirements. Similar demolitions, termination of franchise agreements or interruptions of our
hotel operations due to zoning or other local regulations could occur in the future. Any such further demolition and relocation could cause us to
lose primary locations for our hotels and we may not be able to achieve comparable operation results following the relocations. While we may
be reimbursed for such demolition and relocation, we cannot assure you that the reimbursement, as determined by the relevant regulatory
authorities, will be sufficient to cover our direct and indirect losses. Accordingly, our business, results of operations and financial condition
could be adversely affected.
Regulatory control of currency conversion may limit our ability to pay dividends in foreign currencies to our shareholders and therefore
adversely affect the value of your investment.
We are a company incorporated in the Cayman Islands. Our ability to pay dividends depends upon, among other things, our PRC
subsidiaries’ ability to obtain and remit sufficient foreign currency. Our PRC subsidiaries must present certain documents to SAFE, its
authorized branch, or the designated foreign exchange bank, before they can obtain and remit foreign currencies out of the PRC, including
evidence that the relevant PRC taxes have been paid. If our PRC subsidiaries, for any reason, fail to satisfy any of the PRC legal requirements
for remitting foreign currency, our ability to pay dividends would be adversely affected.
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The PRC regulators imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency
out of China. See “Item 4. Information on the Company — B. Business Overview — Regulation — Regulations on Foreign Currency
Exchange” for discussions of the principal regulations and rules governing foreign currency exchange in China. We receive a substantial
portion of our revenues in RMB. For most capital account items, approval from appropriate regulatory authorities is required where RMB is to
be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in
foreign currencies. The PRC regulators may also at its discretion restrict access in the future to foreign currencies for current account
transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we
may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs and ordinary shares, which would
adversely affect the value of your investment.
Fluctuation in the value of the Renminbi may have a material adverse effect on your investment.
The value of the Renminbi against the U.S. dollar, Euro, Hong Kong dollar and other currencies is affected by, among other things,
changes in China’s political and economic conditions and China’s foreign exchange policies.
A significant portion of our revenues, expenses and financial assets are denominated in the Renminbi. Our reporting currency is Renminbi.
The functional currencies of the entities within Deutsche Hospitality include Euro and other currencies such as Swiss Franc. Our exposure to
foreign exchange risk primarily relates to cash and cash equivalents and loans denominated in U.S. dollars and Euro, and our investment in
equity securities of Accor denominated in Euro. We rely substantially on dividends paid to us by our operating subsidiaries in China and
Europe. Any significant depreciation of the Renminbi or Euro against the U.S. dollar may have a material adverse effect on our revenues, and
the value of, and any dividends payable on, our ADSs and ordinary shares, when translated into U.S. dollars. If we decide to convert our
Renminbi or Euro into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes,
depreciation of the Renminbi or Euro against the U.S. dollar or Hong Kong dollar would reduce the U.S. dollar or Hong Kong dollar amount
available to us. On the other hand, to the extent that we need to convert U.S. dollars or Hong Kong dollar into Renminbi or Euro for our
operations, appreciation of the Renminbi or Euro against the U.S. dollar or Hong Kong dollar would have an adverse effect on the Renminbi
amount we receive from the conversion. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk — Foreign Exchange Risk”
for discussions of our exposure to foreign currency risks. In summary, fluctuation in the value of the Renminbi in either direction could have a
material adverse effect on the value of our company and the value of your investment.
In addition, because we also have operations in Europe (namely, Deutsche Hospitality) with the functional currencies of Euro and other
currencies such as Swiss Franc, when the Renminbi appreciates (or depreciates) against these other functional currencies, such as Euro and
Swiss Franc, our revenues from these operations could decrease (or increase) when translated into Renminbi. In general, fluctuation in the
value of the Renminbi in either direction could result in the fluctuation in the value of our Company and the value of your investment.
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PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident
shareholders to personal liability and limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to
distribute profits to us, or otherwise adversely affect us.
On July 4, 2014, SAFE issued the Circular of the State Administration of Foreign Exchange on Relevant Issues concerning Foreign
Exchange Administration of the Overseas Investment and Financing and Round-trip Investments by Domestic Residents through Special
Purpose Vehicles, or Circular 37, which replaced the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic
Residents’ Corporate Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles issued by SAFE in October 2005, or
Circular 75. Pursuant to Circular 37, any PRC residents, including both PRC institutions and individual residents, are required to register with
the local SAFE branch before making contribution to a company set up or controlled by the PRC residents outside of the PRC for the purpose
of overseas investment or financing with their legally owned domestic or offshore assets or interests, referred to in this circular as a “special
purpose vehicle.” In addition, such PRC residents or entities must update their SAFE registrations when the offshore special purpose vehicle
undergoes material events relating to any change of basic information (including change of such PRC citizens or residents, name and operation
term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers or spin-offs. In February 2015, SAFE
promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Management Policies on Direct
Investment, which took effect on June 1, 2015. This notice has amended SAFE Circular 37, requiring PRC residents or entities to register with
qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the
purpose of overseas investment or financing, where banks are required to review and carry out foreign exchange registration for offshore direct
investments, and SAFE and its branches supervise foreign exchange registration for direct investments indirectly through the banks. See “Item
4. Information on the Company — B. Business Overview — Regulation — Regulations on Offshore Financing” for discussions of the
registration requirements and the relevant penalties.
We attempt to comply, and attempt to ensure that our shareholders and beneficial owners of our shares who are subject to these rules
comply, with the relevant requirements. We cannot provide any assurance that our shareholders and beneficial owners of our shares who are
PRC residents have complied or will comply with the requirements imposed by Circular 37 or other related rules. Any failure by any of our
shareholders and beneficial owners of our shares who are PRC residents to comply with relevant requirements under this regulation could
subject such shareholders, beneficial owners and us to fines or sanctions imposed by the PRC regulators, including limitations on our relevant
subsidiary’s ability to pay dividends or make distributions to us and our ability to increase our investment in China, or other penalties that may
adversely affect our operations.
We rely principally on dividends and other distributions on equity paid by our subsidiaries to fund any cash and financing requirements
we may have, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our
ability to conduct our business.
We are a holding company, and we rely principally on dividends from our subsidiaries in China for our cash requirements, including any
debt we may incur. Current PRC laws and regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits, if
any, determined in accordance with PRC accounting standards and regulations. In addition, each of our subsidiaries in China is required to set
aside a certain percentage of its after-tax earnings each year, if any, to fund certain statutory reserves. These reserves are not distributable as
cash dividends. As of December 31, 2022, a total of RMB904 million (US$131 million) was not distributable in the form of dividends to us
due to these PRC regulations. In addition, due to restrictions on the distribution of share capital from our PRC subsidiaries, the PRC
subsidiaries’ share capital of RMB2,831 million (US$411 million) as of December 31, 2022 is considered restricted. Furthermore, if our
subsidiaries in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends
or make other payments to us. The inability of our subsidiaries to distribute dividends or other payments to us could materially and adversely
limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends, or otherwise fund and
conduct our business.
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PRC regulation of loans and direct investment by offshore holding companies to PRC entities may delay or prevent us from using the
proceeds from offerings of the ADSs, ordinary shares or other securities to make loans or additional capital contributions to our PRC
operating subsidiaries and VIEs.
As an offshore holding company, our ability to make loans or additional capital contributions to our PRC operating subsidiaries and VIEs
is subject to PRC regulations and approvals. These regulations and approvals may delay or prevent us from using the proceeds we received in
the past or will receive in the future from the offerings of ADSs, ordinary shares or other securities to make loans or additional capital
contributions to our PRC operating subsidiaries and VIEs, and impair our ability to fund and expand our business which may adversely affect
our business, financial condition and result of operations. For example, SAFE promulgated the Circular of the State Administration of Foreign
Exchange on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement Under the Capital Accounts, or Circular 16,
on June 9, 2016. Under Circular 16, registered capital of a foreign-invested company settled in RMB converted from foreign currencies shall
be subject to certain limitations prescribed under Circular 16. In addition, foreign-invested companies may not change how they use such
capital without SAFE’s approval, and may not in any case use such capital to repay RMB loans if they have not used the proceeds of such
loans.
Furthermore, any offshore funds that we use to finance our PRC entities, including the net proceeds from the offering of the ADSs,
ordinary shares or other securities, are subject to the foreign investment regulations and foreign exchange regulations in the PRC. We may
make loans to our PRC entities, but they are subject to such PRC entities’ sufficient foreign debt quota and foreign exchange loan registration
with SAFE. For example, loans by us to our PRC entities (as foreign-invested enterprises) in China to finance their activities cannot exceed
statutory limits, i.e., the difference between its total amount of investment and its registered capital, or certain amount calculated based on
elements including capital or net assets, the cross-border financing leverage ratio and the macro prudential coefficient (“Macro-prudential
Management Mode”) under relevant PRC laws, and the loans must be registered with SAFE. According to the Circular of the People’s Bank
of China and the State Administration of Foreign Exchange on Adjusting the Macro-prudent Adjustment Parameter for Cross-border Financing
issued on January 7, 2021, the limit for the total amount of foreign debt under the Macro-prudential Management Mode is adjusted to two
times of their respective net assets.
In addition, the application of the proceeds under the ADSs, ordinary shares or other securities is subject to the foreign exchange
regulations in the PRC. We may also decide to finance our entities by means of capital contributions. According to the relevant PRC
regulations on foreign-invested enterprises in China, depending on the total amount of investment, capital contributions to our PRC operating
subsidiaries and VIEs is no longer subject to the approval of the PRC Ministry of Commerce or its local branches. Instead, if we finance our
PRC subsidiaries by means of additional capital contributions, these capital contributions must be filed and registered with relevant regulatory
authorities, including the Ministry of Commerce, or MOFCOM, or its local counterparts, the State Administration for Market Regulation, or
SAMR, through the Enterprise Registration System and the National Enterprise Credit Information Publicity System, and SAFE. However, we
cannot assure you that the regulations will always remain favorable to us. If the regulations are revised in the future or we fail to complete such
registration or obtain such approvals on time, our ability to use the proceeds of the ADSs, ordinary shares or other securities and to capitalize
our operations in PRC may be negatively affected, which could adversely affect our liquidity and our ability to fund and expand our business.
We may be subject to fines and legal sanctions imposed by SAFE or other Chinese regulatory authorities and our ability to further grant
shares or share options to, and to adopt additional share incentive plans for, our directors and employees may be restricted if we or the
participants of our share incentive plans fail to comply with PRC regulations relating to employee shares or share options granted by
offshore special purpose companies or offshore listed companies to PRC participants.
In February 2012, the SAFE issued the Notice on Relevant Issues Concerning Foreign Exchange Control on Domestic Individuals
Participating in the Stock Incentive Plan of An Overseas Listed Company, or Circular 7, which requires PRC individual participants of stock
incentive plans to register with the SAFE and to comply with a series of other requirements. See “Item 4. Information on the Company — B.
Business Overview — Regulation — Regulations on Foreign Currency Exchange.” We are an offshore listed company and as a result we and
the participants of our share incentive plans who are PRC citizens or non-PRC citizens residing in China successively for at least one year, or,
collectively, the PRC participants, are subject to Circular 7. While we completed the foreign exchange registration procedures and complied
with other requirements according to Circular 7 in June 2012, we cannot provide any assurance that we or the PRC participants of our share
incentive plans will be deemed by regulatory authorities to have complied with the requirements imposed by Circular 7. If we or the PRC
participants of our share incentive plans fail to comply with Circular 7, we or the PRC participants of our share incentive plans may be subject
to fines or other legal sanctions imposed by SAFE or other PRC regulatory authorities and our ability to further grant shares or share options
under our share incentive plans to, and to adopt additional share incentive plans for, our directors and employees may be restricted. Such
events could adversely affect our business operations.
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It is unclear whether we will be considered as a PRC resident enterprise under the Enterprise Income Tax Law of the PRC. If we are not
treated as a PRC resident enterprise, dividends paid to us by our PRC subsidiaries will be subject to PRC withholding tax; if we are
treated as a PRC resident enterprise, we may be subject to a 25% PRC income tax on our worldwide income, and holders of our ADSs or
ordinary shares that are non-PRC resident investors may be subject to PRC withholding tax on dividends on and gains realized on their
transfer of our ADSs or ordinary shares.
On March 16, 2007, the PRC National People’s Congress passed the Enterprise Income Tax Law, and the PRC State Council subsequently
issued the Implementation Regulations of the Enterprise Income Tax Law (the “Implementation Regulations”). The Enterprise Income Tax
Law (last amended on December 29, 2018) and its Implementation Regulations (amended on April 23, 2019), collectively the “EIT Law”,
provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered resident
enterprises and are therefore subject to PRC enterprise income tax at a uniform rate of 25% with respect to their income sourced from both
within and outside of China. The Implementation Regulations define the term “de facto management body” as a management body that
exercises substantial and overall control and management over the production and operations, personnel, accounting and properties of an
enterprise.
On April 22, 2009, the State Taxation Administration, or the “STA” (previously known as State Administration of Taxation, or the “SAT”)
issued the Notice Regarding the Determination of Chinese-Controlled Enterprises Registered Offshore as PRC Tax Resident Enterprises on the
Basis of De Facto Management Bodies, or Circular 82. Circular 82 provides certain specific criteria for determining whether the “de facto
management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. In addition, the STA issued Public
Announcement [2011] No. 45 in 2011 and Public Announcement [2014] No. 9 in 2014, providing more guidance on the implementation of
Circular 82 and clarifying matters including resident status determination, post-determination administration and competent tax authorities.
However, the above-mentioned tax circulars apply only to offshore enterprises controlled by PRC enterprises, not those invested in or
controlled by PRC individuals. Currently, there are no further detailed rules or precedents applicable to us regarding the procedures and
specific criteria for determining “de facto management body” for a company invested in or controlled by PRC individuals. It is still unclear if
the PRC tax authorities would determine that we should be classified as a PRC resident enterprise.
Although we have not been notified that we are treated as a PRC resident enterprise, we cannot assure you that we will not be treated as a
resident enterprise under the EIT Law, any aforesaid circulars or any amended regulations in the future. If we are treated as a PRC resident
enterprise for PRC enterprise income tax purposes, among other things, we would be subject to the PRC enterprise income tax at the rate of
25% on our worldwide taxable income. Furthermore, if we are treated as a PRC resident enterprise, payments of dividend by us may be
regarded as derived from sources within the PRC and therefore we may be obligated to withhold PRC income tax at 10% on payments of
dividend on the ADSs or ordinary shares to non-PRC resident enterprise investors. In the case of non-PRC resident individual investors, the
tax may be withheld at a rate of 20%.
In addition, if we are treated as a PRC resident enterprise, pursuant to the EIT Law and the Individual Income Tax Law of the PRC, any
gain realized on the transfer of the ADSs and/or ordinary shares by non-PRC resident investors may be regarded as derived from sources
within the PRC and accordingly may be subject to a 10% PRC income tax in the case of non-PRC resident enterprises or 20% in the case of
non-PRC resident individuals. The PRC income tax on dividends and/or gains may be reduced or exempted under applicable tax treaties
between the PRC and the ADS holder’s or ordinary share holder’s home country. See “Item 10. Additional Information — E. Taxation — PRC
Taxation.”
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If the PCAOB is unable to inspect our auditors as required under the HFCA Act, the SEC will prohibit the trading of our ADSs, which
may materially and adversely affect the value of your investment.
The HFCA Act was enacted into law on December 18, 2020. Under the HFCA Act, if the SEC determines that we have filed audit reports
issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years (beginning with
those we filed in 2022), the SEC will prohibit our securities, including our ADSs, from being traded on a U.S. national securities exchange,
including NASDAQ, or in the over-the-counter trading market in the U.S. Each chamber of the U.S. On December 29, 2022, the AHFCA Act
was signed into law by the U.S. president as part of the fiscal year 2023 omnibus spending legislation, which reduced the number of
consecutive non-inspection years required for triggering the prohibitions under the HFCA Act from three years to two. As a result, the risk has
been heightened. The process for implementing trading prohibitions pursuant to the HFCA Act will be based on a list of registered public
accounting firms that the PCAOB has been unable to inspect and investigate completely as a result of a position taken by a non-U.S.
government. The first such list was announced by the PCAOB on December 16, 2021, and our auditor was included on that list.
The SEC reviews annual reports filed with it to determine if the auditor used for such reports was so identified by the PCAOB, and such
issuers are designated as “Commission-Identified Issuers” on a list to be published by the SEC. If an issuer is a Commission-Identified Issuer
for two consecutive years (which will be determined after the second such consecutive annual report), the SEC will issue an order that will
implement the trading prohibitions described above. We were conclusively identified as a “Commission-Identified Issuer” under the HFCA
Act on May 26, 2022 in respect of our Annual Report for 2021 on Form 20-F filed on April 27, 2022. If our ADSs are subject to a trading
prohibition under the HFCA Act, the price of our ADSs may be adversely affected, and the threat of such a trading prohibition would also
adversely affect their price. If our listing in Hong Kong cannot provide sufficient liquidity or if we are unable to be listed on another securities
exchange that provides sufficient liquidity, such a trading prohibition may substantially impair your ability to sell or purchase our ADSs when
you wish to do so. Furthermore, even if we are able to maintain a listing of our ordinary shares on the Hong Kong Stock Exchange or another
non-U.S. exchange, investors owning our ADSs may have to take additional steps to engage in transactions on that exchange, including
converting ADSs into ordinary shares and establishing non-U.S. brokerage accounts.
On August 26, 2022, the PCAOB signed a Statement of Protocol with the CSRC and the Ministry of Finance of the PRC, taking a first
step toward opening access for the PCAOB to inspect and investigate registered public accounting firms headquartered in Mainland China and
Hong Kong. On December 15, 2022, the PCAOB announced its determination that it has been able to inspect and investigate audit firms in
mainland China and Hong Kong completely for purposes of the HFCA Act, and the PCAOB vacated its December 16, 2021 determinations.
Based on this announcement, we do not expect to be a Commission-Identified Issuer in respect of our annual report for 2022 on Form 20-F to
be filed in 2023. However, the PCAOB stated that should PRC authorities obstruct the PCAOB’s ability to inspect or investigate completely in
any way and at any point in the future, the PCAOB Board will act immediately to consider the need to issue new determinations consistent
with the HFCA Act. While we currently do not expect the HFCA Act or the AHFCA Act to prevent us from maintaining the trading of our
ADSs in the U.S., uncertainties exist with respect to future determinations of the PCAOB in this respect and any further legislative or
regulatory actions to be taken by the U.S. or Chinese regulators that could affect our listing status in the U.S. The delisting of our ADSs, or the
threat of their being delisted, may materially and adversely affect the value of your investment.
Risks Related to Our Corporate Structure
H World Group Limited is a Cayman Islands holding company. As a result, you may experience difficulties in effecting service of legal
process, enforcing foreign judgments or bringing actions in China against us or our management based on foreign laws.
H World Group Limited is a holding company with no operations of its own. H World Group Limited conducts its operations primarily by
our subsidiaries, a majority of which are based in China and Europe, and through contractual arrangements with the Consolidated Affiliated
Entities and the Consolidated Fund. Investors in our ADSs and ordinary shares do not hold equity interest in our operating entities in China,
but instead are purchasing equity securities of a Cayman Islands holding company. In addition, most of our executive officers reside within
China for a significant portion of the time and most of them are PRC nationals. As a result, it may be difficult for our shareholders to effect
service of process upon us or those persons residing inside China. In addition, China does not have treaties providing for the reciprocal
recognition and enforcement of judgments of courts with the Cayman Islands, United States and many other countries and regions.
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Therefore, recognition and enforcement in China of judgments of a court in any of these non-PRC jurisdictions in relation to any matter
not subject to a binding arbitration provision may be difficult or impossible.
Revenue and assets contributions from the Consolidated Affiliated Entities have not been material. Nonetheless, if the PRC regulatory
authorities deem that the contractual arrangements in relation to the Consolidated Affiliated Entities do not comply with PRC regulatory
restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in
the future, our ordinary shares and ADSs may decline in value if we are unable to assert our contractual control rights over the assets of
the Consolidated Affiliated Entities.
The current industry entry clearance requirements governing foreign investment activities in the PRC are set out in two categories, namely
the Encouraged Industry Catalogue for Foreign Investment (2022 version), as promulgated by the NDRC and the MOFCOM, which became
effective on January 1, 2023 (the “Encouraged List), and the Negative List (2021 Edition). Industries listed in the Encouraged List are
generally deemed “encouraged” for foreign investments, and industries not listed in either of these two lists are generally deemed “permitted”
for foreign investments unless specifically prohibited or restricted by other PRC laws. According to the Negative List (2021 Edition), a foreign
stake in a value-added telecommunications service may not exceed 50% (except for e-commerce, domestic conferencing, store-and-forward,
and call center services). Pursuant to the Regulations on Travel Agencies (2020 Revision), which was promulgated by the State Council and
became effective on November 29, 2020, generally, no foreign-invested travel agency may operate a business providing travel services to
Chinese mainland residents’ traveling to other countries or to the Hong Kong or Macao Special Administrative Region, or Taiwan.
Because H World Group Limited is an exempted company incorporated in the Cayman Islands with limited liability, it is classified as a
foreign enterprise under PRC laws and regulations, and our PRC subsidiaries are foreign-invested enterprises (“FIEs”). PRC laws and
regulations restrict and impose conditions on foreign investment in certain internet-based businesses and international travel agency
businesses. Accordingly, to comply with PRC laws and regulations, we operate these businesses in China through the variable interest entity
model, and rely on contractual arrangements among our PRC subsidiaries, the Consolidated Affiliated Entities and their respective nominee
shareholders to control the business operations of the Consolidated Affiliated Entities and their subsidiary.
If our corporate structure and contractual arrangements are deemed by the Ministry of Industry and Information Technology or the
MOFCOM or other regulators having competent authority to be illegal, either in whole or in part, we may lose control of the Consolidated
Affiliated Entities and have to modify such structure and contractual arrangements to comply with regulatory requirements. However, there
can be no assurance that we can achieve this without disrupting our business. Further, if our corporate structure and contractual arrangements
are found to be in violation of any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion
in dealing with such violations, including:
● revoking our relevant business and operating licenses;
● levying fines on us;
● confiscating any of our income that they deem to be obtained through illegal operations;
● shutting down our relevant services;
● discontinuing or restricting our operations of such Consolidated Affiliated Entities in China;
● imposing conditions or requirements with which we may not be able to comply;
● requiring us to change our corporate structure and contractual arrangements;
● prohibiting our use of the proceeds from overseas offerings to finance the Consolidated Affiliated Entities’ business and operations;
and
● taking other regulatory or enforcement actions that could be harmful to our business.
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Furthermore, new PRC laws, rules and regulations may be introduced to impose additional requirements that may be applicable to our
corporate structure and contractual arrangements. See “—Uncertainties exist with respect to the interpretation and implementation of the
Foreign Investment Law and its implementing rules and how they may impact our business, financial condition and results of operations”
below for more information. Occurrence of any of these events could materially and adversely affect our business, financial condition and
results of operations. If the PRC regulators determine that these contractual arrangements do not comply with PRC regulations, or if these
regulations change or are interpreted differently in the future, our ordinary shares and ADSs may decline in value if we are unable to assert our
contractual control rights over the assets of the Consolidated Affiliated Entities. In addition, H World Group Limited, which is the company
our investors hold securities in, may never have a direct equity ownership interest in the businesses that are conducted by the Consolidated
Affiliated Entities. If the imposition of any of these penalties or requirement to restructure our corporate structure causes us to lose the rights to
direct the activities of the Consolidated Affiliated Entities or our right to receive their economic benefits, we would no longer be able to
consolidate the financial results of such Consolidated Affiliated Entities in our consolidated financial statements.
We rely in part on contractual arrangements with each of the Consolidated Affiliated Entities and their respective nominee shareholders
to operate certain restricted business. These contractual arrangements may not be as effective as direct ownership in providing
operational control and otherwise have a material adverse effect as to our business.
H World Group Limited is not a Chinese operating company but a Cayman Islands holding company with operations primarily conducted
by our subsidiaries, a majority of which are based in China and Europe, and through contractual arrangements with the Consolidated Affiliated
Entities. The Consolidated Affiliated Entities include (i) Tianjin Jizhu, (ii) Shanghai Huanmei and Huanmei Travel, and (iii) Ningbo Futing.
Mr. Pengfei Jiang, who is the director/supervisor of certain of our subsidiaries, holds 100% of equity interest in Tianjin Jizhu. Mr. Pengfei
Jiang and Mr. Andong Chen, our employee, hold 90% and 10% of equity interest in Shanghai Huanmei, respectively. Mr. Dongfu Shi, who is
the director/supervisor of certain of our subsidiaries, holds 100% of equity interest in Ningbo Futing.
We rely in part on contractual arrangements entered into among HZ Hotel Management, the Consolidated Affiliated Entities and their
respective nominee shareholders to operate certain restricted business. We have control over and are the primary beneficiary of the
Consolidated Affiliated Entities for accounting purposes and, therefore, have consolidated the financial results of the Consolidated Affiliated
Entities in our consolidated financial statements in accordance with U.S. GAAP. Any references to control or benefits that accrue to us because
of the Consolidated Affiliated Entities in this annual report are limited to, and are subject to conditions for consolidation of, the Consolidated
Affiliated Entities under U.S. GAAP. These contractual arrangements may not be as effective as direct ownership in providing us with control
over the Consolidated Affiliated Entities. Investors in our ADSs and ordinary shares are not purchasing equity interest in our operating entities
in China, but instead are purchasing an equity interest in H World Group Limited, a Cayman Islands holding company. The Consolidated
Affiliated Entities do not have a material contribution to our results of operations and the Consolidated Affiliated Entities do not support
material revenues reported within other subsidiaries of our company. The Consolidated Affiliated Entities are consolidated with our results of
operations for accounting purposes. If the Consolidated Affiliated Entities or the respective nominee shareholders of the Consolidated
Affiliated Entities fail to perform their respective obligations under these contractual arrangements, our recourse to the assets held by the
Consolidated Affiliated Entities is indirect and we may have to incur substantial costs and expend significant resources to enforce such
arrangements in reliance on legal remedies under PRC law. These remedies may not always be effective. Furthermore, in connection with
litigation, arbitration or other judicial or dispute resolution proceedings, assets under the name of any of record holder of equity interest in the
Consolidated Affiliated Entities, including such equity interest, may be put under court custody. As a consequence, we cannot be certain that
the equity interest will be disposed pursuant to the contractual arrangement or ownership by the record holder of the equity interest.
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All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC.
Accordingly, these contractual arrangements would be interpreted in accordance with PRC laws and any disputes would be resolved in
accordance with PRC legal procedures. However, the legal framework and system in China, in particularly those relating to arbitration
proceedings, are not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties regarding the enforcement
of laws in China could limit our ability to enforce these contractual arrangements. Meanwhile, there are very few precedents and little formal
guidance as to how contractual arrangements in the context of variable interest entities should be interpreted or enforced under PRC law. There
remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. In addition, under
PRC laws, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing parties fail to carry out the
arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in the PRC courts through
arbitration award recognition proceedings, which would require additional expenses and delay. In the event that we are unable to enforce these
contractual arrangements, or if we suffer significant time delays or other obstacles in the process of enforcing these contractual arrangements,
it would be very difficult to exert effective control over the Consolidated Affiliated Entities, and our ability to conduct our business and our
financial condition and results of operations may be materially and adversely affected. See “ —Risks Relating to Doing Business in China—
Developments in the interpretation and enforcement of PRC laws and regulations could limit the legal protections available to you and us”
below in this annual report.
If we exercise the option to acquire equity ownership of the Consolidated Affiliated Entities, the ownership transfer may subject us to
certain limitations and substantial costs.
Pursuant to the contractual arrangements, to the extent allowed by PRC laws, rules and regulations, HZ Hotel Management or its
designated person has the exclusive right to purchase all or any part of the equity interests in the Consolidated Affiliated Entities from their
respective nominee shareholders at the higher of (i) the lowest price permitted by applicable PRC laws and (ii) a nominal price of RMB100.
The transfer prices of such equity transfers might be subject to review and tax adjustment with reference to the market value by the relevant tax
authorities, and such authorities may require HZ Hotel Management to pay individual income tax in the PRC on behalf of the individual
shareholders of such Consolidated Affiliated Entities for ownership transfer income with reference to the market value accordingly, in which
case the amount of tax could be substantial.
The nominee shareholders of the Consolidated Affiliated Entities may have potential conflicts of interest with us, which may materially
and adversely affect our business and financial condition.
The Consolidated Affiliated Entities include (i) Tianjin Jizhu, (ii) Shanghai Huanmei, and (iii) Ningbo Futing. Mr. Pengfei Jiang, who is
the director/supervisor of certain of our subsidiaries, holds 100% of equity interest in Tianjin Jizhu. Mr. Pengfei Jiang and Mr. Andong Chen,
our employee, hold 90% and 10% of equity interest in Shanghai Huanmei, respectively. Mr. Dongfu Shi, who is the director/supervisor of
certain of our subsidiaries, holds 100% of equity interest in Ningbo Futing.
We rely on the nominee shareholders of the Consolidated Affiliated Entities to abide by the obligations under such contractual
arrangements. The interests of these shareholders in their capacities as the shareholders of the Consolidated Affiliated Entities may differ from
the interests of our company as a whole, as what is in the best interests of the Consolidated Affiliated Entities, including matters such as
whether to distribute dividends or to make other distributions to fund our offshore requirements, may not be in the best interests of our
company. There can be no assurance that when conflicts of interest arise, any or all of these shareholders will act in the best interests of our
company or that those conflicts of interest will be resolved in our favor. In addition, these shareholders may breach or cause the Consolidated
Affiliated Entities and their subsidiary to breach or refuse to renew the existing contractual arrangements with us. Control over, and funds due
from, the Consolidated Affiliated Entities may be jeopardized if such shareholders breach the terms of the contractual arrangements or are
subject to legal proceedings.
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Though it is difficult to address the potential conflicts of interest the nominee shareholders of the Consolidated Affiliated Entities may
encounter, on the one hand, and as a director, supervisor or employee of our group company, on the other hand, we could, however, at all
times, exercise our option under the exclusive option agreements to cause them to transfer all of their equity ownership in the Consolidated
Affiliated Entities to an entity or individual designated by us as permitted by the then applicable PRC laws. In addition, if such conflicts of
interest arise, we could also, in the capacity of attorney-in-fact of the nominee shareholders of the Consolidated Affiliated Entities as provided
under the power of attorney, directly appoint new directors, supervisors or senior management of the Consolidated Affiliated Entities. We rely
on the nominee shareholders of the Consolidated Affiliated Entities to comply with PRC laws and regulations, which protect contracts and
provide that directors and senior management owe a duty of loyalty to the companies they serve and require them to avoid conflicts of interest
and not to take advantage of their positions for personal gains. If we cannot resolve any conflicts of interest or disputes between us and the
individual shareholders of the Consolidated Affiliated Entities, we would have to rely on legal proceedings, which could result in disruption of
our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
If the custodians or authorized users of our controlling non-tangible assets, including chops and seals, fail to fulfill their responsibilities,
or misappropriate or misuse these assets, our business and operations may be materially and adversely affected.
Under PRC law, legal documents for corporate transactions, including agreements and contracts such as the leases and sales contracts that
our business relies on, are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation
is registered and filed with the relevant local branch of the State Administration for Market Regulation. We generally execute legal documents
by affixing chops or seals, rather than having the designated legal representatives sign the documents. The chops of our subsidiaries and the
Consolidated Affiliated Entities are generally held by the relevant entities so that documents can be executed locally. Although we usually
utilize chops to execute contracts, the registered legal representatives of our subsidiaries and the Consolidated Affiliated Entities have the
apparent authority to enter into contracts on behalf of such entities without chops, unless such contracts set forth otherwise.
In order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to the
designated key employees of our legal, human resources or finance departments. Our designated legal representatives generally do not have
access to the chops. Although we have approval procedures in place and monitor our key employees, including the designated legal
representatives of our subsidiaries and the Consolidated Affiliated Entities, the procedures may not be sufficient to prevent all instances of
abuse or negligence. There is a risk that our key employees or designated legal representatives could abuse their authority, for example, by
binding our subsidiaries and the Consolidated Affiliated Entities with contracts against our interests, as we would be obligated to honor these
contracts if the other contracting party acts in good faith in reliance on the apparent authority of our chops or signatures of our legal
representatives. If any designated legal representative obtains control of the chop in an effort to obtain control over the relevant entity, we
would need to have a shareholder or board resolution to designate a new legal representative and to take legal action to seek the return of the
chop, apply for a new chop with the relevant authorities, or otherwise seek legal remedies for the legal representative’s misconduct. If any of
the designated legal representatives obtains and misuses or misappropriates our chops and seals or other controlling intangible assets for
whatever reason, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which
could involve significant time and resources to resolve while distracting management from our operations, and our business and operations
may be materially and adversely affected.
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Uncertainties exist with respect to the interpretation and implementation of the Foreign Investment Law and its implementing rules and
how they may impact our business, financial condition and results of operations.
The VIE structure through contractual arrangements has been adopted by many PRC-based companies, including us, to obtain necessary
licenses and permits in industries that are currently subject to foreign investment restrictions in China. The MOFCOM published a discussion
draft of the proposed Foreign Investment Law of the PRC in January 2015, or the 2015 Draft FIL, according to which, variable interest entities
that are controlled via contractual arrangements would also be deemed as foreign-invested entities, if they are ultimately controlled by foreign
investors. In March 2019, the PRC National People’s Congress promulgated the Foreign Investment Law of the PRC, or the FIL, and in
December 2019, the State Council promulgated the Implementing Rules of the Foreign Investment Law of the PRC, or the Implementing
Rules, to further clarify and elaborate the relevant provisions of the FIL. The FIL and the Implementing Rules both became effective from
January 1, 2020 and replaced the major previous laws and regulations governing foreign investments in the PRC. Pursuant to the FIL, “foreign
investments” refer to investment activities conducted by foreign investors (including foreign natural persons, foreign enterprises or other
foreign organizations) directly or indirectly in the PRC, which include any of the following circumstances: (i) foreign investors setting up
foreign-invested enterprises in the PRC solely or jointly with other investors, (ii) foreign investors obtaining shares, equity interests, property
portions or other similar rights and interests of enterprises within the PRC, (iii) foreign investors investing in new projects in the PRC solely or
jointly with other investors, and (iv) investment in other methods as specified in laws, administrative regulations, or as stipulated by the State
Council. The FIL and the Implementing Rules do not introduce the concept of “control” in determining whether a company would be
considered as a foreign-invested enterprise, nor do they explicitly provide whether the VIE structure through contractual arrangements would
be deemed as a method of foreign investment. However, the FIL has a catch-all provision that includes in its definition of “foreign
investments” made by foreign investors in China in other methods as specified in laws, administrative regulations, or as stipulated by the State
Council. To implement this provision of the FIL, the relevant regulatory authorities may promulgate more laws, regulations or rules on the
interpretation and implementation of the FIL, and we cannot rule out the possibility that the concept of “control” as stated in the 2015 Draft
FIL may be embodied in, or the VIE structure through contractual arrangements adopted by us may be deemed as a method of foreign
investment by, any of such future laws, regulations and rules. If any of the Consolidated Affiliated Entities were deemed as a foreign-invested
enterprise under any of such future laws, regulations and rules, and any of the businesses operated by such Consolidated Affiliated Entities in
any “negative list” for foreign investment were therefore subject to any foreign investment restrictions or prohibitions, our business, financial
condition and results of operations may be materially and adversely affected. Furthermore, if future laws, administrative regulations or
provisions mandate further actions to be taken by companies with respect to existing contractual arrangements, we may face substantial
uncertainties as to whether we can complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope
with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure, business,
financial condition and results of operations.
Risks Related to Our ADSs, Ordinary Shares and Our Trading Market
The market prices for our ADSs and/or ordinary shares has been and may continue to be volatile.
The market price for our ADSs has been volatile and ranged from a low of US$21.84 to a high of US$45.70 on the NASDAQ Global
Select Market in 2022. Likewise, the high and low prices of our ordinary shares on the Hong Kong Stock Exchange in 2022 were HK$36.5 and
HK$17.43, respectively. In addition, the performance and fluctuation of the market prices of other companies with business operations located
mainly in China that have listed their securities in Hong Kong and/or the United States may affect the volatility in the prices of and trading
volumes for our ADSs and/or ordinary shares. Some of these companies have experienced significant volatility. The trading performance of
these companies’ securities may affect the overall investor sentiment towards other companies with business operations located mainly in
China and listed in Hong Kong and/or the United States and consequently may impact the trading performance of our ADSs and/or ordinary
shares. The market price is subject to wide fluctuations in response to various factors, including the following:
● actual or anticipated fluctuations in our quarterly operating results;
● changes in financial estimates by securities research analysts;
● conditions in the travel and lodging industries;
● changes in the economic performance or market valuations of other lodging companies;
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● announcements by us or our competitors of new products, acquisitions, strategic partnerships, joint ventures or capital commitments;
● addition or departure of key personnel;
● fluctuations of exchange rates between the RMB and U.S. dollar, Hong Kong dollar or other foreign currencies;
● potential litigation or administrative investigations;
● release of lock-up or other transfer restrictions on our outstanding ADSs or ordinary shares or sales of additional ADSs or ordinary
shares; and
● political or market instability or disruptions, pandemics or epidemics and other disruptions to China’s economy or the global
economy, and actual or perceived social unrest in the United States, Hong Kong, Europe or other countries and regions that we
operate.
In addition, the market prices for companies with operations in China in particular have experienced volatility that might have been
unrelated to the operating performance of such companies. The securities of some China-based companies that have listed their securities in
the United States and/or in Hong Kong have experienced significant volatility, including, in some cases, substantial declines in the market
prices of their securities. The performance of the securities of these China-based companies after their offerings may affect the attitudes of
investors toward Chinese companies listed in the United States and/or Hong Kong, which consequently may impact the performance of our
ADSs and ordinary shares, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate
corporate governance practices or fraudulent accounting, corporate structure or other matters of other China-based companies may also
negatively affect the attitudes of investors towards China-based companies in general, including us, regardless of whether we have engaged in
any inappropriate activities.
Inflation has accelerated in many economies, including the United States and Europe, and policy actions to address inflation have slowed,
and could reverse, economic growth in relevant countries. In addition, the continuing Russia-Ukraine war and the related energy crisis in
Europe have weighed on global economic prospects. These types of economic conditions could result in postponed or decreased spending
amid consumer concerns over unemployment, inflation, reduced asset values, increased energy costs, geographical issues, the availability and
cost of credit, and the stability and solvency of financial institutions, financial markets, businesses, local and state governments, and sovereign
nations. The economic recessions in many countries have contributed and may continue to contribute to extreme volatility in the global stock
markets, such as the large declines in share prices in the United States, China, Hong Kong and other jurisdictions at various times since 2008.
These broad market and industry fluctuations may adversely affect the prices of our ADSs and/or ordinary shares, regardless of our operating
performance.
An active trading market for our ordinary shares on the Hong Kong Stock Exchange might not be sustained and trading prices of our
ordinary shares might fluctuate significantly.
Since our listing in Hong Kong in 2020, our ordinary shares have been traded on the Hong Kong Stock Exchange. However, we cannot
assure you that an active trading market for our ordinary shares on the Hong Kong Stock Exchange will be sustained. The trading price or
liquidity for our ADSs on the NASDAQ Global Select Market and the trading price or liquidity for our ordinary shares on the Hong Kong
Stock Exchange in the past might not be indicative of those of our ordinary shares on the Hong Kong Stock Exchange in the future. If an active
trading market of our ordinary shares on the Hong Kong Stock Exchange is not sustained, the market price and liquidity of our ordinary shares
could be materially and adversely affected.
In 2014, the Hong Kong, Shanghai and Shenzhen Stock Exchanges collaborated to create an inter-exchange trading mechanism called
Stock Connect that allows international and mainland Chinese investors to trade eligible equity securities listed in each other’s markets through
the trading and clearing facilities of their home exchange. Stock Connect allows certain mainland Chinese investors to trade directly in eligible
equity securities listed on the Hong Kong Stock Exchange, known as Southbound Trading. If a company’s shares are not considered eligible,
they cannot be traded through Stock Connect. It is unclear whether and when the ordinary shares of our company will be eligible to be traded
through Stock Connect, if at all. The ineligibility of our ordinary shares for trading through Stock Connect will affect certain mainland Chinese
investors’ ability to trade our ordinary shares.
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If securities or industry analysts do not continue to publish research or if they publish inaccurate or unfavorable research about our
business, the market prices and trading volume for our ADSs and/or ordinary shares could decline.
The trading market for our ADSs and/or ordinary shares relies in part on the research and reports that equity research analysts publish
about us or our business. We do not control these analysts. If research analysts do not maintain adequate research coverage or if one or more of
the analysts who covers us downgrades our ADSs and/or ordinary shares or publishes inaccurate or unfavorable research about our business,
the market price for our ADSs and/or ordinary shares would likely decline. If one or more of these analysts cease coverage of us or fail to
publish reports on us regularly, we could lose visibility in the financial markets, which, in turn, could cause the market price or trading volume
for the ADSs and/or ordinary shares to decline significantly.
Techniques employed by short sellers may drive down the market prices of the ADSs and/or ordinary shares.
Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention
of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the
securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that
purchase than it received in the sale. As it is in the short seller’s interest for the price of the security to decline, many short sellers publish, or
arrange for the publication of, negative opinions and allegations regarding the relevant issuer and its business prospects in order to create
negative market momentum and generate profits for themselves after selling a security short. These short attacks have, in the past, led to
selling of shares in the market and significant volatility of the prices of ordinary shares and/or ADSs of the targeted company. We received two
short seller reports in September 2020. After receiving those reports, we immediately formed a special investigation committee, hired attorneys
and conducted an internal investigation regarding the allegations in the relevant reports. Though we concluded that those unfavorable
allegations in the short sellers reports were untrue and without merit, the short seller reports, the volatility in the prices of our ADSs and
ordinary shares, as well as our responses to regulatory inquiries and relevant institutions, had diverted and could continue to divert our
management’s attention. Furthermore, we have spent and could continue to spend a significant amount of resources investigating such
allegations, responding to relevant regulatory inquiries and defending ourselves against any potential class action lawsuits. In the event we
receive additional short seller reports in the future, our management’s attention could be diverted, which could adversely affect our business
operations and administration. We may need to spend a significant amount of time and resources responding to the short selling firms and
regulatory inquiries and preparing for or defending against potential class action lawsuits or derivative actions initiated by our investors and
shareholders. Additionally, we may also be constrained in the manner in which we can proceed against the relevant short sellers by principles
of freedom of speech, applicable laws of the relevant jurisdictions or issues of commercial confidentiality.
We may need additional capital, and the sale of additional ADSs, ordinary shares or other equity securities could result in additional
dilution to our shareholders and the incurrence of additional indebtedness could increase our debt service obligations.
We believe that our current cash and cash equivalents, anticipated cash flow from operations, and funds available from borrowings under
our bank facilities (including the undrawn bank facilities currently available to us and bank facilities we plan to obtain in 2023) will be
sufficient to meet our anticipated working capital cash needs for at least the next 12 months. We may, however, require additional cash
resources due to changed business conditions, strategic acquisitions or other future developments, including expansion through leased and
owned hotels and any investments or acquisitions we may decide to pursue. If these resources are insufficient to satisfy our cash requirements,
we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity and equity-linked
securities could dilute the interests of our shareholders and ADS holders and adversely impact the market prices of our ADSs and/or ordinary
shares. Our incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants
that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all.
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Due to the global outbreak of COVID-19, our business was significantly impacted and we experienced operating losses in 2020, 2021 and
2022. We recorded net loss attributable to H World Group Limited of RMB2,192 million, RMB465 million and RMB1,821 million (US$264
million) in 2020, 2021 and 2022, respectively. As of December 31, 2022, our current liabilities exceeded our current assets by US$576 million.
We repaid all outstanding principal and interest on our convertible senior notes due 2022 of US$475 million on the maturity date of November
1, 2022 by utilizing our revolving facility of EUR70 million and our cash and cash equivalents. Our ability to continue as a going concern
depends on our ability to generate cash flows from operations and to arrange adequate financing arrangements to support our working capital
requirements. For more information, please see “Item 5. Operating and financial review and prospects—5.B. Liquidity and Capital Resources.”
If we are unable to continue as a going concern or achieve or maintain profitability, the market price of our ADSs may significantly decrease.
Future sales or issuances, or perceived future sales or issuances, of substantial amounts of our ordinary shares or ADSs could adversely
affect the prices of our ADSs and/or ordinary shares.
If our existing shareholders sell, or are perceived as intending to sell, substantial amounts of our ordinary shares or ADSs, including those
issued upon the exercise of our outstanding stock options, the market price of our ADSs and/or ordinary shares could fall. For example, as of
December 31, 2022, we had approximately 76.9 million non-vested restricted stocks outstanding. Such sales, or perceived potential sales, by
our existing shareholders might make it more difficult for us to issue new equity or equity-related securities in the future at a time and place we
deem appropriate. Ordinary shares held by our existing shareholders may be sold in the public market in the future subject to the restrictions
contained in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements. If any existing shareholder or
shareholders sell a substantial amount of ordinary shares after the expiration of the lock-up period, the prevailing market price for our ADSs
and/or ordinary shares could be adversely affected.
In addition, certain of our shareholders or their transferees and assignees will have the right to cause us to register the sale of their shares
under the Securities Act upon the occurrence of certain circumstances. Registration of these shares under the Securities Act would result in
these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales
of these registered shares in the public market could cause the prices of our ADSs and/or ordinary shares to decline.
Furthermore, we will be required to issue ADSs to holders of our convertible senior notes due 2026, upon their conversion of the notes.
We have not entered into any hedging transactions to reduce the dilution to our existing shareholders upon the holders’ conversion of our
convertible senior notes due 2026. As a result, the prevailing trading prices of our ADSs and/or ordinary shares could be adversely affected by
conversions of these notes.
As our founder and co-founders collectively hold a controlling interest in us, they have significant influence over our management and
their interests may not be aligned with our interests or the interests of our other shareholders.
As of March 31, 2023, our founder, Mr. Qi Ji, who is also our chairman of the board and our co-founders, Ms. Tong Tong Zhao and Mr.
John Jiong Wu, in total beneficially owned approximately 30.8% of our outstanding ordinary shares on an as-converted basis. The interests of
these shareholders may conflict with the interests of our other shareholders. Our founder and co-founders have significant influence over us,
including on matters relating to mergers, consolidations and the sale of all or substantially all of our assets, election of directors and other
significant corporate actions. This concentration of ownership may discourage, delay or prevent a change in control of us, which could deprive
our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company or of our assets and might reduce the
price of our ADSs and/or ordinary shares. These actions may be taken even if they are opposed by our other shareholders, including holders of
our ADSs and/or ordinary shares.
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Holders of our ADSs may not receive dividends or other distributions on our ordinary shares and may not receive any value for them, if
it is illegal or impractical to make them available to these holders.
The depositary of the ADSs has agreed that if it or the custodian receives any cash dividends or other distributions on our ordinary shares
or other deposited securities underlying the ADSs, it will pay them to the holders of ADSs after deducting its fees and expenses pursuant to the
deposit agreement. The holders of ADSs will receive these distributions in proportion to the number of ordinary shares that their ADSs
represent. However, the depositary or the custodian is not responsible if it decides that it is unlawful or impractical to make a distribution
available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that
require registration under the Securities Act, but that are not properly registered or distributed under an applicable exemption from registration.
The depositary may also determine that it is not practicable to distribute certain property. In these cases, the depositary may determine not to
distribute such property. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities
received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares,
rights or anything else to holders of ADSs. This means that the holders of ADSs may not receive distributions we make on our ordinary shares
or any value for them if it is illegal or impractical for us to make them available to these holders. These restrictions may cause a material
decline in the value of the ADSs.
ADS holders may not have the same voting rights as the holders of our ordinary shares and generally have fewer rights than our
ordinary shareholders, and must act through the depositary to exercise those rights.
Holders of ADSs do not have the same rights as our ordinary shareholders and may only exercise voting and other shareholder rights with
respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Except as described in the deposit
agreement, holders of our ADSs may not be able to exercise voting rights attaching to the shares evidenced by our ADSs on an individual
basis. Holders of our ADSs appoint the depositary or its nominee as their representative to exercise the voting rights attaching to the shares
represented by the ADSs. ADS holders may not receive voting materials in time to instruct the depositary to vote, and it is possible that they
may not have the opportunity to exercise a right to vote and/or may lack recourse if the ADSs are not voted as you requested.
Except in limited circumstances, the depositary will give us a discretionary proxy to vote our ordinary shares underlying the ADSs if
holders of these ADSs do not give voting instructions to the depositary, which could adversely affect the interests of holders of ordinary
shares and/or the ADSs.
Under the deposit agreement, the depositary will give us a discretionary proxy to vote the ordinary shares underlying the ADSs at
shareholders’ meetings if holders of these ADSs do not give voting instructions to the depositary, unless:
● we have instructed the depositary that we do not wish a discretionary proxy to be given;
● we have informed the depositary that there is substantial opposition as to a matter to be voted on at the meeting;
● a matter to be voted on at the meeting may adversely affect the rights of shareholders; or
● voting at the meeting is made on a show of hands.
The effect of this discretionary proxy is that, if holders of ADSs fail to give voting instructions to the depositary, they cannot prevent our
ordinary shares underlying their ADSs from being voted, except under the circumstances described above. This may make it more difficult for
shareholders to influence our management. Holders of our ordinary shares are not subject to this discretionary proxy.
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We adopt different practices as to certain matters as compared with many other companies listed on the Hong Kong Stock Exchange.
We completed our public offering and listing in Hong Kong in September 2020 and the trading of our ordinary shares on the Hong Kong
Stock Exchange commenced on September 22, 2020 under the stock code “1179.” As a company listed on the Hong Kong Stock Exchange
pursuant to Chapter 19C of the Hong Kong Listing Rules, we are not subject to certain provisions of the Hong Kong Listing Rules pursuant to
Rule 19C.11, including, among others, rules on notifiable transactions, connected transactions, share option schemes, content of financial
statements as well as certain other continuing obligations. In addition, in connection with the listing of our ordinary shares on the Hong Kong
Stock Exchange, we have been granted a number of waivers and/or exemptions from strict compliance with the Hong Kong Listing Rules, the
Companies (Winding Up and Miscellaneous Provisions) Ordinance (Chapter 32 of the Laws of Hong Kong), the Code on Takeovers and
Mergers and Share Buy-backs (the “Takeovers Codes”) and the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
(the “SFO”). As a result, we will adopt different practices as to those matters, including with respect to the content and presentation of our
annual reports and interim reports, as compared with other companies listed on the Hong Kong Stock Exchange that do not enjoy those
exemptions or waivers. Furthermore, if 55% or more of the total worldwide trading volume, by dollar value, of our ordinary shares and ADSs
over our most recent fiscal year takes place on the Hong Kong Stock Exchange, the Hong Kong Stock Exchange will regard us as having a
dual primary listing in Hong Kong and we will no longer enjoy certain exemptions or waivers from strict compliance with the requirements
under the Hong Kong Listing Rules, the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Chapter 32 of the Laws of Hong
Kong), the Takeovers Codes and the SFO, which could result in our needing to undertake additional compliance activities, to devote additional
resources to comply with new requirements, and our incurring of incremental compliance costs.
ADS holders may not be able to participate in rights offerings and may experience dilution of his, her or its holdings as a result.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement for
the ADSs, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to
ADS holders are either registered under the Securities Act, or exempt from registration under the Securities Act with respect to all holders of
ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to
cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of any exemptions from
registration under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may
experience dilution in their holdings as a result.
ADS holders may be subject to limitations on transfer of their ADSs.
Our ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to
time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or
register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it
advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit
agreement, or for any other reason.
We may be subject to securities litigation, which is expensive and could divert management attention.
Companies that have experienced volatility in the volume and market prices of their shares have been subject to an increased incidence of
securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in
substantial costs and divert our management’s attention from other business concerns, and, if adversely determined, could have a material
adverse effect on our business, financial condition and results of operations.
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As a foreign private issuer, we are permitted to, and we will, rely on exemptions from certain NASDAQ corporate governance standards
applicable to U.S. issuers, including the requirement regarding the implementation of a nominations committee. This may afford less
protection to holders of our ordinary shares and ADSs.
The NASDAQ Marketplace Rules in general require listed companies to have, among other things, a nominations committee consisting
solely of independent directors. As a foreign private issuer, we are permitted to, and we will, follow home country corporate governance
practices instead of certain requirements of the NASDAQ Marketplace Rules, including, among others, the implementation of a nominations
committee. The corporate governance practice in our home country, the Cayman Islands, does not require the implementation of a nominations
committee. We currently intend to rely upon the relevant home country exemption with respect to the nominations committee. As a result, the
level of independent oversight over management of our company may afford less protection to holders of our ordinary shares and ADSs.
Our amended and restated articles of association contain anti-takeover provisions that could have a material adverse effect on the rights
of holders of our ordinary shares and ADSs.
Our amended and restated articles of association contain provisions that have potential to limit the ability of others to acquire control of
our company or cause us to enter into change-of-control transactions. These provisions could have the effect of depriving our shareholders of
opportunities to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our
company in a tender offer or similar transaction.
For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more
classes or series and to fix their designations, powers, preferences, and relative participating, optional or other rights and the qualifications,
limitations or restrictions, including, without limitation, dividend rights, conversion rights, voting rights, terms of redemption privileges and
liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADSs or
otherwise. In the event these preferred shares have better voting rights than our ordinary shares, in the form of ADSs or otherwise, they could
be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more
difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may decline and the voting and other rights of the
holders of our ordinary shares and ADSs may be materially and adversely affected.
The provisions of our amended and restated articles of association may encourage potential acquirers to negotiate with us and allow our
board of directors the opportunity to consider alternative proposals in the interest of maximizing shareholder value. However, these provisions
may also discourage acquisition proposals or delay or prevent a change in control that could be beneficial to holders of our ordinary shares and
ADSs.
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You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts or Hong
Kong courts may be limited. The ability of U.S. or Hong Kong authorities to bring actions against us or our management may also be
limited.
We are an exempted company limited by shares incorporated under the laws of the Cayman Islands, and conduct a substantial portion of
our business and operations through our subsidiaries in China, the world’s largest emerging market. With the acquisition of Deutsche
Hospitality in January 2020, we also operate part of our business in Germany, among other jurisdictions. Most of our officers reside outside the
United States and Hong Kong and some or all of the assets of those persons are located outside of the United States and Hong Kong. It may be
difficult or impossible for you to bring an action against us or against these individuals in the Cayman Islands, China, Hong Kong or Germany
in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing
an action of this kind outside the Cayman Islands, China, Hong Kong or Germany, the laws of the Cayman Islands, China, Hong Kong and
Germany may render you unable to effect service of process upon, or to enforce a judgment against our assets or the assets of our directors and
officers. There is uncertainty as to whether the courts of the Cayman Islands would (i) recognize or enforce judgments of U.S. courts obtained
against us or our directors or officers that are predicated upon the civil liability provisions of the securities laws of the United States or any
state in the United States, or (ii) entertain original actions brought in the Cayman Islands against us or our directors or officers that are
predicated upon the securities laws of the United States or any state in the United States. Although there is no statutory enforcement in the
Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties
for the reciprocal enforcement or recognition of such judgments), the courts of the Cayman Islands would recognize as a valid judgment, a
final and conclusive judgment in personam obtained in the foreign courts against our company under which a sum of money is payable (other
than a sum of money payable in respect of multiple damages, taxes or other charges of a like nature or in respect of a fine or other penalty) or,
in certain circumstances, an in personam judgment for non-monetary relief, and would give a judgment based thereon provided that (a) such
courts had proper jurisdiction over the parties subject to such judgment, (b) such courts did not contravene the rules of natural justice of the
Cayman Islands, (c) such judgment was not obtained by fraud, (d) the enforcement of the judgment would not be contrary to the public policy
of the Cayman Islands, (e) no new admissible evidence relevant to the action is submitted prior to the rendering of the judgment by the courts
of the Cayman Islands, and (f) there is due compliance with the correct procedures under the laws of the Cayman Islands. A Cayman Islands
court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.
A judgment of a court of another jurisdiction may be reciprocally recognized or enforced if the jurisdiction has a treaty with China or if
judgments of the PRC courts have been recognized before in that jurisdiction, subject to the satisfaction of other requirements. However, China
does not have treaties providing for the reciprocal enforcement of judgments of courts with Japan, the United Kingdom, the United States and
most other Western countries. There are also uncertainties as to the enforceability in Germany of civil liabilities based on the U.S. federal and
state securities laws or Hong Kong laws, either in an original action or in an action to enforce a judgment obtained in U.S. courts or Hong
Kong courts (as the case may be). Germany currently does not have a treaty with the U.S. or Hong Kong providing for the reciprocal
recognition and enforcement of judgments, other than arbitration awards, in civil and commercial matters. German courts usually deny the
recognition and enforcement of punitive damages as incompatible with the fundamental principles of German law. In addition, due to
jurisdictional limitations, matters of comity and various other factors, the SEC, the Department of Justice and other U.S. authorities may be
limited in their ability to take enforcement actions, including in instances of fraud, against us or our directors and officers in China. In addition,
shareholder claims that are common in the United States, including class action securities law and fraud claims, are generally uncommon in
China.
Our corporate affairs are governed by our amended and restated memorandum and articles of association and by the Companies Act, Cap
22 (Act 3 of 1961, as consolidated and revised) (the “Companies Act”) and the common law of the Cayman Islands. The rights of shareholders
to take legal action against our directors and us, actions by minority shareholders and the fiduciary responsibilities of our directors to us under
Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is
derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has
persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our
directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States
and Hong Kong. In particular, the Cayman Islands has a less developed body of securities laws as compared to the United States and Hong
Kong, and provides significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a
shareholder derivative action before the federal courts of the United States or the courts of Hong Kong. Furthermore, our amended and restated
articles of association are specific to us and include certain provisions that may be different from common practices in Hong Kong, such as the
absence of requirements that the appointment, removal and remuneration of auditors must be approved by a majority of our shareholders.
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As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against our
management, directors or major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States or in
Hong Kong.
It may be difficult for overseas regulators to conduct investigations or collect evidence within China.
On February 24, 2023, the CSRC released a Provisions on Strengthening the Confidentiality and Archives Administration Relating to
Overseas Issuance and Listing of Securities by Domestic Enterprises, which came into effective on March 31, 2023. Pursuant to which, a PRC
based company must obtain approvals and make filings with relevant authorities when providing or publicly disclosing, by itself or through the
overseas listing entity, any document or material that involves state secret or work secret of state agencies. In addition, pursuant to such
regulation, any cross-border investigation, collection of evidence or inspection targeting PRC-based issuers, securities companies and security
service institutions proposed by overseas securities regulatory authorities must be carried out through cross-border regulatory cooperation
mechanism and reported to CSRC or relevant competent departments in advance.
As of the date of this annual report, there remains uncertainties as to the interpretation and implementation of such regulation. Also,
shareholder claims or regulatory investigations that are common in the United States generally are difficult to pursue as a matter of law or
practicality in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory
investigations or litigation initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with
the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation
with the securities regulatory authorities in the United States may not be efficient in the absence of mutual and practical cooperation
mechanisms. Furthermore, according to Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020, no
overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC. In
addition, the Data Security Law and the Personal Information Protection Law provide that no entity or individual within the PRC territory can
provide any foreign judicial body and law enforcement body with any data or any personal information stored within the PRC territory without
the approval of the competent PRC regulatory authority. While detailed interpretations of or implementation rules under Article 177 have yet
to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within
China may increase difficulties you may face in protecting your interests.
The different characteristics of the capital markets in Hong Kong and the U.S. may negatively affect the trading prices of our ordinary
shares and ADSs.
We are subject to Hong Kong and NASDAQ listing and regulatory requirements concurrently. The Hong Kong Stock Exchange and the
NASDAQ Global Select Market have different trading hours, trading characteristics (including trading volume and liquidity), trading and
listing rules, and investor bases (including different levels of retail and institutional participation). As a result of these differences, the trading
prices of our ordinary shares and/or ADSs may not be the same, even allowing for currency differences and the ADS ratio. Fluctuations in the
price of our ADSs due to circumstances peculiar to the U.S. capital markets could materially and adversely affect the price of the ordinary
shares, or vice versa. Certain events having significant negative impact specifically on the U.S. capital markets may result in a decline in the
trading price of our ordinary shares notwithstanding that such event may not impact the trading prices of securities listed in Hong Kong
generally or to the same extent, or vice versa. Because of the different characteristics of the U.S. and Hong Kong capital markets, the historical
market prices of our ADSs in the NASDAQ Global Select Market may not be indicative of the trading performance of the ordinary shares in
the Hong Kong Stock Exchange, and vice versa.
Exchange between our ordinary shares and our ADSs may adversely affect the liquidity and/or trading price of each other.
Our ADSs are currently traded on the NASDAQ Global Select Market. Subject to compliance with U.S. securities law and the terms of the
deposit agreement, holders of our ordinary shares may deposit ordinary shares with the depositary in exchange for the issuance of our ADSs.
Any holder of ADSs may also withdraw the ordinary shares underlying the ADSs pursuant to the terms of the deposit agreement for trading on
the Hong Kong Stock Exchange. In the event that a substantial number of ordinary shares are deposited with the depositary in exchange for
ADSs, or vice versa, the liquidity and trading prices of our ordinary shares on the Hong Kong Stock Exchange and our ADSs on the NASDAQ
Global Select Market may be adversely affected.
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The time required for the exchange between ordinary shares and ADSs may be longer than expected and investors may not be able to
settle or effect any sale of their securities during this period, and the exchange of ordinary shares into ADSs involves costs.
There is no direct trading or settlement route between the NASDAQ Global Select Market and the Hong Kong Stock Exchange on which
our ADSs and the ordinary shares are respectively traded. In addition, the time differences between Hong Kong and New York and unforeseen
market circumstances or other factors may delay the deposit of ordinary shares in exchange of ADSs or the withdrawal of ordinary shares
underlying the ADSs. Investors will be prevented from settling or effecting the sale of their securities during such periods of delay. In addition,
there is no assurance that any exchange of ordinary shares into ADSs (and vice versa) will be completed in accordance with the timelines
investors may anticipate.
Furthermore, the depositary for the ADSs is entitled to charge holders fees for various services including for the issuance of ADSs upon
deposit of ordinary shares, the release of ordinary shares upon cancelation of ADSs, distributions of cash dividends or other cash distributions,
distributions of ADSs pursuant to share dividends or other free share distributions, distributions of securities other than ADSs and annual
service fees. As a result, shareholders who exchange ordinary shares into ADSs, and vice versa, may not achieve the level of economic return
the shareholders may anticipate.
We may be classified as a passive foreign investment company, which could result in adverse United States federal income tax
consequences for U.S. Holders of our ADSs or ordinary shares.
Based on our financial statements and relevant market and shareholder data, we believe that we should not be treated as a passive foreign
investment company (a “PFIC”) for U.S. federal income tax purposes for 2022. In addition, based on our financial statements and our current
expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market and shareholder data, we
do not anticipate becoming a PFIC in 2023. The application of the PFIC rules is subject to ambiguity in several respects and, in addition, we
must make annual separate determinations each year as to whether we are a PFIC (after the close of each taxable year). Accordingly, we cannot
assure you of our PFIC status for 2023 or for any future taxable year. If we were treated as a PFIC for any taxable year during which a U.S.
Holder held an ADS or an ordinary share, certain adverse United States federal income tax consequences could apply to the U.S. Holder (as
defined herein). For a more detailed discussion of United States federal income tax consequences to U.S. Holders, see “Item 10. Additional
Information—E. Taxation—United States Federal Income Tax Consideration.”
There is uncertainty as to whether Hong Kong stamp duty will apply to the trading or conversion of our ADSs.
In connection with the public offering of our ordinary shares in Hong Kong in September 2020, or the Hong Kong IPO, we established a
branch register of members in Hong Kong, or the Hong Kong share register. Our ordinary shares that are traded on the Hong Kong Stock
Exchange, including those issued in the Hong Kong IPO and those that may be converted from ADSs, are registered on the Hong Kong share
register, and the trading of these ordinary shares on the Hong Kong Stock Exchange are subject to the Hong Kong stamp duty. To facilitate
ADS-ordinary share conversion and trading between the NASDAQ Global Select Market and the Hong Kong Stock Exchange, we have moved
a portion of our issued ordinary shares from our Cayman share register to our Hong Kong share register.
Under the Hong Kong Stamp Duty Ordinance, any person who effects any sale or purchase of Hong Kong stock, defined as stock the
transfer of which is required to be registered in Hong Kong, is required to pay Hong Kong stamp duty. The stamp duty is currently set at a total
rate of 0.26% of the greater of the consideration for, or the value of, shares transferred, with 0.13% payable by each of the buyer and the seller.
To the best of our knowledge, Hong Kong stamp duty has not been levied in practice on the trading or conversion of ADSs of companies
that are listed in both the United States and Hong Kong and that have maintained all or a portion of their ordinary shares, including ordinary
shares underlying ADSs, in their Hong Kong share registers. However, it is unclear whether, as a matter of Hong Kong law, the trading or
conversion of ADSs of these dual-listed companies constitutes a sale or purchase of the underlying Hong Kong-registered ordinary shares that
is subject to Hong Kong stamp duty. We advise investors to consult their own tax advisors on this matter. If Hong Kong stamp duty is
determined by the competent authority to apply to the trading or conversion of our ADSs, the trading price and the value of your investment in
our ADSs or ordinary shares may be affected.
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ITEM 4.
INFORMATION ON THE COMPANY
4.A. History and Development of the Company
The following table illustrates the key milestones of our history and business development:
Year
2005
2008
2010
2012
2013
2014
2016
2017
2018
2019
2020
We launched the first HanTing Hotel in Kunshan, Suzhou.
Milestone
We launched our budget hotel product, HanTing Hi Inn, which was subsequently rebranded as Hi Inn.
Our ADSs were listed on the NASDAQ Global Selected Market.
We launched the first JI Hotel in Shanghai.
We acquired a 51% equity interest in Starway HK, a midscale hotel chain, and expanded our offering to four hotel brands.
We changed our Chinese trade name from “HanTing Hotel Group” to “HuaZhu Hotel Group”.
We acquired the remaining 49% equity interest in Starway HK from C-Travel International Limited.
We adopted the first proprietary cloud-based property management system in China.
We entered into agreements with Accor S.A., or Accor, to join forces in the Pan-China region to develop Accor brand hotels
and to form an extensive and long-term alliance with Accor.
We offered the first automated self-check-in or check-out kiosks in China, featuring advanced technologies such as facial
recognition.
We completed our transaction with Accor. For further details, please refer to the sub-sections headed “Major Acquisitions” and
“Strategic Alliance with Accor” in this section.
We adopted a centralized procurement system, leveraging our Internet of Things technology, which allows all hotels across the
network to make bulk purchases of hotel supplies.
We completed the acquisition of all of the equity interests in Crystal Orange, which operated hotels under the brands Crystal
Orange Hotel and Orange Hotel.
We issued US$475 million of 0.375% convertible senior notes due 2022.
We changed our name to Huazhu Group Limited, or Huazhu.
We completed the acquisition in steps of a majority stake in Blossom Hotel Management, which was engaged in the business of
operating and managing hotels under Blossom Hill Hotels & Resorts (currently Blossom House) brand in the upscale market in
the PRC.
We were a winner of the “2019 CIO 100 Award”, which recognized us as one of the 100 most innovative organizations
worldwide that use information technology in innovative ways to deliver business value.
Our H Rewards loyalty program surpassed 150 million members.
We opened our first overseas hotel in Singapore under JI Hotel brand, which we directly operate.
We completed the acquisition of all equity interest in Steigenberger Hotels AG, which was engaged in the business of operating
and managing hotels under five brands, namely Steigenberger Hotels & Resorts, MAXX by Steigenberger, Jaz in the City,
IntercityHotel and Zleep Hotels, primarily in Europe.
We issued US$500 million of 3% convertible senior notes due 2026.
We completed our global offering and listing on the Hong Kong Stock Exchange. We issued a total of 23,485,450 ordinary
shares (including 3,063,300 ordinary shares pursuant to the exercise of over-allotment option) at a public offering price of
HKD297 (US$38.31) per ordinary share. Our ordinary shares started to be traded on the Hong Kong Stock Exchange on
September 22, 2020. The offering size and offering price presented in this paragraph did not retroactively reflect the Share
Subdivision.
We completed the put right offer relating to the 2022 Notes.
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Year
2021
2022
We completed the acquisition of CitiGO in May 2021, which operates hotels under the brand of CitiGO Hotel.
Milestone
We changed our name to H World Group Limited, or H World.
We fully redeemed our convertible senior notes due 2022 on the maturity date of November 1, 2022.
Our principal executive offices are located at No. 1299 Fenghua Road, Jiading District, Shanghai 201803, People’s Republic of China.
Our telephone number at this address is +86 (21) 6195-2011. Our registered office in the Cayman Islands is located at the offices of Cricket
Square, Hutchins Drive, P.O. Box 2681, Grand Cayman, KY1-1111, Cayman Islands.
Investors should contact us for any inquiries through the address and telephone number of our principal executive offices. Our website is
http://www.hworld.com. The information contained on our website is not a part of this annual report.
The SEC maintains an internet site (http://www.sec.gov), which contains reports, proxy and information statements, and other information
regarding us that file electronically with the SEC.
4.B. Business Overview
We are a leading, fast-growing multi-brand hotel group in China with international operations. Our hotels are operated under three
different models: leased and owned, franchised, and franchised hotels that we operate under management contracts, which we refer to as
“manachised.” We expanded our hotel network from 6,789 hotels as of December 31, 2020 to 8,543 hotels as of December 31, 2022,
representing a CAGR of 12.2%. As of December 31, 2022, we had 8,543 hotels in operation, including 704 leased and owned hotels and 7,839
manachised and franchised hotels, with an aggregate of 809,478 hotel rooms. As of the same date, we were developing an additional 2,580
hotels, including 40 leased and owned hotels and 2,540 manachised and franchised hotels.
Brands are the bedrock of our success. In over a decade, we grew from an economy hotel chain to a multi-brand hotel group covering the
full spectrum of market segments. Leveraging our consumer insights and our capability to deliver innovative and trend-setting products, we
now operate a portfolio of over 20 distinct hotel brands.
We have developed a vast base of loyal and engaged customers under our H Rewards loyalty program. H Rewards covers all of our brands
and had more than 199 million members as of December 31, 2022. We engage with program members through multiple online and offline
touch points to personalize their lodging experiences and foster strong and long-lasting relationships that inspire loyalty to our brands. H
Rewards is a powerful distribution platform, enabling us to conduct lower-cost, targeted marketing campaigns and maintain a high percentage
of direct sales to customers. In 2022, approximately 76% of our room-nights were sold to customers who were individual or corporate H
Rewards members in legacy Huazhu. In the same year, approximately 87% of our room-nights were sold through our own sales channels.
We have developed industry-leading, proprietary technology infrastructure that enhances customer experience, increases our operational
efficiency, and supports our fast growth. The core of this infrastructure is a comprehensive suite of modularized applications, including a
cloud-based property management system and centralized reservation, procurement and revenue management systems. Leveraging our
operational experience and technological capabilities, we have built a centralized shared service center and realized the economies of scale
made possible through our sizable hotel operations. We have also undertaken a series of industry-first digitalization initiatives to optimize our
hotels’ operational efficiency and cost structure and operate “smart” hotels. Our digital transformation initiative, the “Easy” series, has
increased the speed and efficiency of our hotels’ entire business processes, from the moment a reservation is made until a guest checks out.
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Leveraging our strong brand recognition, massive member traffic, and robust technology infrastructure, we have pioneered a business
operating system designed to enhance hotel operations across all fronts. Our business operating system is the result of our years of industry
know-how, and it includes innovative ideas that are first tested and refined by our leased and owned business. Subsequently, these ideas can be
“plugged-and-played” by our franchisees with confidence, thus allowing us to effectively expand our hotel network in an asset-light manner.
We added a net 1,754 hotels (including 12 hotels under legacy DH) from December 31, 2020 to December 31, 2022, 1,803 of which were
manachised and franchised hotels. Apart from receiving franchise fees for these hotels, we also share our technology infrastructure and our
vast customers base with our franchisees. In addition to extending our expertise to our manachised and franchised hotels, we can also monetize
our core competencies by offering standardized and tailored SaaS and IT solutions to other hotel operators, real estate companies and service
apartment providers. We believe that our distinct approach to hospitality has helped us establish a highly differentiated business model that
balances scale, quality and returns.
We recorded outstanding financial performance in the past, although our financial performance has recently been adversely affected by
COVID-19 since 2020 and was also affected by exchange loss as a result of the Euro’s depreciation in 2022. Our total revenue was
RMB10,196 million, RMB12,785 million and RMB13,862 million (US$2,010 million) in 2020, 2021 and 2022, respectively. We had net loss
attributable to H World Group of RMB2,192 million, RMB465 million and RMB1,821 million (US$264 million) in 2020, 2021 and 2022,
respectively. Our adjusted EBITDA (non-GAAP) amounted to negative RMB244 million, RMB1,571 million and RMB610 million (US$88
million) in 2020, 2021 and 2022, respectively. Our net cash provided by operating activities amounted to RMB609 million, RMB1,342 million
and RMB1,564 million (US$227 million) in these respective periods.
We believe that our core competencies and proven business model well-position us to increase our share in the expanding global lodging
industry and continue to deliver encouraging financial performance.
Our Brands and Products
As of the date of this annual report, we have hotels in operation or under development under the following brands, which are designed to
target distinct segments of customers:
● Economy hotel brands: HanTing Hotel, Ni Hao Hotel, Hi Inn, Elan Hotel, Zleep Hotels and Ibis Hotel;
● Midscale hotel brands: JI Hotel, Orange Hotel, Starway Hotel and Ibis Styles Hotel;
● Upper midscale hotel brands: Crystal Orange Hotel, IntercityHotel, Manxin Hotel, Mercure Hotel, Madison Hotel, Novotel Hotel,
CitiGO Hotel and MAXX by Steigenberger;
● Upscale hotel brands: Joya Hotel, Blossom House, Steigenberger Hotels & Resorts, Jaz in the City, and Grand Mercure; and
● Luxury hotel brand: Steigenberger Icon and Song Hotels.
We have entered into brand franchise agreements with Accor and enjoy exclusive franchise rights in respect of Mercure Hotel, Ibis Hotel
and Ibis Styles Hotel in the PRC, Taiwan and Mongolia and non-exclusive franchise rights in respect of Grand Mercure and Novotel Hotel in
the PRC, Taiwan and Mongolia. Through our acquisition of Deutsche Hospitality, we have obtained exclusive rights to construct, operate,
manage, franchise and license hotels under the Jaz in the City brand in China, South East Asia, Japan, South Korea and Europe subject to
certain exceptions, and non-exclusive rights to operate, manage, franchise and license certain number of hotels under the Jaz in the City brand
in certain other countries and regions, such as Tunisia, Cape Verde, the UAE and Egypt.
As of December 31, 2022, we also operated ten other hotels, including partner hotels under Deutsche Hospitality and other hotels under
other hotel brands in Yongle Huazhu Hotel & Resort Group.
We believe that our multi-brand strategy provides us with a competitive advantage to open more hotels in attractive markets, capture a
wider range of customers with evolving lodging preferences and needs thereby achieving greater economies of scale through shared platforms.
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Economy Hotel Brands
HanTing Hotel
Launched in 2005, HanTing Hotel is our starting brand and our economy hotel product with the value proposition of “Quality,
Convenience and Value.” HanTing Hotels also include hotels we previously marketed under the name of Hanting Premium Hotels. These
hotels are “close neighbors” of 1.4 billion Chinese people. As of December 31, 2022, we had 3,257 HanTing Hotels in operation and an
additional 652 HanTing Hotels under development.
Ni Hao Hotel
Ni Hao Hotel is our economy hotel product targeting young customers. By digitalizing and standardizing independent hotels, it helps
improve their operational efficiency while maintaining their individual features. Ni Hao Hotels provide clean and comfortable lodging
experiences to the guests at affordable prices. Ni Hao Hotel is committed to creating a “happy planet” for young travelers. As of December 31,
2022, we had 199 Ni Hao Hotels under development and had 159 Ni Hao Hotels in operation.
Hi Inn
Launched in late 2008 and originally marketed under the name of HanTing Hi Inn, Hi Inn is our economy hotel product committed to
support self-help service. With the tenet of “freedom of lodging for all,” Hi Inn has carefully selected the streets and alleys of cities, reasonably
planned every inch of space, and met the needs of practical people on leisure vacations and business trips with self-help services, devoting
itself to making every traveler feel free, wise, practical and green lodging experience. As of December 31, 2022, we had 456 Hi Inns in
operation and an additional 170 Hi Inns under development.
Elan Hotel
In September 2014, we launched Elan Hotel. Elan Hotel is our economy hotel product committed to improving the operating efficiency of
individual micro, small- and medium-sized economy hotels. With the continuing upgrade of accommodations and services, these hotels
provide a high quality experience for young customers. As of December 31, 2022, we had 836 Elan Hotels in operation. No Elan Hotels was
under development as of the same date.
Ibis Hotel
Ibis Hotel is an economy hotel brand that is recognized across the world for its quality, reliability and commitment to the environment. It
has created complex public spaces, specialty cocktails, Ibis Croissant and other specialty dining, and is known worldwide for its comfortable,
stylish and energetic brand tonality. As of December 31, 2022, we had 222 Ibis Hotels in operation and an additional 32 Ibis Hotels under
development.
Zleep Hotels
Zleep Hotels, our economy hotel brand, is a well-known and successful hotel brand in Scandinavia offering service and design at a great
rate. As of December 31, 2022, we had 18 Zleep Hotels in operation and an additional 13 Zleep Hotels under development.
Midscale Hotel Brands
JI Hotel
JI Hotel is a midscale brand that we launched in 2010. JI Hotel creates a quality experience through friendly services to make more people
feel the natural decency of the Orient and enhance the quality of life on the journey for customers. Its brand purpose is to make customers feel
the natural decency of the Orient, and its brand philosophy focuses on Orient, Moderation and Culture. As of December 31, 2022, we had
1,694 JI Hotels in operation and an additional 611 JI Hotels under development.
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Orange Hotel
Orange Hotel, previously marketed under two brand names: Orange Hotel and Orange Select Hotel, is our midscale hotel brand. With
healthy lifestyle and attitude, energetic and bright hotel products and services, Orange Hotel meets the lifestyle and consumption needs of the
contemporary middle class. In terms of space design, Orange Hotel adopts the theme of California sunshine, emphasizes on returning to the
essence of “Orange,” hoping that everyone who enters the hotel can enjoy life with a healthy and energetic attitude. As of December 31, 2022,
we had 519 Orange Hotels in operation and an additional 261 Orange Hotels under development.
Starway Hotel
Starway Hotel is our select local specialty hotel brand. Comfortable sleeping system, preferred special breakfast, convenient intelligent
services and laundry and other supporting facilities are available to meet personalized travel needs. As of December 31, 2022, we had 567
Starway Hotels in operation and an additional 242 Starway Hotels under development.
Ibis Styles Hotel
Ibis Styles Hotel is a midscale brand that offers comfortable and designer hotels. Ibis Styles Hotel advocates one-hotel-one-design, with
each hotel choosing a different story theme to create creative spaces through a fun and premium design approach that is eye-catching. The
different style collections of Ibis Styles Hotel can cater to the accommodation needs of different people, covering not only business and
vacation, but also attracting the innovative Z-Generations. As of December 31, 2022, we had 85 Ibis Styles Hotels in operation and an
additional 25 Ibis Styles Hotels under development.
Upper Midscale Hotel Brands
Crystal Orange Hotel
Crystal Orange Hotel is our upper midscale hotel brand featuring boutique design hotels. Crystal Orange Hotel has launched a new
version, targeting the upper midscale segment market and empowering customers with a five-star quality experience at a four-star price. The
“New Crystal” returns to the essence and purity, using walnut, antique copper and glass elements to create a more textured and premium space
atmosphere. As of December 31, 2022, we had 164 Crystal Orange Hotels in operation and an additional 57 Crystal Orange Hotels under
development.
IntercityHotel
IntercityHotel is our upper midscale urban hotel brand targeting business travelers. The hotels of IntercityHotel are usually located within
walking distance of train stations or airports. In the future, IntercityHotel will once again break through the city edge and become not only a
local city landmark, but also a perfect starting point for customers to do business and explore the city. As of December 31, 2022, we had 56
IntercityHotels in operation and an additional 25 IntercityHotels under development, including five hotels in operation and eleven pipeline
hotels in China.
Manxin Hotel
Manxin Hotel was launched as an upper midscale brand of resorts in October 2013, and was previously branded as Manxin Hotel &
Resorts. Nowadays Manxin Hotel has become a brand with city hotels and resorts. Manxin Hotel is aimed at bringing the guests a distinct
experience by presenting amazing space design and offering attractive activities. Manxin Hotel incorporates localized features into the design
and experience, and is a must-stay upper midscale hotel for urban exploration, with both business and travel features. As of December 31,
2022, we had 112 Manxin Hotels in operation and an additional 59 Manxin Hotels under development.
Mercure Hotel
Mercure Hotel is an upper midscale hotel brand that combines the French romantic and elegant lifestyle with a strong quality commitment
with the warm experiences of hotels that are rooted in their local community. As of December 31, 2022, we had 137 Mercure Hotels in
operation and an additional 62 Mercure Hotels under development.
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Madison Hotel
We launched our new upper midscale hotel brands Madison Hotel and Grand Madison Hotel in 2019, which are committed to offering
guests a classic lodging experience. In 2020, we merged the Grand Madison Hotel brand into the Madison Hotel brand. These hotels target
business and leisure guests with high lodging standards and desire to understand more of the cities they are traveling in, and offer comfortable
accommodations, functional furnishings and facilities, and high-quality services. As of December 31, 2022, we had 52 Madison Hotels in
operation, and an additional 64 Madison Hotels under development.
Novotel Hotel
Novotel is an upper midscale brand that provides a multi-service offering for both business and leisure guests, with spacious, modular
rooms, 24/7 catering offers with balanced meals, meeting rooms, attentive and proactive staff, kid areas, multi-purpose lobbies and fitness
centers. These hotels are typically located in the heart of major international cities, business districts and tourist destinations. As of December
31, 2022, we had 17 Novotel Hotels in operation and an additional 19 Novotel Hotels under development.
CitiGO Hotel
CitiGO Hotel is a lifestyle brand that mainly targets young people. Crafted by internationally prestigious designers, CitiGO blends travel,
sports and urban culture together to provide guests with unique lodging experience. With the concept of entry lux, fashion, social life and fun,
CitiGO offers trendy hospitality with affordable price. The hotel restaurant provides extra-long breakfast from 7:00 am to 12:00 pm, fresh
coffee, craft beer and free late-night snack. As of December 31, 2022, we had 33 CitiGO Hotels in operation, and an additional seven CitiGO
Hotels under development.
MAXX by Steigenberger
MAXX by Steigenberger, our upper midscale hotel brand, is a new, charismatic concept and focuses on creating a warm, feel-good
atmosphere in all destinations. MAXX by Steigenberger inherits the European model and integrates insights into the local market, focusing on
the core needs of sleep, bathroom and breakfast, with quality facilities, subtle style, superb hospitality and social circle as the emphasis,
providing customers with a new, luxurious accommodation experience. As of December 31, 2022, we had nine MAXX by Steigenberger hotels
in operation (including three in China) and eight MAXX by Steigenberger hotel under development in China.
Upscale Hotel Brands
Joya Hotel
In December 2013, we launched our upscale brand Joya Hotel. These hotels are typically located in areas close to major business and
commercial districts in first- and second-tier cities. With the new Chinese-style design and diversified service features, Joya Hotel creates a
hotel space more in line with the Chinese culture and lifestyle. As of December 31, 2022, we had eight Joya Hotels in operation and one Joya
Hotel under development.
Blossom House
Blossom House, launched in Lijiang, China in 2009, previously branded Blossom Hill Hotels & Resorts, is our upscale lifestyle and resort
brand targeting affluent travelers. With the unique brand connotation of Chinese culture and regional culture and creativity, Blossom House
hotels have created three resort types: urban resort lifestyle hotel, themed country club and mega-resort. As of December 31, 2022, we have 53
Blossom House hotels in operation and an additional 49 Blossom House hotels under development.
Steigenberger Hotels & Resorts
Steigenberger Hotels & Resorts is our upscale brand originated in Germany. With high-quality facilities and services and unique
entertainment resources, Steigenberger Hotels & Resorts provides guests with a super high-end experience of high-quality conference services,
high-quality leisure and quality meals to meet the diverse needs of guests’ various activities. As of December 31, 2022, we had 54
Steigenberger Hotels & Resorts in operation and an additional eight Steigenberger Hotels & Resorts under development, including 11 hotels in
operation and three pipeline hotels in China.
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Jaz in the City
Jaz in the City is our upscale lifestyle brand. Jaz in the City branded hotels reflect metropolitan lifestyle and draw upon the local music
and cultural scene. As of December 31, 2022, we have three Jaz in the City hotels in operation and one Jaz in the City hotel under
development.
Grand Mercure
Grand Mercure offers guests an imaginative, discovery-filled hotel experience, a fresh and engaging stay that attracts visitors from around
the world. Deeply rooted in its destinations, Grand Mercure offers an elegant and immersive cultural experience through warm, attentive staff
who tell vivid stories and take guests on a journey through the traditions of fine dining and high-end hospitality. As of December 31, 2022, we
had seven Grand Mercure Hotels in operation and an additional five Grand Mercure Hotels under development.
Luxury Hotel Brand
Steigenberger Icon
Steigenberger Icon is our first brand under luxury level, a prestigious level we granted only to our most legendary Steigenberger hotels.
For its signature premium service and spiritual and cultural appeals, Steigenberger Icon has become the top choice for royalty, celebrities,
dignitaries, talents and superstars to stay. As of December 31, 2022, we had nine Steigenberger Icon Hotels in operation (including three in
China) and one Steigenberger Icon Hotel under development.
Song Hotels
Song Hotels is our luxury hotel brand designed for high-end vacation experience. The development of this brand is inspired by culture and
the delicate aesthetics from Song dynasty. Song hotels convey a leisure and elegant lifestyle to its guests through the use of the exquisite
decoration and meticulous service. As of December 31, 2022, we had six Song Hotels in operation and additional four Song Hotels under
development.
Our Hotel Network
We operate hotels under lease and ownership, manachise and franchise models. Under the lease and ownership model, we directly operate
hotels located primarily on leased properties, as well as on owned properties. Under the manachise model, we manage manachised hotels
through the on-site hotel managers we appoint and collect fees from franchisees. Under the franchise model, we collect fees from franchisees
but do not appoint on-site hotel managers. We have adopted a disciplined return-driven development model aimed at achieving high growth
and profitability and applied consistent operational and quality standards across all of our hotels.
Our hotel network has grown rapidly. The following table sets forth the number of hotels we operated as of the dates indicated.
Leased and owned hotels
Manachised hotels
Franchised hotels
Total
2012
465
516
54
1,035
2013
565
835
25
1,425
2014
611
2015
616
As of December 31,
2017
671
2016
624
2018
699
2019
688
2020
753
2021
738
1,376
8
1,995
2,067
80
2,763
2,471
174
3,269
2,874
201
3,746
3,309
222
4,230
4,519 5,746
290
5,618 6,789
411
6,824
268
7,830
2022
704
7,617
222
8,543
As of December 31, 2022, our hotel network covered 8,543 hotels spanning 882 cities in 31 provinces and municipalities across the
greater China region and 17 other countries, and we also had a pipeline of hotels in these countries and regions. As of December 31, 2022, we
had an additional 2,580 leased and owned as well as manachised and franchised hotels under development.
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The following table sets forth a summary of all of our hotels by geographic region as of December 31, 2022.
Greater China:
Shanghai, Beijing, Guangzhou, Shenzhen and Hangzhou
Others (including Taiwan)(5)
Subtotal
Outside Greater China:
Europe
Other countries(6)
Subtotal
Total
Leased and
Owned
Hotels(2)
Manachised
Hotels(3)
Franchised
Hotels(3)
Leased and
Owned Hotels
Under
Manachised
and Franchised
Hotels Under
Development(4) Development(4)
238
384
622
81
1
82
704
1,620
5,967
7,587
13
17
30
7,617
74
126
200
11
11
22
222
6
8
14
26
0
26
40
220
2,309
2,529
6
5
11
2,540
(1) The data in this table include hotels under temporary requisition and hotels temporarily closed following the outbreak of COVID-19. As of
December 31, 2022, we had 572 hotels under temporary requisition in China.
(2) Include 81 leased hotels operated by Deutsche Hospitality and 623 leased and owned hotels operated by the rest of our Group.
(3) Include 51 manachised and franchised hotels operated by Deutsche Hospitality and 7,788 manachised and franchised hotels operated by
the rest of our Group.
(4) Include hotels for which we have entered into binding leases, purchase agreements of land use right or property, or franchise agreements
but that have not yet commenced operations. The inactive projects are excluded from this list according to management judgment.
(5) For our hotels in operation, include 877 cities across 29 provinces and municipalities; for our hotels under development, include 784 cities
across 30 provinces and municipalities (including Taiwan).
(6) For our hotels in operation, include Tunisia, Egypt, the UAE, Oman, Saudi Arabia, Singapore, Qatar and Mongolia; for our hotels under
development, include Oman, the UAE, India, Cambodia and Uzbekistan.
The following table sets forth the status of our hotels under development as of December 31, 2022.
Leased and owned hotels
Manachised and franchised hotels
Total
34
1,790
1,824
6
750
756
Pre-conversion Conversion
Period(1)
Period(2)
Total
40
2,540
2,580
(1) Includes hotels for which we have entered into binding leases or franchise agreements but of which the property has not been delivered by
the respective lessors or property owners, as the case may be. The inactive projects are excluded from this list according to management
judgment.
(2) Includes hotels for which we have commenced conversion activities but that have not yet commenced operations. The inactive projects are
excluded from this list according to management judgment.
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Among the 40 leased and owned hotels under development as of December 31, 2022, we had 34 leased and owned hotels during pre-
conversion period, for which we have entered into binding leases but of which the property has not been delivered by the respective lessors,
and had 6 leased and owned hotels during the conversion period, for which we have commenced conversion activities but that have not yet
commenced operations. The anticipated completion dates for these leased and owned hotels during the conversion period range from January
2023 to December 2023. Total budgeted development costs for these leased and owned hotels during the conversion period, which primarily
include construction costs for leasehold improvement and the furniture and equipment for hotel operation, were RMB164 million (US$24
million), of which RMB58 million (US$8 million) was incurred as of December 31, 2022. The average development costs per square meter for
completed leased and owned hotels in 2022 were approximately RMB2,400 (US$348). The franchisees are responsible for development costs
for our manachised hotels and franchised hotels.
The reasons for hotel closures typically include property-related matters (such as rezoning and expiry of leases), hotel operation quality or
results not meeting our requirements, and other commercial reasons.
In addition to hotels permanently closed as presented above, due to the impact of COVID-19, we also had a number of hotels temporarily
requisitioned for the accommodation of medical support workers and for quarantine purposes in relation to COVID-19. As of December 31,
2022, we had 572 hotels under temporary requisition in China. We also had a large number of hotels temporarily closed from time to time amid
the pandemic. The hotel operations of Deutsche Hospitality in Europe were also adversely affected beginning from early March 2020. Local
governments in Europe imposed travel restrictions and lockdowns to contain the spread of COVID-19, and as a result, a number of our
Deutsche Hospitality hotels were temporarily closed in 2020. Legacy DH hotels have experienced continuing RevPAR recovery since March
2022. See “—COVID-19 Outbreak: response and impact” below for more information.
Leased and owned hotels
As of December 31, 2022, we had 695 leased hotels and 9 owned hotels, accounting for approximately 8.2% of our hotels in operation.
We manage and operate each aspect of these hotels and bear all of the accompanying expenses. We are responsible for recruiting, training and
supervising the hotel managers and employees, paying for leases and costs associated with construction and renovation of these hotels, and
purchasing all supplies and other required equipment.
Our leased hotels are located on leased properties. The terms of our leases typically range from ten to 25 years. We generally enjoy an
initial two- to eight-month rent-free period. For certain of our hotels (under Deutsche Hospitality), the landlords are responsible for renovating
the hotels (other than soft furnishing) and we are not required to pay rent until this renovation is completed. We generally pay fixed rent on a
monthly, quarterly or biannual basis for the first three to five years of the lease term, after which we are generally subject to a 2% to 6%
increase on rent every three to five years or, for Deutsche Hospitality’s hotels, generally annual adjustments based on consumer price index
levels. Our leases usually allow extensions by mutual agreement. In addition, our lessors are typically required to notify us in advance if they
intend to sell or dispose of their properties, in which case we have a right of first refusal to purchase the properties on equivalent terms and
conditions. To mitigate the impact of COVID-19, we have been negotiating with landlords to reduce or delay our rental payment. 67 of our
leases expired in 2022, among which 25 had been renewed, 17 had been converted to manachised and franchised hotels and 25 had been
terminated as of December 31, 2022.
The following table sets forth the number of our leases for hotels in operation and under development that were expected to expire in the
periods indicated as of December 31, 2022.
2023
2024
2025
2026
2027
2028-2030
2031-2033
2034 and onward
Total
62
Number of
Leases
58
46
49
61
60
143
112
99
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Manachised and Franchised Hotels
As of December 31, 2022, we had 7,617 manachised hotels and 222 franchised hotels, accounting for approximately 89% and 3%,
respectively, of our hotels in operation. Our franchisees lease or own their hotel properties and are responsible for the costs of developing and
operating the manachised or franchised hotels, including constructing and renovating the hotels according to our standards, and all of the hotel
operating expenses. We impose the same standards on all of our manachised and franchised hotels to ensure product quality and consistency
across our hotel network. Our franchisees are not allowed to sub-franchise hotels under our brands to any third party. We collect fees from the
franchisees of our manachised and franchised hotels and do not bear any loss incurred by our franchisees, and we generally do not share any
profit realized by our franchisees. We believe that the manachise and franchise models have enabled us to quickly and effectively expand our
geographical coverage and market share in a less capital-intensive manner through leveraging the local knowledge and relationships of our
franchisees.
Manachised hotels
We manage our manachised hotels and impose the same standards on all manachised hotels as our other hotels to ensure product quality
and consistency across our hotel network. For our manachised hotels under legacy Huazhu, our manachise agreements typically have the
following terms:
Scope of service: We authorize a manachised hotel to use our relevant brand name, logo and relevant trademarks. The franchisee is
responsible for the hotel’s construction, renovation and maintenance. We provide guidance to the franchisee on the construction or
renovation of the hotel and require the hotel to meet our standards before approving it to commence operations. We appoint and train
hotel managers who are responsible for hiring hotel staff and managing daily operations of our manachised hotels. We also provide
our franchisees with services such as central reservation, sales and marketing support, technology support, quality assurance
inspections and other operational support and information.
Fees charged to franchisees: we generally charge our franchisees an upfront franchise fee typically ranging between RMB80,000 and
RMB1,000,000 per hotel, as well as a monthly franchise fee of approximately 3% to 6.5% of the gross revenues generated by each
manachised hotel. In addition, we collect from franchisees a reservation fee for using our central reservation system and a
membership registration fee for customers who join our H Rewards (previously known as HUAZHU Rewards) loyalty program at the
manachised hotels. We also charge system maintenance and support fees and other IT service fees from our franchisees for sharing
our technology infrastructure with our manachised hotels. Furthermore, we employ and appoint hotel managers for the manachised
hotels and charge franchisees for a manager fee on a monthly basis.
Term of service: our franchise and management agreements for our manachised hotels typically run for an initial term of eight to ten
years, and may be extended upon mutual agreement between us and the franchisee three months prior to the expiration of the
franchise and management agreements.
Termination: we typically have the right to early terminate the franchise and management agreements immediately, if the franchisee
commences operations without our approval, goes bankrupt, suspends operation for a specified period, interferes in our appointed
manager’s management of the hotel, or violates applicable laws and regulations that result in harm to our brand, among others. We are
also entitled to terminate these agreements in case of material breaches of the agreements by the franchisee, if the franchisee fails to
rectify within a grace period.
For our manachised hotels under Deutsche Hospitality, the franchisees have historically been required to pay Deutsche Hospitality a
management fee consisting of a base fee of 0.5% to 3.5% of the hotel’s turnover and an incentive fee of 6% to 10% of the hotel’s adjusted
gross operating profit. Deutsche Hospitality participates in the distribution of the manachised hotel’s profit, and charges a marketing fee for a
few manachised hotels. General manager compensation of a manachised hotel, including salaries, social security contribution, and various
benefits and bonuses, is borne by the manachised hotel. For some manachised hotels outside Germany, Deutsche Hospitality further charges a
license fee of approximately 0.5% to 1% of the hotel’s turnover. The term of service for our manachised hotels under Deutsche Hospitality is
typically 15 to 20 years. We are gradually adapting the terms of Deutsche Hospitality’s franchise and management agreements to be similar to
those of our other manachised hotels.
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Franchised hotels
We do not appoint hotel managers for our franchised hotels and do not manage their daily operations. We apply the same standards to our
franchised hotels as our other hotels. For our franchised hotels under legacy Huazhu, the terms of the franchise agreements are subject to
negotiation with individual hotel owners, while they generally have the following terms:
Scope of service: the services that we provide to franchised hotels are similar to those we provide to manachised hotels, except that
we do not appoint managers and do not provide management services to the franchised hotels.
Franchise fee: we charge our franchised hotels fees on generally the same terms as our manachised hotels, except that we do not
appoint hotel managers to our franchised hotels and thus do not charge these hotels hotel manager fee on a monthly basis.
Term of service: our franchise agreements for our franchised hotels typically run for an initial term of eight to ten years, and may be
extended upon mutual agreement between us and the franchisee three months prior to the expiration of the franchise agreements.
Termination: our rights to terminate the franchise agreements for our franchised hotels are similar to those for our manachised hotels.
For our franchised hotels under Deutsche Hospitality, the franchisees have historically been required to pay Deutsche Hospitality a
franchise fee of approximately 0.5% to 4.0% of the hotel’s gross room revenue or turnover. Some hotels outside Germany are charged a fixed
franchise fee ranging from EUR40,000 to EUR150,000 per year. Most franchised hotels are also charged a central service fee (or marketing fee
in older contracts) and a license fee. The term of service for our franchised hotels under Deutsche Hospitality is typically ten to 15 years. We
are gradually adapting the terms of Deutsche Hospitality’s franchise agreements to be similar to those of our other franchised hotels.
Hotel Development
We mainly use the manachise and franchise models to expand our network in a less capital-intensive manner. We also lease the properties
of the hotels we operate. Other than the properties we acquired as part of our strategic alliance with Accor in 2016, and from our acquisition of
Blossom Hotel Management, we typically do not acquire properties ourselves, as owning properties is generally much more capital intensive.
We have adopted a systematic process with respect to the planning and execution of new development projects. Our development department
analyzes economic data by city, field visit reports and market intelligence information to identify target locations in each city and form a three-
year development plan for new hotels on a regular basis. The plan is subsequently reviewed and approved by our investment committee. Once
a property is identified in the targeted location, staff in our development department analyzes the business terms and formulates a proposal for
the project. In the case of a lease opportunity, the investment committee evaluates each proposed project based on several factors, including the
length of the investment payback period, the rate of return on the investment, the amount of net cash flow projected during the operating period
and the impact on our existing hotels in the vicinity. When evaluating potential manachising and franchising opportunities, the investment
committee considers the attractiveness of the location as well as additional factors such as quality of the prospective franchisee and product
consistency with our standards. Our investment committee weighs each investment proposal carefully to ensure that we can effectively expand
our coverage while concurrently improving our profitability.
The following is a description of our hotel development process.
Manachised and franchised hotels
We open manachised and franchised hotels to expand our geographical coverage or to further penetrate in our existing markets.
Manachised and franchised hotels provide us valuable operating information in assessing the attractiveness of new markets, and supplement
our coverage in areas where the potential franchisees can have access to attractive locations by leveraging their own assets and local network.
As is the case with leased and owned hotels, we generally look to establish manachised and franchised hotels near popular commercial and
office districts that tend to generate stronger demand for hotel accommodations. Manachised and franchised hotels must also meet specified
criteria in connection with the infrastructure of the building, such as adequate water, electricity and sewage systems.
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We typically source potential franchisees through word-of-mouth referrals, applications submitted via our website and industry
conferences. Some of our franchisees operate several of our manachised and franchised hotels. In general, we seek franchisees who share our
values and management philosophies.
We typically supervise the franchisees in designing and renovating their properties pursuant to the same standards required for our leased
and owned hotels, and provide assistance as required. We also provide technical expertise and recommend pre-selected qualified suppliers to
our franchisees. In addition, we appoint or train hotel managers and help train other hotel staff for our manachised hotels to ensure that high
quality and consistent services are provided throughout all our hotels.
Leased and owned hotels
We seek properties that are in central or highly accessible locations in economically more developed cities in order to showcase our hotel
operation expertise and ability to achieve desirable investment returns. In addition, we typically seek properties that will accommodate hotels
of 80 to 300 rooms.
After identifying a proposed site, we conduct thorough due diligence and typically negotiate leases concurrently with the lessors. All
leases and development plans are subject to the final approval of our investment committee. Once a lease agreement has been executed, we
then engage independent design firms and construction companies to begin work on leasehold improvement. Our construction management
team works closely with these firms on planning and architectural design. Our contracts with construction companies typically contain
warranties for quality and requirements for timely completion of construction. Contractors or suppliers are typically required to compensate us
in the event of delays or poor work quality. A majority of the construction materials and supplies used in the construction of our new hotels are
purchased by us through a centralized procurement system.
Hotel Management
Our management team has accumulated significant experience with respect to the operation of hotels. Building on this experience, our
management team has developed a robust operational platform for our years of operations, implemented a rigorous budgeting process, and
utilized our real-time information systems to monitor our hotel performance. We believe these systems are critical in maximizing our revenues
and profitability. The following are some of the key components of our hotel management infrastructure:
Budgeting. Our budget and analysis team prepares a detailed annual cost and revenue budget for each of our leased and owned hotels, and
an annual revenue budget for each of our manachised and franchised hotels. The hotel budget is prepared based on, among other things, the
historical operating performance of each hotel, the performance of comparable hotels and local market conditions. We may adjust the budget
upon the occurrence of unexpected events that significantly affect a specific hotel’s operating performance. In addition, our compensation
scheme for managers in each hotel is directly linked to its performance against the annual budget.
Pricing. The room rates of our leased and owned hotels as well as manachised hotels are determined using a centralized RMS. We adjust
room rates regularly based on seasonality and market demand. We also adjust room rates for certain events, such as the China Import and
Export Fair held twice a year in Guangzhou, the World Expo in Shanghai in 2010 and public health events such as COVID-19. Room rates for
our franchised hotels are determined by the franchisees based on local market conditions.
Monitoring. Through our cloud-based property management system, we are able to monitor each hotel’s occupancy status, average daily
room rates, RevPAR and other operating data on a real-time basis. Real-time hotel operating information allows us to adjust our sales efforts
and other resources to rapidly capitalize on changes in the market and to maximize operating efficiency.
Centralized cash management. Our leased and owned hotels deposit cash into our central account several times a week. We also generally
centralize all payments for expenditures. Our manachised and franchised hotels manage their cash separately.
Centralized procurement. We have implemented a centralized procurement system to cope with our large procurement requirements.
Given the scale of our hotel network and our centralized procurement system, we have the purchasing power to secure favorable terms from
suppliers for all of our hotels.
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Quality assurance. We have formed detailed brand standards on hotel facilities and interior decoration for us and our franchisees to follow.
We have also developed an operating manual to which our staff closely adhere to ensure the consistency and quality of our customer
experience. We conduct periodic internal quality checks of our hotels to ensure that our operating policies and procedures are followed. We
also engage “mystery guests” from time to time to ensure that we are providing consistent quality services. Furthermore, we actively solicit
customer feedback by conducting outbound e-mail surveys and monitor comments posted on our website and third-party websites.
Training. We view the quality and skill sets of our employees as essential to our business and thus have made employee training one of
our top priorities. Our Research and Study Center of H World Group, previously known as HanTing College and HuaZhu University, together
with our regional management teams, offers structured training programs for our hotel managers, other hotel-based staff and corporate staff.
Our hotel managers are required to attend a three-week intensive training program, covering topics such as our corporate culture, team
management, sales and marketing, customer service, hotel operation standards and financial and human resource management. A substantial
number of our hotel managers have received training completion certificates. Our Research and Study Center of H World Group has prepared a
new-hire training package to standardize the training for hotel-based staff across our hotel group. In addition, we provide our corporate staff
with various training programs, such as managerial skills, office software skills and corporate culture. In 2022, our hotel-based staff and
corporate staff on average received approximately 68 and 48 hours of training, respectively.
Technology Infrastructure and Digitalization
We have successfully developed and fully rolled out an advanced and scalable group-level technology infrastructure platform, as well as
complete suite of hotel-level digital transformation initiatives. They cover our hotel operations by leveraging advanced technologies such as
algorithms, big data analytics, data mining, AI, machine learning and IoT. These facilities enable us to improve the efficiency of our
operations, make timely decisions and enhance our profitability.
We have successfully promoted our independently developed digital system platform with 100% independent intellectual property rights
to overseas markets. As of March 2023, the new generation of global central reservation systems has completed global promotion and
implementation, covering all hotels under our brand, achieving unified inventory management and unified distribution management
worldwide. The new digital hotel solution has also successfully launched in Europe. The global membership system is effectively supporting
the release and launching of the new overseas loyalty program. By investing in digital platforms and building technological competency, we
aim to position our company as a leader in the industry, which can lead to sustainable growth and success at a global level.
The following discusses certain key aspects of our technology infrastructure as well as our digitalization initiatives:
Technology Infrastructure
Customer relationship management (CRM) system. Our integrated CRM system maintains information of our H Rewards members,
including their reservation and consumption history and pattern, points accumulated and redeemed, and prepayment and balance. This allows
us to better serve the members of our loyalty program and offer targeted promotions to enhance customer loyalty. The CRM system also allows
us to monitor the performance of our corporate client sales representatives. An integrated CRM system effectively supports the promotion of H
Rewards membership benefits worldwide and provides members with more precise and competitive services and promotional activities,
constantly enhancing the consumption experience of our H Rewards members. At the same time, based on member reviews and feedback, it
can more effectively and comprehensively track the service quality of every hotel, promoting closed-loop comprehensive quality management
driven by customers.
Central reservation system (CRS). We have an around-the-clock, real-time central reservation system available 24 hours a day, seven days
a week. Our central reservation system allows reservations through multiple channels including our mobile apps, call center, third-party travel
agents and online reservation partners. The real-time inventory management capability of the system improves the efficiency of reservations,
enhances customer satisfaction and maximizes our profitability.
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Centralized revenue management system (RMS). Our RMS is the first in-house developed, large scale, fully automated RMS in China’s
hotel industry. Powered by in-house developed algorithms and AI, our RMS automatically adjusts room rates of hotels within our hotel
network in a centralized manner at the group level or the business unit level, based on the current business status and real-time demand
forecasts for the local markets within minutes, effectively increasing hotel occupancy through price and promotional tools. We believe our
centralized revenue managing system enhances our ability to adjust room rates in a timely fashion, maximizing the revenue per room for hotels
within our network.
Centralized procurement system (CPS). Leveraging Internet of Things (“IoT”) technology, our CPS is the most representative top
collection platform. Our CPS has enabled us to efficiently manage our operating costs, especially with respect to supplies used in large
quantities, and allows all hotels across our network to make bulk purchases of hotel supplies at the same time.
Digitalization Initiatives
Cloud-based property management system (Cloud-PMS). A property management system, or PMS, is a hotel management software suite
that hotel managers and front desk staff use to manage every hotel’s daily business operations. Our Cloud-PMS is a cloud-based, hotel-level
application that is empowered by, and seamlessly integrated with, our centralized technology infrastructure (which is comprised of our RMS
and other group-level modules). Unlike onsite-PMSs which require significant upfront hardware investment and are costly and time-
consuming to upgrade, our cloud-based PMS is highly scalable and enables the simultaneous launch of new services across all of our hotels.
This system enables each hotel within our network to efficiently and cost-effectively manage its room inventory, reservations and pricing on its
own on a real-time basis through an Internet browser, which in turn optimizes each hotel’s occupancy rate, average daily room rates and
revenues generated per available room, or RevPAR. The system is designed to enable us to enhance our profitability and compete more
effectively by integrating with our CRS and CRM. We believe our Cloud-PMS has enabled our management to more effectively assess the
performance of our hotels on a timely basis and to efficiently allocate resources and effectively identify specific market and sales targets.
“Easy” series. We have implemented an “Easy” series digital system to improve our hotel’s operating efficiency. For example, our “Easy
House Keeping” digital system, which is the first of its kind in the industry, streamlines and digitizes various hotel housekeeping processes,
including room cleaning, room status update and maintenance, which in turn reduces the time between check-out and check-in of a hotel room,
increasing hotel room turnover efficiency. This system features an in-house developed, designated mobile application which automatically
assigns cleaning or maintenance staff to a room that requires cleaning or repairs. In addition, our “Easy Invoicing” digital system greatly
simplifies the check-out process for business travelers.
Self-check-in/out kiosks guest terminals. Our user-friendly, patented self-check-in/out kiosks guest terminals, featuring a variety of
advanced automated technologies to replace traditional manual check-in and check-out services.
Digital payment initiatives. We currently offer a variety of convenient digital payment options for our hotel guests, including online credit
card payment, Alipay, WeChat Pay and Apple Pay.
Smart robots. We are one of the first hotel groups in China that have achieved large-scale deployment of smart robots. These smart robots
powered by big data and algorithms, which we co-developed with our partner, can travel the entire hotel to make deliveries of snacks, toiletries
and other hotel amenities, greet guests and lead them to their rooms, improving both the hotel’s operating efficiency and guest experience.
AI assistant. Our intelligent AI assistant, which we co-launched with our partner the first AI assistant for China’s hotel industry based on
intelligent voice recognition technology. Embedded in our mobile apps, our intelligent AI assistant can engage in conversation with hotel
guests and answer their queries, thereby enhancing guest experience.
Smart rooms. A number of other smart features of our hotel rooms also help enhance the quality of guests’ stay. For example, one of our
AI initiatives, “Hello Huazhu,” also enables voice control of room facilities such as lights, TV, air-conditioning and window shades.
Complimentary Wi-Fi. We were one of the first in China to offer complimentary Wi-Fi to all hotel guests in 2013. This initiative has
greatly contributed to the growth of our customer base and has become mainstream in the industry.
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Privacy and Data Security
We place a strong emphasis on data security. We have established an information security committee and an information security and
privacy protection working group consisting of heads of various departments. To further ensure data security, we have also set up a special data
security committee to ensure the security of customer data and prevent data leakage by setting data security guidelines and coordinating data
security planning. We also have a dedicated information security center equipped with personnel specialized in data security, compliance and
risk management. This center is involved in key aspects of our business operations and provides other departments with professional data
security and risk management services.
We strictly comply with Cyber Security Law of the People’s Republic of China, the Data Security Law of the People’s Republic of China,
the Personal Information Protection Law of the People’s Republic of China, and the General Data Protection Regulation (“GDPR”) of the
European Union. We have in place extensive policies, processes, network architecture, and software to protect customer data. Our major
systems, including those regarding property management, customer relationship management, as well as our website and mobile apps, have
passed the Level III information security protection assessment conducted by the China National Accreditation Service for Conformity
Assessment. We have also obtained the ISO27001 information security management certification and the ISO27701 privacy information
management certification. Our payment system has passed the payment card industry (“PCI”) data security standard (“DSS”) requirements and
security assessment procedures assessment. In addition, we collaborate with renowned consulting companies to strengthen the infrastructure of
our information technologies and systems and to ensure compliance with all applicable laws and regulations.
We attach great importance to customer privacy and security, adhere to the requirements of data security, and have implemented relevant
protection measures in all aspects throughout the data life cycle. We strictly comply with relevant laws and regulations, carry out compliance
analyses on our internal App to ensure that the collection, use and processing of personal information are legal and compliant, and adopt the
principle of minimum necessity to only collect customer information with the authorization and consent of customers. All personal information
of guests is classified as the upmost confidential data in our data security system.
We have real-time controls over networks and network services to ensure that users can only access authorized networks and network
services. Employee can only access authorized internal resources and, by default, enjoys only minimal authorities. We conduct at least one
vulnerability scan per year covering all production devices. The information security team implements a 24/7 emergency response strategy,
performs annual data security compliance assessments, and conducts occasional security-related audits to ensure continuous data security
compliance.
We have set up the H World Security Response Center, inviting external security experts to submit online reports outlining security
vulnerabilities in our products and business to help us discover and resolve security issues in a timely manner. We are committed to
safeguarding the security of hundreds of millions of our members and Internet users. In addition, we are committed to building the information
security ecology across the hotel industry. For example, to build an inclusive and win-win ecosystem, we actively hold information security
events, establish information security industry alliances and jointly publish industry white papers.
Sales and Marketing
Our marketing strategy is designed to enhance our brand recognition and customer loyalty. Building and differentiating the brand image of
each of our hotel products is critical to increasing our brand recognition. We focus on targeting the distinct guest segments that each of our
hotel products serves and adopting effective marketing measures based on thorough analysis and application of data and analytics. In 2022,
approximately 87% of our room nights were sold through our own sales channels and the remaining 13% of our room nights through
intermediaries in legacy Huazhu.
We use our RMS and Cloud-PMS systems to conduct pricing management for all of our hotels except for our franchised hotels. We review
our hotel pricing regularly and adjust room rates as needed based on local market conditions and the specific location of each hotel, focusing
mainly on three factors: (i) optimum occupancy rate of the hotel and our other hotels nearby, (ii) seasonal demand for the hotel and (iii) event-
driven demand for the hotel.
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A key component of our marketing efforts is the H Rewards, our loyalty program, which covers all of our brands. We believe the H
Rewards loyalty program allows us to build customer loyalty and conduct lower-cost, targeted marketing campaigns. As of December 31,
2022, our H Rewards had more than 199 million members. In 2022, approximately 76% of our room nights were sold to our H Rewards
members in legacy Huazhu. Members of the H Rewards are provided with discounts on room rates, free breakfasts (for gold and platinum
members), more convenient check-out procedures and other benefits. H Rewards members can also accumulate points through stays in our
hotels or by purchasing products and services provided at our hotels and from Hua Zhu Mall. These points can be used to offset the room
charges in our hotels, buy products in Hua Zhu mall, book transportations and tickets through our platform or be redeemed for various
coupons. The H Rewards includes five levels of membership: star, silver, rose gold, gold and platinum. Rose gold membership is only
available for corporate members of the H Rewards. H Rewards was previously known as HanTing Club and HuaZhu Club.
Our marketing activities also include internet advertising, press and sponsored activities held jointly with our corporate partners and
advertisements on travel and business magazines.
Competition
The hotel industry in China is highly fragmented. A significant majority of the room supply has come from independent hotels, guest
houses and other lodging facilities. In recent years hotel groups emerged and began to consolidate the market by converting independent hotels
into hotel chains. As a multi-brand hotel group we believe that we compete primarily based on location, room rates, brand recognition, quality
of accommodations, geographic coverage, service quality, range of services, guest amenities and convenience of the central reservation system.
We primarily compete with other hotel chains as well as various independent hotels in each of the markets in which we operate, including
Chinese hotel groups such as BTG Homeinns and Jinjiang, as well as international hotel groups such as Marriot, Intercontinental, Accor and
Hilton. We also face competition from Airbnb and service apartments.
Intellectual Property
We regard our trademarks, copyrights, domain names, trade secrets and other intellectual property rights as critical to our business. We
rely on a combination of copyright and trademark law, trade secret protection and confidentiality agreements with our employees, lecturers,
business partners and others, to protect our intellectual property rights.
The trademarks and logos used in our current hotels are under protection of the registered trademarks and logos. As of December 31,
2022, we registered 1,382 trademarks and logos with the China Trademark Office. As of December 31, 2022, we filed 272 trademark
applications pending for examination and review by the PRC trademark office. As of the same date, we also registered 1,210 trademarks and
filed 220 trademark applications outside China. As of December 31, 2022, we received 28 patents; another 5 patents were applied and under
review by relevant PRC authority. We also received copyright registration certificates for 153 software programs developed by us as of
December 31, 2022. In addition, we registered 622 national and international top-level domain names, including www.hworld.com, as of
December 31, 2022. Our intellectual property is subject to risks of theft and other unauthorized use, and our ability to protect our intellectual
property from unauthorized use is limited. In addition, we may be subject to claims that we have infringed the intellectual property rights of
others. See “Item 3. Key Information — D. Risk Factors — Risks Related to Our Business — Failure to protect our tradenames and
trademarks as well as other intellectual property rights could have a negative impact on our brands and adversely affect our business.”
Insurance
We believe that our hotels are covered by adequate property and liability insurance policies with coverage features and insured limits that
we believe are customary for similar companies in China. We also require our franchisees to carry adequate property and liability insurance
policies. We carry property insurance that covers the assets that we own at our hotels. Although we require our franchisees to purchase
customary insurance policies, we cannot guarantee that they will adhere to such requirements. If we were held liable for amounts and claims
exceeding the limits of our insurance coverage or outside the scope of our insurance coverage, our business, results of operations and financial
condition may be materially and adversely affected. See “Item 3. Key Information — D. Risk Factors — Risks Related to Our Business — Our
limited insurance coverage may expose us to losses, which may have a material adverse effect on our reputation, business, financial condition
and results of operations.”
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Legal and Administrative Proceedings
In the ordinary course of our business, we, our directors, management and employees are subject to legal or administrative proceedings.
Although we cannot predict with certainty the ultimate resolution of lawsuits, investigations and claims asserted against us, our directors,
management and employees, we do not believe that any currently pending legal or administrative proceeding to which we, our directors,
management and employees are a party will have a material adverse effect on our business or reputation. See “Item 3. Key Information — D.
Risk Factors — Risks Related to Our Business — We, our directors, management and employees may be subject to certain risks related to
legal proceedings filed by or against us, and adverse results may harm our business.”
As of December 31, 2022, we had several pending legal and administrative proceedings, including lease contract terminations and
disputes and management agreement disputes. As of the same date, we had no accrued contingencies remained.
Corporate Social Responsibility: Environmental Impact
As a global leader and rapidly emerging multi-brand hotel group in China, we are deeply aware of our corporate responsibility and
mission. Not only do we provide customers with comfortable, safe and personalized stay experiences, but we also actively reduce our
environmental footprint by upholding the concept of sustainability development and exploring green operation methods.
We have launched a “modular” construction plan in the design, material selection, and construction process of hotels, which not only
ensures high standards of quality control while effectively reduces construction waste and avoids noise, dust generated during the construction
process. As for hotel operation, we have developed our own online energy consumption management system, “Easy Energy Consumption”, to
conduct systematic analysis on the energy usage data in operation. While providing foundation for energy-saving renovation, “Easy Energy
Consumption”can also give real-time warning of abnormal energy consumption, so that failures of water, electricity and heat systems can be
dealt with in a timely manner, avoiding unnecessary waste of resources. We also prioritize the maintenance of equipment such as air
conditionings and hot water systems, while also upgrading or replacing outdated equipment with eco-friendly alternatives. This two-pronged
approach ensures that we continuously improve our energy-saving and emission-reducing efforts. In addition, most legacy DH hotels are using
green electricity, and over 60 legacy DH hotels have been certified with both ISO14001 Environmental Management System Certification and
ISO50001 Energy Management System Certification.
We also share our environmental protection philosophy with our customers. Our latest launched eco-friendly slippers are made with
internationally recognized environmentally friendly non-woven fabric and EPE pearl cotton, which are both environmentally friendly and
recyclable. Hi Inn Hotel launched a pilot “Green Living Project”, encouraging customers to choose more green and low-carbon
accommodations by reducing or exempting part of their room fee. For Legacy DH hotels, customers can choose Green Conference Services so
as to minimize conference-generated carbon emissions and offset the CO2 footprint of attending conference. We also drive customers to
participate in energy saving activities by reducing the provision of disposables, reminding them to order reasonable amount of food, and
encouraging electronic invoicing.
We have also extended the green development requirements to our suppliers. For instance, we have established a strict examine process
for the entry of laundry suppliers, making specific requirements for equipment’s water and energy-saving capability, laundry chemical types
and the inspection procedure. For suppliers with which we have already built cooperative relationship, we provide technical support for
pollution control and water recycling, helping create a benchmark for green development of the industry.
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COVID-19 Outbreak: Response and Impact
In December 2019, COVID-19 was reported to have surfaced in Wuhan, China, which subsequently spread throughout China. On January
31, 2020, the World Health Organization declared COVID-19 as a Public Health Emergency of International Concern. The travel industry has
been severely affected by the outbreak of COVID-19 since the beginning of 2020 due to the reduced traveler traffic. During the COVID-19
pandemic, government authorities around the world have imposed widespread lockdowns, closure of workplaces and restrictions on mobility
and travel to contain the spread of the virus. These containment measures negatively affected occupancy rates and revenue of our hotels
(including both leased and owned hotels and manachised and franchised hotels). Since the outbreak of COVID-19, we have taken various cost
and cash flow mitigation measures to counter the negative impact of COVID-19 on our results of operations. Despite these efforts, our
business operations and results in 2020, 2021 and 2022 were adversely affected by COVID-19. However, the outbreak also led to increased
demand for quarantine hotels. Due to the impact of COVID-19, we experienced operating losses and closed down certain of our hotels in 2020,
2021 and 2022. For more information, please see “Item 3. Key Information — 3.D. Risk Factors — Risk Related to Our Business — The
COVID-19 outbreak has adversely affected, and may continue to adversely affect, our financial and operating performance” and “Item 5.
Operating and Financial Review and Prospects — 5.B. Liquidity and Capital Resources.”
China has significantly eased its COVID-19 control measures since early December 2022. As a result, the RevPAR for our legacy Huazhu
business in the fourth quarter of 2022 and the first quarter of 2023 recovered to approximately 83% and 118%, respectively, of the 2019 levels.
Legacy DH hotels have experienced continuing RevPAR recovery since March 2022. Legacy DH’s blended RevPAR reached
approximately 110% and 94% of the 2019 levels in the fourth quarter of 2022 and the first quarter of 2023, respectively. Excluding the effects
of the FIFA World Cup and the COP27 UN Climate Conference, the RevPAR in the fourth quarter of 2022 recovered to 100% of the 2019
level. RevPAR recovery continued to be driven by average daily room rates increases, while occupancy levels still remained behind the levels
achieved in 2019. The reduction of energy-related risks has eased energy price increases in Europe. However, inflation continues to adversely
impact our operating costs in Europe. We will bridge the rising cost through further rate increases as well as an ongoing focus on cost
reduction, process optimization and stringent cash management.
Regulation
The hotel industry in China is subject to a number of laws and regulations, including laws and regulations relating specifically to hotel
operation, management and commercial franchising, and travel agency business, as well as those relating to environmental and consumer
protection. The principal regulations governing foreign ownership of hotel businesses in the PRC are the Special Administrative Measures
(Negative List) for the Access of Foreign Investment (Edition 2021) issued on December 27, 2021, which became effective on January 1, 2022,
and the Industry Guidelines on Encouraged Foreign Investment (Edition 2020) issued on December 27, 2020, which became effective as of
January 27, 2021, both of which were promulgated by the PRC Ministry of Commerce, or the MOC, and the NDRC as well as other negative
lists (generally with fewer limitations) applicable to the free trade zones. Pursuant to these regulations, there are no restrictions on foreign
investment in limited service hotel businesses in China aside from business licenses and other permits that every hotel must obtain. Similar
with other industries in China, regulations governing the hotel industry in China are still developing and evolving. As a result, most legislative
actions consist of general measures such as industry standards, rules or circulars issued by different ministries rather than detailed legislations.
This section summarizes the principal PRC regulations currently relevant to our business and operations.
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Regulations on Hotel Operation
The Ministry of Public Security issued the Measures for the Control of Security in the Hotel Industry in November 1987 and amended it in
2011, 2020 and 2022, respectively, and the State Council promulgated the Decision of the State Council on Establishing Administrative
License for Necessarily Retained Items Requiring Administrative Examination and Approval in June 2004 and amended it in January 2009 and
August 2016, respectively. Under these two regulations, anyone who applies to operate a hotel is subject to examination and approval by the
local public security authority and must obtain a special industry license. The Measures for the Control of Security in the Hotel Industry
impose certain security control obligations on the operators. For example, the hotel must examine the identification card of any guest to whom
accommodation is provided and make an accurate registration. The hotel must also report to the local public security authority if it discovers
anyone violating the law or behaving suspiciously or an offender wanted by the public security authority. Pursuant to the Measures for the
Control of Security in the Hotel Industry, hotels failing to obtain the special industry license may be subject to warnings or fines of up to
RMB200. In addition, pursuant to the Law of the PRC on Penalties for the Violation of Public Security Administration promulgated in August,
2005 and amended in October 2012, and various local regulations, hotels failing to obtain the special industry license may be subject to
warnings, orders to suspend or cease continuing business operations, confiscations of illegal gains or fines. Operators of hotel businesses who
have obtained the special industry license but violate applicable administrative regulations may also be subject to revocation of such licenses in
serious circumstances.
The State Council promulgated the Administrative Regulations on Sanitation of Public Places in April 1987 and amended it in February
2016 and in April 2019, according to which, a hotel must obtain a public area hygiene license before opening for business. Pursuant to this
regulation, hotels failing to obtain a public area hygiene license may be subject to the following administrative penalties depending on the
seriousness of their respective activities: (i) warnings; (ii) fines; or (iii) orders to suspend or cease continuing business operations. In March
2011, the Ministry of Health promulgated the Implementation Rules of the Administrative Regulations on Sanitation of Public Places, which
was amended in January 2016 and December 2017, according to which, starting from May 1, 2011, hotel operators shall establish sanitation
management system and keep records of sanitation management. The Standing Committee of the National People’s Congress, or the SCNPC
enacted the Food Safety Law of the PRC in February 2009, which was most recently amended in April 2021, according to which any hotel that
provides food must obtain a license. The State Administration for Market Regulation, or the SAMR, (previously known as “China Food and
Drug Administration”) enacted the Administrative Measures on Administration of Food Business Licensing in August 2015 and amended it in
November 2017, according to which any entity involving sales of food or food services must obtain a food business license, and any food
service license which had been obtained prior to October 1, 2015 will be replaced upon expiry by the food business license. Pursuant to the
Food Safety Law of the PRC, hotels failing to obtain the food business license (or formerly the food service license) may be subject to: (i)
confiscation of illegal gains, food illegally produced for sale, and tools, facilities and raw materials used for illegal production; or (ii) fines
between RMB50,000 and RMB100,000 if the value of food illegally produced is less than RMB10,000, or fines equal to 10 to 20 times of the
value of food if such value is equal to or more than RMB10,000.
The Fire Prevention Law of the PRC, promulgated in April 1998 and amended in October 2008, April 2019 and April 2021 by the
SCNPC, and the Provisions on Supervision and Inspection on Fire Prevention and Control, promulgated on April 30, 2009 and effective as of
May 1, 2009 and amended on July 17, 2012 by the Ministry of Public Security, together with the Interim Provisions on the Administration of
Fire Protection Design Review and Final Inspection of Construction Projects, promulgated by the Ministry of Housing and Urban-Rural
Development on April 1, 2020 and effective as of June 1, 2020, require that (i) the fire prevention design documents of special construction
projects, such as hotels with overall floor area of more than 10,000 square meters, shall be reviewed and inspected by local housing and urban-
rural construction authorities before construction; (ii) the construction of specific construction projects, such as hotels with overall floor area of
more than 10,000 square meters be inspected and accepted by local housing and urban-rural construction authorities from a fire prevention
perspective before completion; and (iii) the public gathering places, such as hotels, shall complete fire prevention safety inspection with the
local fire and rescue department, which is a prerequisite for business opening. Pursuant to these regulations, related hotels failing to obtain
approval of fire prevention inspection and acceptance or failing fire prevention safety inspections (including acceptance check and safety
check on fire prevention) may be subject to: (i) orders to suspend the construction of projects, use or operation of business; and (ii) fines
between RMB30,000 and RMB300,000.
In January 2006, the State Council promulgated the Regulations for Administration of Entertainment Places, which was amended in
February 2016 and November 2020. The Ministry of Culture issued the Administrative Measures for Entertainment Places in February 2013
and amended it in December 2017 and May 2022. Under these regulations, hotels that provide entertainment facilities, such as discos or
ballrooms, are required to obtain a license for entertainment business operations.
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On October 18, 2010, the General Administration of Quality Supervision, Inspection and Quarantine and Standardization Administration
approved and issued Classification and Accreditation for Star-rated Tourist Hotels (GB/T14308-2010), which became effective on January 1,
2011. On November 19, 2010, the National Tourist Administration promulgated the Implementation Measures of Classification and
Accreditation for Star-rated Tourist Hotels, which became effective on January 1, 2011. Under these regulations, all hotels with operations of
over one year are eligible to apply for a star rating assessment. There are five ratings from one star to five stars for tourist hotels, assessed
based on the level of facilities, management standards and quality of service. A star rating, once granted, is valid for three years.
On September 21, 2012, the Ministry of Commerce promulgated the Provisional Administrative Measures for Single-purpose Commercial
Prepaid Cards, which was amended on August 18, 2016. Pursuant to this regulation, if an enterprise engaged in retail, accommodation and
catering, or residential services issues any single-purpose commercial prepaid card to its customers, it shall undergo a record-filing procedure.
For a hotel primarily engaged in the business of accommodation, the aggregate balance of the advance payment under the single-purpose
commercial prepaid cards it issued shall not exceed 40% of its income from its primary business in the previous financial year.
On April 25, 2013, the Standing Committee of the National People’s Congress issued the Tourism Law of the PRC, which became
effective on October 1, 2013 and was most recently amended on October 26, 2018. According to this law, the accommodation operators shall
fulfill their obligations under the agreements with customers. If the accommodation operators subcontract part of their services to any third
party or involve any third party to provide services to customers, the accommodation operators shall assume the joint and several liabilities
with the third parties for any damage caused to the customers.
Regulations on Travel Agency Business
Generally, the travel agency business is subject to the Regulations on Travel Agencies promulgated by the State Council on February 20,
2009 and last amended on November 29, 2020, which prohibits foreign-invested travel agencies from providing travel services to Chinese
mainland residents for their travels to foreign countries, and to Hong Kong Special Administrative Region, Macao Special Administrative
Region and Taiwan region. However, on September 21, 2022, the State Council issued a Reply of the State Council on Temporary Adjustments
to the Implementation of Relevant Administrative Regulations in Tianjin, Shanghai, Hainan and Chongqing, which temporarily allows foreign-
invested travel agencies incorporated in Shanghai and Chongqing to serve Chinese mainland residents for their travels abroad (including
travels to Hong Kong and Macau, but excluding travels to Taiwan).
Regulations on Leasing
Under the Law of the PRC on Administration of Urban Real Estate promulgated by the SCNPC, which took effect as of January 1995 and
was amended in August 2007, August 2009 and August 2019, respectively, and the Administrative Measures on Leasing of Commodity House
promulgated by the Ministry of Housing and Urban-rural Construction, which took effect as of February 1, 2011, when leasing premises, the
lessor and lessee are required to enter into a written lease contract, prescribing such provisions as the leasing term, use of the premises, rental
and repair liabilities, and other rights and obligations of both parties. Both lessor and lessee are also required to go through registration
procedures to record the lease with the real estate administration department. Pursuant to these laws and regulations and various local
regulations, if the lessor and lessee fail to go through the registration procedures, both lessor and lessee may be subject to fines, and the leasing
interest will be subordinated to an interested third party acting in good faith.
In May 2020, the National People’s Congress, the China legislature, passed the Civil Code of the PRC, or the Civil Code, which took
effect on January 1, 2021. According to Chapter 14, Book 3 of the Civil Code, which governs lease agreements, subject to consent of the
lessor, the lessee may sublease the leased item to a third party. Where the lessee subleases the lease item, the leasing contract between the
lessee and the lessor remains valid. The lessor is entitled to terminate the contract if the lessee subleases the lease item without the consent of
the lessor.
Pursuant to Chapter 17, Book 2 of the Civil Code, which where a mortgagor leases the mortgaged property and the possession thereof has
been transferred before the creation of mortgage interest, the previously established leasing relation shall not be affected; and where a
mortgagor leases the mortgaged property after the creation of the mortgage interest, the leasing interest will be subordinated to the registered
mortgage interest.
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Regulations on Consumer Protection
In October 1993, the SCNPC promulgated the Law of the PRC on the Protection of the Rights and Interests of Consumers, or the
Consumer Protection Law, which became effective on January 1, 1994 and was amended in October 2013. Under the Consumer Protection
Law, a business operator providing a commodity or service to a consumer is subject to a number of requirements, including the following:
● to ensure that commodities and services meet with certain safety requirements;
● to protect the safety of consumers;
● to disclose serious defects of a commodity or a service and to adopt preventive measures against damage occurrence;
● to provide consumers with accurate information and to refrain from conducting false advertising;
● to obtain consents of consumers and to disclose the rules for the collection and/or use of information when collecting data or
information from consumers; to take technical measures and other necessary measures to protect the personal information collected
from consumers; not to divulge, sell, or illegally provide consumers’ information to others; not to send commercial information to
consumers without the consent or request of consumers or with a clear refusal from consumers;
● not to set unreasonable or unfair terms for consumers or alleviate or release itself from civil liability for harming the legal rights and
interests of consumers by means of standard contracts, circulars, announcements, shop notices or other means;
● to remind consumers in a conspicuous manner to pay attention to the quality, quantity and prices or fees of commodities or services,
duration and manner of performance, safety precautions and risk warnings, after-sales service, civil liability and other terms and
conditions vital to the interests of consumers under a standard form of agreement prepared by the business operators, and to provide
explanations as required by consumers; and
● not to insult or slander consumers or to search the person of, or articles carried by, a consumer or to infringe upon the personal
freedom of a consumer.
Business operators may be subject to civil liabilities for failing to fulfill the obligations listed above. These liabilities include restoring the
consumer’s reputation, eliminating the adverse effects suffered by the consumer, and offering an apology and compensation for any losses
incurred. The following penalties may also be imposed upon business operators for the infraction of these obligations: issuance of a warning,
confiscation of any illegal income, imposition of a fine, an order to cease business operation, revocation of its business license or imposition of
criminal liabilities under circumstances that are specified in laws and statutory regulations. Art. 1198 of the Civil Code further increases the
liabilities of business operators engaged in the operation of hotels, restaurants, or entertainment facilities and subjects such operators to tort
liabilities for failing to guarantee the personal safety of others.
Regulations on Environmental Protection
In February 2012, the SCNPC issued the newly amended Law of the PRC on Promoting Clean Production, which regulates service
enterprises such as restaurants, entertainment establishments and hotels and requires them to use technologies and equipment that conserve
energy and water, serve other environmental protection purposes, and reduce or stop the use of consumer goods that waste resources or pollute
the environment.
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According to the Environmental Protection Law of the PRC promulgated by the SCNPC on December 26, 1989 and last amended on April
24, 2014, the Environmental Impact Assessment Law of the PRC promulgated by the SCNPC on October 28, 2002 and last amended on
December 29, 2018, the Administrative Regulations on Environmental Protection for Construction Projects promulgated by the State Council
on November 29, 1998 and amended on July 16, 2017, the Interim Measures on Acceptance of Environmental Protection for Completion of
Construction Projects promulgated by the Ministry of Environmental Protection (renamed as the Ministry of Ecology and Environment) on
November 20, 2017 and effective as of the same date and the Category-Based Management Directory on the Environmental Impact
Assessment for Construction Projects (Edition 2021) issued by the Ministry of Ecology and Environment, hotels which involve Environment
Sensitive Areas should submit a Form on Environmental Impact Assessment to competent environmental protection authorities for approvals,
and shall prepare and make public an Acceptance Inspection Report of the Environmental Protection Facilities before commencing the
operation. Such Environment Sensitive Areas are defined by the Category-Based Management Directory on the Environmental Impact
Assessment for Construction Projects (Edition 2021), which was issued by the Ministry of Ecology and Environment. Pursuant to the
Environmental Impact Assessment Law, any hotel failing to obtain the approval of the Form of Environmental Impact Assessment may be
ordered to cease construction and restore the property to its original state, and according to the violation activities committed and the harmful
consequences thereof, be subject to fines of no less than 1% but no more than 5% of the total investment amount for the construction project of
such hotel. The person directly responsible for the project may be subject to certain administrative penalties. Pursuant to the Administrative
Regulations on Environmental Protection for Construction Projects, where the construction project is put into production or use when the
environmental protection facilities have not undergone acceptance inspection or do not pass acceptance inspection, the responsible hotels may
be ordered to make correction within a stipulated period and subject to a fine ranging from RMB200,000 to RMB1 million; where correction is
not made within the stipulated period, a fine ranging from RMB1 million to RMB2 million will be imposed. The directly responsible person
may be subject to a fine ranging from RMB50,000 to RMB200,000. If the construction project causes any significant environmental pollution
or ecological damage, the production or use should be suspended, or the project should be closed down upon approval by the relevant local
regulators. Furthermore, any hotel failing to public the Acceptance Inspection Report may be ordered to publicize the Report, and may be
subject to a fine ranging from RMB50,000 to RMB200,000. The relevant breach may also be announced by local environmental protection
authorities.
Regulations on Commercial Franchising
Franchise operations are subject to the supervision and administration of the MOC, and its regional counterparts. Such activities are
currently regulated by the Administrative Regulations on Commercial Franchising, which was promulgated by the State Council on February
6, 2007 and became effective on May 1, 2007. The Administrative Regulations on Commercial Franchising were subsequently supplemented
by the Administrative Measures on Filing of Commercial Franchises, which was newly amended and promulgated by the MOC on December
12, 2011 and became effective on February 1, 2012, and the newly amended Administrative Measures on Information Disclosure of
Commercial Franchises, which was promulgated by the MOC on February 23, 2012 and became effective on April 1, 2012.
Under the above applicable regulations, a franchisor must have certain prerequisites including a mature business model, the capability to
provide long-term business guidance and training services to franchisees and ownership of at least two self-operated storefronts that have been
in operation for at least one year. Franchisors engaged in franchising activities without satisfying the above requirements may be subject to
penalties such as forfeit of illegal income and imposition of fines between RMB100,000 and RMB500,000 and may be bulletined by the MOC
or its local counterparts. Franchise contracts shall include certain required provisions, such as terms, termination rights and payments.
Franchisors are generally required to file franchise contracts with the MOC or its local counterparts. Failure to report franchising activities
may result in penalties such as fines up to RMB100,000. Such noncompliance may also be bulletined. In the first quarter of every year,
franchisors are required to report to the MOC or its local counterparts any franchise contracts they executed, canceled, renewed or amended in
the previous year.
The term of a franchise contract shall be no less than three years unless otherwise agreed by franchisees. The franchisee is entitled to
terminate the franchise contract in his sole discretion within a set period of time upon signing of the franchise contract.
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Pursuant to the Administrative Measures on Information Disclosure of Commercial Franchises, 30 days prior to the execution of franchise
contracts, franchisors are required to provide franchisees with copies of the franchise contracts, as well as written true and accurate basic
information on matters including:
● the name, domiciles, legal representative, registered capital, scope of business and basic information relating to its commercial
franchising;
● basic information relating to the registered trademark, logo, patent, know-how and business model;
● the type, amount and method of payment of franchise fees (including payment of deposit and the conditions and method of refund of
deposit);
● the price and conditions for the franchisor to provide goods, service and equipment to the franchisee;
● the detailed plan, provision and implementation plan of consistent services including operational guidance, technical support and
business training provided to the franchisee;
● detailed measures for guiding and supervising the operation of the franchisor;
● investment budget for all franchised hotels of the franchisee;
● the current numbers, territory and operation evaluation of the franchisees within China;
● a summary of accounting statements audited by an accounting firm and a summary of audit reports for the previous two years;
● information on any lawsuit in which the franchisor has been involved in the previous five years;
● basic information regarding whether the franchisor and its legal representative have any record of material violation; and
● other information required to be disclosed by the MOC.
In the event of failure to disclose or misrepresentation, the franchisee may terminate the franchise contract and the franchisor may be fined
up to RMB100,000. In addition, such noncompliance may be bulletined.
According to the Manual of Guidance on Administration for Foreign Investment Access (Edition 2008) promulgated by the MOC in
December 2008, if an existing foreign-invested company wishes to operate a franchise in China, it must apply to the MOC or its local
counterparts to expand its business scope to include “engaging in commercial activities by way of franchise.”
Regulations on Trademarks
Both the Trademark Law of the PRC adopted by the SCNPC on August 23, 1982 and revised on August 30, 2013 and April 23, 2019, and
the Implementation Regulation of the Trademark Law of the PRC adopted by the State Council on August 3, 2002 and revised on April 29,
2014 give protection to the holders of registered trademarks and trade names. The China National Intellectual Property Administration
(Trademark Office) handles trademark registrations. Trademarks can be registered for a term of ten years and can be extended for another ten
years if requested upon expiration of any ten-year term. Trademark licensing agreements should be submitted to the Trademark Office for
record. Without the filing, the trademark licensing should not be used against a bona fide third party.
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Regulations on Foreign Currency Exchange
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Control Regulations of the PRC
promulgated by the State Council, as amended on August 5, 2008, or the Foreign Exchange Regulations. Under the Foreign Exchange
Regulations, the RMB is freely convertible for current account items, including the distribution of dividends, interest payments, trade and
service-related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments
and investments in securities outside of China, unless the prior approval of the State Administration of Foreign Exchange, or the SAFE, is
obtained and prior registration with the SAFE is made.
The Circular on Reforming the Management Method regarding the Settlement of Foreign Exchange Capital of Foreign-invested
Enterprises (“Circular 19”), promulgated by the SAFE on March 30, 2015 and last amended on December 30, 2019, allows foreign-invested
enterprises to make equity investments by using RMB funds converted from foreign exchange capital. Under Circular 19, the foreign exchange
capital in the capital account of foreign-invested enterprises upon the confirmation of rights and interests of monetary contribution by the local
foreign exchange bureau (or the book-entry registration of monetary contribution by the banks) can be settled at the banks based on the actual
operation needs of the enterprises. The proportion of willingness-based foreign exchange settlement of capital for foreign-invested enterprises
is temporarily set at 100%. The SAFE can adjust such proportion in due time based on the circumstances of the international balance of
payments. However, Circular 19 and the Circular on Reforming and Regulating the Management Policies on the Settlement of Capital
Projects, promulgated by the SAFE on and effective as of June 9, 2016, continues to prohibit foreign-invested enterprises from, among other
things, using RMB fund converted from its foreign exchange capitals for expenditure beyond its business scope, investment and financing in
securities and other investments except for bank’s principal-secured products, providing loans to non-affiliated enterprises or constructing or
purchasing real estate not for self-use.
On October 23, 2019, the SAFE promulgated the Circular on Further Promoting the Facilitation of Cross-border Trade and Investment
(“Circular 28”). Pursuant to Circular 28, on the basis of allowing investment-oriented foreign-invested enterprise (including foreign-invested
investment companies, foreign-invested venture capital enterprises and foreign-invested equity investment enterprises) to use capital funds for
domestic equity investment in accordance with laws and regulations, non-investment foreign-invested enterprises shall be allowed to use
capital funds for domestic equity investment in accordance with the laws under the premise of not violating the Negative List and the
authenticity and compliance of their domestic invested projects.
According to the Circular on Optimizing Administration of Foreign Exchange to Support the Development of Foreign-related Business
issued by the SAFE on April 10, 2020, eligible enterprises are allowed to make domestic payments by using their capital funds, foreign credits
and the income under capital accounts of overseas listing, with no need to provide the evidentiary materials concerning authenticity of such
capital for banks in advance, provided that their capital use shall be authentic and in line with provisions, and conform to the prevailing
administrative regulations on the use of income under capital accounts. The concerned bank shall conduct spot checking in accordance with the
relevant requirements.
On December 25, 2006, the People’s Bank of China issued the Administration Measures on Individual Foreign Exchange Control and its
Implementation Rules were issued by the SAFE on January 5, 2007, both of which became effective on February 1, 2007. The Implementation
Rules was later amended on May 29, 2016. Under these regulations, all foreign exchange matters involved in the employee stock ownership
plan, stock option plan and other similar plans, participated by onshore individuals shall be transacted upon approval from the SAFE or its
authorized branch. On February 25, 2012, the SAFE promulgated the Notice on Relevant Issues Concerning Foreign Exchange Control on
Domestic Individuals Participating in the Stock Incentive Plan of An Overseas Listed Company, or Circular 7, to replace the Operating
Procedures for Administration of Domestic Individuals Participating in the Employee Stock Option Plan or Stock Option Plan of An Overseas
Listed Company. Under Circular 7, the board members, supervisors, officers or other employees, including PRC citizens and foreigners having
lived within the territory of the PRC successively for at least one year of a PRC entity, who participate in stock incentive plans or equity
compensation plans by an overseas publicly listed company, or the PRC participants, are required, through a PRC agent or PRC subsidiaries of
such overseas publicly-listed company, to complete certain foreign exchange registration procedures with respect to the plans upon the
examination by, and approval of, the SAFE. We and our PRC participants who have been granted stock options are subject to Circular 7. If our
PRC participants who hold such options or our PRC subsidiary fail to comply with these regulations, such participants and their PRC employer
may be subject to fines and legal sanctions.
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Regulations on Foreign Investment
The SCNPC enacted the Foreign Investment Law of the PRC on March 15, 2019 and the State Council promulgated the Implementation
Regulations of Foreign Investment Law of the PRC on December 26, 2019, both of which came into force on January 1, 2020. On December
30, 2019, the MOC and the SAMR jointly promulgated the Measures on Reporting of Foreign Investment Information, which also became
effective on January 1, 2020. Under these laws and regulations, foreign investors or foreign-invested enterprises shall report and update
investment information to the competent authorities for commerce through the Enterprise Registration System and the Enterprise Credit
Information Publicity System. Any foreign investor or foreign-invested company found to be non-compliant with these reporting obligations
may potentially be subject to fines and legal sanctions.
The Foreign Investment Law of the PRC, together with its Implementation Regulations replaced, in their entirety, the trio of previous laws
regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint
Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations.
Generally speaking, the Company Law of the PRC or the Partnership Law of the PRC (promulgated by the SCNPC in February 1997 and
amended in August 2006) shall apply with respect to the organization of foreign-invested enterprises. The Foreign Investment Law of the PRC
provides that foreign invested enterprises established according to the previous laws regulating foreign investment may maintain their current
structure and corporate governance during the five-year transition period. This implies that we may be required to adjust the structure and
corporate governance of certain of our PRC subsidiaries in the transition period. Failure to take timely and appropriate measures to cope with
any of these or similar regulatory compliance requirements may lead to regulatory incompliance and hence materially and adversely affect our
current corporate structure, corporate governance and business operations.
Regulations on Share Capital
In October 2005, the SCNPC issued the amended Company Law of the PRC, which became effective on January 1, 2006 and was
amended in October 2018. On June 17, 2014, the MOC issued the Notice of the Ministry of Commerce on Improving the Administration of
Foreign Investment Review. Pursuant to the above regulations, shareholders of a foreign-invested company are obligated to make full and
timely contribution to the registered capital of the foreign-invested company in accordance with the company’s articles of association pursuant
to which the restrictions or requirements on the percentage of initial capital contribution, the percentage of cash contribution and the period of
contribution imposed on foreign-invested companies (including companies invested by investors from Taiwan, Hong Kong and Macao
regions) are abolished. A company which proposes to reduce its registered capital shall prepare a balance sheet and a list of assets. The
company shall notify its creditors within ten days from the date of resolution on reduction of registered capital and publish an announcement in
the newspapers within 30 days. The creditors may, within 30 days from receipt of the notice or within 45 days from the announcement date,
require the company to settle the debts or provide a corresponding guarantee. Shareholders of certain of our PRC subsidiaries have mandatory
preemptive rights.
Regulations on Dividend Distribution
The principal regulations governing distribution of dividends of foreign-invested enterprises include the Company Law of the PRC (the
“Company Law”).
Under the Company Law, companies shall contribute 10% of the profits into their statutory surplus reserve upon distribution of their post-
tax profits of the current year. A company may discontinue the contribution when the aggregate sum of the statutory surplus reserve is more
than 50% of its registered capital.
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Regulations on Offshore Financing
On October 21, 2005, the SAFE issued Notice on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’
Corporate Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or Circular 75, which became effective as of
November 1, 2005. Under Circular 75, if PRC residents use assets or equity interests in their PRC entities as capital contributions to establish
offshore companies or inject assets or equity interests of their PRC entities into offshore companies to raise capital overseas, they are required
to register with local SAFE branches with respect to their overseas investments in offshore companies. PRC residents are also required to file
amendments to their registrations if their offshore companies experience material events involving capital variation, such as changes in share
capital, share transfers, mergers and acquisitions, spin-off transactions, long-term equity or debt investments or uses of assets in China to
guarantee offshore obligations. Moreover, Circular 75 applies retroactively. As a result, PRC residents who have established or acquired
control of offshore companies that have made onshore investments in the PRC in the past were required to complete the relevant registration
procedures with the local SAFE branch by March 31, 2006. Under the relevant rules, failure to comply with the registration procedures set
forth in Circular 75 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including the
increase of its registered capital, the payment of dividends and other distributions to its offshore parent or affiliate and the capital inflow from
the offshore entity, and may also subject relevant PRC residents to penalties under PRC foreign exchange administration regulations. PRC
residents who control our company are required to register periodically with the SAFE in connection with their investments in us.
The SAFE issued a series of guidelines to its local branches with respect to the operational process for SAFE registration, including the
Notice of the State Administration of Foreign Exchange on Further Improving and Adjusting Foreign Exchange Administration Policies for
Direct Investment, or Circular 59, which came into effect as of December 17, 2012. The guidelines standardized more specific and stringent
supervision on the registration required by Circular 75. For example, the guidelines impose obligations on onshore subsidiaries of an offshore
entity to make true and accurate statements to the local SAFE authorities in case any shareholder or beneficial owner of the offshore entity is a
PRC citizen or resident. Untrue statements by the onshore subsidiaries will lead to potential liability for the subsidiaries, and in some instances,
for their legal representatives and other individuals.
On July 4, 2014, the SAFE issued the Circular of the State Administration of Foreign Exchange on Relevant Issues concerning Foreign
Exchange Administration of the Overseas Investment and Financing and Round-trip Investments by Domestic Residents through Special
Purpose Vehicles, or Circular 37, which became effective and suspended Circular 75 on the same date, and Circular 37 shall prevail over any
other inconsistency between itself and relevant regulations promulgated previously. Pursuant to Circular 37, any PRC residents, including both
PRC institutions and individual residents, are required to register with the local branch of the SAFE before making a contribution to an
enterprise directly established or indirectly controlled by the PRC residents outside of the PRC for the purpose of overseas investment or
financing with their legally owned domestic or offshore assets or equity interests, referred to in this circular as a “special purpose vehicle”.
Under Circular 37, the term “PRC institutions” refers to entities with legal person status or other economic organizations established within the
territory of the PRC. The term “PRC individual residents” includes all PRC citizens (also including PRC citizens abroad) and foreigners who
habitually reside in the PRC for economic benefit. A registered special purpose vehicle is required to amend its SAFE registration or file with
respect to such vehicle in connection with any change of basic information including PRC individual resident shareholder, name, term of
operation, or PRC individual resident’s increase or decrease of capital, transfer or exchange of shares, merger, division or other material
changes. In addition, if a non-listed special purpose vehicle grants any equity incentives to directors, supervisors or employees of domestic
companies under its direct or indirect control, the relevant PRC individual residents could register with the local branch of the SAFE before
exercising such options. The SAFE simultaneously issued guidance to its local branches with respect to the implementation of Circular 37.
Under Circular 37, failure to comply with the foreign exchange registration procedures may result in restrictions being imposed on the foreign
exchange activities of the relevant onshore company, including restrictions on the payment of dividends and other distributions to its offshore
parent company and the capital inflow from the offshore entity, and may also subject the relevant PRC residents and onshore company to
penalties under the PRC foreign exchange administration regulations. See “Risk Factors—Risks Related to Doing Business in China—PRC
regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to
personal liability and limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us,
or otherwise adversely affect us.”
On September 14, 2015, the NDRC issued the Circular of the National Development and Reform Commission on Promoting the
Administrative Reform of the Record-filing and Registration System for the Issuance of Foreign Debts by Enterprises to remove the quota
review and approval system for the issuance of foreign debts (including bonds and loans for more than 1 year) by enterprises, reform and
innovate the ways that foreign debts are managed, and implement the administration of record-filing and the registration system.
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On January 5, 2023, the NDRC issued the Administrative Measures for Examination and Registration of Medium- and Long-term Foreign
Debts of Enterprises, which took effect on February 10, 2023, replacing the above Circular of the National Development and Reform
Commission on Promoting the Administrative Reform of the Record-filing and Registration System for the Issuance of Foreign Debts by
Enterprises. The new Administrative Measures provide more clarity on the procedures and requirements of the registration and reporting of
medium- and long-term foreign debts.
Regulations on Merger and Acquisition and Overseas Listing
On August 8, 2006, six PRC regulatory agencies, namely the MOC, the State Assets Supervision and Administration Commission, the
State Administration of Taxation, the SAIC, the China Securities Regulatory Commission, or the CSRC, and the SAFE, jointly adopted the
Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rule, also known as Circular 10,
which became effective on September 8, 2006. This New M&A Rule, as amended on June 22, 2009, purports, among other things, to require
offshore special purpose vehicles, or SPVs, formed for overseas listing purposes through acquisitions of PRC domestic companies and
controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock
exchange. On September 21, 2006, the CSRC published a notice on its official website specifying documents and materials required to be
submitted to it by SPVs seeking the CSRC approval of their overseas listings.
While the application of this new regulation remains unclear, we believe, based on the advice of our PRC counsel, that the CSRC approval
is not required in the context of our Listing because we established our PRC subsidiaries by means of direct investment other than by merger
or acquisition of domestic companies, and we started to operate our business in the PRC through foreign invested enterprises before September
8, 2006, the effective date of the New M&A Rule. However, we cannot assure you that the relevant PRC regulators, including the CSRC,
would reach the same conclusion as our PRC counsel. If the CSRC or other PRC regulatory body subsequently determines that CSRC’s
approval was required for our Listing, we may face sanctions by the CSRC or other PRC regulatory agencies, which could have a material
adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading prices of our ADSs
and/or ordinary shares.
The New M&A Rule also established additional procedures and requirements that could make merger and acquisition activities by foreign
investors more time-consuming and complex, including requirements in some instances that the MOC be notified in advance of any change of
control transaction in which a foreign investor takes control of a PRC domestic enterprise.
On July 30, 2017, for the purpose of promoting the reform of the foreign investment administrative system and simplifying the
administrative procedures, the MOC amended the Interim Measures for the Record-filing Administration of the Incorporation and Change of
Foreign-invested Enterprises which was promulgated in October 2016 and further amended in June 2018. According to the amended interim
measures, a record-filing administration system shall apply to foreign investors’ mergers and acquisitions of domestic non-foreign-invested
enterprises and strategic investments in listed companies, provided that they do not involve the implementation of special access administrative
measures prescribed by the PRC regulators or involve the mergers and acquisitions of affiliates.
On December 30, 2019, for the purpose of further promoting the foreign investment administration and simplifying the administrative
procedures, the MOC and the SAMR promulgated the Measures on Reporting of Foreign Investment Information, which became effective on
January 1, 2020 and suspended the Interim Measures for the Record-filing Administration of the Incorporation and Change of Foreign-
invested Enterprises on the same date. Under this regulation, an information reporting system shall apply to foreign investors’ mergers and
acquisitions of domestic non-foreign-invested enterprises and strategic investments in listed companies, provided that they comply with the
implementation of special access administrative measures prescribed by the PRC regulators and do not involve the mergers and acquisitions of
affiliates. Specifically, under the information reporting system, where a new foreign-invested enterprise is incorporated or a non-foreign
invested enterprise changes to a foreign-invested enterprise through acquisition, merger or other means, such incorporation or change no
longer requires approval or record-filing of MOC, but shall be reported online to the commerce administrative authorities through the
Enterprise Registration System and the National Enterprise Credit Information Publicity System, together with the registration with the
relevant department of the SAMR through the same systems.
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Regulation on Security Review
In August 2011, the MOC promulgated the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors, or the MOC Security Review Rule, which came into effect on September 1, 2011,
to implement the Notice of the General Office of the State Council on Establishing the Security Review System for Mergers and Acquisitions of
Domestic Enterprises by Foreign Investors promulgated on February 3, 2011. Under these regulations, a security review is required for foreign
investors’ mergers and acquisitions having “national defense and security” implications and mergers and acquisitions by which foreign
investors may acquire “de facto control” of domestic enterprises having “national security” implications. In addition, when deciding whether a
specific merger or acquisition of a domestic enterprise by foreign investors is subject to a security review, the MOC will look into the
substance and actual impact of the transaction. The MOC Security Review Rule further prohibits foreign investors from bypassing the security
review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual
arrangements or offshore transactions. Based on the above regulations, on December 19, 2020, the NDRC and MOC jointly issued the
Measures for the Security Review of Foreign Investments, which became effective as of January 18, 2021. The Measures for the Security
Review of Foreign Investments establishes a comprehensive security review system of foreign investments, which, among others, expands the
review subjects to various types of foreign investments that affect or may affect national security, including greenfield investments and
investments in other forms. Similar to the previous regulations, the foreign investments subject to security review include investments having
“national defense security” implications and investments by which foreign investors may acquire “de facto control” of invested enterprises
having “national security” implications.
Regulations on Labor Contracts and Social Security
The Labor Law of the PRC, which was promulgated by the SCNPC on July 5, 1994, came into effect on January 1, 1995, and was
amended on August 27, 2009 and December 29, 2018, the Labor Contract Law of the PRC that became effective on January 1, 2008, as
amended on December 28, 2012, and the Implementation Regulations on Labor Contract Law of the PRC which was promulgated and came
into effect on September 18, 2008 by the State Council seek to clarify the responsibilities of both employers and employees and codifies
certain basic rights and protections of employees. Among others, the Labor Contract Law of the PRC provides that after completing two fixed-
term employment contracts, an employee that desires to continue working for an employer is entitled to require a non-fixed-term employment
contract. In addition, employees who have been employed for more than ten years by the same employer are entitled to require a non-fixed-
term contract. The Labor Contract Law of the PRC also requires that the employees dispatched from human resources outsourcing firms or
labor agencies be limited to temporary, auxiliary or substitute positions. Furthermore, an employer may be held jointly liable for any damages
to its dispatched employees caused by its human resources outsourcing firm or labor agency if it hired such employees through these entities.
According to the Interim Provisions on Labor Dispatch, which was promulgated in January 2014 and took effect in March 2014, to implement
the provisions of the Labor Contract Law of the PRC regarding labor dispatch, a company is permitted to use dispatched employees for up to
10% of its labor force and the companies currently using dispatched employees are given a two-year grace period after March 1, 2014 to
comply with this limit.
According to the Individual Income Tax Law of the PRC, which was promulgated on September 10, 1980 by the National People’s
Congress, last amended by the SCNPC on August 31, 2018 and came into effect on January 1, 2019, companies operating in China are
required to withhold individual income tax on employees’ salaries based on the actual salary of each employee upon payment.
According to the Law on Social Insurance of the PRC, which was promulgated by the SCNPC on October 28, 2010, came into effect on
July 1, 2011, and was amended on December 29, 2018, the Provisional Regulations on the Collection and Payment of Social Insurance
Premium, which was promulgated by the State Council on January 22, 1999 and amended on March 24, 2019, and the Regulations on the
Administration of Housing Provident Fund, which was promulgated by the State Council on April 3, 1999 and came into effective on the same
date, and was amended on March 24, 2002 and March 24, 2019, employers are required to contribute, on behalf of their employees, to a
number of social security funds, including funds for basic pension insurance, unemployment insurance, basic medical insurance, occupational
injury insurance, maternity insurance and housing provident funds. Employers who fail to contribute may be fined and ordered to make good
the deficit within a stipulated time limit.
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Considering the PRC regulatory authorities have continued to introduce various new labor-related regulations since the effectiveness of
the labor contract law, and the interpretation and implementation of these regulations are still evolving, we cannot assure you that our
employment practice will at all times be deemed in compliance with the new regulations. If we are subject to severe penalties or incur
significant liabilities in connection with labor disputes or investigations, our business and results of operations may be adversely affected. See
“Risk Factors—Risks Related to Our Business—Our current employment practices may be adversely impacted under the applicable labor
laws.”
Regulation on Information Protection on Networks
On December 28, 2012, the SCNPC issued Decision of the Standing Committee of the National People’s Congress on Strengthening
Information Protection on Networks, pursuant to which network service providers and other enterprises and institutions shall, when gathering
and using electronic personal information of citizens in business activities, publish their collection and usage rules and adhere to the principles
of legality, rationality and necessarily, explicitly state the purposes, manners and scopes of collecting and using information, and obtain the
consent of those from whom information is collected, and shall not collect and use information in violation of laws and regulations and the
agreement between both sides; and the network service providers and other enterprises and institutions and their personnel must strictly keep
such information confidential and may not divulge, alter, damage, sell, or illegally provide others with such information.
On July 16, 2013, the Ministry of Industry and Information Technology, or the MIIT, issued the Provisions on the Protection of Personal
Information of Telecommunication and Internet User. The requirements under this order are stricter and specific compared to the above
decision issued by the National People’s Congress. According to the provisions, if a network service provider wishes to collect or use personal
information, it may do so only if such collection is necessary for the services it provides. Furthermore, it must disclose to its users the purpose,
method and scope of any such collection or usage, and must obtain consent from the users whose information is being collected or used.
Network service providers are also required to establish and publish their protocols relating to personal information collection or usage, keep
any collected information strictly confidential and take technological and other measures to maintain the security of such information. Network
service providers are required to cease any collection or usage of the relevant personal information, and provide services for the users to de-
register the relevant user account, when a user stops using the relevant Internet service. Network service providers are further prohibited from
divulging, distorting or destroying any such personal information, or selling or providing such personal information unlawfully to other parties.
In addition, if a network service provider appoints an agent to undertake any marketing or technical services that involve the collection or
usage of personal information, the network service provider is required to supervise and manage the protection of the information. The
provisions state, in broad terms, that violators may face warnings, fines, public exposure and, criminal liability whereas the case constitutes a
crime.
On June 1, 2017, the Cybersecurity Law of the PRC promulgated in November, 2016 by the SCNPC became effective. This law also
absorbed and restated the principles and requirements mentioned in the aforesaid decision and order, and further provides that, where an
individual finds any network operator collects or uses his or her personal information in violation of the provisions of any law, regulation or
the agreement of both parties, the individual shall be entitled to request the network operator to delete his or her personal information; if the
individual finds that his or her personal information collected or stored by the network operator has any error, he or she shall be entitled to
request the network operator to make corrections, and the network operator shall take measures accordingly. Pursuant to this law, the violators
may be subject to: (i) warning; (ii) confiscation of illegal gains and fines equal to one to ten times of the illegal gains; or if without illegal
gains, fines up to RMB1,000,000; or (iii) an order to shut down the website, suspend the business operation for rectification, or revoke
business license. Besides, responsible persons may be subject to fines between RMB10,000 and RMB100,000.
On January 1, 2021, the Civil Code promulgated in May 2020 by the SCNPC became effective. The Civil Code protects individuals’ right
to personal information and provides for similar requirements for personal information protection as the Cybersecurity Law. Individuals may
bring up civil litigations based on the Civil Code if their right to personal information is infringed upon.
From criminal law perspective, the PRC Criminal Law, as amended by its Amendment 7 (effective on February 28, 2009) and Amendment
9 (effective on November 1, 2015), prohibits institutions, companies and their employees from selling or otherwise illegally disclosing a
citizen’s personal information obtained during the course of performing duties or providing services or obtained through theft or other illegal
ways.
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Regulation on Information Protection on Networks in Europe
The Regulation (EU) 2016/679 of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on
the free movement of such data, and repealing Directive 95/46/EC (GDPR), complemented by EU Member States law on data protection (e.g.
in Germany the German Federal Data Protection Act), imposes certain requirements on the processing of personal data relating to natural
persons. GDPR requirements will apply both to companies established in the EU and to companies, such as us, that are not established in the
EU but process personal data of individuals who are in the EU (and in the EEA subject to the enactment of implementation procedures), where
the processing activities relate to: (a) the offering of goods or services, irrespective of whether a payment of the data subject is required, to
such data subjects in the EU; or (b) the monitoring of their behavior as far as their behavior takes place within the EU. Therefore, the GDPR
applies to our EU entities as well as the offering of services by our non-EU entities when EU guests are targeted. The GDPR imposes on
subject companies a large number of obligations, which relate for example, but are not limited, to (i) the principles applying to the processing
of personal data, for example, lawfulness, fairness, transparency, purpose limitation, data minimization and “privacy by design”, accuracy,
storage limitations to process and store personal data only as long as necessary, access restrictions on a “need to know basis”, and ensuring
security and confidentiality of personal data by technical and organizational measures; (ii) the ability of the controller to demonstrate
compliance with such principles (accountability); (iii) the obligation to identify a legal basis before the processing (special requirements apply
to certain specific categories of data such as health related data and other sensitive data); and (iv) data subjects rights (for example,
transparency, right of information about personal data processed, right of access/receive copies, right to rectification, right to erasure, right to
restrict processing, right to data portability, and right to object to a processing under certain circumstances). This leads to companies being
under the obligation to implement a number of formal processes and policies reviewing and documenting the privacy implications of the
development, acquisition, or use of all new products and services, technologies, or types of data. The GDPR provides for substantial fines for
breaches of data protection requirements, which, depending on the infringed provisions of the GDPR, can go up to either (thresholds
depending on the obligations which have been breached): (i) 2% of the group’s annual worldwide turnover of the preceding financial year or
EUR10 million, whichever is greater, or (ii) 4% of the group’s annual worldwide turnover of the preceding financial year or EUR20 million,
whichever is greater. The fine may be imposed instead of, or in addition to, measures that may be ordered by supervisory authorities (for
example, request to cease the processing). The GDPR and EU Member States law also provide for private enforcement mechanisms and, in the
most severe cases, criminal liability.
The Directive (EC) 2002/58 of 12 July 2002 concerning the processing of personal data and the protection of privacy in the electronic
communications sector imposes restrictions on the use of cookies and similar means as well as on website tracking, including the requirement
to obtain informed consent for storage or access to information stored on a user’s terminal equipment in the EU in certain cases (in particular
for cookies which track for marketing purposes).
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4.C. Organizational Structure
The following diagram illustrates our corporate and ownership structure, the place of formation and the ownership interests of our
subsidiaries as of March 31, 2023.
(1) We have four affiliated entities consolidated through contractual arrangements: Tianjin Jizhu, Shanghai Huanmei and its wholly-owned
subsidiary Huanmei Travel, and Ningbo Futing. The registered shareholders of these Consolidated Affiliated Entities are (i) Mr. Pengfei
Jiang, who is the director/supervisor of certain of our subsidiaries, holding 100% of equity interest in Tianjin Jizhu, (ii) Mr. Pengfei Jiang
and Mr. Andong Chen, our employee, holding 90% and 10% of equity interest in Shanghai Huanmei, respectively, and (iii) Mr. Dongfu
Shi, who is the director/supervisor of certain of our subsidiaries, holding 100% of equity interest in Ningbo Futing.
(2) Includes our Consolidated Fund, namely Ningbo Hongting, which is a limited liability partnership with Huazhu Hotel Management Co.,
Ltd, a wholly-owned entity of the Company, and certain third-party investors serving as the limited partners (“LPs”) and Ningbo Qiji
Galaxy Investment Management Center (“Ningbo Qiji”), a wholly-owned entity of the Company, serving as the general partner (“GP”).
Ningbo Hongting and its subsidiary primarily operate hotel businesses and invest in companies in the hotel industry.
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The following table sets forth summary information for our significant subsidiaries as of March 31, 2023.
Major Subsidiaries
China Lodging Holdings (HK) Limited
H World Holdings Singapore Pte. Ltd.
HanTing Xingkong (Shanghai) Hotel Management Co., Ltd.
HanTing (Tianjin) Investment Consulting Co., Ltd
HanTing Technology (Suzhou) Co., Ltd.
HanTing (Shanghai) Enterprise Management Co., Ltd.
Starway Hotel Management (Shanghai) Co., Ltd.
HuaZhu Hotel Management Co., Ltd.
Jizhu Information Technology (Shanghai) Co., Ltd.
ACL Greater China Limited
Huazhu Investment I Limited
Yagao Meihua Hotel Management Co., Ltd.
Orange Hotel Management (China) Co., Ltd.
Beijing Crystal Orange Hotel Management Consulting Co., Ltd.
Huazhu Hotel Management (Ningbo) Co., Ltd.
H-World Information and Technology Co., Ltd (盟广信息技术有限公司)
Steigenberger Hotels GmbH
Intercity Hotel GmbH
Percentage of
Ownership
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
86.85%
100%
100%
Date of
Incorporation/Acquisition
October 22, 2008
April 14, 2010
March 3, 2006
January 16, 2008
December 3, 2008
December 14, 2010
May 1, 2012
August 16, 2012
February 26, 2014
January 25, 2016
November 10, 2017
January 25, 2016
May 25, 2017
May 25, 2017
July 20, 2018
November 7, 2013
January 2, 2020
January 2, 2020
Place of Incorporation
Hong Kong
Singapore
PRC
PRC
PRC
PRC
PRC
PRC
PRC
Hong Kong
Hong Kong
PRC
PRC
PRC
PRC
PRC
Germany
Germany
H World Group Limited is not a Chinese operating company but a holding company incorporated in the Cayman Islands. As a holding
company with no material operations of its own, H World Group Limited conducts substantially all of its business through its subsidiaries, and
for some businesses the direct holding of which is restricted by PRC law, through the Consolidated Affiliated Entities. While we do not have
any equity ownership of the Consolidated Affiliated Entities, the contractual arrangements we have with the Consolidated Affiliated Entities
enables us to direct the activities that most significantly affect the economic performance of the Consolidated Affiliated Entities, as well as
receive the economic benefits from the Consolidated Affiliated Entities. In addition, we also have one Consolidated Fund, and the
Consolidated Fund has a subsidiary, which primarily operate hotel businesses and invest in companies in the hotel industry. While we have
minority equity ownership in the Consolidated Fund, the Consolidated Fund’s partnership arrangement enables us to direct the activities that
most significantly affect its economic performance, as well as receive its significant economic benefits. Because of these arrangements, we
have control over and are the primary beneficiary of the VIEs for accounting purposes and, therefore, have consolidated the financial results of
the VIEs in our consolidated financial statements in accordance with U.S. GAAP. Any references to control or benefits that accrue to us
because of the VIEs in this annual report are limited to, and are subject to conditions for consolidation of, the VIEs under U.S. GAAP.
Investors in our securities do not own equity interest in our operating entities, including our subsidiaries, the Consolidated Affiliated Entities
and the Consolidated Fund in China, but instead own equity interest in the Cayman Islands holding company. Our securities that are listed on
the stock exchanges are securities of our Cayman Islands holding company, not of our operating subsidiaries or the VIEs.
Contractual Arrangements with the Consolidated Affiliated Entities
We have entered into a series of contractual arrangements with each of Tianjin Jizhu, Shanghai Huanmei and Ningbo Futing and the
respective nominee shareholder(s) of the Consolidated Affiliated Entities (the “Affiliated Entity Shareholders”), as described in more detail
below, including (i) the power of attorney, the share pledge agreement and the loan agreement, which provide us with effective control over
and ability to receive significant economic benefits from the Consolidated Affiliated Entities to the extent permitted by PRC law; and (ii)
exclusive option agreements, which provide us with exclusive options to purchase all or part of the equity interests in the Consolidated
Affiliated Entities to the extent permitted by PRC law.
The contractual arrangements with each of Tianjin Jizhu, Shanghai Huanmei and Ningbo Futing were entered into by and among Huazhu
Hotel Management Co., Ltd., a wholly-owned subsidiary of H World Group Limited (“HZ Hotel Management”), the Consolidated Affiliated
Entities and each of their respective nominee shareholder(s). The contractual arrangements between each Consolidated Affiliated Entity on the
one hand, and HZ Hotel Management and the respective Affiliated Entity Shareholders on the other hand, are all on substantially the same
terms, which are summarized below:
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Share Pledge Agreement
Pursuant to the Share Pledge Agreement among HZ Hotel Management, the Consolidated Affiliated Entity and the Affiliated Entity
Shareholders, the Affiliated Entity Shareholders have pledged 100% equity interest in the Consolidated Affiliated Entity to HZ Hotel
Management to guarantee the performance by the Consolidated Affiliated Entity and its shareholder(s) of their obligations under the
contractual arrangements. Pursuant to this agreement, HZ Hotel Management has right to claim dividends or distributive profits with regard to
the pledged shares from the Consolidated Affiliated Entity. The Consolidated Affiliated Entity Shareholders also agreed, without HZ Hotel
Management’s prior written consent, not to transfer the pledged shares, or establish or permit the existence of any security interest or other
encumbrance on the pledged shares, except by the performance of the Exclusive Option Agreement. The Share Pledge Agreement will remain
effective until the Consolidated Affiliated Entity and the Affiliated Entity Shareholders have discharged all their obligations and fully paid all
the amounts payable under the contractual arrangements.
Loan Agreement
Pursuant to the Loan Agreement among HZ Hotel Management and the respective Affiliated Entity Shareholders, HZ Hotel Management
agrees to provide the shareholders of the Consolidated Affiliated Entity with a loan to fund the Consolidated Affiliated Entity. This loan will be
repaid only by transfer of Affiliated Entity Shareholders’ equity interest in the Consolidated Affiliated Entity to HZ Hotel Management or any
person designated by HZ Hotel Management pursuant to the Exclusive Option Agreement. Without the prior written consent of HZ Hotel
Management, Affiliated Entity Shareholders may not, in any manner, among other things, supplement or amend the articles of associations of
the Consolidated Affiliated Entity; increase or reduce its registered capital or change the structure of its registered capital in other manners;
sell, transfer, pledge or dispose of its assets, legal or beneficial interests in business or revenue or allow any encumbrance on such assets,
business or revenue; assume, inherit, guarantee any debt, or allow the existence of any debt, except for debts incurred in the ordinary course of
business and debts known and agreed in writing by HZ Hotel Management; cause the Consolidated Affiliated Entity to enter into any material
contract with value above RMB100,000 outside the ordinary course of business; provide loans or credits in any form to any other persons;
cause or permit to merge, consolidate with, acquire or invest in any other persons; or distribute dividends to its shareholders. The loan
agreement will remain effective until ten years after the date of the Loan Agreement and the loan under this agreement should be fully repaid
before or upon the termination of the Loan Agreement.
Exclusive Option Agreement
Pursuant to the Exclusive Option Agreement among HZ Hotel Management, the Consolidated Affiliated Entity and the Affiliated Entity
Shareholders, the Affiliated Entity Shareholders irrevocably grant HZ Hotel Management or any third party designated by HZ Hotel
Management an exclusive option to purchase all or part of their equity interests in the Consolidated Affiliated Entity at the higher of (i) the
lowest price permitted by applicable PRC laws and (ii) a nominal price of RMB100. This agreement will remain effective until 20 years after
the date of the agreement, and will be automatically renewed at the discretion of HZ Hotel Management.
Power of Attorney
Pursuant to the Power of Attorney given by the Affiliated Entity Shareholders, the Affiliated Entity Shareholders irrevocably authorize HZ
Hotel Management or any person(s) designated by HZ Hotel Management to act as his or her attorney-in-fact to exercise all of his or her rights
as a shareholder of the Consolidated Affiliated Entity, including, but not limited to, the right to call and attend shareholders’ meetings, vote,
sell, transfer, pledge or dispose of any or all of the shares, nominate, appoint or remove the directors, supervisors and senior management, and
other shareholders rights conferred by the articles of association of the Consolidated Affiliated Entity and the relevant laws and regulations.
This power of attorney will remain in force as long as the shareholder remains a shareholder of the respective Consolidated Affiliated Entity
unless otherwise instructed by us. The Affiliated Entity Shareholders shall not have the right to terminate this power of attorney or revoke the
appointment of the attorney-in-fact.
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These contractual arrangements may not be as effective as direct ownership in providing us with control over the Consolidated Affiliated
Entities. If the Consolidated Affiliated Entities or their shareholders fail to perform their respective obligations under these contractual
arrangements, our recourse to the assets held by the Consolidated Affiliated Entities is indirect and we may have to incur substantial costs and
expend significant resources to enforce such arrangements in reliance on legal remedies under PRC law. These remedies may not always be
effective. Furthermore, in connection with litigation, arbitration or other judicial or dispute resolution proceedings, assets under the name of
any record holder of equity interest in the Consolidated Affiliated Entities, including such equity interest, may be put under court custody. As a
consequence, we cannot be certain that the equity interest will be disposed of pursuant to the contractual arrangement or ownership by the
record holder of the equity interest.
There are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules, and
regarding the status of the rights of our Cayman Islands holding company with respect to its contractual arrangements with the Consolidated
Affiliated Entities, and their shareholders. See “Risk Factors—Risks Related to Our Corporate Structure—Uncertainties exist with respect to
the interpretation and implementation of the Foreign Investment Law and its implementing rules and how they may impact our business,
financial condition and results of operations” and “—The nominee shareholders of the Consolidated Affiliated Entities may have potential
conflicts of interest with us, which may materially and adversely affect our business and financial condition” below in this annual report for
more details regarding these uncertainties.
Partnership Arrangement with the Consolidated Fund
In 2017, Ningbo Qiji, as the GP, and Huazhu Hotel Management Co., Ltd and certain third-party investors, as the LPs, entered into a
Limited Partnership Agreement (the “LPA”) to establish Ningbo Hongting. Ningbo Qiji and Huazhu Hotel Management Co., Ltd together hold
40% of partnership interests in Ningbo Hongting. The term of the partnership as stipulated in the LPA is 10 years.
Pursuant to the LPA, the GP, acting as the managing partner for Ningbo Hongting, is solely responsible for the management and the
execution of all the activities required to carry on the main objectives of Ningbo Hongting and receive significant economic benefits. The LPs
have limited influence over Ningbo Hongting’s investment decisions.
4.D. Property, Plants and Equipment
Our headquarters are located in Shanghai, China and occupy nearly 30,000 square meters of office space, which is owned by us. As of
December 31, 2022, we leased 695 out of our 8,543 hotel facilities with an aggregate size of approximately 5.1 million square meters,
including approximately 109,000 square meters subleased to others. As of December 31, 2022, we owned nine out of our 8,543 hotel facilities
with an aggregate size of approximately 93,000 square meters. For detailed information about the locations of our hotels, see “Item 4.
Information on the Company — B. Business Overview — Our Hotel Network.”
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
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ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
5.A. Operating Results
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our
consolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion may contain
forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from
those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item 3. Key Information –
D. Risk Factors” or in other parts of this annual report on Form 20-F.
Overview
We are a leading, fast-growing multi-brand hotel group in China with international operations. Our hotels are operated under three
different models: leased and owned, franchised, and franchised hotels that we operate under management contracts, which we refer to as
“manachised.” We expanded our hotel network from 6,789 hotels as of December 31, 2020 to 8,543 hotels as of December 31, 2022,
representing a CAGR of 12.2%. As of December 31, 2022, we had 8,543 hotels in operation, including 704 leased and owned hotels and 7,839
manachised and franchised hotels, with an aggregate of 809,478 hotel rooms. As of the same date, we were developing an additional 2,580
hotels, including 40 leased and owned hotels and 2,540 manachised and franchised hotels. On January 2, 2020, we completed the acquisition
of Deutsche Hospitality and have consolidated its financial information since then.
Our total revenue was RMB10,196 million, RMB12,785 million and RMB13,862 million (US$2,010 million) in 2020, 2021 and 2022,
respectively. We had net loss attributable to H World Group of RMB2,192 million, RMB465 million and RMB1,821 million (US$264 million)
in 2020, 2021 and 2022, respectively. Our adjusted EBITDA (non-GAAP) amounted to negative RMB244 million, RMB1,571 million and
RMB610 million (US$88 million) in 2020, 2021 and 2022, respectively, and our net cash provided by operating activities amounted to
RMB609 million, RMB1,342 million and RMB1,564 million (US$227 million) in these respective years.
Specific factors affecting our results of operations
While our business is affected by factors relating to general economic conditions and the lodging industry in China and other jurisdictions
in which we operate, including business and leisure travel of the customers and market competition (see “Item 3. Key Information — D. Risk
Factors — Risks Related to Our Business — Our operating results are subject to conditions affecting the lodging industry in general” and “—
The lodging industries in China and Europe are competitive, and if we are unable to compete successfully, our financial condition and results
of operations may be harmed”), we believe that our results of operations are also affected by company-specific factors, including, among
others:
● The total number of hotels and hotel rooms in our hotel network. Our revenues largely depend on the size of our hotel network.
Furthermore, we believe that the expanded geographic coverage of our hotel network will enhance our brand recognition. Whether
we can successfully increase the number of hotels and hotel rooms in our hotel group is largely affected by our ability to effectively
identify and lease, own, manachise or franchise additional hotel properties at desirable locations on commercially favorable terms and
the availability of funding to make necessary capital investments to open these new hotels.
● Nature of the cost of our business. A significant portion of our operating costs and expenses, including rent and depreciation and
amortization, is relatively fixed. As a result, an increase in our revenues achieved through higher RevPAR generally will result in
higher profitability. Vice versa, a decrease in our revenues, in particular with respect to hotels temporarily closed during the COVID-
19 outbreak, could result in a disproportionately larger decrease in our earnings because our operating costs and expenses are unlikely
to decrease proportionately.
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● The number of new leased and owned hotels under development. Generally, the operation of each leased and owned hotel goes
through three stages: development, ramp-up and mature operations. During the development stage, our leased and owned hotels
generate no revenue. In addition, we bear the pre-opening expenses for a substantial majority of our leased and owned hotels, which
generally range from approximately RMB1.5 million to RMB20.0 million per hotel. For certain of our hotels (under Deutsche
Hospitality), the landlords are responsible for renovating the hotels (other than soft furnishing) and we are not required to pay rent
until this renovation is completed. During periods when a large number of new leased and owned hotels are under development, the
pre-opening expenses incurred may have a significant negative impact on our financial performance.
● The mix of mature and new leased and owned hotels, manachised hotels and franchised hotels. When a new hotel starts operation and
goes through the ramp-up stage, the occupancy rate is relatively low and the room rate may be subject to discount. Revenues
generated by these hotels are lower than those generated by mature hotels and may be insufficient to cover their operating costs,
which are relatively fixed in nature and are similar to those of mature hotels. The lower profitability during the ramp-up stage for
leased and owned hotels may have a significant negative impact on our financial performance. The length of the ramp-up stage may
be affected by factors such as hotel size, seasonality and location. New hotels opened in lower-tier cities generally have longer ramp-
up period. On average, it takes our hotels approximately six months to ramp up. We define mature leased and owned hotels as those
that have been in operation for more than six months. Our mature leased and owned hotels have been and will continue to be the main
contributor to our revenues in the foreseeable future.
Under the manachise and franchise models, we generate revenues from franchise and service fees we charge to each manachised and
franchised hotel while the franchisee bears substantially all the capital expenditures, pre-opening and operational expenses. The hotel
operating costs relating to manachised hotels are mainly costs for hotel managers as we hire and send them to manachised hotels. An
increasing proportion of manachised and franchised hotels in our hotel mix will allow us to benefit from the recurring cash inflows
from franchise and service fees with minimal upfront costs and capital expenditures.
Key Performance Indicators
We utilize a set of non-financial and financial key performance indicators which our senior management reviews frequently. The review of
these indicators facilitates timely evaluation of the performance of our business and effective communication of results and key decisions,
allowing our business to react promptly to changing customer demands and market conditions. After our acquisition of Deutsche Hospitality
hotels in January 2020, we modified our operating segment structure into two operating segments⸺legacy Huazhu and legacy DH. Our
analysis below sets forth information of both operating segments.
Non-financial Key Performance Indicators
Our non-financial key performance indicators consist of (i) change in the total number of hotels and hotel rooms in our hotel group, (ii)
RevPAR, especially RevPAR achieved by our leased and owned hotels, and (iii) same-hotel RevPAR change.
Change in the total number of hotels and hotel rooms. We track the change in the total number of hotels and hotel rooms in operation to
monitor our business expansion. Our total hotels in operation increased from 6,789 as of December 31, 2020 to 8,543 as of December 31,
2022.
Due to the impact of COVID-19, we had a large number of hotels in China temporarily requisitioned in various locations and during
different periods for the accommodation of medical support workers and for quarantine purposes in relation to COVID-19. As of December
31, 2022, we had 572 hotels under temporary requisition in China. Our legacy Huazhu business witnessed accelerated recovery since mid-
November 2022 after the Chinese authorities modified the COVID policy. We also had a large number of hotels temporarily closed from time
to time amid the pandemic. As a result, excluding hotels under temporary requisition or temporarily closed, our total number of hotel room-
nights available for sale increased from 193.8 million as of December 31, 2020 to 229.5 million as of December 31, 2022 for legacy Huazhu.
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The hotel operations of Deutsche Hospitality in Europe was adversely affected beginning from early March 2020. Local governments in
Europe imposed travel restrictions and lockdowns to contain the spread of COVID-19, and as a result, a number of our Deutsche Hospitality
hotels were temporarily closed in 2020. Thanks to the progress of vaccination campaigns and easing of social restrictions, legacy DH hotels
have experienced continuing RevPAR recovery since March 2022. As of December 31, 2022, all hotels of Deutsche Hospitality that were
temporarily closed due to COVID-19 had resumed operation and, excluding a small number of hotels which were temporarily closed for
reasons unrelated to COVID-19, the total room-nights available for sale was 8.85 million for legacy DH.
The following table sets forth various measures of changes in the total number of hotels and hotel rooms (excluding room-nights of hotels
under temporary requisition (1) or temporarily closed(2)) as of the dates indicated.
Total hotels in operation
Leased and owned hotels
Manachised hotels
Franchised hotels
Total hotel rooms in operation
Leased and owned hotels
Manachised hotels
Franchised hotels
Total hotel room-nights available for sale
Leased and owned hotels
Manachised hotels
Franchised hotels
2020
Legacy
Huazhu
6,669
681
5,718
270
628,135
90,942
515,338
21,855
193,819,296
31,286,112
154,743,646
7,789,583
As of December 31,
2021
Legacy DH
120
72
28
20
24,027
13,371
5,630
5,026
6,488,185
3,998,572
1,439,155
1,050,458
Legacy
Huazhu
7,706
662
6,797
247
728,143
91,284
617,340
19,519
234,841,153
32,818,789
195,076,643
6,945,721
Legacy DH
124
76
27
21
25,073
14,264
5,390
5,419
8,203,832
4,933,508
1,681,517
1,588,807
2022
Legacy
Huazhu
8,411
623
7,588
200
783,174
89,638
678,245
15,291
229,534,995
28,046,243
196,734,849
4,753,903
Legacy DH
132
81
29
22
26,304
15,328
5,711
5,265
8,851,555
5,302,509
1,788,026
1,761,020
(1) As of December 31, 2022, 572 of legacy Huazhu’s hotels were temporarily requisitioned and no legacy DH hotel was requisitioned.
(2) As of December 31, 2022, ten of legacy Huazhu’s hotels and three hotels of legacy DH were temporarily closed. Legacy Huazhu’s hotels
were temporarily closed for brand-upgrade and business-model-change purposes. For legacy DH, the hotels were temporarily closed for
renovation, or due to flood damage, extensive hotel refurbishment.
RevPAR. RevPAR is a commonly used operating measure in the lodging industry and is defined as the product of average occupancy rates
and average daily room rates achieved.
Occupancy rates of our hotels mainly depend on the locations of our hotels, product and service offering, the effectiveness of our sales and
brand promotion efforts, our ability to effectively manage hotel reservations, the performance of managerial and other employees of our hotels,
as well as our ability to respond to competitive pressure. From year to year, occupancy of our portfolio may fluctuate as a result of changes in
the mix of our mature and ramp-up hotels, as well as special events and public health events.
We set the room rates of our hotels primarily based on the location of a hotel, room rates charged by our competitors within the same
locality, and our relative brand and product strength in the city or city cluster. From year to year, average daily room rates of our portfolio may
change due to our yield management practice, city mix change and special events such as the Shanghai Expo in 2010 and public health events
such as COVID-19.
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The following table sets forth our RevPAR, average daily room rate and occupancy rate for legacy Huazhu’s leased and owned hotels as
well as manachised and franchised hotels for the periods indicated.
RevPAR (1) (in RMB)
Leased and owned hotels
Manachised hotels
Franchised hotels
Total hotels in operation
Average daily room rate (1) (in RMB)
Leased and owned hotels
Manachised hotels
Franchised hotels
Total hotels in operation
Occupancy rate (as a percentage)
Leased and owned hotels
Manachised hotels
Franchised hotels
Total hotels in operation
Weight of hotel room-nights available for sale contributed by leased and owned hotels less
than 6 months (as a percentage)(2)
2020
Year Ended December 31,
2021
2022
(Excluding hotels under requisition)
166
147
129
149
241
204
208
210
69
72
62
71
4
202
168
155
172
286
231
238
239
71
73
65
72
4
174
156
130
157
272
231
222
236
64
67
59
67
2
(1) The RevPAR and average daily room rates disclosed in this annual report for legacy Huazhu are based on the tax-inclusive room rates.
(2) Represents (i) the aggregate of monthly hotel room-nights available for sale in a given period of leased and owned hotels, which had been
in operation for less than six months, divided by (ii) the aggregate of monthly total hotel room-nights available for sale in that same
period.
RevPAR may change from period to period due to (i) the change in the mix of our leased and owned hotels in the ramp-up and mature
phases, (ii) the change in the mix of our hotels in different cities and locations, (iii) the change in the mix of our hotels of different brands, and
(iv) the change in same-hotel RevPAR. The RevPAR for all hotels in operation of legacy Huazhu (excluding hotels under temporary
requisition) in 2022 was lower than the RevPAR for all of our hotels in operation in 2021, primarily due to the large-scale outbreak of the
Omicron variant in 2022. The RevPAR for all hotels in operation of legacy Huazhu (excluding hotels under temporary requisition) in 2021 was
higher than the RevPAR for all of our hotels in operation of legacy Huazhu (excluding hotels under temporary requisition) in 2020 primarily
due to relief of COVID-19 restriction measures and recovery from COVID-19.
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The following table sets forth our RevPAR, average daily room rate and occupancy rate for the leased hotels as well as manachised and
franchised hotels of legacy DH for the periods indicated.
RevPAR(1) (in EUR)
Leased and owned hotels
Manachised hotels
Franchised hotels
All hotels in operation
Average daily room rate (in EUR)
Leased and owned hotels
Manachised hotels
Franchised hotels
All hotels in operation
Occupancy rate (as a percentage)
Leased and owned hotels
Manachised hotels
Franchised hotels
All hotels in operation
Year Ended December 31,
2021
2022
2020
30
29
34
31
89
89
82
88
34
32
42
35
29
31
41
32
91
85
93
90
32
37
44
35
61
61
67
62
110
110
116
111
56
55
57
56
(1) The RevPAR and average daily room rates for legacy DH are based on the tax-exclusive room rates.
The RevPAR for all legacy DH hotels in operation in 2022 was higher than 2021, primarily due to the improving conditions in the lodging
market after Europe lifted COVID-19 related restrictions in mid-February. The RevPAR for all hotels in operation of legacy DH in 2021 was
higher than that of 2020, primarily due to relief of COVID-19 restriction measures and recovery from COVID-19.
The seasonality of our business may cause fluctuations in our quarterly RevPAR. We typically have the lowest RevPAR in the first quarter
due to reduced travel activities in winter and during the Spring Festival holidays, and the highest RevPAR in the third quarter due to increased
travel during summer, though this may not be true for this year given the COVID-19 impact. National and regional special events that attract
large numbers of people to travel may also cause fluctuations in our RevPAR.
The following table sets forth quarterly RevPAR of legacy Huazhu’s hotels for the periods indicated.
March 31,
2021
June 30,
2021
September 30,
2021
December 31,
2021
March 31,
2022
June 30,
2022
September 30,
2022
December 31,
2022
For the Three Months Ended
RevPAR (in RMB):
Leased and owned hotels
Manachised hotels
Franchised hotels
Total hotels in operation
156
135
125
138
252
203
194
210
206
173
156
177
193
159
144
163
149
130
118
132
153
140
112
141
215
190
167
193
176
158
125
159
The following table sets forth the quarterly RevPAR of the hotels operated by legacy DH for the periods indicated.
For the Three Months Ended
March June
31, 2021
30, 2021
September December March
31, 2021
30, 2021
31, 2022 30, 2022
June
September December
31, 2022
30, 2022
RevPAR (in EUR):
Leased and owned hotels
Manachised hotels
Franchised hotels
Total hotels in operation
17
19
29
20
45
51
52
48
41
37
57
43
31
32
42
33
69
53
70
66
76
77
72
75
68
75
82
72
12
12
20
13
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Same-hotel RevPAR change. Our overall RevPAR trend does not reflect the trend of a stable and mature portfolio, because it may fluctuate
when city mix and mix of mature and ramp-up hotels change. We track same-hotel year-over-year RevPAR change for legacy Huazhu’s hotels
in operation for at least 18 months to monitor the RevPAR trend for our mature hotels on a comparable basis. The following table sets forth our
same-hotel RevPAR for hotels in operation under legacy Huazhu (excluding hotels under temporary requisition) for at least 18 months for the
periods indicated.
March 31,
2021
June 30,
2021
September 30,
2021
For the Three Months Ended
December 31,
2021
March 31,
2022
June 30,
2022
September 30,
2022
December 31,
2022
Number of hotels in operation for at least
18 months
RevPAR (RMB)
Same-hotel RevPAR change (as a
percentage)
4,209
138
4,537
210
4,803
176
5,075
162
5,225
131
4,912
138
5,488
190
5,296
158
50.2
58.1
(5.9)
(15.6)
(8.9)
(36.2)
3.9
(9.2)
(1) In calculating the same-hotel RevPAR change (as a percentage) of our mature hotels in a specified period, which are hotels in operation
for at least 18 months as at the beginning of one of the months within this period, the average RevPAR of these hotels in the months in
which they are mature hotels within this period is compared with the average RevPAR of these same hotels in the corresponding months
of the prior year.
Financial Key Performance Indicators
Our financial key performance indicators consist of (i) revenues, (ii) operating costs and expenses and (iii) EBITDA (Non-GAAP) and
Adjusted EBITDA (Non-GAAP).
Revenues. We primarily derive our revenues from operations of our leased and owned hotels and franchise and service fees from our
manachised and franchised hotels. The following table sets forth the revenues generated by our leased and owned as well as manachised and
franchised hotels and other revenues, each in absolute amount and as a percentage of total revenues for the periods indicated.
2020
(RMB)
%
Year Ended December 31,
2021
(RMB)
%
(In millions except percentages)
(RMB)
Revenues:
Leased and owned hotels
Manachised and franchised hotels
Others
Total revenues
6,908
3,136
152
10,196
67.8
30.8
1.4
100.0
8,118
4,404
263
12,785
63.5
34.4
2.1
100.0
9,148
4,405
309
13,862
2022
(US$)
1,326
639
45
2,010
%
66.0
31.8
2.2
100.0
● Leased and Owned Hotels. In 2020, we generated revenue of RMB6,908 million from our leased and owned hotels, which accounted
for 67.8% of our total revenues for the year. In 2021, we generated revenues of RMB8,118 million from our leased and owned hotels,
which accounted for 63.5% of our total revenues for the year. In 2022, we generated revenue of RMB9,148 million (US$1,326
million) from our leased and owned hotels, which accounted for 66.0% of our total revenues for the year. We expect that revenues
from our leased and owned hotels will continue to constitute a majority of our total revenues in the foreseeable future. As of
December 31, 2022, we had 40 leased and owned hotels under development.
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For our leased hotels, we lease properties from real estate owners or lessors and we are responsible for hotel development and
customization to conform to our standards, as well as for repairs and maintenance and operating costs and expenses of properties over
the term of the lease. We are also responsible for substantially all aspects of hotel operations and management, including hiring,
training and supervising the hotel managers and employees required to operate our hotels and purchasing supplies. Our typical lease
term ranges from ten to 25 years. For a substantial majority of our hotels, we typically enjoy an initial two- to eight-month rent-free
period. For certain of our hotels (under Deutsche Hospitality), the landlords are responsible for renovating the hotels (other than soft
furnishing) and we are not required to pay rent until this renovation is completed. We generally pay fixed rent on a monthly, quarterly
or biannual basis for the first three to five years of the lease term, after which we are generally subject to a 2% to 6% increase every
three to five years or, for Deutsche Hospitality’s hotels, generally annual adjustments based on consumer price index levels.
Our owned hotels include the hotels we acquired as part of our strategic alliance with Accor in 2016 and the ones we acquired
through acquisition of Blossom Hotel Management in 2018.
Our revenues generated from leased and owned hotels are significantly affected by the following two operating measures:
● The total number of room nights available from the leased and owned hotels in our hotel group. The future growth of revenues
generated from our leased and owned hotels will depend significantly upon our ability to expand our hotel group into new
locations and maintain and further increase our RevPAR at existing hotels.
● RevPAR achieved by our leased and owned hotels, which represents the product of average daily room rates and occupancy
rates. To understand factors impacting our RevPAR, please see “– Non-financial Key Performance Indicators – RevPAR.”
● Manachised and Franchised Hotels. In 2020, we generated revenues of RMB3,136 million from our manachised and franchised
hotels, which accounted for 30.8% of our total revenues for the year. In 2021, we generated revenues of RMB4,404 million from our
manachised and franchised hotels, which accounted for 34.4% of our total revenues for the year. In 2022, we generated revenues of
RMB4,405 million (US$639 million) from our manachised and franchised hotels, which accounted for 31.8% of our total revenues
for the year. We expect that revenues from our manachised and franchised hotels will increase in the foreseeable future as we add
more manachised and franchised hotels in our hotel group. We also expect the number of our manachised and franchised hotels as a
percentage of the total number of hotels in our network to increase. As of December 31, 2022, we had 2,540 manachised and
franchised hotels under development.
● Manachised Hotels. Our franchisees either lease or own their hotel properties and also invest in the renovation of their properties
according to our product standards. Our franchisees are typically responsible for the costs of developing and operating the hotels,
including renovating the hotels according to our standards, and all of the operating expenses. We manage our manachised hotels
and impose the same standards for all manachised hotels to ensure product quality and consistency across our hotel network.
Management services we provide to our franchisees for our manachised hotels generally include hiring, appointing and training
hotel managers, managing reservations, providing sales and marketing support, conducting quality inspections and providing
other operational support and information. We believe that our manachise model has enabled us to quickly and effectively
expand our geographical coverage and market share in a less capital-intensive manner through leveraging the local knowledge
and relationships of our franchisees.
We collect fees from our franchisees and do not bear the loss incurred or otherwise share any profit realized by our franchisees.
They are also responsible for all costs and expenses related to hotel construction and refurbishing. Our franchise and management
agreements for manachised hotels typically run for an initial term of eight to ten years, and for our hotels under Deutsche
Hospitality, 15 to 20 years.
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For our manachised hotels under legacy Huazhu, our franchisees are generally required to pay us an upfront franchise fee
typically ranging between RMB80,000 and RMB1,000,000 per hotel. In general, we charge a monthly franchise fee of
approximately 3% to 6.5% of the gross revenues generated by each manachised hotel. We also collect from franchisees a
reservation fee for using our central reservation system and a membership registration fee for customers who join our H Rewards
loyalty program at the manachised hotels. In addition, we charge system maintenance and support fees and other IT service fees
from our franchisees for sharing our technology infrastructure with our manachised hotels. Furthermore, we employ and appoint
hotel managers for the manachised hotels and charge franchisees manager fee on a monthly basis.
For our manachised hotels under Deutsche Hospitality, the franchisees have historically been required to pay Deutsche
Hospitality a management fee consisting of a base fee of 0.5% to 3.5% of the hotel’s turnover and an incentive fee of 6% to 10%
of the hotel’s adjusted gross operating profit. Deutsche Hospitality participates in the distribution of the manachised hotel’s profit
and charges a marketing fee for the manachised hotels. General manager compensation of a manachised hotel, including salaries,
social security contribution, and various benefits and bonuses, is borne by the manachised hotel. For some manachised hotels
outside Germany, Deutsche Hospitality further charges a license fee of approximately 0.5% to 1% of the hotel’s turnover. We are
gradually adapting the terms of Deutsche Hospitality’s franchise and management agreements to be similar to those of our other
manachised hotels.
● Franchised Hotels. Under our typical franchise agreements, we provide our franchisees with training, central reservation, sales
and marketing support, technology support, quality assurance inspections and other operational support and information. We do
not appoint hotel managers for our franchised hotels. We collect fees from the franchisees of our franchised hotels and do not
bear any loss incurred or otherwise, share any profit realized by our franchisees. Our franchise agreements for our franchised
hotels typically run for an initial term of eight to ten years, and for our hotels under Deutsche Hospitality, 10 to 15 years.
For our franchised hotels under legacy Huazhu, we charge our franchised hotels fees on generally the same terms as our
manachised hotels, except that we do not appoint hotel managers to our franchised hotels and thus do not charge these hotels a
monthly management service fee.
For our franchised hotels under Deutsche Hospitality, the franchisees have historically been required to pay Deutsche Hospitality
a franchise fee of approximately 0.5% to 4.0% of the hotel’s gross room revenue turnover and gross operating revenue. Some
hotels outside Germany are charged a fixed franchise fee ranging from EUR40,000 to EUR150,000 per year. Most franchised
hotels are also charged a central service fee (or marketing fee in older contracts) and a license fee. We are gradually adapting the
terms of Deutsche Hospitality’s franchise agreements to be similar to those of our other franchised hotels.
● Other Revenues. Other revenues of RMB152 million, RMB263 million and RMB309 million (US$45 million) in 2020, 2021 and
2022, respectively, represented revenues generated from services other than the operation of hotel businesses, which mainly
included revenues from the provision of IT products and services to hotels and revenues from Hua Zhu mall and other revenues
from legacy DH.
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Operating Costs and Expenses. Our operating costs and expenses consist of costs for hotel operation, other operating cost, selling and
marketing expenses, general and administrative expenses and pre-opening expenses. To mitigate the impact of COVID-19, we have taken
measures to improve our cost structure, including negotiating with landlords to reduce or delay rental payments, streamlining our hotel staff,
work shift sharing, temporary furlough of staff, and reducing or eliminating discretionary spending and capital expenditures. The following
table sets forth the components of our operating costs and expenses, both in absolute amount and as a percentage of total revenues for the
periods indicated.
2020
(RMB)
%
Year Ended December 31,
2021
(RMB)
%
(In millions except percentages)
(RMB)
2022
(US$)
%
Total revenues
Operating costs and expenses
Hotel operating costs:
Rents
Utilities
Personnel costs
Depreciation and amortization
Consumables, food and beverage
Others
Total hotel operating costs
Other operating costs
Selling and marketing expenses
General and administrative expenses
Pre-opening expenses
Total operating costs and expenses
10,196
100.0
12,785
100.0
13,862
2,010
100.0
3,485
478
2,501
1,316
885
1,064
9,729
52
597
1,259
288
11,925
34.2
4.7
24.5
12.9
8.7
10.4
95.4
0.5
5.9
12.3
2.8
116.9
3,900
507
3,022
1,413
969
1,471
11,282
58
641
1,545
81
13,607
30.5
4.0
23.6
11.1
7.6
11.5
88.3
0.4
5.0
12.1
0.6
106.4
3,927
603
3,683
1,414
1,026
1,607
12,260
62
613
1,675
95
14,705
569
87
534
205
149
233
1,777
9
89
243
14
2,132
28.3
4.3
26.6
10.2
7.4
11.6
88.4
0.5
4.4
12.1
0.7
106.1
● Hotel Operating Costs. Our hotel operating costs consist primarily of costs and expenses directly attributable to the operation of our
leased and owned as well as manachised hotels. Leased and owned hotel operating costs primarily include rental payments and utility
costs for hotel properties, compensation and benefits for our hotel-based employees, costs of hotel room consumable products and
depreciation and amortization of leasehold improvements, intangible assets and land use rights. Manachised hotel operating costs
primarily include compensation and benefits for manachised hotel managers and other limited number of employees directly hired by
us, which are recouped by us in the form of monthly service fees. We anticipate that our hotel operating costs in absolute amount will
increase as we continue to open new hotels. Our hotel operating costs as a percentage of our total revenue may change from period to
period mainly driven by three factors: (i) the hotel operating costs as a percentage of revenues from our leased and owned hotels,
(ii) the operating costs, mainly personnel costs, as a percentage of revenues from the manachised and franchised business and (iii) the
weight of manachised and franchised hotels in our revenue mix.
● Selling and Marketing Expenses. Our selling and marketing expenses consist primarily of commissions to travel intermediaries,
expenses for marketing programs and materials, bank fees for processing bank card payments, and compensation and benefits for our
sales and marketing personnel, including personnel at our centralized reservation center. We expect that our selling and marketing
expenses will increase as our sales increase and as we further expand into new geographic locations and promote our brands.
● General and Administrative Expenses. Our general and administrative expenses consist primarily of compensation and benefits for
our corporate and regional office employees and other employees who are not sales and marketing or hotel-based employees, travel
and communication expenses of our general and administrative staff, costs of third-party professional services, and office expenses
for corporate and regional offices. We expect that our general and administrative expenses will increase as we hire additional
personnel and incur additional costs in connection with the expansion of our business.
● Pre-opening Expenses. Our pre-opening expenses consist primarily of rents, personnel cost, and other miscellaneous expenses
incurred prior to the opening of a new leased or owned hotel.
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Our pre-opening expenses are largely determined by the number of pre-opening hotels in the pipeline and the rental fees incurred during
the development stage. Landlords typically offer a two- to eight-month rent-free period at the beginning of the lease. Nevertheless, rental is
booked during this period on a straight-line basis. Therefore, a portion of pre-opening expenses is non-cash rental expenses. For certain of our
hotels (under Deutsche Hospitality), the landlords are responsible for renovating the hotels (other than soft furnishing) and we are not required
to pay rent until this renovation is completed. The following table sets forth the components of our pre-opening expenses for the periods
indicated.
Rents
Personnel cost
Others
Total pre-opening expenses
Year Ended December 31,
2020
(RMB)
2021
(RMB)
2022
(RMB)
(US$)
251
15
22
288
(In millions)
68
5
8
81
84
5
6
95
12
1
1
14
EBITDA (Non-GAAP) and Adjusted EBITDA (Non-GAAP). We use earnings before interest income, interest expense, income tax expense
(benefit) and depreciation and amortization, or EBITDA, a non-GAAP financial measure, to assess our results of operations before the impact
of investing and financing transactions and income taxes. Given the significant investments that we have made in leasehold improvements,
depreciation and amortization expense comprises a significant portion of our cost structure. We believe that EBITDA is widely used by other
companies in the lodging industry and may be used by investors as a measure of our financial performance. We also use Adjusted EBITDA,
another non-GAAP measure, which is defined as EBITDA before share-based compensation expenses and unrealized gains (losses) from fair
value changes of equity securities. We present Adjusted EBITDA because it is used by our management to evaluate our operating performance.
We also believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our consolidated
results of operations in the same manner as our management and in comparing financial results across accounting periods and to those of our
peer companies.
A reconciliation of EBITDA and Adjusted EBITDA to net income, which is the most directly comparable U.S. GAAP measure, is
provided below:
For the Year Ended December 31,
2022
2020
(RMB)
2021
(RMB)
(RMB)
(US$)
Net loss attributable to our company
Interest income
Interest expense
Income tax expense (benefit)
Depreciation and amortization
EBITDA(1) (Non-GAAP)
Share-based compensation expenses
Unrealized (gains) losses from fair value changes of equity securities
Adjusted EBITDA(1) (Non-GAAP)
(2,192)
(119)
533
(215)
1,362
(631)
122
265
(244)
(In millions)
(465)
(89)
405
12
1,503
1,366
109
96
1,571
(1,821)
(87)
409
207
1,456
164
87
359
610
(264)
(13)
59
30
211
23
13
52
88
(1) We believe that EBITDA is a useful financial metric to assess our operating and financial performance before the impact of investing and
financing transactions and income taxes. Given the significant investments that we have made in leasehold improvements, depreciation
and amortization expense comprises a significant portion of our cost structure. In addition, we believe that EBITDA is widely used by
other companies in the lodging industry and may be used by investors as a measure of our financial performance. We believe that
EBITDA will provide investors with a useful tool for comparability between periods because it eliminates depreciation and amortization
expense attributable to capital expenditures. We also use Adjusted EBITDA, which is defined as EBITDA before share-based
compensation expenses and unrealized gains (losses) from fair value changes of equity securities. We present Adjusted EBITDA because
it is used by our management to evaluate our operating performance. We also believe that Adjusted EBITDA provides useful information
to investors and others in understanding and evaluating our consolidated results of operations in the same manner as our management and
in comparing financial results across accounting periods and to those of our peer companies. The presentation of EBITDA and Adjusted
EBITDA should not be construed as an indication that our future results will be unaffected by other charges and gains we consider to be
outside the ordinary course of our business.
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The use of EBITDA and Adjusted EBITDA has certain limitations. Depreciation and amortization expense for various long-term assets,
income tax, interest income and interest expense have been and will be incurred and are not reflected in the presentation of EBITDA.
Share-based compensation expenses and unrealized gains (losses) from fair value changes of equity securities have been and will be
incurred and are not reflected in the presentation of Adjusted EBITDA. Each of these items should also be considered in the overall
evaluation of our results. Additionally, EBITDA or Adjusted EBITDA does not consider capital expenditures and other investing activities
and should not be considered as a measure of our liquidity. We compensate for these limitations by providing the relevant disclosure of our
depreciation and amortization, interest income, interest expense, income tax expense, share-based compensation expenses, unrealized
gains (losses) from fair value changes of equity securities, capital expenditures and other relevant items both in our reconciliations to the
U.S. GAAP financial measures and in our consolidated financial statements, all of which should be considered when evaluating our
performance.
The terms EBITDA and Adjusted EBITDA are not defined under U.S. GAAP, and neither EBITDA nor Adjusted EBITDA is a measure of
net income, operating income, operating performance or liquidity presented in accordance with U.S. GAAP. When assessing our operating
and financial performance, you should not consider this data in isolation or as a substitute for our net income, operating income or any
other operating performance measure that is calculated in accordance with U.S. GAAP. In addition, our EBITDA or Adjusted EBITDA
may not be comparable to EBITDA or Adjusted EBITDA or similarly titled measures utilized by other companies since such other
companies may not calculate EBITDA or Adjusted EBITDA in the same manner as we do.
Taxation
We are incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, the British Virgin Islands and Seychelles, our
subsidiaries are not subject to tax on income or capital gain. Under the current laws of Singapore, companies are subject to Singapore
corporate income tax at a rate of 17%. Under the current laws of Germany, companies are subject to income tax at a standard rate of 15%
(15.825% including solidarity surcharge), plus municipal trade tax of 7%-21%. Companies established in Japan are subject to Japan corporate
income tax at a rate of 23.2% (30%-34% including local taxes). Companies established in Hong Kong are subject to Hong Kong profit tax at a
rate of 16.5%. Companies established in Taiwan are subject to Taiwan corporate income tax at a rate of 20%.
Under the Law of the People’s Republic of China on Enterprise Income Tax (“EIT Law”), which was effective from January 1, 2008,
domestically-owned enterprises and foreign-invested enterprises are subject to a uniform tax rate of 25%, and the industries and projects that
are encouraged and supported by the State may enjoy tax preferential treatment. Jizhu Information and Technology (Shanghai) Co., Ltd.
(“Jizhu Shanghai”) (previously named Mengguang Information and Technology (Shanghai) Co., Ltd) is a recognized software development
entity located in Shanghai of PRC. In November 2018, Jizhu Shanghai was qualified as a high and new tech enterprise, resulting Jizhu
Shanghai being subject to a reduced tax rate of 15% in 2018, 2019 and 2020. In December 2021, Jizhu Shanghai was qualified as a high and
new tech enterprise, resulting Jizhu Shanghai being subject to a reduced tax rate of 15% in 2021, 2022 and 2023. H-World Information and
Technology Co., Ltd. (“H-World Information”) is qualified as a high and new tech enterprise, resulting H-World Information and Technology
Co., Ltd. being subject to a reduced tax rate of 15% in 2019, 2020 and 2021. In December 2022, H-World Information was qualified as a high
and new tech enterprise, resulting H-World Information being subject to a reduced tax rate of 15% in 2022, 2023 and 2024.
The EIT Law imposes a withholding tax of 10% on dividends distributed by a PRC foreign-invested enterprise to its immediate holding
company outside of China, if such immediate holding company is considered a “non-resident enterprise” without any establishment or place
within China or if the dividends received have no connection with the establishment or place of such immediate holding company within
China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that provides for a different
withholding tax rate. A holding company which is a tax resident in Hong Kong, for example, would be subject to a 5% withholding tax rate on
the dividends received from its PRC subsidiary if it owns at least 25% equity in the PRC subsidiary and is the beneficial owner of the
dividends. See “Item 3. Key Information — D. Risk Factors — Risks Related to Doing Business in China — It is unclear whether we will be
considered as a PRC resident enterprise under the Enterprise Income Tax Law of the PRC, and depending on the determination of our PRC
resident enterprise status, if we are not treated as a PRC resident enterprise, dividends paid to us by our PRC subsidiaries will be subject to
PRC withholding tax; if we are treated as a PRC resident enterprise, we may be subject to 25% PRC income tax on our worldwide income, and
holders of our ADSs or ordinary shares that are non-PRC resident investors may be subject to PRC withholding tax on dividends on and gains
realized on their transfer of our ADSs or ordinary shares.”
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Results of Operations
We have grown rapidly since we began our current business of operating and managing a multi-brand hotel portfolio in 2007. We believe
that the period-to-period comparison of operating results should not be relied upon as being indicative of future performance. The following
table sets forth a summary of our consolidated results of operations, both in absolute amount and as a percentage of total revenues for the
periods indicated. This information should be read together with our consolidated financial statements and related notes for the relevant
periods.
2020
RMB
%
Year Ended December 31,
2021
RMB
%
(In millions except percentages)
(RMB)
2022
(US$)
%
Consolidated Statement of Comprehensive
Income Data:
Revenues:
Leased and owned hotels
Manachised and franchised hotels
Others
Total revenues
Operating costs and expenses(1):
Hotel operating costs
Other operating costs
Selling and marketing expenses
General and administrative expenses
Pre-opening expenses
Total operating costs and expenses
Goodwill impairment loss
Other operating income, net
(Loss) income from operations
Interest income
Interest expenses
Other (expense) income, net
Unrealized losses from fair value changes of
equity securities, net
Foreign exchange gain (loss), net
Loss before income taxes
Income tax (benefit) expense
Loss from equity method investments
Net loss
Less: net loss attributable to noncontrolling
interest
Net loss attributable to H World Group Limited
Note:
6,908
3,136
152
10,196
9,729
52
597
1,259
288
11,925
437
480
(1,686)
119
533
(89)
(265)
175
(2,279)
(215)
(140)
(2,204)
(12)
(2,192)
(1) Includes share-based compensation expenses as follows:
Share-based compensation expenses
8,118
4,404
263
12,785
11,282
58
641
1,545
81
13,607
—
986
164
89
405
157
(96)
(317)
(408)
12
(60)
(480)
(15)
(465)
63.5
34.4
2.1
100.0
88.3
0.4
5.0
12.1
0.6
106.4
—
7.7
1.3
0.7
3.2
1.2
(0.7)
(2.5)
(3.2)
0.1
(0.5)
(3.8)
(0.1)
(3.7)
9,148
4,405
309
13,862
12,260
62
613
1,675
95
14,705
—
549
(294)
87
409
10
(359)
(641)
(1,606)
207
(36)
(1,849)
(28)
(1,821)
1,326
639
45
2,010
1,777
9
89
243
14
2,132
—
79
(43)
13
59
1
(52)
(93)
(233)
30
(5)
(268)
(4)
(264)
66.0
31.8
2.2
100.0
88.4
0.5
4.4
12.1
0.7
106.1
—
4.0
(2.1)
0.6
3.0
0.1
(2.6)
(4.6)
(11.6)
1.4
(0.3)
(13.3)
(0.2)
(13.1)
Year Ended December 31,
2020
(RMB)
2021
(RMB)
2022
(RMB)
(US$)
122
(In millions)
109
87
13
67.8
30.8
1.4
100.0
95.4
0.5
5.9
12.3
2.8
116.9
4.3
4.7
(16.5)
1.2
5.2
(0.9)
(2.6)
1.7
(22.3)
(2.1)
(1.4)
(21.6)
(0.1)
(21.5)
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Table of Contents
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
Total Revenues. Our total revenues increased by 8.4% from RMB12,785 million in 2021 to RMB13,862 million (US$2,010 million) in
2022. This increase was primarily due to the robust recovery of our European business since Europe’s lifting of COVID-19 related restrictions
starting from mid-February 2022. Legacy Huazhu’s total revenues for 2022 were RMB10,655 million (US$1,545 million), representing a 5.3%
decrease compared to 2021.
● Leased and Owned Hotels. Total revenues from our leased and owned hotels increased by 12.7% from RMB8,118 million in 2021 to
RMB9,148 million (US$1,326 million) in 2022. This increase was primarily due to the increase of revenues from legacy DH and
partially offset by the decrease of revenues from Legacy Huazhu. Legacy Huazhu’s total revenues from leased and owned hotels in
2022 were RMB6,062 million (US$879 million), representing a 9.2% decrease compared to 2021 due to negative impact of the
COVID-19 and its related restrictions. Legacy DH’s total revenues from leased and owned hotels in 2022 was RMB3,086 million
(US$447 million), representing a significant increase compared to 2021, primarily due to the robust recovery of our European
business since Europe’s lifting of COVID-19 related restrictions starting from mid-February 2022.
● Manachised and Franchised Hotels. Total revenues from our manachised and franchised hotels remained relatively flat at RMB4,404
million in 2021 and RMB4,405 million (US$639 million) in 2022. Legacy Huazhu’s total revenues from manachised and franchised
hotels in 2022 were RMB4,324 million (US627 million), representing a 0.4% decrease compared to RMB4,342 million in 2021.
Legacy DH’s total revenues from manachised and franchised hotels in 2022 was RMB81 million (US$12 million), representing a
30.6% increase compared to 2021, also primarily due to the robust recovery of our European operation.
● Other Revenues. Other revenues increased by 17.5% from RMB263 million in 2021 to RMB309 million (US$45 million) in 2022.
Operating Costs and Expenses. Our total operating costs and expenses increased by 8.1% from RMB13,607 million in 2021 to
RMB14,705 million (US$2,132 million) in 2022.
● Hotel Operating Costs. Our hotel operating costs increased by 8.7% from RMB11,282 million in 2021 to RMB12,260 million
(US$1,777 million) in 2022. This increase was primarily due to the continued hotel network expansion of legacy Huazhu, and
business recovery of legacy DH, partially offset by our cost control measures to achieve rental reductions. Our hotel operating costs
as a percentage of total revenues remained relatively flat at 88.3% in 2021 and 88.4% in 2022. Legacy Huazhu’s hotel operating costs
in 2022 were RMB9,170 million (US$1,330 million), representing 86.1% of legacy Huazhu’s total revenues, compared to RMB8,806
million or 78.3% of revenue in 2021. In the full year of 2022, we recognized a negative lease expense of RMB281 million under the
relief of lease concession from COVID-19.
● Selling and Marketing Expenses. Our selling and marketing expenses decreased by 4.4% from RMB641 million in 2021 to RMB613
million (US$89 million) in 2022. Our selling and marketing expenses as a percentage of total revenues decreased from 5.0% in 2021
to 4.4% in 2022, primarily attributable to our cost control measures for legacy Huazhu to address the negative impact of the COVID-
19, partially offset by a 53.0% increase in selling and marketing expenses from 2021 to 2022 for legacy DH, which is in line with its
business recovery. Legacy Huazhu’s selling and marketing expenses in 2022 were RMB336 million (US$49 million), representing
3.2% of legacy Huazhu’s total revenues, compared to RMB460 million in 2021.
● General and Administrative Expenses. Our general and administrative expenses increased by 8.4% from RMB1,545 million in 2021
to RMB1,675 million (US$243 million) in 2022. The increase was mainly due to investments in our business development team,
information technology division and upscale hotel division, partially offset by lower headquarter expenses since the second quarter of
2022. Our general and administrative expenses as a percentage of total revenues remained relatively flat at 12.1% in both 2021 and
2022. Legacy Huazhu’s general and administrative expenses in 2022 were RMB1,262 million (US$183 million), representing 11.8%
of legacy Huazhu’s total revenues, compared to RMB1,164 million in 2021.
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● Pre-opening Expenses. Our pre-opening expenses increased by 17.3% from RMB81 million in 2021 to RMB95 million (US$14
million) in 2022. Our pre-opening expenses as a percentage of total revenues increased from 0.6% in 2021 to 0.7% in 2022. Our pre-
opening expenses in 2022 was primarily from legacy Huazhu.
Other Operating Income, Net. Our other operating income decreased by 44.3% from RMB986 million in 2021 to RMB549 million
(US$79 million) in 2022, which was mainly attributable to a decrease in COVID-19 subsidies granted to our legacy DH.
Income (Loss) from Operations. As a result of the foregoing, we had loss from operations of RMB294 million (US$43 million) in 2022,
compared to income from operations of RMB164 million in 2021. Legacy Huazhu’s income from operations in 2022 was RMB51 million
(US$7 million).
Interest Expense, Net. Our net interest expense was RMB322 million (US$46 million) in 2022. Our interest income was RMB87 million
(US$13 million), and our interest expense was RMB409 million (US$59 million) in 2022. Our net interest expense was RMB316 million in
2021. Our interest income was RMB89 million, and our interest expense was RMB405 million in 2021.
Other Income, Net. We recorded other income, net of RMB10 million (US$1 million) in 2022, compared to other income, net of RMB157
million in 2021. The higher other income, net in 2021 was due to our gains from sales of Accor’s shares in 2021.
Unrealized Losses from Fair Value Changes of Equity Securities. Unrealized gains (losses) from fair value changes of equity securities
mainly represents the unrealized gains (losses) from our investment in equity securities with readily determinable fair values, such as Accor
hotels. Our unrealized losses from fair value changes of equity securities were RMB359 million (US$52 million) in 2022, primarily due to the
decrease in the price of Accor’s shares we held. We had unrealized losses from fair value changes of equity securities of RMB96 million in
2021.
Foreign Exchange Loss. Our foreign exchange loss was RMB641 million (US$93 million) in 2022, compared to our foreign exchange loss
of RMB317 million in 2021. Our foreign exchange loss in 2022 was primarily attributable to the exchange loss related to our investment in
Accor denominated in Euro and certain internal loan receivables denominated in Euro as a result of the Euro’s depreciation.
Income Tax Expense. Our income tax expense was RMB207 million (US$30 million) in 2022, compared to income tax expense of RMB12
million in 2021. Our effective tax rate in 2022 was negative 12.9%, compared with negative 2.9% in 2021.
Equity Method Investments. Our loss from equity method investments decreased from RMB60 million in 2021 to RMB36 million (US$5
million) in 2022, primarily due to the decrease in losses incurred by certain of our investee companies.
Net Income (Loss) Attributable to Noncontrolling Interest. Net income attributable to noncontrolling interest represents joint venture
partners’ share of our net income or loss based on their equity interest in the leased and owned hotels owned by the joint ventures which are
controlled and consolidated by us. Net loss attributable to noncontrolling interest was RMB28 million (US$4 million) in 2022, primarily due to
losses from certain of our joint ventures. The net loss attributable to noncontrolling interest was RMB15 million in 2021.
Net Income (Loss) Attributable to H World Group Limited. As a result of the foregoing, net loss attributable to H World Group Limited
increased from RMB465 million in 2021 to RMB1,821 million (US$264 million) in 2022. In 2022, Legacy Huazhu’s net loss attributable to H
World Group Limited was RMB1,420 million (US$206 million), compared to net income attributable to H World Group Limited of RMB153
million in 2021.
EBITDA and Adjusted EBITDA. EBITDA (non-GAAP) was RMB164 million (US$23 million) in 2022, compared with RMB1,366
million in 2021. Adjusted EBITDA (non-GAAP) was RMB610 million (US$88 million) in 2022, compared with RMB1,571 million in 2021.
This change was primarily due to (i) the decrease in our revenue from legacy Huazhu as a result of negative pandemic impact, which offset in
part the revenue gains from our European operations, (ii) a decrease in the price of Accor’s shares we held, and (iii) our foreign exchange loss
related to our investment in Accor and certain internal loan receivables denominated in Euro as a result of the Euro’s depreciation. Legacy
Huazhu’s EBITDA decreased from RMB1,827 million in 2021 to RMB282 million (US$41 million) in 2022.
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Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Total Revenues. Our total revenues increased by 25.4% from RMB10,196 million in 2020 to RMB12,785 million in 2021. This increase
was primarily due to the gradual recovery from COVID-19 in China, which resulted in higher occupancy rates and RevPAR of our Legacy
Huazhu hotels. Legacy Huazhu’s total revenues for 2021 were RMB11,247 million, representing a 29.8% increase compared to 2020.
● Leased and Owned Hotels. Total revenues from our leased and owned hotels increased by 17.5% from RMB6,908 million in 2020 to
RMB8,118 million in 2021. This increase was primarily due to relief from the impact of COVID-19 in China, as a result of which the
RevPAR for legacy Huazhu’s leased and owned hotels (excluding those under temporary requisition), was RMB202 in 2021,
compared to RMB166 for all of our leased and owned hotels in 2020. Legacy Huazhu’s total revenues from leased and owned hotels
in 2021 were RMB6,674 million, representing a 22.7% increase compared to 2020. This increase was partially offset by a decrease in
revenue from the leased hotels of Deutsche Hospitality due to the depreciation in Euro, although the revenue from the leased hotels of
Deutsche Hospitality in Euro increased slightly from 2020 to 2021.
● Manachised and Franchised Hotels. Total revenues from our manachised and franchised hotels increased by 40.4% from RMB3,136
million in 2020 to RMB4,404 million in 2021. This increase was primarily due to relief from the impact of COVID-19. Legacy
Huazhu’s total revenues from manachised and franchised hotels in 2021 were RMB4,342 million, representing a 40.4% increase
compared to 2020. Legacy DH’s total revenues from manachised and franchised hotels in 2021 was RMB62 million, representing a
44.2% year-over-year increase due to the strong recovery of leisure travel, especially for Egypt.
● Other Revenues. Other revenues increased by 73.0% from RMB152 million in 2020 to RMB263 million in 2021.
Operating Costs and Expenses. Our total operating costs and expenses increased by 14.1% from RMB11,925 million in 2020 to
RMB13,607 million in 2021.
● Hotel Operating Costs. Our hotel operating costs increased by 16.0% from RMB9,729 million in 2020 to RMB11,282 million in
2021. This increase was primarily due to higher rental costs in relation to our leased upscale hotels and acquired CitiGO hotels,
higher personnel costs in relation to continuous hotel network expansion, and intangible assets impairment loss mainly related to
legacy DH. Our hotel operating costs as a percentage of total revenues decreased from 95.4% in 2020 to 88.3% in 2021. The year-
over-year decrease in the percentage was mainly attributable to recovery in our revenue from the impact of COVID-19. Legacy
Huazhu’s hotel operating costs in 2021 were RMB8.8 billion, representing 78.3% of legacy Huazhu’s total revenues.
● Selling and Marketing Expenses. Our selling and marketing expenses increased by 7.4% from RMB597 million in 2020 to RMB641
million in 2021. Our selling and marketing expenses as a percentage of total revenues decreased from 5.9% in 2020 to 5.0% in 2021,
primarily attributable to recovery in our revenue from the impact of COVID-19. Legacy Huazhu’s selling and marketing expenses in
2021 were RMB460 million, representing 4.1% of legacy Huazhu’s total revenues.
● General and Administrative Expenses. Our general and administrative expenses increased by 22.7% from RMB1,259 million in 2020
to RMB1,545 million in 2021. Our general and administrative expenses as a percentage of total revenues remained relatively flat at
12.3% in 2020 and 12.1% in 2021. Legacy Huazhu’s general and administrative expenses in 2021 were RMB1,164 million,
represented 10.3% of legacy Huazhu’s total revenues, compared to RMB893 million in 2020. The increase was mainly due to
investments in our business development team, our information technology, and our upscale hotel division.
● Pre-opening Expenses. Our pre-opening expenses decreased by 71.9% from RMB288 million in 2020 to RMB81 million in 2021.
Our pre-opening expenses as a percentage of total revenues decreased from 2.8% in 2020 to 0.6% in 2021. The decrease was mainly
attributable to the opening of certain upscale hotels in 2020. Our pre-opening expenses in 2021 was primarily from legacy Huazhu.
Other Operating Income, Net. Our other operating income increased significantly from RMB480 million in 2020 to RMB986 million in
2021, which was mainly attributable to COVID-19 related subsidy income for our legacy DH.
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Income (Loss) from Operations. As a result of the foregoing, we had income from operations of RMB164 million in 2021, compared to
loss from operations of RMB1,686 million in 2020. Legacy Huazhu’s income from operations in 2021 was RMB891 million.
Interest Income (Expense), Net. Our net interest expense was RMB316 million in 2021. Our interest income was RMB89 million, and our
interest expense was RMB405 million in 2021. Our net interest expense was RMB414 million in 2020. Our interest income was RMB119
million, and our interest expense was RMB533 million in 2020. The decrease in our net interest expense was primarily due to a decrease in
bank borrowings in 2021.
Other Income (Expense), Net. We recorded other income, net of RMB157 million in 2021, compared to other expense, net of RMB89
million in 2020. This change was primarily attributable to the realized gain from partial disposal of Accor’s shares in 2021.
Unrealized Gains (Losses) from Fair Value Changes of Equity Securities. Unrealized gains (losses) from fair value changes of equity
securities mainly represents the unrealized gains (losses) from our investment in equity securities with readily determinable fair values, such as
Accor hotels. Our unrealized losses from fair value changes of equity securities were RMB96 million in 2021, primarily due to decrease in the
price of Accor’s shares we held. We had unrealized losses from fair value changes of equity securities of RMB265 million in 2020.
Foreign Exchange (Loss) Gain. Our foreign exchange losses was RMB317 million in 2021, compared to our foreign exchange gain of
RMB175 million in 2020. Our foreign exchange losses in 2021 was primarily attributable to the exchange loss related to our investment in
Accor in Euro.
Income Tax (Expense) Benefit. Our income tax expense was RMB12 million in 2021, compared to income tax benefit of RMB215 million
in 2020. Our effective tax rate in 2021 was negative 2.9%, compared with 9.4% in 2020. The negative effective tax rate in 2021 primarily
resulted from the valuation allowance provided for deferred tax assets.
Equity Method Investments. Our loss from equity method investments decreased from RMB140 million in 2020 to RMB60 million in
2021, primarily due to the relief of losses incurred by certain of our investee companies from the impact of COVID-19.
Net Income (Loss) Attributable to Noncontrolling Interest. Net income attributable to noncontrolling interest represents joint venture
partners’ share of our net income or loss based on their equity interest in the leased and owned hotels owned by the joint ventures which are
controlled and consolidated by us. Net loss attributable to noncontrolling interest was RMB15 million in 2021, primarily due to losses from
certain of our joint ventures. The net loss attributable to noncontrolling interest was RMB12 million in 2020.
Net Income (Loss) Attributable to H World Group Limited. As a result of the foregoing, net loss attributable to H World Group Limited
decreased from RMB2,192 million in 2020 to RMB465 million in 2021. In 2021, legacy Huazhu’s net income attributable to H World Group
Limited was RMB153 million.
EBITDA and Adjusted EBITDA. EBITDA (non-GAAP) was RMB1,366 million in 2021, compared with negative RMB631 million in
2020. Adjusted EBITDA (non-GAAP) was RMB1,571 million in 2021, compared with negative RMB244 million in 2020. This change was
primarily due to relief from the impact of COVID-19 in 2021. In 2021, legacy Huazhu’s EBITDA was RMB1,827 million.
Outstanding Indebtedness
In May 2020, we issued US$500 million of the 2026 Notes. These notes will mature on May 1, 2026 and bear interest at a rate of 3.00%
per annum, payable in arrears semi-annually on May 1 and November 1, beginning November 1, 2020. The 2026 Notes can be converted into
our ADSs at an initial conversion rate of 23.9710, subject to adjustment upon the occurrence of certain events, of our ADSs per US$1,000
principal amount of the notes (equivalent to an initial conversion price of approximately US$41.72 per ADS). Holders of the notes may require
the Company to repurchase all or a portion of the notes for cash on May 1, 2024, or upon a fundamental change, at a repurchase price equal to
100% of the principal amount, plus accrued and unpaid interest.
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In January 2021, we entered into a twelve-year syndicated loan contract with facility amount of RMB650 million expiring in December
2032. This loan is used to finance the construction project of our headquarters. The interest rate resets every year, and is based on the People’s
Bank of China five-year benchmark LPR minus certain basis points on the pricing date. The mortgage ratio covenant is related to this facility.
We were fully in compliance with the further amended covenants as of December 31, 2022. As of December 31, 2021 and 2022, the
outstanding loan amount is RMB53 million and RMB53 million, respectively.
In August 2022, we entered into a 3-year long-term facility of EUR220 million and RMB-equivalent of EUR110 million term facility, and
EUR70 million revolving credit facility agreement with several banks. The EUR70 million revolving credit facility is available for 35 months
after the date of the agreement. The interest rate on the loan for each interest period is the aggregate of the applicable Margin and EURIBOR or
one-year benchmark LPR. The margin for each loan depends on the currency of loan, a loan denominated in EUR means 1.55% per annum and
a loan denominated in RMB means -0.15% per annum. There are some financial covenants including interest cover, leverage and book equity
related to this facility. As of December 31, 2022, we had drawn down EUR220 million, RMB equivalent of EUR110 million and EUR70
million under the facility agreement and repaid nil.
In October 2022, we entered into a one-year uncommitted term loan facility of up to US$123 million which is to be made by single
drawing only. We had drawn down US$121 million under this agreement, the interest rate was fixed at 5.4% per annum. As of December 31,
2022, the outstanding loan amount was US$121 million.
In October 2022, we entered into a one-year USD-denominated facility agreement that allowed us to draw down no more than RMB1,000
million with the interest rate to be determined case by case. As of December 31, 2022, we had drawn down US$65 million under the facility
agreement and repaid all the bank borrowings in advance in January 2023.
As of December 31, 2022, we had a total debt balance of RMB9.9 billion (US$1.4 billion), unutilized facilities of approximately RMB2.1
billion.
We had complied with the covenants under our existing banking facilities as of December 31, 2022.
5.B. Liquidity and Capital Resources
Our principal sources of liquidity have been cash generated from operating activities, proceeds from our follow-on offering of ADSs in
January 2023, borrowings from commercial banks, and issuance of convertible senior notes due 2026. As of December 31, 2022, we had
RMB3,583 million (US$520 million) in cash and cash equivalents. Our cash and cash equivalents and restricted cash consist of cash on hand,
liquid investments which have maturities of three months or less when acquired and are unrestricted as to withdrawal or use, deposits used as
security against borrowings, and deposits restricted due to contract disputes or lawsuits or special purpose. Our cash and cash equivalents as of
December 31, 2022 primarily consisted of Renminbi and U.S. dollars.
As of December 31, 2022, we had 40 properties for our leased and owned hotels under development. As of December 31, 2022, we
expected to incur approximately RMB1,487 million (US$216 million) of capital expenditures in connection with (i) certain recently completed
leasehold improvements and installation of equipment and (ii) the funding of the leasehold improvements and installation of equipment of
these 40 leased and owned hotels, which is expected to be incurred within one to two years. We intend to fund this planned expansion with our
operating cash flow, our cash balance and our credit facilities.
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The following table sets forth a summary of our cash flows for the periods indicated:
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at the beginning of the year
Cash, cash equivalents and restricted cash at the end of the year
Operating Activities
Year Ended December 31,
2020
(RMB)
2021
(RMB)
2022
(RMB)
(US$)
(In millions)
609
8,101
883
(300)
(6,909)
13,999
7,090
1,342
1,402
(1,801)
(88)
(1,949)
7,090
5,141
1,564
522
(1,394)
297
(55)
5,141
5,086
227
76
(201)
43
(7)
745
738
In 2020, 2021 and 2022, we financed our operating activities primarily through cash generated from operations.
Net cash provided by operating activities amounted to RMB1,564 million (US$227 million) in 2022, primarily attributable to (i) an add-
back of RMB2,257 million (US$327 million) in noncash lease expense and (ii) an add-back of RMB1,456 million (US$211 million) in
depreciation and amortization, partially offset by (i) our net loss of RMB1,849 million (US$268 million) and (ii) a decrease in operating lease
liabilities of RMB1,608 million (US$233 million).
Net cash provided by operating activities amounted to RMB1,342 million in 2021, primarily attributable to (i) an add-back of RMB1,503
million in depreciation and amortization and (ii) an add-back of RMB2.3 billion in noncash lease expense, partially offset by (i) deferred taxes
of RMB543 million, (ii) our net loss of RMB480 million; (iii) decrease in operating lease liabilities of RMB2.1 billion; and (iv) decrease in
accrued expenses and other current liabilities of RMB439 million.
Net cash provided by operating activities amounted to RMB609 million in 2020, primarily attributable to (i) an add-back of RMB2,063
million in noncash lease expense, (ii) an add-back of RMB1,362 million in depreciation and amortization, and (iii) an add-back of RMB709
million in impairment loss, partially offset by (i) our net loss of RMB2,204 million, (ii) a decrease of RMB1,640 million in operating lease
liability, and (iii) a deduction of RMB553 million in deferred taxes.
Investing Activities
Our cash used in investing activities in 2022 is primarily related to purchases of property and equipment of RMB1,049 million (US$152
million), proceeds from maturity/sale of investments of RMB937 million (US$136 million), and purchase of investments of RMB401 million
(US$58 million).
Net cash used in investing activities decreased from RMB1,402 million in 2021 to RMB522 million (US$76 million) in 2022, primarily
due to (i) a decrease in acquisitions, net of cash received from RMB742 million in 2021 to RMB57 million (US$8 million) in 2022, (ii) a
decrease in purchase of property and equipment from RMB1,658 million in 2021 to RMB1,049 million (US$152 million) in 2022, and (iii) a
decrease in proceeds from maturity/sale and return of investments from RMB1,494 million in 2021 to RMB937 million (US$136 million) in
2022.
Net cash used in investing activities decreased from RMB8,101 million in 2020 to RMB1,402 million in 2021, primarily due to (i) a
decrease in acquisitions, net of cash received from RMB5,060 million in 2020 to RMB742 million in 2021, and (ii) a decrease in purchase of
investments from RMB1,702 million in 2020 to RMB521 million in 2021, and (iii) an increase in proceeds from maturity/sale of investments
from RMB396 million in 2020 to RMB1,494 million in 2021.
Financing Activities
Our major financing activities since 2021 consist of loans with commercial banks, proceeds from our follow-on offering of ADSs in
January 2023, payment of dividends, and share repurchases.
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We had net cash used in financing activities of RMB1,394 million (US$201 million) in 2022, compared with net cash used in financing
activities of RMB1,801 million in 2021. Net cash used in financing activities in 2022 primarily consisted of proceeds from short-term debt of
RMB4,249 million (US$616 million), proceeds from long-term debt of RMB2,797 million (US$407 million) and repayment of convertible
senior notes of RMB3,406 million (US$494 million), partially offset by (i) repayment of short-term debt of RMB1,935 million (US$281
million); and (ii) repayment of long-term debt of RMB2,364 million (US$342 million).
Net cash provided by financing activities of RMB883 million in 2020, compared with net cash used in financing activities of RMB1,801
million in 2021. Net cash used in financing activities in 2021 primarily consisted of proceeds from short-term bank borrowing of RMB2,288
million, offset of (i) repayment of short-term bank borrowings of RMB2,474 million; and (ii) repayment of long-term bank borrowings of
RMB1,650 million.
Net cash provided by financing activities in 2020 primarily consisted of (i) net proceeds of RMB6,018 million from our global offering on
the Hong Kong Stock Exchange, (ii) proceeds from issuance of convertible senior notes, net of issuance cost of RMB3,499 million, (iii)
proceeds from short-term bank borrowings of RMB1,658 million, and (iv) proceeds from long-term bank borrowings of RMB1,652 million,
partially offset of (i) repayment of long-term bank borrowings of RMB9,163 million; and (ii) repayment of short-term bank borrowings of
RMB1,993 million.
Capital Expenditure
Our capital expenditures were incurred primarily in connection with leasehold improvements, investments in furniture, fixtures and
equipment and technology, information and operational software. Our cash paid on capital expenditures totaled RMB1,776 million, RMB1,675
million and RMB1,053 million (US$153 million) in 2020, 2021 and 2022, respectively. Our capital expenditures in 2022 consisted of
RMB1,049 million (US$152 million) in property and equipment and RMB4 million (US$1 million) in software and license. We will continue
to make capital expenditures to meet the expected growth of our operations and expect our cash balance, cash generated from our operating
activities and credit facilities will meet our capital expenditure needs in the foreseeable future.
Transfer of Cash within Our Organization
H World Group Limited is a holding company with no material operations of its own. H World Group Limited conducts its operations
primarily through its subsidiaries in China and Europe. Under legacy Huazhu, H World Group Limited generally transfers cash to its Hong
Kong or Singapore subsidiaries, by way of loans and capital contributions, and these Hong Kong or Singapore subsidiaries generally transfer
cash to its PRC subsidiaries by making capital contributions or providing loans to them. H World Group Limited may also directly transfer
cash to its PRC subsidiaries by making capital contributions or providing loans to them. These PRC subsidiaries generally transfer cash to the
VIEs by loans or by making payment to the VIEs for inter-group transactions. These PRC subsidiaries generally transfer cash to these Hong
Kong or Singapore subsidiaries by way of repayment of loans and dividends, and these PRC, Hong Kong or Singapore subsidiaries generally
transfer cash to H World Group Limited through loans or repayment of loans.
To a lesser extent, H World Group Limited and its subsidiaries may transfer cash to entities of Deutsche Hospitality by way of loans, if
needed.
Except as disclosed in the table and discussion below, the VIEs have not distributed and do not currently have any plans to distribute any
earnings or settle any amounts owed under the contractual agreements to our subsidiaries. The VIEs in aggregate contributed an insignificant
portion (less than 2%) of our total retained earnings as of December 31, 2020, 2021 and 2022.
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The following table presents the cash flows among the Company, its subsidiaries and the VIEs for the fiscal years ended December 31,
2020, 2021 and 2022.
Cash transfer between our company, subsidiaries and VIEs
(RMB in millions)
Cash flows between subsidiaries and VIEs
Loans from subsidiaries to the VIEs under the contractual arrangement
Cash receipts by the VIEs from subsidiaries for services
Loans to subsidiaries by the VIEs
Repayment of loans by subsidiaries
Cash flows between holding company and subsidiaries(1)
Loans to subsidiaries
Repayment of loans by subsidiaries
Loans from subsidiaries
Note:
(1)
Includes overseas and PRC subsidiaries
For the years ended December 31, 2020, 2021 and 2022,
2020
2021
2022
5
29
(14)
3
—
34
(21)
7
1
30
(2)
5
2020
(6,267)
2021
(1,050)
—
—
—
—
2022
(750)
4,165
798
● our subsidiaries paid service fee totaled approximately RMB29 million, RMB34 million and RMB30 million (US$4 million),
respectively, to the VIEs for telecommunication services and internet-related services provided to hotels;
● cash inflows of the VIEs were primarily provided via loan arrangements with our subsidiaries, our payment to the VIEs for inter-
group transactions, and capital contributions of the nominee shareholders. For example, HZ Hotel Management, which is our
subsidiary that entered into contractual arrangements with the Consolidated Affiliated Entities, provided loans of approximately
RMB5 million to nominee shareholders of Shanghai Huanmei in 2020 as capital contributions to the VIEs, the cash flows of which
have been included in “loans from subsidiaries to the VIEs under the contractual arrangements” in the table above;
● the VIEs lent approximately RMB14 million, RMB21 million and RMB2 million (US$0.3 million), respectively, to our subsidiaries
other than HZ Hotel Management, and these subsidiaries repaid RMB3 million, RMB7 million and RMB5 million (US$1 million) to
the VIEs for loans that the VIEs previously provided to them; and
● cash was transferred from us to our subsidiaries primarily through shareholder loans. In these same respective periods, our
subsidiaries borrowed approximately RMB6,267 million, RMB1,050 million and RMB750 million (US$109 million) from us, and
these subsidiaries repaid approximately nil, nil and RMB4,165 million (US$604 million) to us for such loans.
● Our subsidiaries provided RMB798 million (US$116 million) loans to us for repayment of convertible senior notes in 2022. No loans
were provided by our subsidiaries to us in 2020 and 2021.
Other than the transfers described above, no assets were transferred among us, our subsidiaries, and the VIEs for the years ended
December 31, 2020, 2021 and 2022.
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Restrictions on Cash Transfers to Us
H World Group Limited is a holding company with no material operations of its own. We conduct our operations primarily through our
subsidiaries in China and Europe. We face various restrictions and limitations on foreign exchange; our ability to transfer cash between
entities, across borders and to U.S. investors; and our ability to distribute earnings from our subsidiaries and/or the VIEs, to us and holders of
the ADSs as well as the ability to settle amounts owed under the contractual arrangements with the VIEs. If our subsidiaries or any newly
formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends
to us. In addition, our subsidiaries are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance
with PRC accounting standards and regulations. Pursuant to laws applicable to entities incorporated in the PRC, our subsidiaries in the PRC
must make appropriations from after-tax profit to non-distributable reserve funds. In particular, subject to certain cumulative limits, the
statutory reserve fund requires an annual appropriation of 10% of after-tax profit (as determined under accounting principles generally
accepted in the PRC at each year-end) until the accumulative amount of such reserve fund reaches 50% of a PRC subsidiary’s registered
capital. These reserve funds can only be used for such specific purposes as provided in PRC laws, and are not distributable as cash dividends.
In addition, due to restrictions on the distribution of share capital from our PRC subsidiaries, the share capital of our PRC subsidiaries is
considered restricted. As a result of these requirements under PRC laws and regulations, as of December 31, 2022, approximately RMB3,735
million (US$542 million) was not available for distribution to us by our PRC subsidiaries in the form of dividends, loans, or advances.
Due to various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding
companies, we and the VIEs may not be able to obtain the necessary regulatory approvals or complete the necessary regulatory registrations or
other procedures on a timely basis, or at all, with respect to future loans by us to our PRC subsidiaries or the VIEs or with respect to future
capital contributions by us to our PRC subsidiaries. These requirements may delay or prevent us from using our offshore funds to make loans
or capital contribution to our PRC subsidiaries and the VIEs, and thus may restrict our ability to execute our business strategy, and materially
and adversely affect our liquidity and our ability to fund and expand our business.
In addition, uncertainties regarding the interpretation and implementation of the contractual arrangements with the VIEs could limit our
ability to enforce such agreements. If the PRC authorities determine that the contractual arrangements constituting part of the VIE structure do
not comply with PRC regulations, or if current regulations change or are interpreted differently in the future, our ability to settle amounts owed
by the VIEs under the VIE agreements may be seriously hindered.
Furthermore, due to restrictions on foreign exchange placed on our PRC subsidiaries and the VIEs by the PRC regulators under PRC laws
and regulations, to the extent cash is located in the PRC or within a PRC-domiciled entity and may need to be used to fund our operations
outside of the PRC, the funds may not be available due to such limitations unless and until related approvals and registrations are obtained.
Under regulations of the SAFE, the Renminbi is not convertible into foreign currencies for capital account items, such as loans, repatriation of
investments and investments outside of China, unless the prior approvals and registrations of the SAFE and other competent PRC authorities
are obtained.
Dividends or Distributions to US Investors
Starting from 2018, each year we have considered making moderate dividend distributions within the range of 0.5% to 2.0% of our market
capitalization from current-year net income.
Our company did not distribute cash dividends to our shareholders in 2021, as it was restricted from distributing cash dividends until June
30, 2021 pursuant to a waiver from certain financial covenants that we obtained on April 17, 2020 for our syndicated bank loans; we have paid
off these syndicated bank loans as of the date of this annual report. On March 3, 2022, our company declared a cash dividend of approximately
US$68 million, which was paid in full in April 2022.
H World Group Limited’s source of dividends has come primarily from dividends from our PRC subsidiaries.
Taxation on Dividends or Distributions
The PRC Enterprise Income Tax Law and its implementing regulations (collectively “EIT Law”) provide that enterprises established
outside of China whose “de facto management bodies” are located in China are considered resident enterprises. Currently, it is still unclear
whether the PRC tax authorities would determine that we should be classified as a PRC resident enterprise. See “Item 10. Additional
Information — E. Taxation — PRC Taxation.”
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The EIT Law imposes a withholding tax of 10% on dividends distributed by a PRC subsidiary to its immediate holding company outside
of China, if such immediate holding company is considered a non-resident enterprise without any establishment or place of business within
China or if the dividends received have no connection with the establishment or place of business of such immediate holding company within
China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that provides for a preferential
withholding tax rate. A holding company which is a tax resident in Hong Kong, for example, would be subject to a 5% withholding tax on
dividends under the Tax Arrangement between the PRC central government and the Hong Kong Special Administrative Region if the holding
company is the beneficial owner of the dividends and holds more than 25% of the share capital of the PRC company.
The EIT Law provides that PRC resident enterprises are generally subject to a uniform 25% enterprise income tax rate on their worldwide
income. Therefore, if we are treated as a PRC resident enterprise, we will be subject to PRC income tax on our worldwide income at the 25%
uniform tax rate, which could have an impact on our effective tax rate and an adverse effect on our net income and results of operations,
although we may be exempted from enterprise income tax on dividends distributed from our directly or indirectly controlled non-PRC
subsidiaries sourced from outside China, since such income received by PRC resident enterprise may be tax exempted subject to certain
requirements and limitations under the EIT Law.
Our German subsidiaries are permitted to pay dividends from their distributable profit as long as there are no agreements, such as debt
covenants, that restrict such payments, in which regulations applying to limited liability companies (Gesellschaft mit beschränkter Haftung)
have to be taken into account. Pursuant to the Companies Act 1967 of Singapore, dividends are only payable out of profits. Typically, the
directors of the relevant companies will recommend a particular rate of dividend and these subsidiaries will, in general meetings, declare the
dividend subject to the maximum recommended by the directors.
In 2020, 2021 and 2022, nil, nil and RMB1,310 million were paid as dividends from our PRC subsidiaries to our Hong Kong and
Singapore subsidiaries, respectively. Except as disclosed under “—Transfer of Cash within Our Organization,” no dividend or distribution was
made by our offshore subsidiaries to our company in 2020, 2021 and 2022.
For purposes of illustration only, the following discussion reflects the hypothetical taxes that might be required to be paid in Mainland
China, Hong Kong and Singapore, assuming that: (i) we have taxable earnings in the PRC subsidiaries/VIEs, and (ii) we determine to pay
dividends with funds derived from our earnings in the PRC subsidiaries/VIEs in the future. The illustration below, presented by percentages,
starts with pre-tax earnings of our PRC subsidiaries and VIEs and concludes with the percentage of that amount payable to our company as
dividends.
Hypothetical pre-tax earnings in the PRC subsidiaries/VIEs
Tax on earnings at statutory rate of 25% at WFOE(2) level
Amount to be distributed as dividend from WFOE(2) to Hong Kong or Singapore entities
Withholding tax at standard rate of 10%(3)
Amount to be distributed as dividend at Hong Kong entities level/Singapore entities level and net distribution to H
World Group Limited(4)
Notes:
Taxation Scenario(1)
Statutory Tax and
Standard Rates
100 %
(25)%
75 %
(7.5)%
67.5 %
(1) For purposes of this example, the tax calculation has been simplified. The hypothetical book pre-tax earnings amount is assumed to equal
Chinese taxable income.
(2) We use the term “WFOE” to refer to our wholly-owned subsidiary in the PRC that is the counterparty to the VIEs in our contractual
arrangements with them.
(3) The EIT Law imposes a withholding income tax of 10% on dividends distributed by a PRC subsidiary to its immediate holding company
outside of Mainland China. A lower withholding income tax rate of 5% is applied if the immediate holding company is a Hong Kong or
Singapore entity which is the beneficial owner of the dividends and holds more than 25% of the share capital of the PRC subsidiary. There
is no incremental tax at Hong Kong or Singapore entities level for any dividend distribution to H World Group Limited.
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(4)
If the treaty benefit is available and a 5% withholding income tax rate is imposed, the withholding tax would be 3.75% of the hypothetical
book pre-tax earnings amount and the amount to be distributed as dividend at Hong Kong or Singapore entities level and net distribution
to H World Group Limited would be 71.25%.
Currently, it is still unclear whether the PRC tax authorities will determine that we should be classified as a PRC resident enterprise. If we
are deemed to be a PRC resident enterprise by the PRC tax authorities, dividends paid to our non-PRC individual shareholders, including our
ADS holders, and any gain realized on the transfer of ADSs or ordinary shares by such holders may be subject to PRC individual income tax at
a rate of 20%, which in the case of dividends may be withheld at source. Any such tax may reduce the returns on your investment in the ADSs
or ordinary shares. See “Item 3. Key Information—3D. Risk Factors—Risks Related to Doing Business in China—It is unclear whether we
will be considered as a PRC resident enterprise under the Enterprise Income Tax Law of the PRC, and depending on the determination of our
PRC resident enterprise status, if we are not treated as a PRC resident enterprise, dividends paid to us by our PRC subsidiaries will be subject
to PRC withholding tax; if we are treated as a PRC resident enterprise, we may be subject to 25% PRC income tax on our worldwide income,
and holders of our ADSs or ordinary shares that are non-PRC resident investors may be subject to PRC withholding tax on dividends on and
gains realized on their transfer of our ADSs or ordinary shares.”
5.C. Research and Development, Patents and Licenses, etc.
See “Item 4. Information on the Company — B. Business Overview — Technology Infrastructure and Digitalization” and “— Intellectual
Property”.
5.D. Trend Information
Jizhu Shanghai is a recognized software development entity located in Shanghai of PRC. In November 2018, Jizhu Shanghai was qualified
as high and new tech enterprise, resulting in it being subject to a reduced tax rate of 15% in 2018, 2019 and 2020. In December 2021, Jizhu
Shanghai was qualified as high and new tech enterprise, resulting Jizhu Shanghai subject to a reduced tax rate of 15% in 2021,2022 and 2023.
H-World Information is qualified as high and new tech enterprise, resulting in H-World Information and Technology Co., Ltd. being subject to
a reduced tax rate of 15% in 2019, 2020 and 2021. In December 2022, H-World Information was qualified as high and new tech enterprise,
resulting H-World Information subject to a reduced tax rate of 15% in 2022, 2023 and 2024. Pursuant to the relevant regulations applicable to
small and micro businesses, several PRC subsidiaries enjoy a preferential tax rate of 20% with a discount to taxable income. From January 1,
2019 to December 31, 2020, for entities with taxable income of less than RMB1 million, 75% of their taxable income would be exempted in
tax computation, and for entities with taxable income over RMB1 million but less than RMB3 million, the discount would be 50%. From
January 1, 2021 to December 31, 2021, for entities with taxable income less than RMB1 million, 87.5% of the taxable income would be
exempted in tax computation, and for entities with taxable income over RMB1 million but less than RMB3 million, the discount would be
50%. From January 1, 2022 to December 31, 2022, for entities with taxable income less than RMB1 million, 87.5% of the taxable income
would be exempted in tax computation, and for taxable income over RMB1 million but less than RMB3 million, the discount would be 75%.
From January 1, 2023 to December 31, 2024, for entities with taxable income less than RMB3 million, 75% of the taxable income would be
exempted in tax computation. Entities qualified as small and micro businesses should engage in industries which are not restricted or
prohibited by the state and should simultaneously meet the following three conditions: annual taxable income does not exceed RMB3 million,
the number of employees does not exceed 300, and the total assets does not exceed RMB50 million. The aggregate amount and per share effect
of tax holidays were as follows:
2020
(RMB)
Year Ended December 31,
2021
(RMB)
(In millions, except per share data)
2022
(RMB)
Aggregate amount
Per share effect—basic
Per share effect—diluted
31
0.01
0.01
37
0.01
0.01
22
0.01
0.01
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for
the current fiscal year that are reasonably likely to have a material adverse effect on our total revenues, income, profitability, liquidity or
capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial
conditions.
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5.E. Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires our management to make estimates that
affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the balance sheet dates, as well as the
reported amounts of revenues and expenses during the reporting periods. To the extent that there are material differences between these
estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on our own historical
experience and other assumptions that we believe are reasonable after taking account of our circumstances and expectations for the future
based on available information. We evaluate these estimates on an ongoing basis.
Our expectations regarding the future are based on available information and assumptions that we believe to be reasonable, which together
form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral
component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a
higher degree of judgment than others in their application.
We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were
highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period
to period or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial
condition or results of operations. There are other items within our financial statements that require estimation but are not deemed critical, as
defined above. Changes in estimates used in these and other items could have a material impact on our financial statements. For a detailed
discussion of our significant accounting policies and related judgments, see “Notes to Consolidated Financial Statements – Note 2 Summary of
Principal Accounting Policies”.
Impairment of Goodwill and Brand Names Arising from the Acquisition of Deutsche Hospitality
Brand names are generally considered to have indefinite useful lives which are obtained through business acquisitions and originally
recorded at their estimated fair values at the date of acquisition.
Determining whether impairment indicators exist and estimating the fair value of our goodwill reporting units and intangible assets for
impairment testing require significant judgment. Brand names are evaluated for impairment using an income approach utilizing the relief from
royalty method. The determination of the fair value using the discount cash flow model requires our management to make significant estimates
and assumptions related to projected hotels’ revenues, growth rates, projected operating cost, royalty saving rates and discount rates.
The assumptions used to assess impairment consider historical trends, macroeconomic conditions, and projections are consistent with our
operating strategy, which involves uncertainty due to the impact of COVID-19. Changes in these estimates can have a significant impact on the
assessment of fair value which could result in material impairment losses.
For the year ended December 31, 2022, we performed a quantitative assessment of goodwill for legacy DH. No goodwill impairment
charges were recorded as a result of the testing. The estimated fair value of goodwill for legacy DH exceeded the calculated carrying value by
more than 10%. A 5% decline in projected cash flows or increase in the discount rate would not result in an impairment.
We also performed quantitative impairment testing for brand names for legacy DH. As of December 31, 2022, the estimated fair value of
one brand name acquired in DH acquisition was lower than its carrying value, and an impairment of RMB167 million was recognized in 2022,
which reduced the carrying value by 41%. A 5% increase in the discount rate or decrease in royalty saving rate could result in further
impairment charges of approximately RMB16 million and RMB12 million, respectively. In addition, the estimated fair value of both the other
two brand names acquired in DH acquisition exceeded their carrying value by approximately RMB212 million and RMB306 million, which
accounted for 9% and 47% of their carrying value, respectively. A 5% increase in the discount rate or decrease in royalty saving rate could
reduce the fair value of these two brand names by RMB172 million and RMB65 million, or RMB134 million and RMB48 million,
respectively.
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ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
6.A. Directors and Senior Management
The following table sets forth the name, age and position of each of our directors and executive officers as of the date of this annual report.
The business address of all of our directors and executive officers is No. 1299 Fenghua Road, Jiading District, Shanghai 201803, People’s
Republic of China.
Directors and Executive Officers
Qi Ji
John Jiong Wu
Tong Tong Zhao
Shangzhi Zhang
Jian Shang
Theng Fong Hee
Lei Cao
Hui Jin
Xinxin Liu
Jihong He
Age
56
55
56
70
55
68
48
45
45
52
Position/Title
Founder and Executive Chairman of the Board of Directors
Co-founder, Independent Director
Co-founder, Independent Director
Director
Independent Director
Independent Director
Independent Director
Chief Executive Officer
President
Chief Financial Officer
Qi Ji is our founder, and was appointed as a director on February 2007. Mr. Ji has also served as the executive chairman of our board since
August 2009. Prior to his current role, he also served as our chief executive officer from January 2012 to May 2015, from 2007 to August
2009, and from November 2019 to September 2021. He co-founded Home Inns & Hotels Management Inc. and served as its chief executive
officer from 2002 to January 2005. He also co-founded Trip.com (a company listed on the NASDAQ, ticker symbol: TCOM), one of the
largest online travel services providers in China, in 1999, acted as its chief executive officer and president until 2001, and currently serves on
Trip.com’s board as an independent director. Mr. Ji received his bachelor degree in engineering mechanics and master degree in mechanical
engineering from Shanghai Jiao Tong University in the PRC in 1989 and February 1992, respectively.
John Jiong Wu, a co-founder of our company, has served as our director since January 2007. He is founding partner and chairman of
FengHe Fund Management Pte. Ltd. He served as the venture partner of Northern Light Venture Capital and was an angel investor and the
chief technology officer of Alibaba Group from 2000 to 2007. Mr. Wu was a non-executive director of Viva Biotech Holdings (a company
listed on the Hong Kong Stock Exchange, stock code: 1873) from 2018 to 2020. Mr. Wu received his Bachelor of Science in Computer
Science degree from the University of Michigan in August 1989.
Tong Tong Zhao, a co-founder of our company, has served as our director since February 2007. Ms. Zhao has served in several companies,
including the supervisor of Shanghai Asia-Tang Health Technology Development Co., Ltd., the executive director of Shanghai Hong Ying Hi-
Tech Co., Ltd., and the executive director of Shanghai Xie Cheng Science and Technology Co., Ltd.. Ms. Zhao received her Master of
Engineering degree from Shanghai Jiao Tong University in the PRC in March 1992 and her Master of Business Administration degree from
McGill University in Canada in June 2003. She also obtained her bachelor’s degree with a major in biomedical engineering from Southeast
University in the PRC in July 1989.
Shangzhi Zhang has served as our director since June 2016. Mr. Zhang has been the executive director of Tianjin Amis Hotel Management
Company since 2009. He acted as general delegate of Accor Hotel Group in China from January 1999 to December 2008, during which he was
concurrently appointed as the executive director and general manager of Tianjin Accor Hotel Management Co., Ltd. in March 2003, and was
responsible for brand Ibis’ development and operation in China. He successively served as head of manager office, assistant to general
manager and deputy general manager at China Export Commodity Bases Development Corporation, from January 1993 to 1998. Prior to that,
Mr. Zhang held several positions at the Ministry of Foreign Economic Relations and Trade of PRC from February 1978 to December 1992. He
was third secretary of the Commercial Bureau of Chinese Embassy in Zaire from October 1981 to September 1985. Mr. Zhang graduated from
the University of International Business and Economics (formerly known as Beijing Institute of Foreign Trade) in the PRC with a major in
French in January 1978. He studied for “joint interpreting and conference service” program at the Commission of the European Communities
in Brussels from September 1987 to February 1988 and the French National School of Administration (École Nationale d’Administration) in
France from 1990 to 1991. In 2014, Mr. Zhang received the medal award of “Chevalier de Legion d’honneur” from French government.
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Jian Shang has served as our independent director since May 2014. Mr. Shang has been the general manager of Hong Shang Asset
Management Co., Ltd. since July 2013. From September 2006 to November 2012, he served as chief executive officer of UBS SDIC Fund
Management Company. Prior to that, he served as chief executive officer of Yin Hua Fund Management Co., Ltd., deputy chief executive
officer of Hua An Fund Management Co., Ltd, and head of strategic planning of Shanghai Stock Exchange respectively from January 2001 to
June 2006. Previously, he was a deputy division director of CSRC. Mr. Shang has been an independent non-executive director of Shanghai
Realway Capital Assets Management Co., Ltd. (a company listed on the Hong Kong Stock Exchange, stock code: 1835) since October 2018.
Mr. Shang obtained his PhD in business administration and master of arts in economics from University of Connecticut in the United States in
December 1997 and December 1994, respectively, and his bachelor’s degree with a major in industrial and foreign trade from Shanghai Jiao
Tong University in the PRC in July 1989.
Theng Fong Hee has served as our independent director of the Company since July 2020. Mr. Hee is a senior lawyer in Singapore with
over 40 years of experience. He is now a full time independent arbitrator and mediator with The Arbitration Chambers. Mr. Hee is a fellow of
Singapore Institute of Arbitrators and Chartered Institute of Arbitrators (UK). He is also on the panel of arbitrators in various arbitration
institutions including Singapore International Arbitration Centre (SIAC), China International Economic and Trade Arbitration Commission
(CIETAC), Beijing Arbitration Commission (BAC), Shanghai International Economic and Trade Arbitration Commission (SHIAC), Hong
Kong International Arbitration Centre (HKIAC), Hainan International Arbitration Court (HIAC), Chongqing Arbitration Commission
(CQAC), Shanghai Arbitration Commission (SHAC), Wuhan Arbitration Commission (WHAC) and Asian International Arbitration Centre
(AIAC). Mr. Hee is also an ambassador of Singapore International Mediation Centre (SIMC) and has been an accredited mediator of Singapore
Mediation Centre (SMC) since March 2017. He serves as an independent director of several listed companies, including Zheneng Jinjiang
Environment Holding Company Limited (a company listed on the Singapore Exchange, stock code: BWM) since June 2016, Straco
Corporation Limited (a company listed on the Singapore Exchange, stock code: S85) since April 2016, Yanlord Land Group Limited (a
company listed on the Singapore Exchange, stock code: Z25) since October 2017, China Aviation Oil (Singapore) Corporation Ltd (a company
listed on the Singapore Exchange, stock code: G92) since April 2019, Haidilao International Holding Ltd. (a company listed on the Hong Kong
Stock Exchange, stock code:6862) since September 2018, Tye Soon Limited (a company listed on the Singapore Exchange, stock code: BFU)
from May 1997 to June 2020, APAC Realty Limited (a company listed on the Singapore Exchange, stock code: CLN) from September 2017 to
June 2020, First Resources Limited (a company listed on the Singapore Exchange, stock code: EB5) from October 2007 to May 2018, YHI
International Limited (a company listed on the Singapore Exchange, stock code: BPF) from May 2003 to April 2018, and Datapulse
Technology Limited (a company listed on the Singapore Exchange, stock code: BKW) from January 1994 to December 2017. Mr. Hee was
also a director of Chinese Development Assistance Council from June 2012 to June 2018 and Singapore Chinese Cultural Centre from May
2015 to September 2019. He has been a director of Chua Foundation of Singapore from March 2015 to 2021, F&H Singhome Fund II Ltd.
since April 2012, F&H Singhome Fund III Ltd. since August 2015 and independent non-executive director of Greenland (Singapore) Trust
Management Pte. Ltd. since April 2018. Mr. Hee was awarded the Public Service Medal and Public Service Star awards respectively in 2008
and 2015. He was also appointed as a Justice of the Peace in April 2018. Mr. Hee obtained his bachelor’s degree in law from National
University of Singapore (formerly known as the University of Singapore) with honors in Singapore in May 1979 and also received a diploma
in Chinese law from Soochow University in the PRC in October 2004. He has been admitted as an advocate and solicitor by the Supreme
Court of Singapore since October 1981.
Lei Cao has served as our independent director since July 2020. She has been the head of tax Greater China in Philips Electronic
Singapore Pte Ltd. since May 2012. Prior to that, Ms. Cao served as a senior tax director from January 2010 to May 2012 and a tax director
from October 2007 to December 2009 in Philips China Investment Co., Ltd. She was also a tax director in Philips Electronics Singapore Pte
Ltd from January 2006 to September 2007 and the senior tax manager in Philips China Investment Co., Ltd. from November 2003 to
December 2005. Her primary role is to manage a team to provide tax solutions for Philips group in the responsible market, as well as to
support and secure Philips group’s interests and operations. Previously, Ms. Cao worked in Deloitte Touche Tohmatsu Certified Public
Accountants LLP from September 1995 to October 2003 under various roles and her last position was a manager in the tax and business
advisory department. Ms. Cao received a bachelor’s degree with a major in international business management from Shanghai University of
Finance and Economics in the PRC in July 1995. Ms. Cao is a PRC Certified Public Accountant, who has obtained her qualification from
Shanghai Institute of Certified Public Accountants in December 2009, and is also a PRC Certified Tax Agent, who has obtained her
qualification from Shanghai Certified Tax Agent Management Center in June 2000.
Hui Jin joined us in 2005 and has served as our chief executive officer since September 2021. He has successively served as the director of
our Development Department, our vice president, executive vice president, and president, respectively. Mr. Jin worked with Shanghai Home
Inns Hotels Management Limited as regional development manager during the period from March 2004 to December 2004. Mr. Jin received
his executive master’s degree from China Europe International Business School in the PRC in August 2014, and a Bachelor of Science degree
in Psychology from the East China Normal University in the PRC in July 2000.
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Xinxin Liu joined us in 2012 and has served as our president since September 2021. She has successively served as our chief information
officer, chief digital officer and co-president. She was the founder and CEO of H-World Information and Technology Co., Ltd. (盟广信息技术
有限公司), which is an IT company incubated by our Group in November 2013. Prior to joining us, Ms. Liu worked in Alcatel-Lucent
Shanghai Bell from July 1999 to September 2012, and was the IT head before she left. Ms. Liu received her master’s degree in master of
business administration from Fudan University in the PRC in January 2008, and her bachelor’s degree in economic information management
from Beijing Technology and Business University (formerly known as Beijing Business Academy) in the PRC in June 1999.
Jihong He joined us in October 2021 and has served as our chief financial officer since December 2022. Prior to joining us, Ms. He was
the Chief Corporate Strategy Officer and CEO of Data Center of CapitaLand (SGX: C31) from July 2019 to August 2021. Prior to that, she
worked with Temasek, including serving as a director and a managing director, successively, of Temasek International from July 2013 to
March 2018, and as the chief strategy officer and chief investment officer of Ascendas-Singbridge, a Temasek portfolio company, from June
2015 and June 2019. Prior to that, she worked for Roland Berger Strategy Consultants (“Roland Berger”), with the latest position as a principal
and a member of the Asia Leadership Team. Before joining Roland Berger, Ms. He worked as a senior manager in global investments &
terminal operations at Fraport AG from January 2002 to August 2005. She started her career as a product manager of the global marketing
chemicals division at BASF SE in Germany in 1997. Ms. He obtained her MBA degree from the University of British Columbia in Canada.
Board Diversity Disclosure
The following information was provided by our directors on a voluntary basis.
Board Diversity Matrix (As of the date of this annual report)
Country of Principal Executive Offices
Foreign Private Issuer
Disclosure Prohibited Under Home Country Law
Total Number of Directors
Part I: Gender Identity
Directors
Part II: Demographic Background
Underrepresented Individual in Home Country
LGBTQ+
Did Not Disclose Demographic Background
Employment Agreements
Female
Male
Non-Binary
People’s Republic of China
Yes
No
7
Did Not Disclose
Gender
2
5
0
0
0
0
0
We have entered into an employment agreement with each of our named executive officers. Each of our named executive officers is
employed for a specified time period, which will be automatically extended unless either we or the named executive officer gives prior notice
to terminate such employment. We may terminate the employment for cause, at any time, without notice or remuneration, for certain acts,
including but not limited to the conviction of a criminal offence and negligent or dishonest acts to our detriment. A named executive officer
may terminate his or her employment at any time with a one-month prior written notice.
Each named executive officer has agreed to hold, both during and after the termination or expiry of his or her employment agreement, in
strict confidence, and not to use, except as required in the performance of his or her duties in connection with the employment, any of our
confidential information or trade secrets or the confidential or proprietary information of any third party received by us and for which we have
confidential obligations. In addition, each named executive officer has agreed to be bound by non-competition restrictions. Specifically, each
named executive officer has agreed not to, during his or her employment with us and for a period of two years following his or her termination
with our company, be engaged as employee or in another capacity to participant directly or indirectly in any business that is in competition
with ours. Each named executive officer also agrees to comply with all material applicable laws and regulations related to his or her
responsibilities at our company as well as all material written corporate and business policies and procedures of our company.
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6.B. Compensation
For the fiscal year ended December 31, 2022, the aggregate cash compensation and benefits that we paid to our directors and executive
officers were approximately RMB25 million (US$4 million). No pension, retirement or similar benefits have been set aside or accrued for our
executive officers or directors. We have no service contracts with any of our directors providing for benefits upon termination of employment.
Share Incentive Plans
In September 2009, our board of directors and our shareholders adopted our 2009 Share Incentive Plan with purposes similar to our 2007
Global Share Plan and 2008 Global Share Plan. Our 2009 Share Incentive Plan was subsequently amended in October 2009, August 2010,
March 2015 and May 2018. 430 million ordinary shares may be issued under our amended 2009 Share Incentive Plan, or the Amended 2009
Plan.
Plan Administration. The compensation committee administers our Amended 2009 Plan. Our ESOP administration committee, currently
comprised solely of Mr. Qi Ji, has been delegated certain authorities, among others, to grant, in its sole discretion, options, restricted stocks and
restricted stock units to be issued under the respective share incentive plans to any of our employees and consultants except for our directors
and executive officers, and the aggregate number of shares covered by any single grant it makes shall not exceed 5,000,000 ordinary shares.
Types of Awards.
● Options. The purchase price per share under an option will be determined by a committee appointed by our board and set forth in the
award agreement. The term of an option granted under the Amended 2009 Plan must not exceed ten years from the grant date, and a
shorter term may be required.
● Restricted Stock and Restricted Stock Units. An award of restricted stock is a grant of our ordinary shares subject to restrictions the
committee appointed by our board may impose. A restricted stock unit is a contractual right that is denominated in our ordinary
shares, each of which represents a right to receive the value of a share or a specified percentage of such value upon the terms and
conditions set forth in the Amended 2009 Plan and the applicable award agreement.
● Other Stock-based Awards. The committee is authorized to grant other stock-based awards that are denominated or payable in or
otherwise related to our ordinary shares such as stock appreciation rights and rights to dividends and dividend equivalents. Terms and
conditions of such awards will be determined by the committee appointed by our board. Unless the awards are granted in substitution
for outstanding awards previously granted by an entity that we acquired or combined, the value of the consideration for the ordinary
shares to be purchased upon the exercise of such awards shall not be less than the fair market value of the underlying ordinary shares
on the grant date.
Vesting Schedule. As of the date of this annual report, we have entered into option agreements and restricted stock award agreements
respectively under our Amended 2009 Plan. Pursuant to our typical option agreement, 50% of the options granted shall vest on the second
anniversary of the vesting commencement date specified in the corresponding option agreement, and 1/48 of the options shall vest each month
thereafter over the next two years on the first day of each month, subject to the optionee’s continuing to provide services to us. Pursuant to our
typical restricted stock award agreement, 50% of the restricted stock granted shall vest on the second anniversary of the vesting
commencement date specified in the corresponding restricted stock award agreement, and 1/8 of the restricted stock shall vest each six-month
period thereafter over the next two years on the last day of each six-month period, subject to the grantee’s continuing to provide services to us.
For certain grants, we may also apply different vesting schedules set forth in the relevant agreements between the grantees and us. For
example, certain restricted stocks granted shall vest over a period of ten years in equal yearly installments.
Termination of the Amended 2009 Plan. Our Amended 2009 Plan will terminate in 2029. Our board of directors may amend, suspend, or
terminate our Amended 2009 Plan at any time. No amendment, alteration, suspension, or termination of these plans shall materially and
adversely impair the rights of any participant with respect to an outstanding award, unless mutually agreed otherwise between the participant
and the administrator.
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The following tables summarize options and restricted stocks that we have granted to our directors and executive officers and to other
individuals as a group under our share incentive plans as of December 31, 2022.
Name
Qi Ji
Tong Tong Zhao
John Jiong Wu
Hui Jin
Xinxin Liu
Other individuals as a group
Ordinary Shares
Underlying
Options
Awarded
4,000,000
4,363,480
1,000,000
1,000,000
*
*
*
*
*
Exercise Price
(US$/Share)
0.153
0.27525
0.153
0.153
0.05
0.4265
0.5415
0.4925
0.5415
169,165,700 0.050-0.5415
Date of Grant
October 1, 2009
July 17, 2012
October 1, 2009
October 1, 2009
February 4, 2007
March 31, 2011
May 13, 2014
March 31, 2015
May 13, 2014
February 4, 2007 – April 1, 2015
Date of Expiration
October 1, 2019
July 17, 2018
October 1, 2019
October 1, 2019
February 4, 2017
March 31, 2017
May 13, 2020
March 31, 2021
May 13, 2020
February 4, 2017 – April 1, 2021
Qi Ji
Name
Shangzhi Zhang
Hui Jin
Jian Shang
Xinxin Liu
Lei Cao
Jihong He
Other individuals as a group
Ordinary Shares
Underlying Restricted
Stocks Awarded
2,000,000
8,978,800
16,971,870
10,982,240
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
141,078,030
Date of Grant
August 6, 2011
July 17, 2012
March 17, 2015
March 26, 2015
January 18, 2012
January 10, 2013
December 10, 2014
March 13, 2017
March 14, 2022
March 31, 2011
July 2, 2012
July 1,2013
July 17, 2014
March 26, 2015
October 24, 2022
May 5, 2014
July 23, 2020
January 10, 2013
July 1, 2013
July 17, 2014
March 26, 2015
March 17, 2017
March 27, 2018
March 7, 2019
March 18, 2020
February 1, 2021
March 14, 2022
October 24, 2022
July 23, 2020
March 14, 2022
October 24, 2022
February 7, 2011 – October 24, 2022
* Upon exercise of all options granted and vesting restricted stock granted, would beneficially own less than 1% of our outstanding ordinary
shares.
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6.C. Board Practices
General
Our board of directors currently consists of seven directors. Under our amended and restated memorandum and articles of association,
which came into effect upon our initial public offering, our board of directors shall consist of at least two directors. Pursuant to our amended
and restated articles of association, our directors may be elected by our shareholders. If our board appoints any person as a director to fill a
casual vacancy or as an addition to our existing board, such director shall be subject to re-election at our first subsequent general meeting or
annual general meeting, respectively. There is no shareholding requirement for qualification to serve as a member of our board of directors.
Our board of directors may exercise all the powers of our company to borrow money, mortgage or charge its undertaking, property and
uncalled capital, and issue debentures, debenture stock and other securities whenever money is borrowed or as security for any debt, liability or
obligation of our company or of any third party.
We believe that each of Ms. Tong Tong Zhao, Mr. John Jiong Wu, Mr. Jian Shang, Mr. Theng Fong Hee and Ms. Lei Cao is an
“independent director” as that term is used in NASDAQ corporate governance rules.
Duties of Directors
Under Cayman Islands law, our directors owe fiduciary duties to our company, including a duty of loyalty, a duty to act honestly and a
duty to act in good faith with a view to our best interests. Our directors also have a duty to exercise the skill they actually possess and such care
and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors
must ensure compliance with our memorandum and articles of association.
Terms of Directors and Executive Officers
Each of our directors holds office until a successor has been duly elected and qualified or until his or her office is otherwise vacated in
accordance with our amended and restated articles of association. All of our executive officers are appointed by and serve at the discretion of
our board of directors.
Board Committees
We have established two committees under the board of directors — the audit committee and the compensation committee. We have
adopted a charter for each of the board committees. Each committee’s members and functions are described below. We currently do not plan to
establish a nominations committee. As a foreign private issuer, we are permitted to follow home country corporate governance practices under
Rule 5615(a)(3) of the NASDAQ Marketplace Rules. This home country practice of ours differs from Rule 5605(e) of the NASDAQ
Marketplace Rules regarding implementation of a nominations committee, because there are no specific requirements under Cayman Islands
law on the establishment of a nominations committee.
Audit Committee
Our audit committee consists of three directors, namely Mr. Jian Shang, Mr. Theng Fong Hee and Ms. Lei Cao. All directors satisfy the
“independence” requirements of the NASDAQ Global Select Market and the SEC regulations. The chairman of our audit committee is Mr.
Jian Shang, who is qualified as an audit committee financial expert within the meaning of the SEC regulations. The audit committee oversees
our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible
for, among other things:
● selecting the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the
independent auditors;
● setting clear hiring policies for employees or former employees of the independent auditors;
● reviewing with the independent auditors any audit problems or difficulties and management’s response;
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● reviewing and approving all proposed related-party transactions;
● discussing the annual audited financial statements with management and the independent auditors;
● discussing with management and the independent auditors major issues regarding accounting principles and financial statement
presentations;
● reviewing reports prepared by management or the independent auditors relating to significant financial reporting issues and
judgments;
● reviewing with management and the independent auditors related-party transactions and off-balance sheet transactions and structures;
● reviewing with management and the independent auditors the effect of regulatory and accounting initiatives and actions;
● reviewing policies with respect to risk assessment and risk management;
● reviewing our disclosure controls and procedures and internal control over financial reporting;
● timely reviewing reports from the independent auditors regarding all critical accounting policies and practices to be used by our
company, all alternative treatments of financial information within GAAP that have been discussed with management and all other
material written communications between the independent auditors and management;
● establishing procedures for the receipt, retention and treatment of complaints received from our employees regarding accounting,
internal accounting controls or auditing matters and the confidential, anonymous submission by our employees of concerns regarding
questionable accounting or auditing matters;
● annually reviewing and reassessing the adequacy of our audit committee charter;
● such other matters that are specifically delegated to our audit committee by our board of directors from time to time; and
● meeting separately, periodically, with management, the internal auditors and the independent auditors.
Compensation Committee
Our compensation committee consists of Mr. John Jiong Wu and Mr. Jian Shang. Both directors satisfy the “independence” requirements
of NASDAQ Marketplace Rules and the SEC regulations. Our compensation committee assists the board in reviewing and approving the
compensation structure of our directors and executive officers, including all forms of compensation to be provided to our directors and
executive officers. The compensation committee is responsible for, among other things:
● reviewing and approving the compensation for our directors and senior executives;
● reviewing and evaluating our director and executive compensation and benefits policies generally;
● reporting to our board of directors periodically;
● evaluating its own performance and reporting to our board of directors on such evaluation;
● periodically reviewing and assessing the adequacy of the compensation committee charter and recommending any proposed changes
to our board of directors; and
● such other matters that are specifically delegated to the compensation committee by our board of directors from time to time.
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6.D. Employees
We had 23,028, 24,384 and 24,335 employees as of December 31, 2020, 2021 and 2022, respectively. We recruit and directly train and
manage all of our employees. We believe that we maintain a good working relationship with our employees and we have not experienced any
significant labor disputes. Some of our employees are represented by unions, with a variety of collective bargaining agreements in place.
Generally, we consider the relationships between us and the unions that represent our employees to be respectful.
6.E. Share Ownership
The following table sets forth information with respect to the beneficial ownership, within the meaning of Rule 13d-3 under the Exchange
Act, of our ordinary shares, as of March 31, 2023 by:
● each of our directors and executive officers; and
● each person known to us to own beneficially more than 5% of our ordinary shares.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting or
investment power with respect to the ordinary shares. Except as indicated below, and subject to applicable community property laws, the
persons named in the table have sole voting and investment power with respect to all ordinary shares shown as beneficially owned by them.
Directors and Executive Officers:
Qi Ji
John Jiong Wu
Tong Tong Zhao
Shangzhi Zhang
Jian Shang
Theng Fong Hee
Lei Cao
Hui Jin
Xinxin Liu
Jihong He
All Directors and Executive Officers as a Group
Principal Shareholders:
Winner Crown Holdings Limited
East Leader International Limited
Invesco Ltd.
Trip.com Group Limited
*
Less than 1%.
Ordinary Shares Beneficially Owned(1)
Number
%
969,315,720 (2)
* (4)
263,246,520 (3)
*
*
—
—
*
*
—
984,362,860 (5)
693,653,690 (6)
262,246,520 (7)
315,743,750 (8)
220,494,460 (9)
30.4 %
*
8.3 %
*
*
—
—
*
*
—
30.9 %
21.8 %
8.2 %
9.9 %
6.9 %
(1) The number of ordinary shares outstanding in calculating the percentages for each listed person or group includes the ordinary shares
underlying options held by such person or group exercisable within 60 days after March 31, 2023. Percentage of beneficial ownership of
each listed person or group is based on (i) 3,186,929,060 ordinary shares outstanding as of March 31, 2023, and (ii) the ordinary shares
underlying share options exercisable by such person within 60 days after March 31, 2023.
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(2) Includes (i) 693,653,690 ordinary shares held by Winner Crown Holdings Limited, or Winner Crown, a British Virgin Islands company
wholly owned by Sherman Holdings Limited, a Bahamas company, which is in turn wholly owned by Credit Suisse Trust Limited, or CS
Trustee. CS Trustee acts as trustee of the Ji Family Trust, of which Mr. Qi Ji and his family members are the beneficiaries, (ii) 4,895,370
ordinary shares and 852,014 ADSs representing 8,520,140 ordinary shares held by Mr. Qi Ji, and (iii) 262,246,520 ordinary shares held by
East Leader International Limited, or East Leader, over which Mr. Ji has voting power pursuant to a power of attorney dated November
27, 2014. East Leader is wholly owned by Perfect Will Holdings Limited, or Perfect Will, a British Virgin Islands company, which is in
turn wholly owned by Trident Trust Company (Singapore) Pte. Limited, or Trident Trust. Trident Trust acts as trustee of the Tanya Trust
with effect from 4th August 2021, of which Ms. Tong Tong Zhao and her family members are the beneficiaries.
(3) Includes (i) 1,000,000 ordinary shares, and (ii) 262,246,520 ordinary shares held by East Leader, a British Virgin Islands company wholly
owned by Perfect Will, a British Virgin Islands company, which is in turn wholly owned by Trident Trust. Trident Trust acts as trustee of
the Tanya Trust with effect from 4th August 2021, of which Ms. Tong Tong Zhao and her family members are the beneficiaries. Ms. Zhao
is the sole director of East Leader.
(4) Includes 9,784,090 ordinary shares held by Mr. John Jiong Wu.
(5) Includes ordinary shares and ordinary shares issuable upon exercise of all of the options that are exercisable within 60 days after March
31, 2023 held by all of our directors and executive officers as a group.
(6) Winner Crown is a British Virgin Islands company wholly owned by Sherman Holdings Limited, a Bahamas company, which is in turn
wholly owned by CS Trustee. CS Trustee acts as trustee of the Ji Family Trust, of which Mr. Qi Ji, our founder and executive chairman,
and his family members, are the beneficiaries. Mr. Ji is the sole director of Winner Crown. The address of Winner Crown is Vistra
Corporate Service Centre, Wickhams Cay II, Road Town, Tortola, VG1110, British Virgin Islands.
(7) East Leader is a British Virgin Islands company wholly owned by Perfect Will Holdings Limited, a British Virgin Islands company, which
is in turn wholly owned by Trident Trust. Trident Trust acts as trustee of the Tanya Trust with effect from 4th August 2021, of which Ms.
Tong Tong Zhao and her family members, are the beneficiaries. Ms. Zhao is the sole director of East Leader. The address of East Leader is
Vistra Corporate Services Centre, Wickhams Cay II, Road Town, Tortola, VG1110, British Virgin Islands.
(8) Based on Amendment No. 3 to Schedule 13G filed with the SEC on February 11, 2022 by Invesco Ltd.
(9) Includes (i) 72,024,820 ordinary shares that Trip.com purchased from us, (ii) an aggregate of 116,469,640 of our ordinary shares that
Trip.com purchased from the Chengwei Funds, CDH Courtyard Limited, the IDG Funds, the Northern Light Funds and Pinpoint Capital
2006 A Limited, and (iii) 3,200,000 ADSs representing 32,000,000 ordinary shares that Trip.com subscribed in our initial public offering.
Trip.com is a Cayman Islands company and its address is 968 Jin Zhong Road, Shanghai 200335, People’s Republic of China.
As of March 31, 2023, we had 3,186,929,060 ordinary shares issued and outstanding. To our knowledge, we had two record shareholders
in the United States. The number of beneficial owners of our ADSs in the United States is likely to be much larger than the number of record
holders of our ordinary shares in the United States.
None of our existing shareholders has different voting rights from other shareholders since the closing of our initial public offering. We are
not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
6.F. Disclosure of Action to Recover Erroneously Awarded Compensation
Not Applicable.
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
7.A. Major Shareholders
Please refer to “Item 6. Directors, Senior Management and Employees — E. Share Ownership.”
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7.B. Related Party Transactions
Transactions with Trip.com
We conduct transactions in the ordinary course of our business with Trip.com, an entity in which Mr. Qi Ji, our founder, is a co-founder
and independent director. Trip.com rendered reservation services to us to facilitate our customers in making reservations at our hotels from
Trip.com’s hotel booking system. In 2022, the aggregate commission fees of our leased and owned hotels paid to Trip.com for its reservation
services amounted to RMB55 million (US$8 million). In 2022, the lease expenses of our leased and owned hotel paid to Trip.com amounted to
RMB19 million (US$3 million).
In 2022, we provided technical services to Trip.com and recorded service fees amounted to RMB93 million (US$13 million).
Transaction with Sheen Star
In April 2014, we set up Sheen Star Group Limited, or Sheen Star, together with Mr. Qi Ji and an independent third party. We own 19.99%
of the equity interest in Sheen Star and Mr. Qi Ji owns 50.01%. We recognized service fees from Sheen Star in the amount of RMB4 million
(US$1 million) in 2022.
Transaction with Cjia Group
China Cjia Group Limited (the “Cjia Group”) is one of our equity investees. We sold goods and provided IT and other services to Cjia
Group amounted to RMB4 million (US$1 million) in 2022.
In 2022, the lease expenses our lease hotels recognized to Cjia Group amounted to RMB31 million (US$4 million).In 2022, we recognized
sublease income from Cjia Group amounted to RMB5 million (US$1 million).
Transaction with Shanghai Lianquan Hotel Management Co., Ltd. (“Lianquan”)
Lianquan is one of our equity investees. In 2022, the sublease income we recognized from Lianquan amounted to RMB12 million (US$2
million).
Employment Agreements
See “Item 6. Directors, Senior Management and Employees — A. Directors and Senior Management — Employment Agreements” for a
description of the employment agreements we have entered into with our senior executive officers.
Share Incentives
See “Item 6. Directors, Senior Management and Employees — B. Compensation of Directors and Executive Officers — Share Incentive
Plans” for a description of share options we have granted to our directors, officers and other individuals as a group.
7.C. Interests of Experts and Counsel
Not applicable.
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ITEM 8.
FINANCIAL INFORMATION
8.A. Consolidated Statements and Other Financial Information
8.A.1. See “Item 18. Financial Statements” for our audited consolidated financial statements.
8.A.2. See “Item 18. Financial Statements” for our audited consolidated financial statements, which cover the last three financial years.
8.A.3. See page F-2 for the report of our independent registered public accounting firm.
8.A.4. Not applicable.
8.A.5. Not applicable.
8.A.6. Not applicable.
8.A.7. See “Item 4. Information on the Company — B. Business Overview — Legal and Administrative Proceedings.”
8.A.8. Dividend Policy
On January 3, 2020, we declared a cash dividend of US$0.34 per ordinary share, or US$0.34 per ADS. Cash dividends are paid in U.S.
dollars, and the total amount of cash distributed for the dividend was approximately US$100 million, which was paid in full by February 5,
2020. The cash dividend per ordinary share presented in this paragraph did not retroactively reflect the Share Subdivision.
On March 3, 2022, we declared a cash dividend of US$0.021 per ordinary share, or US$0.21 per ADS. Cash dividends are paid in U.S.
dollars, and the total amount of cash distributed for the dividend was approximately US$68 million, which was paid in full in April 2022.
We are a holding company with no material operations of our own. We conduct our operations primarily through our subsidiaries in China,
as well as our subsidiaries in Europe and other jurisdictions. As a result, our ability to pay dividends and to finance any debt we may incur
depends upon dividends paid to us by our subsidiaries. If our subsidiaries or any newly formed subsidiaries incur debt on their own behalf in
the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our PRC subsidiaries are permitted
to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations.
Pursuant to laws applicable to entities incorporated in the PRC, our subsidiaries in the PRC must make appropriations from after-tax profit to
non-distributable reserve funds. In particular, subject to certain cumulative limits, the statutory reserve fund requires an annual appropriation of
10% of after-tax profit (as determined under accounting principles generally accepted in the PRC at each year-end) until the accumulative
amount of such reserve fund reaches 50% of a PRC subsidiary’s registered capital. These reserve funds can only be used for such specific
purposes as provided in PRC laws, and are not distributable as cash dividends. We may make a moderate dividend distribution every year with
the range of 0.5% to 2.0% of our market capitalization from current year net income. If we pay any dividends, we will pay our ADS holders to
the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable
thereunder. We are restricted from distributing cash dividends until June 30, 2021 pursuant to the waiver from certain financial covenants that
we obtained on April 17, 2020 for our syndicated bank loans. In March 2022, we announced that our board of directors declared a cash
dividend of approximately US$68millon. To facilitate this dividend distribution and meet the oversea treasury demand, certain amount of
dividends from our PRC subsidiaries to our oversea subsidiaries was planned.
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The distributable profit is calculated based on the respective subsidiary’s annual unconsolidated financial statements prepared in
accordance with the German accounting principles, namely, the general accounting principles stated in the German Commercial Code
(Handelsgesetzbuch). Distributions of dividends on shares of stock corporations (Aktiengesellschaften) for a given financial year are generally
determined by a process in which the management board (Vorstand) and supervisory board (Aufsichtsrat) submit a proposal to the annual
general shareholders’ meeting (Hauptversammlung) held in the subsequent financial year and such annual general shareholders’ meeting
(Hauptversammlung) adopts a resolution. German law provides that a resolution concerning dividends and distribution thereof may be adopted
only on the basis of a balance sheet profit (Bilanzgewinn) shown in the company’s adopted annual single entity financial statements
(festgestellter Jahresabschluss). If the management board and supervisory board adopt the financial statements, they can (but are not obliged
to) allocate an amount of up to half of the company’s net income for the year to other surplus reserves. Additions to the legal reserves and loss
carryforwards must be deducted in advance when calculating the amount of net income for the year to be allocated to other surplus reserves.
Dividends on shares resolved by the general shareholders’ meeting (Hauptversammlung) are paid annually, generally three days after the
annual shareholders’ meeting (Hauptversammlung). The German subsidiaries are mainly integrated into Steigenberger Hotels AG through
control and profit and loss transfer agreements (Beherrschungs- und Gewinnabführungsverträge) in such a way that its annual profits or losses
are automatically transferred to Steigenberger Hotels AG and integrated into its financial statements. Steigenberger Hotels AG is prohibited
from conducting dividend distribution during the 60-month term of a credit facility with KFW it obtained in July 2020.
Steigenberger Hotels AG has changed its legal form on 8 November 2022 into a limited liability company (Steigenberger Hotels GmbH).
Consequently the distribution of profits follows the law on limited liability companies (Gesetz betreffend die Gesellschaften mit beschränkter
Haftung). The distributable profit is calculated based on the respective subsidiary’s annual unconsolidated single entity financial statements
prepared in accordance with the German accounting principles, namely, the general accounting principles stated in the German Commercial
Code (Handelsgesetzbuch). Distributions of dividends on shares of limited liability companies (GmbH) for a given financial year are generally
determined by a process in which the management board (Geschäftsführung) presents the single entity financial statements to the supervisory
board (Aufsichtsrat) for review. The supervisory board submits a proposal regarding the distribution of a possible profit to the annual general
shareholders’ meeting (Gesellschafterversammlung) held in the subsequent financial year. Such annual general shareholders’ meeting passes a
resolution regarding the confirmation of the single entity financial statements and passes another resolution on the distribution of profits.
Pursuant to the Companies Act 1967 of Singapore, dividends are only payable out of profits. Typically, the directors will recommend a
particular rate of dividend and the company in general meeting will declare the dividend subject to the maximum recommended by the
directors.
Subject to certain contractual restrictions, our board of directors has complete discretion in deciding whether to distribute dividends and
the dividend amounts within the approved range.
8.B. Significant Changes
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited
consolidated financial statements included in this annual report.
ITEM 9.
THE OFFER AND LISTING
9.A. Offering and Listing Details
Our ADSs have been listed on the NASDAQ Global Select Market under the symbol “HTHT” since March 26, 2010. In 2020, 2021 and
2022, no significant trading suspensions occurred.
Our ordinary shares have been listed on the Hong Kong Stock Exchange since September 22, 2020 under the stock code “1179.”
9.B. Plan of Distribution
Not applicable.
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9.C. Markets
The principal trading market for our shares is the NASDAQ Global Select Market, on which our shares are traded in the form of ADSs.
Our ordinary shares are also traded on the Hong Kong Stock Exchange under the stock code “1179.”
9.D. Selling Shareholders
Not applicable.
9.E. Dilution
Not applicable.
9.F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
10.A. Share Capital
Not applicable.
10.B. Memorandum and Articles of Association
We incorporate by reference into this annual report the description of our amended and restated memorandum and articles of association
contained in our registration statement on Form F-1 (File No. 333-165247) originally filed with the Securities and Exchange Commission on
March 5, 2010, as amended. Our shareholders adopted our amended and restated memorandum and articles of association currently in effective
by a special resolution on June 29, 2021, which was further amended by special resolutions on June 24, 2022.
10.C. Material Contracts
We have not entered into any material contracts other than in the ordinary course of business and other than those described in Item 4,
“Information on the Company” and in Item 7, “Major Shareholders and Related Party Transactions” or elsewhere in this annual report.
10.D. Exchange Controls
See “Item 4. Information on the Company — B. Business Overview — Regulation — Regulations on Foreign Currency Exchange.”
10.E. Taxation
The following summary of the material Cayman Islands, Hong Kong, People’s Republic of China, Germany and United States federal
income tax consequences of an investment in our ADSs or ordinary shares is based upon laws and relevant interpretations thereof in effect as
of the date of this annual report, all of which are subject to change. This summary does not deal with all possible tax consequences relating to
an investment in our ADSs or ordinary shares, such as the tax consequences under state, local and other tax laws.
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Cayman Islands Taxation
The Cayman Islands currently levy no taxes on individuals or corporations based upon profits, income, gains or appreciations and there is
no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us or holders of our ADSs or
ordinary shares levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in,
or after execution brought within the jurisdiction of, the Cayman Islands. The Cayman Islands are a party to a double tax treaty entered into
with the United Kingdom in 2010 but otherwise are not a party to any double tax treaties. There are no exchange control regulations or
currency restrictions in the Cayman Islands.
Under existing Cayman Islands laws, payments of dividends and capital in respect of our ADSs and ordinary shares will not be subject to
taxation in the Cayman Islands and no withholding will be required on the payment of a dividend or capital to any holder of our ADSs or
ordinary shares, as the case may be, nor will gains derived from the disposal of our ADSs or ordinary shares be subject to Cayman Islands
income or corporation tax.
Hong Kong Taxation
Taxation on us
Hong Kong profits tax is chargeable on every person carrying on a trade, profession or business in Hong Kong in respect of profits arising in or derived
from Hong Kong from such trade, profession or business (excluding profits arising from the sale of capital assets).
Our Hong Kong subsidiaries are subject to Hong Kong profits tax at a maximum rate of 16.5% of their respective estimated assessable profits determined
under relevant Hong Kong tax regulations. No Hong Kong profits tax has been provided as our Hong Kong subsidiaries have no estimated assessable profits
during the years presented.
Taxation on our shareholders
Gains arising from the sale of ADSs, where the purchases and sales of ADSs are effected outside of Hong Kong, should not be subject to Hong Kong
profits tax.
According to the current tax practice of the Hong Kong Inland Revenue Department, dividends paid by us on ADSs would not be subject to any Hong
Kong tax, even if received by investors in Hong Kong.
To the best of our knowledge, Hong Kong stamp duty has not been levied in practice on the trading or conversion of ADSs of companies that are listed in
both the United States and Hong Kong and that have maintained all or a portion of their shares, including shares underlying ADSs, in their Hong Kong share
registers. However, it is unclear whether, as a matter of Hong Kong law, the trading or conversion of ADSs of these dual-listed companies constitutes a sale or
purchase of the underlying Hong Kong-registered ordinary shares that is subject to Hong Kong stamp duty.
In connection with the initial public offering of our ordinary shares in Hong Kong, we established a branch register of members in Hong Kong, or the
Hong Kong share register. Dealings in our ordinary shares registered on our Hong Kong share register will be subject to Hong Kong stamp duty. The stamp
duty is charged to each of the seller and purchaser at the ad valorem rate of 0.13% of the consideration for, or (if greater) the value of, our ordinary shares
transferred. In other words, a total of 0.26% is currently payable on a typical sale and purchase transaction of our ordinary shares. In addition, a fixed duty of
HK$5.00 is charged on each instrument of transfer (if required).
To facilitate ADS-ordinary share conversion and trading between NASDAQ and the Hong Kong Stock Exchange, we also moved a portion of our issued
ordinary shares from our register of members maintained in the Cayman Islands to our Hong Kong share register. It is unclear whether, as a matter of Hong
Kong law, the trading or conversion of ADSs constitutes a sale or purchase of the underlying Hong Kong-registered ordinary shares that is subject to Hong
Kong stamp duty. We advise investors to consult their own tax advisors on this matter.
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PRC Taxation
PRC taxation on us
● Enterprise Income Tax
On March 16, 2007, the National People’s Congress, the Chinese legislature, passed the Enterprise Income Tax Law of the PRC, which
was amended in February 2017 and December 2018, and on December 6, 2007, the PRC State Council issued the Implementation Regulations
of the Enterprise Income Tax Law of the PRC, which was amended in April 2019, both of which became effective on January 1, 2008. The
Enterprise Income Tax Law of the PRC and its Implementation Regulations, or the EIT Law, applies a uniform 25% enterprise income tax rate
to PRC resident enterprises, including both foreign-invested enterprises and domestic enterprises. The EIT Law restructures China’s tax
preference policy under the general principle that industries and projects that are encouraged and supported by the State may enjoy tax
preferential treatment. For example, enterprises classified as “high and new technology enterprises strongly supported by the State” are entitled
to a 15% enterprise income tax rate. Enterprises classified as “small and micro businesses” enjoy a preferential enterprise income tax rate of
20%.
The EIT Law provides that enterprises established outside of China whose “de facto management bodies” are located in China are
considered “resident enterprises.” The “de facto management body” is defined as the organizational body that effectively exercises overall
management of and full and substantial control over production and business operations, personnel, finance and accounting, and properties of
the enterprise. The State Taxation Administration, or the STA (previously known as State Administration of Taxation, or the SAT), issued on
April 22, 2009 the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident
Enterprises on the Basis of De Facto Management Bodies, or Circular 82, implemented from January 1, 2008. Circular 82 provides certain
specific criteria for determining whether the “de facto management body” of a PRC-controlled offshore incorporated enterprise is located in
China, which include: (a) the primary location where senior management members responsible for an enterprise’s daily production and
operations management and the senior management departments discharge their duties; (b) the location where financial and human resource
decisions are made or approved by organizations or persons; (c) the location where the major assets and corporate documents are kept; and (d)
the location where more than half (inclusive) of all directors with voting rights or senior management have their habitual residence. In addition,
the STA issued Public Announcement [2011] No. 45 in 2011 and Public Announcement [2014] No.9 in 2014, providing more guidance on the
implementation of Circular 82 and clarifying matters including resident status determination, post-determination administration and competent
tax authorities. The above-mentioned tax circulars apply only to offshore enterprises controlled by PRC enterprises or PRC enterprise groups
and are not applicable to our case. But the determining criteria set forth in such tax circulars may reflect the STA’s general position on how the
“de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they
are controlled by PRC enterprises or PRC enterprise groups or by PRC or foreign individuals. Currently, there are no further detailed rules or
precedents applicable to us regarding the procedures and specific criteria for determining “de facto management body” for a company invested
in or controlled by PRC individuals. As such, it is still unclear if the PRC tax authorities would determine that, notwithstanding our status as
the Cayman Islands holding company of our operating business in China, we should be classified as a PRC “resident enterprise”.
The EIT Law imposes an enterprise income tax of 10% on dividends distributed by a foreign-invested enterprise to its immediate holding
company outside of China, if such immediate holding company is considered a “non-resident enterprise” without any establishment or place of
business within China or if the received dividends have no actual connection with the establishment or place of business of such immediate
holding company within China, unless such immediate holding company’s jurisdiction of incorporation has a tax treaty with China that
provides for a preferential withholding tax rate. A holding company which is a tax resident in Hong Kong, for example, would be subject to a
5% withholding tax rate on the dividends received from its PRC subsidiary if the holding company owns at least 25% equity in the PRC
subsidiary and is the beneficial owner of the dividends.
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The EIT Law provides that PRC resident enterprises are generally subject to a uniform 25% enterprise income tax rate on their worldwide
income. Therefore, if we are treated as a PRC “resident enterprise”, we will be subject to PRC income tax on our worldwide income at the
25% uniform tax rate, which could have an impact on our effective tax rate and an adverse effect on our net income and results of operations.
Although the EIT Law provides that dividend payments between qualified PRC resident enterprises are exempted from enterprise income tax,
it remains unclear as to the detailed qualification requirements for this exemption and whether dividend payments by our PRC subsidiaries to
us would meet such qualification requirements if we were considered a PRC resident enterprise for this purpose. If we are required under the
EIT Law to pay income tax on any dividends we receive from our PRC subsidiaries, our income tax expenses will increase and the amount of
dividends, if any, we may pay to our shareholders and ADS holders may be materially and adversely affected.
● Value-added Tax
On March 23, 2016, the Ministry of Finance of China (the “MOF”), and the STA jointly issued the Circular on the Nationwide
Implementation of Pilot Program for the Collection of Value Added-Tax Instead of Business Tax, or Circular 36, which became effective on
May 1, 2016. Pursuant to Circular 36, most of our PRC subsidiaries’ business are subject to value-added tax, or VAT, at a rate of 6% as general
VAT taxpayers, and they would be permitted to offset input VAT by providing valid VAT special invoices received from vendors against their
VAT liability.
On March 20, 2019, the MOF, the STA and the General Administration of Customs of China jointly issued the Public Announcement on
Strengthening the VAT Reform Policies, or Public Announcement [2019] No. 39, pursuant to which, during the period from April 1, 2019 to
December 31, 2021, a general VAT taxpayer engaging in the provision of living services, postal services, telecommunications services or
modern services with sales revenue from the provision of such services accounting for more than 50% of its total sales revenue is allowed to
deduct extra 10% of the deductible input VAT for the current period from the VAT payable. Such rate of extra deduction of input VAT was
increased to 15% during the period from October 1, 2019 to December 31, 2021 for general VAT taxpayers engaging in provision of living
services with sales revenue from the provision of living services accounting for more than 50% of its total sales revenue pursuant to the Public
Announcement on Clarifying the VAT Super Deduction Policy for the Living Service Sector, or Public Announcement [2019] No. 87, jointly
issued by the MOF and the STA on September 30, 2019. Our PRC subsidiaries that provide living services and meet the required criteria
stipulated in Public Announcement [2019] No. 39 and Public Announcement [2019] No. 87 would be permitted to enjoy such extra deduction
of input VAT at a rate of 10% during period from April 1, 2019 to September 30, 2019, and at a rate of 15% during period from October 1,
2019 to December 31, 2021, and PRC subsidiaries that do not provide living services but provide postal services, telecommunications services
or modern services and meet the required sales revenue criteria stipulated in Public Announcement [2019] No. 39 would be permitted to enjoy
such extra deduction of input VAT at a rate of 10% during period from April 1, 2019 to December 31, 2021. The above-mentioned super VAT
deduction policy was extended to December 31, 2022 pursuant to Public Announcement [2022] No. 11 jointly issued by the MOF and the STA
on March 3, 2022. On January 9, 2023, the MOF and the STA jointly issued the Public Announcement on Clarifying the VAT Relief and Other
Policies for Small-scale VAT Taxpayers, or Public Announcement [2023] No. 1, to renew the relevant super VAT deduction policy, pursuant to
which, during the period from January 1, 2023 to December 31, 2023, a general VAT taxpayer engaging in the provision of living services,
postal services, telecommunications services or modern services with sales revenue from the provision of such services accounting for more
than 50% of its total sales revenue is allowed to deduct extra 5% of the deductible input VAT for the current period from the VAT payable, and
a general VAT taxpayer engaging in provision of living services with sales revenue from the provision of living services accounting for more
than 50% of its total sales revenue is allowed to deduct extra 10% of the deductible input VAT for the current period from the VAT payable.
On February 6, 2020, the MOF and the STA jointly issued the Public Announcement on Tax Policies to Support Prevention and Control of
Pneumonia Caused by COVID-19, or Public Announcement [2020] No.8, which retroactively came into force on January 1, 2020, providing
that revenue derived by VAT taxpayers from provision of living services shall be temporarily exempted from VAT from January 1, 2020. Such
temporary VAT exemption policy was extended to March 31, 2021 pursuant to Public Announcement [2021] No. 7 jointly issued by the MOF
and the STA on March 17, 2021, and was no longer applicable upon expiry. Pursuant to Circular 36, VAT taxpayers that enjoy such temporary
VAT exemption would not be permitted to issue VAT special invoices to customers.
On December 30, 2022, the Standing Committee of the National People’s Congress promulgated the Value-added Tax Law of the PRC
(Draft for Comments). Under the current draft, among other things, input VAT of loan service will no longer be non-creditable, which means,
the input VAT amount on acquiring loan services may be offset against relevant output VAT amounts. Further changes may be made to the
Draft for Comments, which we will pay attention to and will evaluate the influence on us in terms of VAT.
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PRC taxation of our overseas shareholders
Under the EIT Law, PRC enterprise income tax at the rate of 10% is applicable to dividends payable to investors that are “non-resident
enterprises”, which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but
the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends have their sources
within the PRC. Similarly, any gain realized on the transfer of ADSs or ordinary shares by such investors is also subject to 10% PRC enterprise
income tax if such gain is regarded as income derived from sources within the PRC. Therefore, if we are considered a PRC “resident
enterprise”, dividends we pay to non-resident enterprise investors with respect to our ADSs or ordinary shares and the gains realized from the
transfer of our ADSs or ordinary shares may be considered as income derived from sources within the PRC and be subject to PRC enterprise
income tax at a rate of 10% or lower, subject to the provisions of any applicable bilateral tax treaty. The double taxation treaty between the
PRC and the United States, or the Treaty, does not reduce the 10% tax rate.
Moreover, non-resident individual investors are required to pay PRC individual income tax at the rate of 20% instead of 10% enterprise
income tax on dividends payable to the investors or any capital gains realized from the transfer of ADSs or ordinary shares if such gains are
deemed income derived from sources within the PRC, unless there is an applicable tax treaty providing exemption or for a lower withholding
tax rate. Under the PRC Individual Income Tax Law (as amended), or IITL, non-resident individual refers to an individual who has no
domicile in China and does not stay in the territory of China or who has no domicile in China and has stayed in the territory of China for less
than 183 days in aggregate in a calendar year. Pursuant to the IITL and its implementation rules, for purposes of the PRC individual income tax
levied on the income from transfer of property, the taxable income will be the balance of the transfer price for the transfer of the ADSs or
ordinary shares minus the original value and reasonable expenses paid for such transfer. Therefore, if we are considered a PRC resident
enterprise and dividends we pay with respect to our ADSs or ordinary shares and the gains realized from the transfer of our ADSs or ordinary
shares are considered income derived from sources within the PRC by relevant competent PRC tax authorities, such dividends and gains
earned by non-resident individuals may be subject to PRC individual income tax.
United States Federal Income Tax Considerations on Our Shareholders
The following is a description of material U.S. federal income tax consequences to the U.S. Holders (described below) of owning and
disposing of ordinary shares or ADSs, but it does not purport to be a comprehensive description of all tax considerations that may be relevant
to a particular person’s decision to own such ordinary shares or ADSs. This discussion applies only to a U.S. Holder that holds ordinary shares
or ADSs as capital assets within the meaning of Section 1221 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”). In
addition, it does not describe all of the tax consequences that may be relevant in light of a U.S. Holder’s particular circumstances, including
alternative minimum tax consequences, the Medicare tax on net investment income, and different tax consequences that may apply to U.S.
Holders subject to special rules, such as:
● certain financial institutions;
● dealers or traders in securities who use a mark-to-market method of tax accounting;
● persons holding ordinary shares or ADSs as part of a straddle, wash sale, conversion transaction or integrated transaction or persons
entering into a constructive sale with respect to the ordinary shares or ADSs;
● persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
● entities or arrangements that are treated as partnerships for U.S. federal income tax purposes (or partners therein);
● tax-exempt entities;
● persons that own or are deemed to own ten percent or more of our ordinary shares (measured by voting power or value); or
● persons who acquired our ordinary shares or ADSs pursuant to the exercise of an employee stock option or otherwise as
compensation.
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This discussion is based on the Code, administrative pronouncements, judicial decisions, final, temporary and proposed Treasury
regulations, and the Treaty, all as of the date hereof, and any of which is subject to change, possibly with retroactive effect. It is also based in
part on representations by the depositary and assumes that each obligation under the deposit agreement and any related agreement will be
performed in accordance with its terms.
A “U.S. Holder” is a beneficial owner of ordinary shares or ADSs that is a citizen or resident of the United States or a U.S. domestic
corporation or that otherwise is subject to U.S. federal income taxation on a net income basis in respect of such ordinary shares or ADSs. In
general, a U.S. Holder who owns ADSs will be treated as the owner of the underlying ordinary shares represented by those ADSs for U.S.
federal income tax purposes. The remainder of this discussion assumes that a U.S. Holder of our ADSs will be treated as the beneficial owner
of the underlying ordinary shares represented by the ADSs.
U.S. Holders should consult their tax advisors concerning the U.S. federal, state, local and foreign tax consequences of owning and
disposing of ordinary shares or ADSs in their particular circumstances.
Taxation of Distributions
Subject to the discussion under “—Passive Foreign Investment Company Rules” below, distributions paid on ordinary shares or ADSs,
other than certain pro rata distributions of ordinary shares, will be treated as dividends to the extent paid out of our current or accumulated
earnings and profits (as determined under U.S. federal income tax principles). Because we do not maintain calculations of our earnings and
profits under U.S. federal income tax principles, it is expected that distributions generally will be treated as dividends for U.S. federal income
tax purposes.
A non-corporate recipient of dividend income from a “qualified foreign corporation” will generally be subject to tax at a reduced U.S.
federal tax rate rather than the marginal tax rates generally applicable to ordinary income provided that certain holding period and other
requirements are met. A non-U.S. corporation will generally be considered to be a qualified foreign corporation (a) if it is eligible for the
benefits of a comprehensive tax treaty with the United States which the Secretary of Treasury of the United States determines is satisfactory for
purposes of this provision and which includes an exchange of information program, or (b) with respect to any dividend it pays on stock or that
are readily tradable on an established securities market in the United States, provided, in both cases, that the corporation is not a PFIC for the
taxable year in which the dividend is paid or the preceding taxable year. Our ADSs are listed on the NASDAQ Global Select Market, and will
qualify as readily tradable on an established securities market in the United States so long as they are so listed. As discussed below in “Passive
Foreign Investment Company Rules”, based on our financial statements and relevant market and shareholder data, we believe that we should
not be treated as a PFIC for U.S. federal income tax purposes with respect to the year of 2022. In addition, based on our financial statements
and our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market and
shareholder data, we do not anticipate becoming a PFIC for our 2023 taxable year or in the foreseeable future. Since our ordinary shares are
not themselves listed on an established securities market in the United States, dividends that we pay on our ordinary shares that are not backed
by ADSs may not be eligible for the reduced tax rate. If, however, we are deemed to be a resident enterprise under the PRC Enterprise Income
Tax Law, we may be eligible for the benefits of the Treaty (which the U.S. Treasury has determined is satisfactory for this purpose) and in that
case we would be treated as a qualified foreign corporation with respect to dividends paid on our ordinary shares or ADSs. Each non-corporate
U.S. Holder is advised to consult its tax advisors regarding the availability of the reduced tax rate applicable to qualified dividend income for
any dividends we pay with respect to our ADSs or ordinary shares. The amount of the dividend will be treated as foreign-source dividend
income to U.S. Holders and will not be eligible for the dividends-received deduction generally available to U.S. corporations under the Code.
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Dividends we pay may be subject to PRC withholding tax. For U.S. federal income tax purposes, the amount of any dividend will include
amounts withheld in respect of such PRC withholding tax. See “—PRC Taxation” above. Subject to generally applicable limitations and
conditions, PRC dividend withholding tax paid at the appropriate rate applicable to the U.S. Holder may be eligible for a credit against such
U.S. Holder’s federal income tax liability. These generally applicable limitations and conditions include new requirements recently adopted by
the U.S. Internal Revenue Service (“IRS”) and any PRC tax will need to satisfy these requirements in order to be eligible to be a creditable tax
for a U.S. Holder. In the case of a U.S. Holder that is eligible for, and properly elects, the benefits of the Treaty, the PRC tax on dividends will
be treated as meeting the new requirements and therefore as a creditable tax. In the case of all other U.S. Holders, the application of these
requirements to the PRC tax on dividends is uncertain and we have not determined whether these requirements have been met. If the PRC
dividend tax is not a creditable tax for a U.S. Holder or the U.S. Holder does not elect to claim a foreign tax credit for any foreign income taxes
paid or accrued in the same taxable year, the U.S. Holder may be able to deduct the PRC tax in computing such U.S. Holder’s taxable income
for U.S. federal income tax purposes. Dividend distributions will constitute income from sources without the United States and, for U.S.
Holders that elect to claim foreign tax credits, generally will constitute “passive category income” for foreign tax credit purposes.
The availability and calculation of foreign tax credits and deductions for foreign taxes depend on a U.S. Holder’s particular circumstances
and involve the application of complex rules to those circumstances. U.S. Holders should consult their own tax advisors regarding the
application of these rules to their particular situations.
Dividends will be included in a U.S. Holder’s income on the date of the U.S. Holder’s, or in the case of ADSs, the depositary’s, actual or
constructive receipt of the dividend. The amount of any dividend income paid in RMB will be the U.S. dollar amount calculated by reference
to the exchange rate in effect on the date of receipt, regardless of whether the payment is in fact converted into U.S. dollars. If the dividend is
converted into U.S. dollars on the date of receipt, a U.S. Holder should not be required to recognize foreign currency gain or loss in respect of
the dividend income. A U.S. Holder may have foreign currency gain or loss, which would be U.S. source ordinary gain or loss, if the dividend
is converted into U.S. dollars after the date of receipt.
Sales or Other Dispositions of Ordinary Shares or ADSs
For U.S. federal income tax purposes, gain or loss realized on the sale or other disposition of ordinary shares or ADSs will be capital gain
or loss, and will be long-term capital gain or loss if the U.S. Holder held the ordinary shares or ADSs for more than one year. The amount of
the gain or loss will equal the difference between the U.S. Holder’s tax basis in the ordinary shares or ADSs disposed of and the amount
realized on the disposition, in each case as determined in U.S. dollars. The deductibility of capital losses is subject to limitations.
As described in “— PRC Taxation — PRC Taxation on Us,” if we were deemed to be a tax resident enterprise under PRC tax law, gains
from dispositions of our ordinary shares or ADSs may be subject to PRC withholding tax. In that case, a U.S. Holder’s amount realized would
include the gross amount of the proceeds of the sale or disposition before deduction of the PRC tax. Although any such gain of a U.S. Holder
would generally be characterized as U.S.-source income, a U.S. Holder that is eligible for, and properly elects to claim, the benefits of the
Treaty may be entitled to elect to treat the gain as foreign-source income for foreign tax credit purposes. Under the new foreign tax credit
requirements recently adopted by the IRS, any PRC tax imposed on the sale or other disposition of our ordinary shares or ADSs generally will
not be treated as a creditable tax for U.S. foreign tax credit purposes except in the case of a U.S. Holder that is eligible for, and properly elects
to claim, the benefits of the Treaty. If the PRC tax is not a creditable tax or claimed as a credit by the U.S. Holder pursuant to the Treaty, the
tax would reduce the amount realized on the sale or other disposition of the shares even if the U.S. Holder has elected to claim a foreign tax
credit for other taxes in the same year. U.S. Holders should consult their own tax advisors regarding the application of the foreign tax credit
rules to a sale or other disposition of the ordinary shares or ADSs and any PRC tax imposed on such sale or disposition.
Deposits and withdrawals of ordinary shares by U.S. Holders in exchange for ADSs will not result in the realization of gain or loss for
U.S. federal income tax purposes.
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Passive Foreign Investment Company Rules
Special U.S. federal income tax rules apply to U.S. persons owning shares of a “passive foreign investment company”, or “PFIC”. If we
were a PFIC for any taxable year during which a U.S. Holder held ordinary shares or ADSs, such U.S. holder may be subject to adverse tax
consequences upon a sale or exchange of our ordinary shares or ADSs (including a sale or exchange that is treated as an “excess distribution”
in respect of the ordinary shares or ADSs). Additionally, a sale or exchange that is treated as a dividend paid by a PFIC are not qualified
dividends eligible to be taxed at preferential rates. Based on our audited consolidated financial statements, we do not believe we were a passive
foreign investment company, or PFIC, for U.S. federal income tax purposes for the2021 or 2022 taxable years and do not expect to be a PFIC
for 2023 or in the foreseeable future.
Specified Foreign Financial Assets
Certain U.S. Holders that own “specified foreign financial assets” with an aggregate value in excess of US$ 50,000 on the last day of the
taxable year or US$75,000 at any time during the taxable year are generally required to file an information statement along with their tax
returns, currently on IRS Form 8938, with respect to such assets. “Specified foreign financial assets” include any financial accounts held at a
non-U.S. financial institution, as well as securities issued by a non-U.S. issuer that are not held in accounts maintained by financial institutions.
Higher reporting thresholds apply to certain individuals living abroad and to certain married individuals. Regulations extend this reporting
requirement to certain entities that are treated as formed or availed of to hold direct or indirect interests in specified foreign financial assets
based on certain objective criteria. U.S. Holders who fail to report the required information could be subject to substantial penalties. In
addition, the statute of limitations for assessment of tax would be suspended, in whole or part. Prospective investors should consult their own
tax advisors concerning the application of these rules to their investment in ADSs or ordinary shares, including the application of the rules to
their particular circumstances.
Information Reporting and Backup Withholding
Dividend payments with respect to ADSs or ordinary shares and proceeds from the sale or exchange of ADSs or ordinary shares may be
subject to information reporting to the IRS and possible U.S. backup withholding. Backup withholding will not apply, however, to a U.S.
Holder who furnishes a correct taxpayer identification number and makes any other required certification or who is otherwise exempt from
backup withholding. U.S. Holders should consult their tax advisers regarding the application of the U.S. information reporting and backup
withholding rules.
Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income
tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate
claim for refund with the IRS and furnishing any required information.
German Taxation
Income Taxation
German-based corporations (AG and GmbH) are subject to corporate income tax (CIT) and in general also to trade tax, which is a profit
tax levied by the municipalities (TT). CIT is charged at a rate of 15% on the taxable income. A 5.5% solidarity surcharge is charged on the
CIT, resulting in an effective tax rate of 15.825%. Trade tax is also charged on the taxable income by the local municipalities whereas the tax
rates depends on the local multiplier of each municipality. Thus, TT rates vary from town to town. Typically, TT is levied at an effective rate of
7% – 21%. For Frankfurt, the TT rate amounts to 16.1% and for Munich to 17.15%. Partnerships themselves (GmbH & Co. KG) that qualifies
as so-called entrepreneurial partnerships for tax purposes (Mitunternehmerschaften) are subject to TT but not subject to CIT. For CIT purposes,
a partnership is tax transparent; i.e., the taxable income of a partnership is determined at the level of the partnership itself and then allocated to
the partners in proportion to their interest in the partnership, irrespective of an actual distribution. In case a partner of a partnership is a
corporation, the income is subject to CIT at the level of the partners. If the conditions are fulfilled, expenses of the partner that arise in
connection with its partnership participation are tax deductible from the taxable income of the partnership as so-called special purpose
expenses (Sonderbetriebsausgaben), subject to general rules that may be applicable in relation to deduction of expenses and further provided
that the expenses are included in the tax-filing at the level of the partnership.
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German branches/permanent establishments of foreign corporations are subject to CIT and TT. In case of permanent establishments, the
German double tax treaties generally assign the taxation right to the state in which the permanent establishment is located. The participation of
a foreign corporation (H World Holdings Singapore Pte. Ltd.) in a German partnership (DH Group GmbH & Co. KG) as limited partner can
create a permanent establishment of the foreign corporation in Germany for CIT and TT purposes.
Taxation of Reorganizations
In certain cases, a reorganization may lead to income subject to CIT and TT as well as to a forfeiture of any tax loss carryforwards.
However, the identity-preserving change of legal form (Formwechsel) from a stock corporation (Steigenberger Hotels Aktiengesellschaft) to a
limited liability company (Steigenberger Hotels GmbH) has no tax consequences.
Tax group for CIT and TT purposes
A tax group in Germany allows a set-off of taxable income (positive and negative) for CIT and TT purposes at the level of the entity
heading the tax group (parent company). Such tax group requires in particular the holding of the majority in voting rights (financial
integration) from the beginning of the fiscal year of the parent subsidiary company as well as the implementation and proper execution of a
profit and loss transfer agreement for a fixed minimum period of at least five calendar years. Accordingly, all profits made as well as all losses
suffered at the level of the subsidiary/ies in a tax group as determined pursuant to German accounting rules (HGB) have to be transferred to or
need to be compensated by the head of the tax group. One advantage of the tax group is that the profit transfer is not subject to dividend
taxation (i.e. no CIT/TT on the 5% non-deductible expenses). Only corporations subject to unlimited corporate income tax with its place of
registered office and management in Germany and seat in a EU or EEA country can be subsidiaries in a tax group.
The change of the legal form of the parent company has no influence on the continued existence of a profit and loss transfer agreement
and therefore does not affect the tax group relationship if the requirements for the tax group are still met by the parent company in its new legal
form.
Participation exemption
Dividends received by a German corporation are generally exempt from CIT if in particular a participation quota of at least 10% at the
beginning of the year the dividend distribution takes place is fulfilled and the distributed dividend has not reduced the taxable income of the
distributing entity; 5% of the dividends are deemed as non-deductible business expenses. Consequently, dividends are effectively 95% tax
exempt. The effective CIT including solidarity surcharge on dividends therefore amounts to approximately 0.8% (= 5% taxable portion x
15.825% tax rate). This participation exemption applies regardless of a minimum holding period or the residence of the subsidiary (German or
foreign). The participation exemption inter alia does not apply if the shares are held as a trading stock of banks and financial institutions.
The 95% exemption applies to TT under additional requirements. For dividends from German corporations the minimum shareholding at
the beginning of the year must be at least 15% instead of 10%; Otherwise, the dividends are fully taxable for TT purposes. The same hold
principally true with regard to the TT-treatment of dividends from foreign corporations.
The 95% participation exemption also applies to capital gains from the disposal of shares in corporations. Exceptions only apply in case of
certain tax neutral restructurings made in the past and in case of past tax-effective write-downs. The 95% participation exemption for capital
gains applies to both CIT and TT. Again, the participation exemption for capital gains inter alia does not apply if the shares are held as a
trading stock of banks and financial institutions or as an investment of a life or health insurance company.
Withholding Taxes
Dividends paid by German corporations are subject to withholding tax (Kapitalertragsteuer) at a rate of 25% plus 5.5% solidarity
surcharge thereupon. A German resident shareholder in the form of a corporation may offset the paid withholding tax against its tax burden or
if higher than its tax burden get a refund in the course of the tax assessment. For shareholders which are non-resident in Germany, the
withholding tax may generally become a final tax cost unless exemptions apply.
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In this regard, for example, a 40% (resp. two fifths) refund on the withholding tax is granted upon application at the Federal Central Tax
Office (Bundeszentralamt für Steuern), if the dividend recipient is domiciled abroad and there is no double taxation treaty with Germany.
Therefore, an effective withholding tax rate of 15.825% on dividends for German non-resident shareholders applies. However, this refund is
subject to enhanced substance requirements.
According to the EU Parent-Subsidiary Directive as implemented into German domestic law, the withholding tax can be reduced to zero
(upon prior application and issuance of a respective tax exemption certificate), if the dividends are paid by a German subsidiary to its EU
shareholder corporation that has held a 10% minimum participation in the German subsidiary for at least 12 months and respective substance
requirements pursuant to German anti-treaty shopping provisions are met.
Furthermore, based on double tax treaties between Germany and the shareholder’s country of residence, the withholding tax may be (upon
application) reduced to 5% to 15%. Also in these cases, the WHT reduction has to be applied for and substance requirements have to be met.
By contrast, profit distributions paid by a partnership (for example, GmbH &Co. KG) are not subject to withholding tax because they are
qualified as “withdrawals” rather than dividends from a German income tax perspective.
If a partnership receives dividends from its corporate subsidiaries and if these corporate subsidiaries are to be actually attributable to the
permanent establishment of the German partnership, the dividend withholding tax cannot be reclaimed at the level of a partnership but only at
the level of its partners. This also applies to foreign partners of the German partnership which creates a permanent establishment due to the
participation in a partnership in Germany and are therefore subject to limited CIT and thus, have to file a CIT return in Germany.
However, reclaiming of the dividend withholding tax in such German CIT return of the foreign partner can only be made in case the
corporate subsidiaries of the partnership are actually attributable to the permanent establishment of the German partnership. As a German
partnership is a semi-transparent entity, the corporate subsidiaries must be in a functional relationship with the partnership in order to be
attributed to the German permanent establishment of the partnership. If the corporate subsidiaries are not attributable to the permanent
establishment of the German partnership, they would be directly attributed to the foreign partner of the partnership. In this case, the dividends
from such corporations would be seen as directly received by the foreign partner and not by the German partnership, leading to the application
of the general refund procedure explained above (including the prove of substance).
Singapore Taxation
Corporate Tax
The prevailing corporate tax rate in Singapore is 17% with effect from Year of Assessment 2011. In addition, with effect from Year of
Assessment 2020, the partial tax exemption scheme applies on the first S$200,000 of a company’s normal chargeable income; specifically 75%
of up to the first S$10,000 of a company’s normal chargeable income, and 50% of up to the next S$190,000 is exempt from corporate tax. The
remaining chargeable income (after the partial tax exemption) will be taxed at 17%.
Singapore has a tax exemption scheme for new start-up companies that was introduced in Year of Assessment 2005 to support
entrepreneurship and help the growth of local enterprises. With effect from Year of Assessment 2020 onwards, there will be a 75% exemption
on the first S$100,000 of normal chargeable income, and a further 50% exemption on the next S$100,000 of normal chargeable income.
Our subsidiaries in Singapore are subject to Singapore corporate income tax at a rate of 17%.
Goods and Services Tax
Goods and services tax (“GST”) in Singapore is a consumption tax that is levied on the import of goods and services into Singapore, as
well as nearly all supplies of goods and services in Singapore at a prevailing rate of 7%.With effect from 1 January 2023, GST rate had
increased to 8%, which will further increased to 9% with effect from 1 January 2024.
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Dividend Distributions
Singapore adopts a one-tier corporate tax system under which the tax collected from corporate profits is a final tax and the after-tax profits
of a company resident in Singapore can be distributed to its shareholders as tax-exempt dividends. Such dividends are tax-exempt in the hands
of the shareholders, irrespective of whether the shareholder is a company or an individual and whether or not the shareholder is a Singapore tax
resident. Singapore does not currently impose withholding tax on dividends paid to resident or non-resident shareholders.
10.F. Dividends and Paying Agents
Not applicable.
10.G. Statement by Experts
Not applicable.
10.H. Documents on Display
We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are
required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F no later than four months
after the close of each fiscal year, which is December 31. Copies of reports and other information, when so filed, may be inspected without
charge and may be obtained at prescribed rates at the public reference facilities maintained by the Securities and Exchange Commission at 100
F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information
statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign
private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy
statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions
contained in Section 16 of the Exchange Act.
10.I. Subsidiary Information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our exposure to interest rate risk primarily relates to the interest rates for our outstanding debt and the interest income generated by excess
cash invested in liquid investments with original maturities of three months or less. We do not rely on derivative financial instruments to
manage our interest risk exposure. Interest-earning instruments carry a degree of interest rate risk.
We have not been exposed to material risks due to changes in interest rates. However, our future interest income and interest expense may
be different from expected due to changes in market interest rates.
Foreign Exchange Risk
A significant portion of our revenues, expenses and financial assets are denominated in the Renminbi. Our reporting currency is Renminbi.
The functional currencies of entities within Deutsche Hospitality include Euro and other currencies such as Swiss Franc. Our exposure to
foreign exchange risk primarily relates to cash and cash equivalents and loans denominated in U.S. dollars and Euro, and our investment in
equity securities of Accor denominated in Euro. Although in general, our exposure to foreign exchange risks should be limited, the value of
your investment in our ADSs will be affected by the foreign exchange rate between U.S. dollars and RMB and between U.S. dollars and Euro
because the value of our business is effectively denominated in RMB and Euro, while the ADSs will be traded in U.S. dollars.
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The value of the RMB against the U.S. dollar, the Hong Kong dollar and other currencies may fluctuate and is affected by, among other
things, changes in China’s political and economic conditions. The conversion of RMB into other currencies, including U.S. dollars and Hong
Kong dollar, has been based on rates set by the People’s Bank of China. On July 21, 2005, the PRC regulatory authorities changed its decade-
old policy of pegging the value of the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to fluctuate within a narrow and
managed band against a basket of certain foreign currencies. This change in policy caused the Renminbi to appreciate by more than 20%
against the U.S. dollar between July 2005 and July 2008. Between July 2008 and June 2010, this appreciation halted and the exchange rate
between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the RMB has fluctuated against the U.S. dollar, at
times significantly and unpredictably. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange
rate between the RMB and the U.S. dollar in the future. To the extent we hold assets denominated in U.S. dollars, any appreciation of the RMB
against the U.S. dollar could result in a change to our statement of operations and a reduction in the value of our U.S. dollar denominated
assets. On the other hand, a decline in the value of the RMB against the U.S. dollar and the Hong Kong dollar could reduce the U.S. dollar
equivalent amounts of our financial results, the value of your investment in our company and the dividends we may pay in the future, if any, all
of which may have a material adverse effect on the prices of ADSs and ordinary shares. To the extent that we need to convert U.S. dollars or
Hong Kong dollars into Renminbi or Euro for our operations, appreciation of the Renminbi or Euro against the U.S. dollar or Hong Kong
dollar would have an adverse effect on the Renminbi or Euro amount we receive from the conversion.
By way of example, assuming we had converted a U.S. dollar denominated cash balance of US$1 million as of December 31, 2022 into
Renminbi at the exchange rate of US$1.00 for RMB6.8972, such cash balance would have been approximately RMB6.9 million (US$1
million). Assuming a 1.0% depreciation of the RMB against the U.S. dollar, such cash balance would have increased to RMB7.0 million
(US$1 million) as of December 31, 2022.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
12.A. Debt Securities
Not applicable.
12.B. Warrants and Rights
Not applicable.
12.C. Other Securities
Not applicable.
12.D. American Depositary Shares
Fees and Expenses
ADS holders will be required to pay the following fees under the terms of the deposit agreement:
Service
Issuance of ADSs
Cancelation of ADSs
Distribution of cash dividends or other cash distributions (e.g., sale of
rights and other entitlements)
Distribution of ADSs pursuant to stock dividends, other free stock
distributions or exercise of rights to purchase additional ADSs
Distribution of securities other than ADSs or rights to purchase
Up to US$0.05 per ADS issued
Up to US$0.05 per ADS canceled
Fees
Up to US$0.05 per ADS held
Up to US$0.05 per ADS held
additional ADSs
Depositary services
Up to US$0.05 per ADS held
Up to US$0.05 per ADS held on the applicable record date(s)
established by the depositary
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● As an ADS holder, you will also be responsible to pay certain charges such as:
● fees for the transfer and registration of ordinary shares charged by the registrar and transfer agent for the ordinary shares in the
Cayman Islands (i.e., upon deposit and withdrawal of ordinary shares);
● expenses incurred for converting foreign currency into U.S. dollars;
● expenses for cable, telex and fax transmissions and for delivery of securities;
● taxes (including applicable interest and penalties) and other governmental charges;
● fees and expenses incurred by the depositary in connection with compliance with exchange control regulations and other applicable
regulatory requirements; and
● fees and expenses incurred in connection with the delivery or servicing of ordinary shares on deposit.
Depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary by the brokers (on behalf of their
clients) receiving the newly issued ADSs from the depositary and by the brokers (on behalf of their clients) delivering the ADSs to the
depositary for cancellation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of
cash or securities to ADS holders and the depositary services fee are charged by the depositary to the holders of record of ADSs as of the
applicable ADS record date.
The depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other
than cash (i.e., stock dividend, rights), the depositary charge the applicable fee to the ADS record date holders concurrent with the distribution.
In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary send
invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via The Depository Trust
Company (“DTC”)), the depositary generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of
the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their
clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary.
In the event of refusal to pay the depositary fees, the depositary may, under the terms of the deposit agreement, refuse the requested
service until payment is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder.
Note that the fees and charges you may be required to pay may vary over time and may be changed by us and by the depositary. You will
receive prior notice of such changes.
Fees and Other Payments Made by the Depositary to Us
The depositary may reimburse us for certain expenses incurred by us in respect of the ADR program established pursuant to the deposit
agreement, by making available a portion of the depositary fees charged in respect of the ADR program or otherwise, upon such terms and
conditions as we and the depositary may agree from time to time. For the year ended December 31, 2022, we have received a total of RMB35
million (US$5 million) from the depositary as reimbursement for our expenses incurred in connection with investor relationship programs
related to the ADS program.
Dealings and Settlement of Ordinary Shares in Hong Kong
Our ordinary shares trade on the Hong Kong Stock Exchange in board lots of 100 shares. Dealings in our ordinary shares on the Hong
Kong Stock Exchange are conducted in Hong Kong dollars.
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The transaction costs of dealings in our ordinary shares on the Hong Kong Stock Exchange include:
● Hong Kong Stock Exchange trading fee of 0.00565% of the consideration of the transaction, charged to each of the buyer and seller;
● the Securities and Futures Commission of Hong Kong, or the SFC, transaction levy of 0.0027% of the consideration of the
transaction, charged to each of the buyer and seller;
● Accounting and Financial Reporting Council of Hong Kong, or the AFRC, transaction levy of 0.00015% of the consideration of the
transaction, charged to each of the buyer and seller;
● transfer deed stamp duty of HK$5.00 per transfer deed (if applicable), payable by the seller;
● ad valorem stamp duty at a total rate of 0.26% of the value of the transaction, with 0.13% payable by each of the buyer and the seller;
● stock settlement fee, which is currently 0.002% of the gross transaction value, subject to a minimum fee of HK$2.00 and a maximum
fee of HK$100.00 per side per trade;
● brokerage commission, which is freely negotiable with the broker (other than brokerage commissions for certain public offering
transactions, which are currently set at 1% of the subscription or purchase price and will be payable by the person subscribing for or
purchasing the securities); and
● the Hong Kong share registrar will charge between HK$2.50 to HK$20.00, depending on the speed of service (or such higher fee as
may from time to time be permitted under the Hong Kong Listing Rules), for each transfer of ordinary shares from one registered
owner to another, each share certificate canceled or issued by it and any applicable fee as stated in the share transfer forms used in
Hong Kong.
Investors must settle their trades executed on the Hong Kong Stock Exchange through their brokers directly or through custodians. For an
investor who has deposited his or her ordinary shares in his or her stock account or in his or her designated Central Clearing and Settlement
System, or CCASS, participant’s stock account maintained with CCASS, settlement will be effected in CCASS in accordance with the General
Rules of CCASS and CCASS Operational Procedures in effect from time to time. For an investor who holds the physical certificates,
settlement certificates and the duly executed transfer forms must be delivered to his or her broker or custodian before the settlement date.
Conversion between Ordinary Shares Trading in Hong Kong and ADSs
In connection with the initial public offering of our shares in Hong Kong, we established a branch register of members in Hong Kong, or
the Hong Kong share register, which is maintained by our Hong Kong share registrar, Computershare Hong Kong Investor Services Limited.
Our principal register of members, or the Cayman share register, will continue to be maintained by our principal share registrar, Conyers Trust
Company (Cayman) Limited.
As described in further detail below, holders of ordinary shares registered on the Hong Kong share register will be able to convert these
ordinary shares into ADSs, and vice versa.
Converting Ordinary Shares Trading in Hong Kong into ADSs
An investor who holds ordinary shares registered in Hong Kong and who intends to convert them to ADSs to trade on NASDAQ must
deposit or have his or her broker deposit the ordinary shares with the depositary’s Hong Kong custodian, Citibank, N.A., Hong Kong, or the
custodian, in exchange for ADSs.
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A deposit of ordinary shares trading in Hong Kong in exchange for ADSs involves the following procedures:
● If ordinary shares have been deposited with CCASS, the investor must transfer ordinary shares to the depositary’s account with the
custodian within CCASS by following the CCASS procedures for transfer and submit and deliver a duly completed and signed
conversion form to the depositary via his or her broker.
● If ordinary shares are held outside CCASS, the investor must arrange to deposit, his or her shares into CCASS for delivery to the
depositary’s account with the custodian within CCASS, submit and deliver a request for conversion form to the custodian and after
duly completing and signing such conversion form, deliver such conversion form to the custodian.
● Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, if applicable,
the depositary will issue the corresponding number of ADSs in the name(s) requested by an investor and will deliver the ADSs to the
designated DTC account of the person(s) designated
For ordinary shares deposited in CCASS, under normal circumstances, the above steps generally require two business days. For ordinary
shares held outside CCASS in physical form, the above steps may take 14 business days, or more, to complete. Temporary delays may arise.
For example, the transfer books of the depositary may from time to time be closed to ADS issuances. The investor will be unable to trade the
ADSs until the procedures are completed.
Converting ADSs to Ordinary Shares Trading in Hong Kong
An investor who holds ADSs and who intends to convert his/her ADSs into ordinary shares to trade on the Hong Kong Stock Exchange
must cancel the ADSs the investor holds and withdraw ordinary shares from our ADS program and cause his or her broker or other financial
institution to trade such ordinary shares on the Hong Kong Stock Exchange.
An investor that holds ADSs indirectly through a broker should follow the broker’s procedure and instruct the broker to arrange for
cancelation of the ADSs, and transfer of the underlying ordinary shares from the depositary’s account with the custodian within the CCASS
system to the investor’s Hong Kong stock account.
For investors holding ADSs directly, the following steps must be taken:
● To withdraw ordinary shares from our ADS program, an investor who holds ADSs may turn in such ADSs at the office of the
depositary (and the applicable ADR(s) if the ADSs are held in certificated form), and send an instruction to cancel such ADSs to the
depositary.
● Upon payment or net of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, if
applicable, the depositary will cancel the ADSs and instruct the custodian to deliver ordinary shares underlying the canceled ADSs to
the CCASS account designated by an investor.
● If an investor prefers to receive ordinary shares outside CCASS, he or she must receive ordinary shares in CCASS first and then
arrange for withdrawal from CCASS. Investors can then obtain a transfer form signed by HKSCC Nominees Limited (as the
transferor) and register ordinary shares in their own names with the Hong Kong share registrar.
For ordinary shares to be received in CCASS, under normal circumstances, the above steps generally require two business days. For
ordinary shares to be received outside CCASS in physical form, the above steps may take 14 business days, or more, to complete. The investor
will be unable to trade the ordinary shares on the Hong Kong Stock Exchange until the procedures are completed.
Temporary delays may arise. For example, the transfer books of the depositary may from time to time be closed to ADS cancellations. In
addition, completion of the above steps and procedures is subject to there being a sufficient number of ordinary shares on the Hong Kong share
register to facilitate a withdrawal from the ADS program directly into the CCASS system. We are not under any obligation to maintain or
increase the number of ordinary shares on the Hong Kong share register to facilitate such withdrawals.
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Depositary Requirements
Before the depositary issues ADSs or permits withdrawal of ordinary shares, the depositary may require:
● production of satisfactory proof of the identity and genuineness of any signature or other information it deems necessary; and
● compliance with procedures it may establish, from time to time, consistent with the deposit agreement, including but not limited to
presentation of transfer documents.
The depositary may refuse to deliver, transfer or register issuances, transfers and cancelations of ADSs generally when the transfer books
of the depositary or our Hong Kong share registrar are closed or at any time if the depositary or we determine it advisable to do so.
All costs attributable to the transfer of ordinary shares to effect a withdrawal from or deposit of ordinary shares into our ADS program will
be borne by the investor requesting the transfer. In particular, holders of ordinary shares and ADSs should note that the Hong Kong share
registrar will charge between HK$2.50 to HK$20, depending on the speed of service (or such higher fee as may from time to time be permitted
under the Hong Kong Listing Rules), for each transfer of ordinary shares from one registered owner to another, each share certificate canceled
or issued by it and any applicable fee as stated in the share transfer forms used in Hong Kong. In addition, holders of ordinary shares and
ADSs must pay up to US$5.00 per 100 ADSs for each issuance of ADSs and each cancelation of ADSs, as the case may be, in connection with
the deposit of ordinary shares into, or withdrawal of ordinary shares from, our ADS program.
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ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None of these events occurred in any of the years ended December 31, 2020, 2021 and 2022.
PART II
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
In June 2021, we effected a share subdivision to sub-divide each ordinary share with a par value of US$0.0001 each into ten ordinary
shares with a par value of US$0.00001 each. Concurrent with the share subdivision, the ratio of ADS to ordinary share was adjusted from one
(1) ADS representing one (1) ordinary share to one (1) ADS representing ten (10) ordinary shares after share subdivision.
The following “Use of Proceeds” information relates to the registration statement on Form F-3ASR (File No. 333-269169), together with
the prospectus supplement dated January 10, 2023 in relation to our follow-on offering of 7,118,500 ADSs (including the exercise in full of the
underwriters’ option to purchase additional ADSs), representing an aggregate of 71,185,000 ordinary shares. The net proceeds raised from the
follow-on public offering were approximately US$291.6 million (including the exercise in full of the underwriters’ option to purchase
additional ADSs), after deducting underwriting discounts and commissions and the offering expenses. Goldman Sachs (Asia) L.L.C. and UBS
Securities LLC are the representatives of the underwriters for our follow-on offering.
The total expenses incurred for our company’s account in connection with the follow-on offering was approximately US$7.4 million,
which included approximately US$6.0 million in underwriting discounts and commissions and approximately US$1.4 million of other costs
and expenses. None of the transaction expenses included payments to directors or officers of our company or their associates, persons owning
more than 10% or more of our equity securities or our affiliates.
For the period from January 10, 2023 to March 31, 2023, we used US$65 million of net proceeds from our follow-on offering to repay
bank loans. The rest of the net proceeds will be used (i) to fund our growth strategies amid post-COVID reopening, including enhancing the
competitiveness of our hotel portfolio and developing our regional-based operating paradigm, (ii) to invest in initiatives that support our long
term success, including our technology infrastructure, supply chain ecosystem, distribution system that connects both individual guests and
corporate clients, and ESG efforts; and (iii) for working capital and general corporate purposes.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the
effectiveness of our disclosure controls and procedures within the meaning of Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of the end
of the period covered by this annual report. Based on such evaluation, our management has concluded that, as of the end of the period covered
by this annual report, our disclosure controls and procedures were effective.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act, for our company. Internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in
accordance with generally accepted accounting principles and includes those policies and procedures that (a) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of a company’s assets, (b) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally
accepted accounting principles and that a company’s receipts and expenditures are being made only in accordance with authorizations of a
company’s management and directors and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of a company’s assets that could have a material effect on the consolidated financial statements.
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Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance with respect
to consolidated financial statement preparation and presentation and may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies and procedures may deteriorate.
As required by Section 404 of the Sarbanes-Oxley Act and related rules as promulgated by the SEC, our management assessed the
effectiveness of the internal control over financial reporting as of December 31, 2022 using criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our
management has concluded that our internal control over financial reporting was effective as of December 31, 2022.
Attestation Report of the Registered Public Accounting Firm
The effectiveness of our internal control over financial reporting as of December 31, 2022 has been audited by Deloitte Touche Tohmatsu
Certified Public Accountants LLP, an independent registered public accounting firm. The attestation report issued by Deloitte Touche
Tohmatsu Certified Public Accountants LLP can be found on page F-4 of this annual report on Form 20-F.
Changes in Internal Control over Financial Reporting
There were no significant changes that have materially affected, or are reasonably likely to materially affect our internal control over
financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Mr. Jian Shang is an audit committee financial expert, as that term is defined in Item 16A(b) of
Form 20-F, and is independent for the purposes of Rule 5605(a)(2) of the NASDAQ Marketplace Rules, or the NASDAQ Rules, and
Rule 10A-3 under the Exchange Act.
ITEM 16B. CODE OF ETHICS
Our board of directors adopted a code of business conduct and ethics on January 27, 2010 that applies to our directors, officers, employees
and agents, including certain provisions that specifically apply to our executive officers and any other persons who perform similar functions
for us. We have filed our code of business conduct and ethics as an exhibit to our registration statement on Form F-1 (File No. 333-165247)
originally filed with the Securities and Exchange Commission on March 5, 2010, as amended. Our code of business conduct and ethics is
publicly available on our website at https://ir.hworld.com/.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Deloitte Touche Tohmatsu Certified Public Accountants LLP, or Deloitte, our independent registered public accounting firm, began
serving as our auditor in August 2009.
Our audit committee is responsible for the oversight of Deloitte’s work. The policy of our audit committee is to pre-approve all audit and
non-audit services provided by Deloitte, including audit services, audit-related services, tax services and other services, other than those for de
minimis services which are approved by the audit committee prior to the completion of the audit.
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We paid the following fees for professional services to Deloitte for the years ended December 31, 2021 and 2022.
Audit Fees(1)
Tax Fees(2)
Total
Year Ended December 31,
2021
US$
2022
US$
(In millions)
2.9
0.5
3.4
2.9
0.1
3.0
Note: (1) Audit Fees. This category includes the aggregate fees billed for the professional services rendered by our principal auditors for the
interim review of quarterly financial statements and the audit of our annual financial statements.
(2) Tax Fees. This category includes the aggregate fees billed for the professional services rendered by our principal auditors for tax
compliance and tax advice.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
We announced a share repurchase program approved by our board of directors on August 21, 2019. Under the terms of the approved
program, we may repurchase up to US$750 million worth of our issued and outstanding ADSs in open market at prevailing market prices or
privately negotiated transaction, depending on market conditions and other factors, as well as in accordance with restrictions relating to
volume, price and timing. This share repurchase plan will be effective for five years. Our board of directors review the share repurchase
program periodically, and may authorize adjustment of its terms and size accordingly. The share repurchase program may be suspended or
discontinued at any time. We did not repurchase any ADSs under this program in 2020. We repurchased 640 and 1,779,470 ADSs in 2021 and
2022, respectively. The following table sets forth information about our purchases of outstanding ADSs in 2022.
Period
January 2022
February 2022
March 2022
April 2022
May 2022
June 2022
July 2022
August 2022
September 2022
October 2022
November 2022
December 2022
(a) Total Number
of ADSs
Purchased
(b) Average Price
Paid per ADSs
(US$)
(c) Total Number
of ADSs
Purchased as Part
of Publicly
Announced Plans
or Programs
(d) Approximate
Dollar Value of ADSs that May
Yet be Purchased
Under the Plans
or Programs (in
US$million)
—
—
1,027,084
684,917
67,469
—
—
—
—
—
—
—
—
—
29.19
29.18
24.94
—
—
—
—
—
—
—
—
—
1,027,724
1,712,641
1,780,110
1,780,110
1,780,110
1,780,110
1,780,110
1,780,110
1,780,110
1,780,110
750
750
720
700
698
698
698
698
698
698
698
698
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
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ITEM 16G. CORPORATE GOVERNANCE
We are a “foreign private issuer” (as such term is defined in Rule 3b-4 under the Exchange Act), and our ADSs are listed on the NASDAQ
Global Select Market. The NASDAQ rules provide that foreign private issuers may follow home country practice in lieu of the corporate
governance requirements of the NASDAQ Stock Market LLC, subject to certain exceptions and requirements and except to the extent that
such exemptions would be contrary to U.S. federal securities laws and regulations. The significant differences between our corporate
governance practices and those followed by domestic companies under the NASDAQ rules are summarized as follows:
● We follow home country practice that permits our board of directors not to have a majority of independent directors in lieu of
complying with Rule 5605(b)(1) of the NASDAQ.
● We follow home country practice that permits our independent directors not to hold regularly scheduled meetings at which only
independent directors are present in lieu of complying with Rule 5605(b)(2) of the NASDAQ.
● We follow home country practice that permits our board of directors not to implement a nominations committee, in lieu of complying
with Rule 5605(e) of the NASDAQ Rules that requires the implementation of a nominations committee.
● We followed home country practice that permits us not to disclose in our annual report or website the material terms of all agreements
or arrangements between any director, nominee for director and any person or entity other than our company relating to compensation
or other payment in connection with that person’s candidacy or services as a director of our company, in lieu of complying with
Rule 5250(b)(3) of the NASDAQ.
Other than the above, we have followed and intend to continue to follow the applicable corporate governance standards under the
NASDAQ rules.
In accordance with Rule 5250(d)(1) of the NASDAQ, we will post this annual report on Form 20-F on our company website at
https://ir.hworld.com.
Under Rule 19C.11 of the Hong Kong Listing Rules, we are exempt from certain corporate governance requirements of the Hong Kong
Stock Exchange, including Appendix 14 of the Hong Kong Listing Rules (Corporate Governance Code) and Appendix 16 of the Hong Kong
Listing Rules (Disclosure of Financial Information).
In connection with our listing on the Hong Kong Stock Exchange, the Hong Kong Stock Exchange and the SFC granted certain waivers
and exemptions from strict compliance with the relevant provisions of the Hong Kong Listing Rules and the SFO, respectively, and the SFC
also granted a ruling under the Takeovers Codes.
Not a Public Company in Hong Kong
Section 4.1 of the Takeovers Codes provides that the Takeovers Codes applies to takeovers, mergers and share repurchases affecting
public companies in Hong Kong and companies with a primary listing in Hong Kong. According to the Note to Section 4.2 of the Introduction
to the Takeovers Codes, a Grandfathered Greater China Issuer within the meaning of Rule 19C.01 of the Hong Kong Listing Rules with a
secondary listing on the Hong Kong Stock Exchange will not normally be regarded as a public company in Hong Kong under Section 4.2 of
the Introduction to the Takeovers Codes.
The SFC granted a ruling that we are not a “public company in Hong Kong” for the purposes of Section 4.2. Therefore, the Takeovers
Codes do not apply to us. In the event that the bulk of trading in the Shares migrates to Hong Kong such that our Company would be treated as
having a dual-primary listing pursuant to Rule 19C.13 of the Hong Kong Listing Rules, the Takeovers Codes will apply to our Company.
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Disclosure of Interests under Part XV of SFO
Part XV of the SFO imposes duties of disclosure of interests in ordinary shares. Under the U.S. Exchange Act, which we are subject to,
any person (including directors and officers of the company concerned) who acquires beneficial ownership, as determined in accordance with
the rules and regulations of the SEC and which includes the power to direct the voting or the disposition of the securities, of more than 5% of a
class of equity securities registered under Section 12 of the U.S. Exchange Act must file beneficial owner reports with the SEC, and such
person must promptly report any material change in the information provided (including any acquisition or disposition of 1% or more of the
class of equity securities concerned), unless exceptions apply. Therefore, compliance with Part XV of the SFO would subject our corporate
insiders to a second level of reporting, which would be unduly burdensome to them, would result in additional costs and would not be
meaningful, since the statutory disclosure of interest obligations under the U.S. Exchange Act that apply to us and our corporate insiders would
provide our investors with sufficient information relating to the shareholding interests of our significant shareholders.
The SFC granted a partial exemption under section 309(2) of the SFO from the provisions of Part XV of the SFO (other than Divisions 5,
11 and 12 of Part XV of the SFO), on the conditions that (i) the bulk of trading in the ordinary shares is not considered to have migrated to
Hong Kong on a permanent basis in accordance with Rule 19C.13 of the Hong Kong Listing Rules; (ii) all disclosures of interest filed in the
SEC are also filed with the Hong Kong Stock Exchange as soon as practicable, which will then publish such disclosure in the same manner as
disclosures made under Part XV of the SFO; and (iii) we will advise the SFC if there is any material change to any of the information which
has been provided to the SFC, including any significant changes to the disclosure requirements in the U.S. and any significant changes in the
volume of our worldwide share turnover that takes place on the Hong Kong Stock Exchange. This exemption may be reconsidered by the SFC
in the event there is a material change in information provided to the SFC.
The U.S. Exchange Act and the rules and regulations promulgated thereunder require disclosure of interests by shareholders that are
broadly equivalent to Part XV of the SFO. For relevant disclosure in respect of the substantial shareholder’s interests, see “Item 7. Major
Shareholders and Related Party Transactions — A. Major Shareholders.”
We undertook to file with the Hong Kong Stock Exchange, as soon as practicable, any declaration of shareholding and securities
transactions filed with the SEC. We further undertook to disclose in present and future listing documents any shareholding interests as
disclosed in an SEC filing and the relationship between our directors, officers, members of committees and their relationship to any controlling
shareholder.
Corporate Communication
Rule 2.07A of the Hong Kong Listing Rules provides that a listed issuer may send or otherwise make available to the relevant holders of
its securities any corporate communication by electronic means, provided that either the listed issuer has previously received from each of the
relevant holders of its securities an express, positive confirmation in writing or the shareholders of the listed issuer have resolved in a general
meeting that the listed issuer may send or supply corporate communications to shareholders by making them available on the listed issuer’s
own website or the listed issuer’s constitutional documents contain provision to that effect, and certain conditions are satisfied.
Since our listing on the Hong Kong Stock Exchange, we made the following arrangements:
● We issue all corporate communications as required by the Hong Kong Listing Rules on our own website in English and Chinese, and
on the Hong Kong Stock Exchange’s website in English and Chinese.
● We continue to make arrangements to provide printed copies of proxy materials and notices to our shareholders at no costs upon
request.
● We have added to the “Investor Relations” page of our website which directs investors to all of our filings with the Hong Kong Stock
Exchange.
The Hong Kong Stock Exchange granted us a waiver from strict compliance with the requirements under Rule 2.07A of the Hong Kong
Listing Rules.
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Rule 13.25B of the Hong Kong Listing Rules requires a listed issuer to publish a monthly return in relation to movements in its equity
securities, debt securities and any other securitized instruments, as applicable, during the period to which the monthly return relates. Pursuant
to the Joint Policy Statement Regarding the Listing of Overseas Companies, or Joint Policy Statement, we sought a waiver from Rule 13.25B
subject to satisfying the waiver condition that the SFC has granted a partial exemption from strict compliance with Part XV of the SFO (other
than Divisions 5, 11 and 12 of Part XV of the SFO) in respect of disclosure of shareholders’ interests. As we have obtained a partial exemption
from the SFC, the Hong Kong Stock Exchange granted a waiver from strict compliance with Rule 13.25B of the Hong Kong Listing Rules. We
disclose information about share repurchases, if any, in our quarterly earnings releases and annual reports on Form 20-F which are furnished or
filed with the SEC in accordance with applicable U.S. rules and regulations.
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
For the immediately preceding annual financial statement period, our auditor, Deloitte Touche Tohmatsu Certified Public Accountants
LLP (a registered public accounting firm that the PCAOB was unable to inspect or investigate completely in 2021) issued an audit report for
us.
As of the date of this annual report and to our best knowledge:
(i) none of our shares or the shares of our consolidated foreign operating entities are owned by governmental entities in the jurisdiction
in which we or such consolidated foreign operating entities are incorporated or otherwise organized;
(ii) none of the governmental entities in the applicable foreign jurisdiction with respect to our registered public accounting firm have a
controlling financial interest in us or any of our consolidated foreign operating entities;
(iii) none of the members of our board of directors or the board of directors of our operating entities is an official of the Chinese
Communist Party; and
(iv) our or our operating entities’ articles of incorporation do not contain any charter of the Chinese Communist Party.
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PART III
ITEM 17. FINANCIAL STATEMENTS
We have elected to provide financial statements pursuant to Item 18.
ITEM 18. FINANCIAL STATEMENTS
Our consolidated financial statements are included at the end of this annual report.
ITEM 19. EXHIBITS
Exhibit
Number
1.1
2.1
2.2
2.3
2.4
2.5*
4.1
4.2
4.3
4.4
4.5
4.6
Description of Document
The Amended and Restated Articles of Association of the Registrant currently in effect, adopted by way of a special resolution
passed on June 24, 2022. (Incorporated by reference to Exhibit 3.1 from our report on Form 6-K filed with the Securities and
Exchange Commission on July 7, 2022.)
Registrant’s Specimen American Depositary Receipt. (Incorporated by reference to Form 424b3 (file no. 333-225171) filed with
the Securities and Exchange Commission on July 11, 2022.)
Registrant’s Specimen Certificate for Ordinary Shares. (Incorporated by reference to Exhibit 4.1 from our Form F-3 (file no.
333- 269169) filed with the Securities and Exchange Commission on January 10, 2023.)
Form of Deposit Agreement Among the Registrant, the Depositary and All Holders and Beneficial Owners of the American
Depositary Shares. (Incorporated by reference to Exhibit 4.3 of our Registration Statement on Form F-1/A (file No. 333-
221034) filed with the Securities and Exchange Commission on December 1, 2017.)
Form of Amendment No. 1 to Deposit Agreement among the Registrant, the Depositary and all Holders and Beneficial Owners
of the American Depositary Shares issued thereunder. (Incorporated by reference to Exhibits (a)(i) from the post-effective
amendment No. 1 to Form F-6 (file no. 333-225171) filed with the Securities and Exchange Commission on May7, 2021.)
Description of Securities
Amended and Restated 2009 Share Incentive Plan, amended and restated as of October 1, 2009. (Incorporated by reference to
Exhibit 10.3 from our Registration Statement on Form F-1 (file no. 333-165247) filed with the Securities and Exchange
Commission on March 5, 2010.)
Amendment to the Amended and Restated 2009 Share Incentive Plan, amended as of August 26, 2010. (Incorporated by
reference to Exhibit 99.2 from our report on Form 6-K (file no. 333-34656) filed with the Securities and Exchange Commission
on July 15, 2010.)
Amendment to the Amended and Restated 2009 Share Incentive Plan, amended as of March 26, 2015. (Incorporated by
reference to Exhibit 99.2 from our report on Form 6-K filed with the Securities and Exchange Commission on March 27, 2015.)
Form of Indemnification Agreement with the Registrant’s Directors. (Incorporated by reference to Exhibit 10.4 from our
Registration Statement on Form F-1 (file no. 333-165247) filed with the Securities and Exchange Commission on March 5,
2010.)
English translation of the Form of Employment Agreement between the Registrant and Executive Officers of the Registrant.
(Incorporated by reference to Exhibit 4.6 from our annual report on Form 20-F (File No. 001-34656) filed with the Securities
and Exchange Commission on April 12, 2012.)
Investor and Registration Rights Agreement between the Registrant and Ctrip.com International, Ltd., dated March 12, 2010.
(Incorporated by reference to Exhibit 10.10 from the Amendment No. 1 to our Registration Statement on Form F-1 (file no. 333-
165247) filed with the Securities and Exchange Commission on March 12, 2010.)
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Table of Contents
4.7
4.8
8.1*
11.1
12.1*
12.2*
Supplemental Registration Rights Agreement between the registrant and Trip.com dated August 3, 2020. (Incorporated by
reference to Exhibit 4.17 from our annual report on Form 20-F filed with the Securities and Exchange Commission on April 23,
2021.)
Indenture between the Registrant and Wilmington Trust, National Association dated May 12, 2020. (Incorporated by reference
to Exhibit 4.17 from our annual report on Form 20-F filed with the Securities and Exchange Commission on April 23, 2021.)
Subsidiaries of the Registrant
Code of Business Conduct and Ethics of the Registrant. (Incorporated by reference to Exhibit 99.1 from our Registration
Statement on Form F-1 (file no. 333-165247) filed with the Securities and Exchange Commission on March 5, 2010.)
Certification of Hui Jin, Chief Executive Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Jihong He, Chief Financial Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
13.1**
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
15.1*
15.2*
101.INS*
Consent of Deloitte Touche Tohmatsu Certified Public Accountants LLP, Independent Registered Public Accounting Firm.
Consent of JunHe LLP
Inline XBRL Instance Document — the instance document does not appear in the Interactive Data File because its XBRLtags
are embedded within the Inline XBRL document.
101.SCH*
Inline XBRL Taxonomy Extension Schema Document
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104.*
Cover Page Interactive Data File (embedded within the Inline XBRL document)
*
Filed with this Annual Report on Form 20-F.
** Furnished with this Annual Report on Form 20-F.
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The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
SIGNATURES
Date: April 27, 2023
H WORLD GROUP LIMITED
By: /s/ Hui Jin
Name: Hui Jin
Title:
Chief Executive Officer
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H WORLD GROUP LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2020, 2021 AND 2022
Reports of Independent Registered Public Accounting Firm (PCAOB 1113)
Consolidated Balance Sheets as of December 31, 2021 and 2022
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2020, 2021 and 2022
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2020, 2021 and 2022
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020, 2021 and 2022
Notes to Consolidated Financial Statements
Financial Statements Schedule I — Financial Information for Parent Company
Financial Statements Schedule II — Valuation and Qualifying Accounts
F-2
F-5
F-6
F-7
F-8
F-10
F-41
F-45
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF H WORLD GROUP LIMITED
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of H World Group Limited (previously known as Huazhu Group Limited) and
its subsidiaries (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of comprehensive income,
consolidated statements of changes in equity, and cash flows, for each of the three years in the period ended December 31, 2022, and the
related notes and the financial statements schedules (collectively referred to as the “financial statements”). In our opinion, the financial
statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of
its operations and its cash flows for each of the three years in the period ended December 31, 2022, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
Company’s internal control over financial reporting as of December 31, 2022, based on the criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 27, 2023,
expressed an unqualified opinion on the Company’s internal control over financial reporting.
Convenience Translation
Our audits also comprehended the translation of Renminbi amounts into United States dollar amounts and, in our opinion, such translation has
been made in conformity with the basis stated in Note 2. Such United States dollar amounts are presented solely for the convenience of readers
outside the People’s Republic of China.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits
included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis
for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was
communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the
financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit
matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit
matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
F-2
Table of Contents
Impairment Assessment of Goodwill and Brand Names with Indefinite Lives - Refer to Notes 6 and 8 to the financial statements
Critical Audit Matter Description
As of December 31, 2022, the Company had goodwill and brand names assigned to the legacy DH reporting unit of RMB2,163 million and
RMB3,348 million, respectively. The Company concluded through its impairment analyses, no impairment on goodwill and RMB167 million
of impairment loss on brand names should be recognized for the year ended December 31, 2022.
We identified impairment assessments of goodwill and brand names with indefinite lives assigned to the legacy DH reporting unit as a critical
audit matter because of the significant judgments made by management relating the determination of the estimated fair value of the legacy DH
reporting unit as part of the impairment assessments. The Company determined the estimated fair value of the legacy DH reporting unit and
each brand name assigned to the legacy DH reporting unit using the discounted cash flow methodology under income approach. The
determination of the fair value using the discount cash flow model requires management to make significant estimates and assumptions related
to projected hotels’ revenues, growth rates, projected operating cost, royalty saving rates and discount rates (collectively referred to as
“significant assumptions”). These significant assumptions used to calculate the fair value of the reporting unit and brand names change from
year to year based on forecasted operating results and are sensitive to change in market conditions and consumer demands. This required a
high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of
management’s significant judgments.
How the Critical Audit Matter Was Addressed in the Audit
● We tested the effectiveness of internal controls which address risks of material misstatements with respect to management’s
impairment assessment of Group’s goodwill and brand names including internal controls related to management’s determination of
significant assumption used in the discounted cash flow model.
● We evaluated the appropriateness and consistency of management’s methods used in developing the impairment analysis.
● We evaluated the reasonableness of judgments made and significant assumptions used by management in the cash flow projections
for the determination of fair value of legacy DH reporting units and brand names with infinite lives. We also evaluated the ranges
and probabilities of reasonably possible outcomes, and where management set its point estimate within the range.
● We performed retrospective reviews when evaluating the thoroughness and precision of management’s estimation process and
effectiveness of the related internal controls by comparing actual outcomes to previous estimates and the related financial statement
impact, and evaluating key judgments made by management.
● With the assistance of internal fair value specialists, we evaluated the reasonableness of the discount rates by developing a range of
independent estimates and comparing those to the related rates selected by management.
● We tested the accuracy and completeness of the key data used in developing estimates.
● We tested the mathematical accuracy of the calculations within the discounted cash flow model.
/s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP
Shanghai, China
April 27, 2023
We have served as the Company’s auditor since 2009.
F-3
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF H WORLD GROUP LIMITED
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of H World Group Limited (previously known as Huazhu Group Limited) and its
subsidiaries (the “Company”) as of December 31, 2022 based on criteria established in Internal Control — Integrated Framework (2013
framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria
established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (the “PCAOB”),
the financial statements as of and for the year ended December 31, 2022 of the Company and our report dated April 27, 2023 expressed an
unqualified opinion on those financial statements and included explanatory paragraphs regarding the convenience translation of Renminbi
amounts into United States dollar amounts.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of the effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP
Shanghai, China
April 27, 2023
F-4
Table of Contents
H WORLD GROUP LIMITED
CONSOLIDATED BALANCE SHEETS
(Renminbi in millions, except share and per share data, unless otherwise stated)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Short-term investments
Accounts receivable, net
Loan receivables - current, net
Amounts due from related parties, net
Inventories
Other current assets, net
Total current assets
Property and equipment, net
Intangible assets, net
Operating lease right-of-use assets
Finance lease right-of-use assets
Land use rights, net
Long-term investments
Goodwill
Amounts due from a related party
Loan receivables, net
Other assets, net
Deferred income tax assets
Total assets
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt and current portion of long-term debt
Accounts payable
Amounts due to related parties
Salary and welfare payables
Deferred revenue
Operating lease liabilities, current
Finance lease liabilities, current
Accrued expenses and other current liabilities
Income tax payable
Total current liabilities
Long-term debt
Operating lease liabilities, non-current
Finance lease liabilities, non-current
Deferred revenue
Other long-term liabilities
Retirement benefit obligations
Deferred income tax liabilities
Total liabilities
Commitments and contingencies (Note 22)
Equity:
Ordinary shares (US$0.00001 par value per share; 80,000,000,000 shares authorized; 3,255,971,250 and 3,265,433,590 shares issued as of
December 31, 2021 and 2022, and 3,120,746,090 and 3,112,413,730 shares outstanding as of December 31, 2021 and 2022, respectively)
Treasury shares (30,974,040 and 153,019,860 shares as of December 31, 2021 and 2022, respectively)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total H World Group Limited shareholders’ equity
Noncontrolling interest
Total equity
Total liabilities and equity
2021
As of December 31,
2022
2022
US$’ in millions
(Note 2)
5,116
25
2,589
521
218
149
88
847
9,553
7,056
5,385
29,942
2,235
206
1,965
5,132
1
98
834
862
63,269
6,232
968
197
591
1,366
3,628
41
1,838
418
15,279
3,565
28,012
2,684
785
903
144
853
52,225
0
(107)
9,964
1,037
41
10,935
109
11,044
63,269
3,583
1,503
1,788
1,113
134
178
70
809
9,178
6,784
5,278
28,970
2,047
199
1,945
5,195
6
124
688
1,093
61,507
3,288
1,171
71
657
1,308
3,773
41
2,337
500
13,146
6,635
27,637
2,513
828
977
110
858
52,704
0
(441)
10,138
(1,200)
232
8,729
74
8,803
61,507
520
218
259
161
19
26
10
117
1,330
984
765
4,200
297
29
282
753
1
18
101
158
8,918
477
170
10
95
190
547
6
339
72
1,906
962
4,007
364
120
142
16
124
7,641
0
(64)
1,470
(174)
34
1,266
11
1,277
8,918
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
H WORLD GROUP LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Renminbi in millions, except share and per share data, unless otherwise stated)
Revenues:
Leased and owned hotels
Manachised and franchised hotels
Others
Total revenues
Operating costs and expenses:
Hotel operating costs
Other operating costs
Selling and marketing expenses
General and administrative expenses
Pre-opening expenses
Total operating costs and expenses
Goodwill impairment loss
Other operating income, net
(Loss) income from operations
Interest income
Interest expense
Other (expense) income, net
Losses from fair value changes of equity securities, net
Foreign exchange gain (loss), net
Loss before income taxes
Income tax (benefit) expense
Loss from equity method investments
Net loss
Less: net loss attributable to noncontrolling interest
Net loss attributable to H World Group Limited
Other comprehensive income (loss)
(Loss) gain arising from defined benefit plan, net of tax of RMB13,RMB4 and RMB10 for the
year ended 2020, 2021 and 2022, respectively
Gains from fair value changes of debt securities, net of tax of nil, nil and RMB19 for 2020,2021
and 2022, respectively
Foreign currency translation adjustments, net of tax of nil for the years ended 2020, 2021 and
2022, respectively
Comprehensive loss
Less: comprehensive loss attributable to the noncontrolling interest
Comprehensive loss attributable to H World Group Limited
Losses per share:
Basic
Diluted
Weighted average number of shares used in computation:
Basic
Diluted
2020
2021
2022
Years Ended December 31,
2022
US$’ in millions
(Note 2)
6,908
3,136
152
10,196
9,729
52
597
1,259
288
11,925
437
480
(1,686)
119
533
(89)
(265)
175
(2,279)
(215)
(140)
(2,204)
(12)
(2,192)
(27)
—
203
(2,028)
(12)
(2,016)
(0.75)
(0.75)
8,118
4,404
263
12,785
11,282
58
641
1,545
81
13,607
—
986
164
89
405
157
(96)
(317)
(408)
12
(60)
(480)
(15)
(465)
13
—
(99)
(566)
(15)
(551)
(0.15)
(0.15)
9,148
4,405
309
13,862
12,260
62
613
1,675
95
14,705
—
549
(294)
87
409
10
(359)
(641)
(1,606)
207
(36)
(1,849)
(28)
(1,821)
22
57
112
(1,658)
(28)
(1,630)
(0.59)
(0.59)
1,326
639
45
2,010
1,777
9
89
243
14
2,132
—
79
(43)
13
59
1
(52)
(93)
(233)
30
(5)
(268)
(4)
(264)
3
8
16
(241)
(4)
(237)
(0.08)
(0.08)
2,927,398,409
2,927,398,409
3,114,124,244
3,114,124,244
3,111,196,757
3,111,196,757
3,111,196,757
3,111,196,757
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Ordinary Shares
Outstanding shares Amount
Accumulated Other
Comprehensive (Loss) Noncontrolling
Income
Interest
Table of Contents
H WORLD GROUP LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Renminbi in millions, except share data, unless otherwise stated)
Balance at January 1, 2020
Issuance of ordinary shares upon exercise of options and vesting of restricted stocks
Conversion of Convertible Senior Notes due 2022
Share-based compensation
Net loss
Dividends to noncontrolling interest holders
Capital contribution from noncontrolling interest holders
Issuance of ordinary shares in Hong Kong public offering
Acquisition of noncontrolling interest
Foreign currency translation adjustments, net of tax of nil
Disposal of noncontrolling interest for deconsolidation
Noncontrolling interest recognized in connection with acquisitions
Noncontrolling interest recognized from partial disposal
Loss arising from defined benefit plan, net of tax of RMB13
Balance at December 31, 2020
Issuance of ordinary shares upon exercise of options and vesting of restricted stocks
Conversion of Convertible Senior Notes due 2022
Share-based compensation
Net loss
Dividends to noncontrolling interest holders
Capital contribution from noncontrolling interest holders
Acquisition of noncontrolling interest
Foreign currency translation adjustments, net of tax of nil
Repurchase of ordinary shares
Net settlement on shares repurchased for withholding taxes related to share-based awards
Noncontrolling interest recognized in connection with acquisitions
Income arising from defined benefit plan, net of tax of RMB4
Balance at December 31, 2021
Issuance of ordinary shares upon exercise of options and vesting of restricted stocks
Return of loaned ADS in connection with issuance of Convertible Senior Notes due 2022
Share-based compensation
Net loss
Dividends to noncontrolling interest holders
Capital contribution from noncontrolling interest holders
Acquisition of noncontrolling interest
Gains from fair value changes of debt securities, net of tax of RMB19
Foreign currency translation adjustments, net of tax of nil
Repurchase of ordinary shares
Cash dividends declared
Noncontrolling interest recognized in connection with acquisitions
Termination of Capped Call
Income arising from defined benefit plan, net of tax of RMB10
Balance at December 31, 2022
2,859,026,090
14,543,070
2,020
—
—
—
—
234,854,500
—
—
—
—
—
—
3,108,425,680
12,325,470
1,340
—
—
—
—
—
—
(6,400)
—
—
—
3,120,746,090
9,462,340
—
—
—
—
—
—
—
—
(17,794,700)
—
—
—
—
3,112,413,730
30,967,640
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Treasury Shares
Shares
0 30,967,640
0
0
—
—
—
—
0
—
—
—
—
—
—
0
0
0
—
—
—
—
—
—
—
—
—
—
0
0
—
— 104,251,120
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
17,794,700
—
—
—
—
0
Amount
(107)
—
—
—
—
—
—
—
—
—
—
—
—
—
(107)
—
—
—
—
—
—
—
—
(0)
—
—
—
(107)
—
—
—
—
—
—
—
—
—
(334)
—
—
—
—
(441)
6,400
—
—
—
30,974,040
—
—
—
—
153,019,860
Additional Paid-in
Capital
Retained Earnings
3,694
—
—
—
(2,192)
—
—
—
—
—
—
—
—
—
3,834
2
0
122
—
—
—
5,968
(118)
—
—
—
—
—
9,808
—
0
109
—
—
—
(3)
—
—
50
—
—
9,964
—
—
87
—
—
—
1
—
—
—
—
—
86
—
10,138
1,502
—
—
—
(465)
—
—
—
—
—
—
—
—
1,037
—
—
—
(1,821)
—
—
—
—
—
—
(416)
—
—
—
(1,200)
The accompanying notes are an integral part of these consolidated financial statements.
F-7
(49)
—
—
—
—
—
—
—
—
203
—
—
—
(27)
127
—
—
—
—
—
—
—
(99)
—
—
—
13
41
—
—
—
—
—
—
—
57
112
—
—
—
—
22
232
121
—
—
—
(12)
(4)
10
—
(18)
—
0
3
2
—
102
—
—
—
(15)
(4)
16
(11)
—
—
—
21
—
109
—
—
—
(28)
(6)
0
(2)
—
—
—
—
Total Equity
7,493
2
0
122
(2,204
(4
10
5,968
(136
203
0
3
2
(27
11,432
0
0
109
(480
(4
16
(14
(99
(0
50
21
13
11,044
0
—
87
(1,849
(6
0
(1
57
112
(334
(416
1
86
22
8,803
—
—
74
1
Table of Contents
H WORLD GROUP LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Renminbi in millions, unless otherwise stated)
Operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
Share-based compensation
Depreciation and amortization
Amortization of issuance cost of convertible senior notes and upfront fee on bank
borrowings
Deferred income taxes
Credit loss
Loss (gain) from disposal of property and equipment
Impairment loss
Loss from equity method investments, net of dividends
Foreign currency exchange loss (gain)
Investment loss (income)
Interest accretion for finance lease
Noncash lease expense
Gain on reassessment of finance lease payments
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable
Inventories
Amounts due from related parties
Other current assets
Other assets
Accounts payable
Amounts due to related parties
Salary and welfare payables
Deferred revenue
Accrued expenses and other current liabilities
Operating lease liabilities
Income tax payable
Other long-term liabilities
Net cash provided by operating activities
Investing activities:
Purchases of property and equipment
Purchases of intangibles
Purchases of land use rights
Amount received as a result of government zoning
Acquisitions, net of cash received
Proceeds from disposals of subsidiary and branch, net of cash disposed
Purchases of investments
Proceeds from maturity/sale and return of investments
Payment for shareholder loans to equity investees
Collection of shareholder loans from equity investees
Origination of loan receivables
Collection of loan receivables
Net cash used in investing activities
F-8
Years Ended December 31,
2020
2021
2022
2022
US$ in millions
(Note 2)
(2,204)
(480)
(1,849)
(268)
122
1,362
83
(553)
65
1
709
145
(176)
284
27
2,063
—
35
0
(14)
(147)
(86)
31
20
(46)
(52)
445
(1,640)
94
41
609
(1,745)
(28)
(3)
—
(5,060)
4
(1,702)
396
(15)
15
(130)
167
(8,101)
109
1,503
60
(543)
105
(14)
380
60
255
(188)
4
2,306
—
(113)
2
12
6
(64)
7
(4)
72
224
(439)
(2,123)
83
122
1,342
(1,658)
(17)
—
33
(742)
3
(521)
1,494
(5)
25
(176)
162
(1,402)
87
1,456
57
(268)
82
(4)
491
85
341
321
16
2,257
(66)
(621)
20
(57)
43
149
9
(30)
63
(19)
507
(1,608)
82
20
1,564
(1,049)
(4)
0
4
(57)
6
(401)
937
(7)
12
(175)
212
(522)
13
211
8
(39)
12
(1)
71
12
49
47
2
327
(10)
(90)
3
(8)
7
22
1
(4)
9
(3)
74
(233)
12
3
227
(152)
(1)
0
0
(8)
1
(58)
136
(1)
2
(25)
30
(76)
Table of Contents
Financing activities:
Proceeds from issuance of ordinary shares in Hong Kong public offering
Proceeds from Termination of Capped Call
Payment of ordinary share issuance costs
Net settlement on shares repurchased for withholding taxes related to
share-based awards
Net proceeds from issuance of ordinary shares upon exercise of options
Payment of repurchases of ordinary shares
Proceeds from short-term debt
Repayment of short-term debt
Proceeds from long-term debt
Repayment of long-term debt
Funds advanced from noncontrolling interest holders
Repayment of funds advanced from noncontrolling interest holders
Acquisitions of noncontrolling interest
Capital contributions from noncontrolling interest holders
Proceeds from long-term finance liabilities
Repayment of long-term finance liabilities
Dividends paid to noncontrolling interest holders
Dividends paid
Repayment of convertible senior notes
Proceeds from issuance of convertible senior notes
Direct financing costs paid
Principal payments of finance lease
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents, and restricted cash
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at the beginning of the year
Cash, cash equivalents and restricted cash at the end of the year
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash shown in the statements of cash flows
Supplemental disclosure of cash flow information:
Interest paid, net of amounts capitalized
Income taxes paid
Supplemental schedule of non-cash investing and financing activities:
Purchases of property and equipment included in payables
Consideration payable for business acquisition
Purchase of intangible assets included in payables
Reimbursement of government zoning included in receivables
6,018
—
(32)
—
1
—
1,658
(1,993)
1,652
(9,163)
14
(9)
(98)
10
83
(42)
(4)
(678)
—
3,499
(10)
(23)
883
(300)
(6,909)
13,999
7,090
7,026
64
7,090
476
238
736
—
5
2
—
—
(19)
50
1
(0)
2,288
(2,474)
53
(1,650)
4
(1)
(29)
16
38
(46)
(4)
—
(0)
—
—
(28)
(1,801)
(88)
(1,949)
7,090
5,141
5,116
25
5,141
297
477
486
86
2
—
—
86
(0)
—
—
(334)
4,249
(1,935)
2,797
(2,364)
1
(27)
(1)
0
55
(49)
(6)
(416)
(3,406)
—
(4)
(40)
(1,394)
297
(55)
5,141
5,086
3,583
1,503
5,086
256
385
652
5
—
—
—
12
(0)
—
—
(48)
616
(281)
407
(342)
0
(4)
(0)
0
8
(7)
(1)
(60)
(494)
—
(1)
(6)
(201)
43
(7)
745
738
520
218
738
37
56
95
1
—
—
The accompanying notes are an integral part of these consolidated financial statements.
F-9
Table of Contents
H WORLD GROUP LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2021 and 2022
(Renminbi in millions, except share and per share data, unless otherwise stated)
1. ORGANIZATION AND PRINCIPAL ACTIVITIES
H World Group Limited (the “Company”) was incorporated in the Cayman Islands under the laws of the Cayman Islands on January 4,
2007. The principal business activities of the Company and its subsidiaries and consolidated variable interest entities (the “Group”) are to
develop leased and owned, manachised and franchised hotels mainly in the People’s Republic of China (“PRC”) and Europe.
On January 2, 2020, the Group completed the acquisition of 100% equity interest of Steigenberger Hotels Aktiengesellschaft Germany
(“Deutsche Hospitality” or “DH”). Deutsche Hospitality was engaged in the business of leasing, franchising, operating and managing hotels
under five brands in the midscale and upscale market in Europe, the Middle East and Africa. After the acquisition, “legacy DH” refers to
Deutsche Hospitality and its subsidiaries and “legacy Huazhu” refers to the Group excluding Deutsche Hospitality.
The Group completed public offering in Hong Kong in September 2020 with proceeds of RMB6,018 and the trading of ordinary shares on
the Hong Kong Stock Exchange commenced on September 22, 2020 under the stock code “1179”.
In June 2021, the Company effected a share split that each ordinary share of the Company with a par value of US$0.0001 was sub-divided
into 10 ordinary shares with a par value of US$0.00001 each. The ratio of ADS to ordinary share was adjusted from one (1) ADS representing
one (1) ordinary share to one (1) ADS representing ten (10) ordinary shares. The share split has been retrospectively applied for all periods
presented in the financial statements.
In June 2022, the English name of the Company was changed from “Huazhu Group Limited” to “H World Group Limited”.
Leased and owned hotels
The Group leases hotel properties from property owners or purchases properties directly and is responsible for all aspects of hotel
operations and management, including hiring, training and supervising the managers and employees required to operate the hotels. In addition,
the Group is responsible for hotel development and customization to conform to the standards of the Group brands at the beginning of the lease
or the construction, as well as repairs and maintenance, operating expenses and management of properties over the term of the lease or the land
and building certificate.
As of December 31, 2021 and 2022, the Group had 738 and 704 leased and owned hotels in operation, respectively.
Manachised and franchised hotels
The Group enters into franchise and management arrangements with franchisees for which the Group is responsible for providing
branding, quality assurance, training, reservation, hiring and appointing of the hotel general manager and various other support services
relating to hotel renovation and operations. Those hotels are classified as manachised hotels. Under the typical franchise and management
agreements, the franchisee is required to pay an initial franchise fee and ongoing franchise and management service fees, which typically equal
to a certain percentage of the revenues of the hotel. The franchisee is responsible for the costs of hotel development, renovation and the costs
of its operations. The franchise and management agreements typically range from eight to ten years under legacy Huazhu, and 15 to 20 years
for manachised hotels and 10 to 15 years for franchised hotels under legacy DH. These agreements are renewable upon mutual agreement
between the Group and the franchisee. There are also some franchised hotels for which the Group does not provide a hotel general manager. As
of December 31, 2021 and 2022, the Group had 6,824 and 7,617 manachised hotels in operation and 268 and 222 franchised hotels in
operation, respectively.
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Table of Contents
2. SUMMARY OF PRINCIPAL ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements of the Group have been prepared in accordance with the accounting principles generally accepted in
the United States of America (“U.S. GAAP”).
Basis of consolidation
The consolidated financial statements include the financial statements of the Company, its majority-owned subsidiaries and consolidated
variable interest entities (the “VIEs”). All intercompany transactions and balances are eliminated on consolidation.
Variable Interest Entities
The Group evaluates the need to consolidate certain variable interest entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated
financial support.
The Company is deemed as the primary beneficiary of and consolidates variable interest entities when the Company has the power to
direct the activities that most significantly impact the economic success of the entities and effectively assumes the obligation to absorb losses
and has the rights to receive benefits that are potentially significant to the entities.
As of December 31, 2021 and 2022, the Group consolidated seven and seven entities under VIE model, and the impact of the consolidated
VIEs are immaterial to the Group’s consolidated financial statements.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the
reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Group bases its
estimates on historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Significant
accounting estimates reflected in the Group’s consolidated financial statements include the useful lives and impairment of property and
equipment, right-of-use assets and intangible assets with definite lives, valuation allowance of deferred tax assets, purchase price allocation,
impairment of investment, goodwill and intangible assets without definite lives and incremental borrowing rate used to measure lease
liabilities.
Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and demand deposits, which are unrestricted as to withdrawal and use, and which have
original maturities of three months or less when purchased.
Restricted cash
Restricted cash mainly represents deposits used as security against borrowings, deposits restricted due to contract disputes or lawsuit and
cash restricted for special purposes.
Investments
The Group uses the equity method of accounting to account for equity investment with significant influence, no control over the investee.
Equity-method investment is reviewed for impairment by assessing if the decline in market value of the investment below the carrying value is
other-than-temporary. In making this determination, factors are evaluated in determining whether a loss in value should be recognized. These
include consideration of the intent and ability of the Group to hold investment and the ability of the investee to sustain an earnings capacity,
justifying the carrying amount of the investment.
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Investments in equity securities that have readily determinable fair values (except those accounted for under the equity method of
accounting or those that result in consolidation of the investee) are measured at fair value, with gains and losses from fair value changes
recognized in net income in the consolidated statements of comprehensive income.
Equity investments without readily determinable fair values are measured at cost, less impairment, plus or minus observable price
changes.
The Group classifies debt securities for which it does not have an intent to hold till maturity or may sell the security in response to the
changes in economic conditions are classified as available-for-sale debt securities. These securities are carried at estimated fair value with
unrealized holding gains and losses, net of tax impact, if any, reported as a net amount in a separate component of shareholders’ equity,
accumulated other comprehensive income, until realized. Credit-related impairment is measured as the difference between the debt security’s
amortized cost basis and the present value of expected cash flows and is recognized as an allowance on the balance sheet with a corresponding
adjustment to earnings. The allowance should not exceed the amount by which the amortized cost basis exceeds fair value.
Allowances for Losses on Certain Financial Assets
The Group establishes allowances for credit losses on accounts receivable, loans receivables and certain other similar financial assets. For
accounts receivables and other financial assets, the adequacy of these allowances is assessed regularly for pools of assets with similar risk
characteristics by evaluating of factors such as historical levels of credit losses, current economic condition that may affect a customer’s ability
to pay, customer credit ratings, and age of the receivable. When specific customers are identified as no longer sharing the same risk profile as
their current pool, they are removed from the pool and evaluated separately.
For loan receivables, the Group estimate current expected credit losses based on the expectation of future economic conditions, historical
collection experience and a loss-rate approach whereby the allowance is calculated using the probability of default and recovery rates and
multiplying it by the asset’s amortized cost at the balance sheet date
Property and equipment, net
Property and equipment, net are stated at cost less accumulated depreciation. The renovations, betterments and interest cost incurred
during construction are capitalized. Depreciation of property and equipment is provided using the straight line method over their expected
useful lives. The expected useful lives are as follows:
Leasehold improvements
Buildings
Furniture, fixtures and equipment
Motor vehicles
Shorter of the lease term or their estimated useful lives
20-40 years
1-20 years
5 years
Construction in progress represents leasehold improvements and property under construction or being installed and is stated at cost. Cost
comprises original cost of property and equipment, installation, construction and other direct costs. Construction in progress is transferred to
leasehold improvements and depreciation commences when the asset is ready for its intended use.
Expenditures for repairs and maintenance are expensed as incurred. Gain or loss on disposal of property and equipment, if any, is
recognized in the consolidated statements of comprehensive income as the difference between the net sales proceeds and the carrying amount
of the underlying asset.
Intangible assets, net
Intangible assets consist primarily of brand name, master brand agreement, non-compete agreements, franchise or manachise agreements
and purchased software.
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Table of Contents
Intangible assets with finite useful lives are amortized using the straight-line method over their respective estimated useful lives over
which the assets are expected to contribute directly or indirectly to the future cash flows of the Group. These estimated useful lives are
generally as follows:
Franchise or manachise agreements
Non-compete agreements
Purchased software
Other intangible assets including trademark, licenses and other rights
Remaining contract terms from 10 to 20 years
2 - 10 years based on specified non-compete period
3 - 10 years based on the estimated usage period
2 - 15 years based on the contractual term, the length of license
agreements and the effective terms of other legal rights
Almost all the brand names and master brand agreement acquired by the Group are considered to have indefinite useful lives since there
are no legal, regulatory, contractual, competitive, economic or other factors that limit the useful lives of these brands and these brands can be
renewed at nominal cost. The Group evaluates the brand name and master brand agreement each reporting period to determine whether events
and circumstances continue to support an indefinite useful life. Impairment is tested annually or more frequently if events or changes in
circumstances indicate that it might be impaired.
Land use rights
The land use rights represent the operating lease prepayments for the rights to use the land in the PRC under ASC 842, Leases, which are
amortized on a straight-line basis over the remaining term of the land certificates, between 30 to 50 years.
Impairment of long-lived assets
The Group evaluates its long-lived assets including property and equipment, net, right-of-use assets and finite lived intangibles for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When these
events occur, the Group measures impairment by comparing the carrying amount of the assets to future undiscounted net cash flows expected
to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flows is less than the carrying
amount of the assets, the Group recognizes an impairment loss equal to the difference between the carrying amount and fair value of these
assets.
The Group performed a recoverability test of its long-lived assets associated with certain hotels due to the continued underperformance
relative to the projected operating results, of which the carrying amount of the long-lived assets exceeded the future undiscounted net cash
flows, and recognized an impairment loss of RMB180, RMB157 and RMB297 during the years ended December 31, 2020, 2021 and 2022,
respectively.
Fair value of the long-lived assets was determined by the Group based on the income approach using the discounted cash flow associated
with the underlying assets, which incorporated certain assumptions including projected hotels’ revenue, growth rates and projected operating
costs based on current economic condition, expectation of management and projected trends of current operating results.
Goodwill
Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.
The Group performs a one-step impairment test in which it compares the fair value of a reporting unit with its carrying amount and recognizes
an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. Upon the acquisition of
Deutsche Hospitality, the Group concludes there are two reporting units, which are legacy Huazhu and legacy DH. The goodwill impairment
testing was performed at each reporting unit level. If the carrying amount of a reporting unit exceeds its fair value, an impairment amounts to
that excess should be recognized in the statement of comprehensive income.
Revenue recognition
Revenue are primarily derived from products and services in leased and owned hotels, contracts of manachised and franchised hotels with
third-party franchisees as well as activities other than the operation of hotel businesses.
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Leased and owned hotel revenues
Leased and owned hotel revenues are primarily derived from the rental of rooms, sales of food, beverage and other ancillary goods and
services, including but not limited to souvenir, laundry, parking and conference reservation. Each of these products and services represents an
individual performance obligation and, in exchange for these services, the Group receives fixed amounts based on published rates or negotiated
contracts. Payment is due in full at the time when the services are rendered or the goods are provided. Room rental revenue is recognized on a
daily basis when rooms are occupied. Food and beverage revenue and other goods and services revenue are recognized when they have been
delivered or rendered to the guests as the respective performance obligations are satisfied.
Manachised and franchised hotel revenues
Manachised and franchised hotel revenues are derived from franchise or manachise agreements where the franchisees are required to pay
(i) an initial one-time franchise fee, and (ii) continuing franchise fees, which mainly consist of (a) primarily on-going management and
franchise service fees, (b) central reservation system usage fees, system maintenance and support fees and (c) reimbursements for hotel
manager fees.
Initial one-time license/franchise fee: For the manachised and franchised hotel, the Group is entitled to an initial one-time franchise fee,
which is typically fixed and collected upfront. Initial franchise fee is recognized as revenue on a straight-line basis over the term of the
franchise agreements.
On-going management and franchise service/royalty fees: On-going management and franchise service/royalty fees for our manachised
and franchised hotels are variable and generally calculated as a percentage of the room revenues of the hotels as defined by each contract.
Generally, on-going management and franchise service/royalty fees are recognized on a monthly basis over the term of the agreements as these
amounts became payable. For the manachised hotel under Deutsche Hospitality, the franchisees are required to pay the Group an on-going
management fees consisting of a base fee as a percentage of the hotel’s gross revenues and an incentive fee as a percentage of the hotel’s gross
adjusted profit. Based fee is recognized on a monthly basis over the term of the agreement when the amounts become payable. Incentive fee
are recognized on a monthly basis over the term of the agreement based on each hotel’s financial results, as long as the Group does not expect
a significant reversal of the hotel’s gross adjusted profit.
Central reservation system usage fees, other system maintenance and support fees: The group also charges a monthly system maintenance
and support fees as part of the contracts. These fees are recognized on a monthly basis over the term of the agreements as these amount
become payable.
Reimbursements for hotel manager fees: Under the management and franchise agreements, the Group is entitled to be reimbursed for
payroll related for the appointed hotel general managers and other out-of-pocket expenses the Group incurs on behalf of the manachised hotels.
The Group is entitled to reimbursement in the period the Group incurs the related reimbursable costs, which are recognized within manachised
and franchised hotels revenue.
Other Revenues
Other revenues mainly include revenues from the provision of IT products and services and commissions charged from suppliers for
goods sold through Hua Zhu mall. Revenue from commissions charged to suppliers for goods through Hua Zhu mall is recognized upon
delivery of goods to end customers when the suppliers’ obligations are fulfilled. Revenues from IT products are recognized when goods are
delivered and revenues from IT services are recognized when services are rendered.
Loyalty Program
H Reward loyalty program members earn loyalty points based on nights and other consumptions that they spent at the Group’s hotels and
Huazhu Mall. These loyalty points can be redeemed for future products and services. Points earned by loyalty program members represent a
material right to free or discounted goods or services in the future. The loyalty program has one performance obligation that consists of
marketing and managing the program and arranging for award redemptions by members. The Group is responsible for arranging for the
redemption of points, but the Group does not directly fulfill the redemption obligation except at leased and owned hotels. Therefore, the Group
is the agent with respect to this performance obligation for manachised and franchised hotels, and is the principal with respect to leased and
owned hotels.
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For leased and owned hotels, a portion of the leased and owned revenues is deferred until a member redeems points. The amount of
revenue the Group recognizes upon point redemption is impacted by the estimate of the “breakage” for points that members will never redeem
in the Group’s owned and leased hotels.
For manachised and franchised hotels, we receive monthly cash contributions from manachised and franchised hotels determined based on
the value of qualified spend by Loyalty Program members (when the points earned). We recognize these contributions into revenue as we
provide the related service. The amount of revenue we recognize is based on a blend of historical funding rates and is impacted by our estimate
of the “breakage” for points that members will never redeem.
Membership fees from the Group’s customer loyalty program are earned and recognized on a straight-line basis over the expected
membership duration of the different membership levels. The membership duration is estimated to be two to five years which reflects the
expected membership retention. Revenues recognized from membership fees were RMB223, RMB243 and RMB267 for the years ended
December 31, 2020, 2021 and 2022, respectively, which amount were included in revenues from leased and owned hotel or revenues from
manachised and franchised hotels depending on the type of hotels the membership was sold at.
Advertising and promotional expenses
Advertising related expenses, including promotion expenses and production costs of marketing materials, are charged to the consolidated
statements of comprehensive income as incurred, and amounted to RMB150, RMB165 and RMB128 for the years ended December 31, 2020,
2021 and 2022, respectively.
Leases
The Group determines if an arrangement is a lease or contains a lease at the inception of the contract. A lease arrangement is being
evaluated for classification as operating or financing upon lease commencement. Lease liabilities, which represent the Group’s obligation to
make lease payments arising from the lease, and corresponding right of-use assets, which represent the Group’s right to use an underlying asset
for the lease term, are recognized at the commencement date of the lease based on the present value of fixed future payments and variable lease
payments that depend on an index or a rate (initially measured using the index or rate as at the commencement date) over the lease term,
calculated using the discount rate implicit in the lease, if available, or the Group’s incremental borrowing rate. For operating leases, lease
expense relating to fixed payments is recognized on a straight-line basis over the lease term and lease expense relating to variable payments is
expensed as incurred. For finance leases, the amortization of the asset is recognized over the shorter of the lease term or useful life of the
underlying asset.
Most leases have initial terms ranging from 10 to 20 years for legacy Huazhu, and from 20 to 25 years for legacy DH. The lease term
includes lessee options to extend the lease and periods occurring after a lessee early termination option, only to the extent it is reasonably
certain that the Group will exercise such extension options and not exercise such early termination options, respectively. The Group’s lease
agreements may include nonlease components, mainly common area maintenance, which are combined with the lease components as the
Group elects to account for these components as a single lease component, as permitted. The Group elected the practical expedient of not to
separate land components outside PRC from leases of specified property and equipment at the ASC842 transition date. Besides, the Group’s
lease payments are generally fixed and certain agreements contain variable lease payments based on the operating performance of the leased
property and the changes in the index of consumer pricing index (“CPI”). Almost all the lease agreements with variable lease payments based
on the changes in CPI are held by legacy DH.
For operating leases, the Group recognizes lease expense on a straight-line basis over the lease term and variable lease payments that
depend on an index or a rate are initially measured using the index or rate at the commencement date, otherwise variable lease payments are
recognized in the period in which the obligation for those payments is incurred. The operating lease expense is recognized as hotel operating
costs, general and administrative expenses and pre-opening expenses in the consolidated statements of comprehensive income. For finance
lease, lease expense is generally front-loaded as the finance lease ROU asset is depreciated on a straight-line basis over the shorter of the lease
term or useful life of the underlying asset within hotel operating costs in the consolidated statements of comprehensive income, but interest
expense on the lease liability is recognized in interest expense in the consolidated statements of comprehensive income using the effective
interest method which results in more expense during the early years of the lease. Additionally, the Group elected not to recognize leases with
lease terms of 12 months or less at the commencement date. Lease payments on short-term leases are recognized as an expense on a straight-
line basis over the lease term, not included in lease liabilities. The Group’s lease agreements do not contain any significant residual value
guarantees or restricted covenants.
F-15
Table of Contents
The Group reassesses of a contract is or contains a leasing arrangement and re-measures ROU assets and liabilities upon modification of
the contract. The Group will derecognize ROU assets and liabilities, with difference recognized in the consolidated statements of
comprehensive income on the contract termination.
Income taxes
Current income taxes are provided for in accordance with the relevant statutory tax laws and regulations.
Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts
in the financial statements. Net operating losses are carried forward and credited by applying enacted statutory tax rates applicable to
future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of the Group, it is more-likely-than-not that some
portion or all of the deferred tax assets will not be realized. For a particular tax-paying component of an entity and within a particular tax
jurisdiction, all deferred tax liabilities and assets, as well as any related valuation allowance, shall be offset and presented as a single
noncurrent amount. However, an entity shall not offset deferred tax liabilities and assets attributable to different tax-paying components of the
entity or to different tax jurisdictions.
Foreign currency translation
The reporting currency of the Group is the Renminbi (“RMB”). The functional currency of the Company is the United States dollar
(“US$”). Monetary assets and liabilities denominated in currencies other than the functional currency are remeasured in functional currency at
the rates of exchange ruling at the balance sheet date. Transactions in currencies other than the functional currency during the year are
converted into the functional currency at the applicable rates of exchange prevailing on the day transactions occurred. Transaction gains and
losses are recognized in the statements of comprehensive income.
Assets and liabilities are translated into RMB at the exchange rates at the balance sheet date, equity accounts are translated at historical
exchange rates and revenues, expenses, gains and losses are translated using the average rate for the year. Translation adjustments are reported
as cumulative translation adjustments and are shown as a separate component of comprehensive income.
The financial records of the Group’s subsidiaries are maintained in local currencies, which are the functional currencies.
Fair value
The established fair value hierarchy by U.S. GAAP has three levels based on the reliability of the inputs used to measure fair value:
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for
the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in
markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are
observable or can be derived principally from, or corroborated by, observable market data.
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the
measurement of the fair value of the assets or liabilities.
The Group’s financial instruments include cash and cash equivalent, restricted cash, loan receivables, other receivables, payables, short-
term debts, long-term debts. The carrying amounts of the short-term financial instruments approximates their fair value due to their short-term
nature. The long-term debts and long-term loan receivables approximate their fair values, because the bearing interest rates approximate
market interest rate, and market interest rates have not fluctuated significantly since the commencement of loan contracts signed. Convertible
senior notes are measured at amortized costs of RMB6,318, RMB6,186 and RMB3,463 and the corresponding fair value estimated based on
quoted market price were RMB7,747, RMB6,681 and RMB4,283, as of December 31, 2020, 2021 and 2022, respectively.
F-16
Table of Contents
The following table presents our assets that are measured at fair value on a recurring basis and are categorized using the fair value
hierarchy.
As of December 31, 2021
Description
Equity securities with readily determinable fair value
Available-for-sale debt securities
Employee benefit plan assets
As of December 31, 2022
Description
Equity securities with readily determinable fair value
Available-for-sale debt securities
Employee benefit plan assets
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
Fair Value Measurements at Reporting Date Using
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
2,589
—
5
—
220
—
—
—
—
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
Fair Value Measurements at Reporting Date Using
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
1,788
—
13
—
—
—
—
296
—
Equity securities with readily determinable fair value and employee benefit plan assets are valued using a market approach based on the
quoted market prices or broker/dealer quotes of identical or comparable instruments.
Level 3 fair value of available-for-sale debt securities is determined based on income approach using various unobservable inputs. The
determination of the fair value required significant judgement by management with respect to the assumptions and estimates for the revenue
growth rate, weighted average cost of capital, lack of marketability discounts, expected volatility and probability in equity allocation.
Certain assets are measured at a non-recurring basis. The following table presents the asset classification, the fair value and the non-
recurring losses recognized for the years ended December 31, 2021 and 2022 due to impairment of the related assets.
As of December 31, 2021
Description
Property and equipment
Operating lease right-of-use assets
Intangible assets
Long-term investment
As of December 31, 2022
Description
Property and equipment
Operating lease right-of-use assets
Intangible assets
Long-term investment
Fair Value
Fair Value Measurements at Reporting Date Using
Significant Unobservable
Inputs (Level 3)
Total Loss for
the Year
33
88
2,556
—
38
336
388
11
Fair Value
33
88
2,556
—
24
48
245
63
Fair Value Measurements at Reporting Date Using
Significant Unobservable
Inputs (Level 3)
Total Loss for
the Year
38
336
388
11
218
76
170
27
Property and equipment, operating lease right-of-use assets and intangible assets were primarily valued using the income approach based
on discounted cash flows associated with the underlying assets, which incorporate certain assumptions including projected hotels’ revenue,
growth rates and projected operating costs based on current economic condition, expectation of management and projected trends of current
operating results. The revenue growth rate and the discount rate were the significant unobservable input used in the fair value measurement,
which are ranged between negative 15% and 4%, 8.64% and 12% respectively, for the years ended December 31, 2020, 2021 and 2022,
respectively.
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Table of Contents
Share-based compensation
The Group recognizes share-based compensation in the consolidated statements of comprehensive income based on the fair value of
equity awards on the date of the grant, with compensation expenses recognized over the period in which the grantee is required to provide
service to the Group in exchange for the equity award. Vesting of certain equity awards are based on the performance conditions for a period of
time following the grant date. Share-based compensation expense is recognized according to the Group’s judgement of likely future
performance and will be adjusted in future periods based on the actual performance.
Earnings (losses) per share
Basic earnings (losses) per share is computed by dividing income attributable to holders of ordinary shares by the weighted average
number of ordinary shares outstanding during the year. Diluted earnings (losses) per share reflects the potential dilution that could occur if
securities or other contracts to issue ordinary shares were exercised or converted into ordinary shares, which consist of the ordinary shares
issuable upon the conversion of the convertible senior notes (using the if-converted method) and ordinary shares issuable upon the exercise of
stock options and vest of nonvested restricted stocks (using the treasury stock method).
Recently Issued Accounting Pronouncements
Adopted Accounting Standards
In November 2021, the FASB issued ASU No. 2021-10, Government Assistance (Topic 832) — Disclosures by Business Entities about
Government Assistance. The amendments in this ASU require disclosures about transactions with a government that have been accounted for
by analogizing to a grant or contribution accounting model to increase transparency about (1) the types of transactions, (2) the accounting for
the transactions, and (3) the effect of the transactions on an entity’s financial statements. The amendments in this ASU are effective for all
entities within their scope for financial statements issued for annual periods beginning after December 15, 2021. Early application of the
amendments is permitted. The Group adopted the guidance on January 1, 2022, as required. There was no material impact on the Group’s
consolidated financial statements and related disclosures as a result of adopting this new standard.
Accounting Standards Not Yet Adopted
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract
Liabilities from Contracts with Customers (“ASU 2021-08”). The amendments create an exception to the general recognition and measurement
principal in ASC 805, Business Combinations to measure assets and liabilities acquired in a business combination at fair value. Instead, an
acquirer in a business combination will be required to apply ASC 606 to recognize and measure contract assets and contract liabilities that
result from contracts accounted for under ASC 606 on the acquisition date and will generally result in the acquirer recognizing amounts
consistent with those recorded by the acquiree immediately before the acquisition date. ASU 2021-08 is effective for fiscal years beginning
after December 15, 2022, and interim periods within those fiscal years, with early adoption permitted. The Group does not expect the adoption
of this ASU will have a significant impact on the consolidated financial statements.
In June 2022, the FASB issued ASU No. 2022-03 Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities
Subject to Contractual Sale Restrictions. The update clarifies that a contractual restriction on the sale of an equity security is not considered
part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. The update also clarifies that an
entity cannot, as a separate unit of account, recognize and measure a contractual sale restriction. The update also requires certain additional
disclosures for equity securities subject to contractual sale restrictions. The amendments in this ASU are effective for fiscal years beginning
after December 15, 2023, and interim periods within those fiscal years, with early adoption permitted. The Group does not expect the adoption
of this ASU will have a significant impact on the consolidated financial statements.
Translation into United States Dollars
The financial statements of the Group are stated in RMB. Translations of amounts from RMB into United States dollars are solely for the
convenience of the reader and were calculated at the rate of US$1 = RMB6.8972, on December 30, 2022, as set forth in H.10 statistical release
of the Federal Reserve Board. The translation is not intended to imply that the RMB amounts could have been, or could be, converted, realized
or settled into United States dollars at that rate on December 30, 2022, or at any other rate.
F-18
Table of Contents
3. ACQUISITIONS
On January 2, 2020, the Group completed an acquisition of 100% equity interest of Deutsche Hospitality. Deutsche Hospitality was
engaged in the business of leasing, franchising, operating and managing hotels under five brands in the midscale and upscale market in Europe,
the Middle East and Africa. The aggregated consideration was EUR720 million (equivalent to RMB5,624) which has been fully paid in cash as
of January 2, 2020.
The allocation of the purchase price as of the date of acquisition is summarized as follows:
Current assets
Property and equipment, net
Operating lease right-of-use assets
Financing lease right-of-use assets
Franchise or manachise agreements
Brand names
Non-compete agreement
Goodwill
Deferred tax assets
Other non-current assets
Operating lease liabilities, current
Finance lease liabilities, current
Other current liabilities
Operating lease liabilities, non-current
Finance lease liabilities, non-current
Other noncurrent liabilities
Deferred tax liabilities
Total
Amortization Period
2-25 years
Remaining lease terms
Shorter of estimated useful lives of
the assets and the lease terms
Remaining contract terms
Indefinite-life
2 years
785
586
8,616
1,794
270
3,873
10
2,694
170
280
(296)
(21)
(784)
(8,553)
(2,166)
(330)
(1,304)
5,624
Goodwill was recognized as a result of expected synergies from combining operations of the Group and acquired business and other
intangible assets that don’t qualify for separate recognition. The goodwill generated from the DH acquisition is allocated to the reporting unit
of legacy DH.Goodwill is not deductible for tax purposes.
On April 30, 2021, the Group completed the acquisition of 100% equity interest of CitiGO hotels from Cjia Group, a related party of the
Group. CitiGO brand is a light luxury and social hotel brand, which are mainly distributed in first and second-tier cities in China. The
aggregated consideration was RMB783 and RMB749 was paid in cash as of December 31, 2021.
F-19
Table of Contents
The allocation of the purchase price as of the date of acquisition is summarized as follows:
Current assets
Property and equipment
Operating lease right-of-use assets
Other non-current assets
Franchise agreement
Brand names
Goodwill
Operating lease liabilities, current
Other current liabilities
Operating lease liabilities, non-current
Other noncurrent liabilities
Deferred tax liabilities
Noncontrolling interest
Total
Amortization Period
5-12 years
Remaining lease terms
Remaining contract terms
Indefinite-life
34
296
1,119
33
61
90
372
(153)
(23)
(987)
(5)
(33)
(21)
783
Goodwill was recognized as a result of expected synergies from combining operations of the Group and acquired business and other
intangible assets that don’t qualify for separate recognition. All the acquired business has been migrated to the Group’s business. The goodwill
generated from the CitiGO acquisition is allocated to the reporting unit of legacy Huazhu. Goodwill is not deductible for tax purposes.
During the years ended December 31, 2020, 2021 and 2022, the Group acquired three, three and seven individual companies for total cash
consideration of RMB26, RMB51 and RMB9, respectively. The business acquisitions were accounted for under purchase accounting. The
assets and liabilities of these hotels and companies acquired in 2020, 2021 and 2022 were immaterial to the consolidated financial statements.
4. REVENUE
Disaggregated Revenues
The following tables present the Group’s revenues disaggregated by the nature of the product or service:
Room revenues
Food and beverage revenues
Others
Leased and owned hotels revenue
Initial one-time license/franchise fee
On-going management and service/royalty fees
Central reservation system usage fees, other system maintenance and support fees
Reimbursements for hotel manager fees
Other fees
Manachised and franchised hotels revenue
Other revenues
Total revenues
F-20
Years Ended December 31,
2021
2020
2022
5,735
608
565
6,908
110
1,057
908
657
404
3,136
152
10,196
7,024
694
400
8,118
109
1,479
1,399
897
520
4,404
263
12,785
7,571
1,049
528
9,148
106
1,375
1,262
1,103
559
4,405
309
13,862
Table of Contents
Contract Balances
The Group’s contract assets are insignificant at December 31, 2021 and 2022.
Current contract liabilities
Long-term contract liabilities
Total contract liabilities
As of December 31,
2021
2022
1,366
785
2,151
1,308
828
2,136
The contract liabilities balances above are classified as deferred revenue on the consolidated balance sheet, as of December 31, 2021 and
2022.
The Group recognized revenues that were previously deferred as contract liabilities of RMB613 and RMB655 during the years ended
December 31, 2021 and 2022, respectively.
5. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consist of the following:
Cost:
Buildings
Leasehold improvements
Furniture, fixtures and equipment
Motor vehicles
Less: Accumulated depreciation
Construction in progress
Property and equipment, net
As of December 31,
2021
2022
305
10,467
2,348
3
13,123
6,845
6,278
778
7,056
843
10,952
2,520
3
14,318
7,727
6,591
193
6,784
Depreciation expense was RMB1,219, RMB1,352 and RMB1,312 for the years ended December 31, 2020, 2021 and 2022, respectively.
6.
INTANGIBLE ASSETS, NET
Intangible assets, net consist of the following:
Intangible assets with indefinite lives:
Brand names
Master brand agreement
Intangible assets with finite lives:
Franchise or manachise agreements
Purchased software
Other intangible assets
Total
Less: Accumulated amortization
Less: Accumulated impairment loss(Note2)
Total
F-21
As of December 31,
2021
2022
5,010
192
366
142
81
5,791
163
243
5,385
5,111
192
368
128
77
5,876
178
420
5,278
Table of Contents
Amortization expense of intangible assets for the years ended December 31, 2020, 2021 and 2022 amounted to RMB62, RMB65, and
RMB45, respectively.
There were 3 brand names with indefinite lives acquired in DH acquisition. In 2021, the estimated fair value of one brand name was
determined to be lower than its carrying amount, as such, an impairment loss of RMB160 was recognized.
In 2022, the estimated fair value of one brand name was determined to be lower than its carrying amount, as such, an impairment loss of
RMB167 was recognized in 2022.
The annual estimated amortization expense for the above intangible assets excluding brand names and master brand agreement for the
following years is as follows:
2023
2024
2025
2026
2027
Thereafter
Total
7.
INVESTMENTS
The investments as of December 31, 2021 and 2022 were as follows:
Short-term investments
Equity securities with readily determinable fair values:
Accor
Other marketable securities
Total
Long-term investments
Equity securities without readily determinable fair values:
Cjia Group-preferred shares
OYO
Other equity securities without readily determinable fair values
Subtotal
Equity-method investments:
AAPC LUB
Hotel related funds
China Hospitality JV
Zleep
Commerz Real Institute
Other investments
Subtotal
Available-for-sale debt securities:
Cjia Group-convertible notes
Total
F-22
Amortization for Intangible Assets
36
33
31
29
28
151
308
As of December 31,
2021
2022
2,508
81
2,589
168
54
71
293
525
488
99
68
85
187
1,452
220
1,965
1,701
87
1,788
138
54
65
257
494
443
67
70
80
238
1,392
296
1,945
Table of Contents
Equity securities with readily determinable fair values:
In 2020, 2021 and 2022, the Group purchased 8,737,987 and 1,180,000 and nil ordinary shares of Accor, respectively, a hotel group listed
in Paris stock exchange, from open market. The Group sold 5,172,458 and 2,397,596 of these shares with gains of RMB209 and RMB74
realized, for the years ended December 31, 2021 and 2022 respectively. As of December 31, 2022, the Group hold 9,814,956 shares of Accor,
which accounts for less than 5% of Accor total outstanding shares where the Group does not have the ability to significantly influence the
operations of this entity. In 2021 and 2022, the Group recognized losses from fair value changes of Accor of RMB94 and RMB358,
respectively.
Equity securities without readily determinable fair values:
As of December 31, 2022 the Group held RMB138 preferred shares of Cjia Group. The preferred shares are accounted for as equity
securities without readily determineable fair value as they are not in substance ordinary shares.
In September 2017, the Group purchased approximately 1% equity interest of Oravel Stays Private limited (“OYO”), an India leading
hospitality company. During the year ended December 31, 2021, the group sold part of equity interest, and recognized investment income of
RMB52 in 2021. As of December 31, 2021 and 2022, the Group owned less than 1% equity interest of OYO.
Other equity securities without readily determinable fair values included several insignificant investments in certain privately-held
companies. As a result of the COVID-19 pandemic, the Group recognized an impairment of nil and RMB7 for these equity securities for the
year ended December 31, 2021 and 2022, respectively.
Equity-method investments:
In January 2016, the Group acquired approximately 28% equity interest in AAPC LUB. The Group accounted for the investment in AAPC
LUB under equity-method as the Group has the ability to exert significant influence. The Group recognized investment income of RMB21,
RMB35 and RMB16 in income (loss) from equity method investments in 2020, 2021 and 2022, respectively. In 2020, 2021 and 2022, the
Group received cash dividend from AAPC LUB of nil, nil and RMB47 which was recognized as return on investment.
As of December 31, 2021 and 2022, the Group had RMB488 and RMB443, respectively, of investments in hotel related funds. Those
funds were VIEs and were managed by or power shared with un-related third-parties. However, the Group determined that they were not the
primary beneficiary of those VIEs since the Group did not have the power to direct the activities of these VIEs that most significantly impacted
their economic performance. The Group accounted for the investment under equity-method as the Group’s influence over the funds is more
than minor. The Group recognized investment loss of RMB16, RMB55 and RMB31, in income (loss) from equity method investments in 2020,
2021 and 2022, respectively. The maximum potential financial statement loss the Group could incur if the investment funds were to default on
all of their obligations is the loss of value of the interests in such investments of RMB443 that the Group holds as of December 31, 2022.
In 2018, the Group partnered with an unrelated third party investor to form China Hospitality JV, Ltd. (“China Hospitality JV”), of which
the Group holds 20% equity interest. The business of China Hospitality JV was to acquire and operate two hotel properties, one of which has
been converted into office buildings in 2020. The Group accounted for the investment in China Hospitality JV under equity-method as the
Group has the ability to exert significant influence. During the year ended December 31, 2022, the Group received cash dividend of RMB54
which was recognized as return of investment. The Group recognized investment loss of RMB12, RMB4, and investment income of RMB22
in income (loss) from equity method investments in 2020, 2021 and 2022, respectively.
In February 2019, Deutsche Hospitality acquired 51% of the shares in Zleep Hotels A/S (“Zleep”), a hotel brand in Scandinavia. The
Group’s interest in Zleep is accounted for using the equity method in the consolidated financial statements because the Group has joint control
only in the business and finance decisions due to voting right restrictions. The Group recognized investment loss of RMB12 and RMB0 in
income (loss) from equity method investments in 2021 and 2022.
In 2021, the Group partnered with an unrelated third party investor who acted as a general partner to form Commerz Real Institute, of
which the Group holds 34% equity interest as a limited shareholder at the consideration of EUR12 million. Commerz Real Institute was
designed as an open-ended investment fund to build a portfolio of hotels in prestigious locations. The Group accounted for the investment in
Commerz Real Institute under equity-method as the Group’s significant influence over the funds is more than minor. The Group recognized
investment loss of RMB1 and RMB7 in income (loss) from equity method investments in 2021 and 2022.
F-23
Table of Contents
Other investments included several insignificant equity investments in certain privately-held companies. As a result of the COVID-19
pandemic, the Group recognized an impairment of RMB63 and RMB20 for these equity investments for the year ended December 31, 2021
and 2022.
8. GOODWILL
The changes in the carrying amount of goodwill for the years ended December 31, 2021 and 2022 were as follows:
Legacy Huazhu
Legacy DH
Total
Balance at January 1, 2021
Goodwill
Accumulated impairment loss
Goodwill acquired during the year (Note 3)
Net foreign exchange-goodwill
Net foreign exchange-impairment loss
Balance at December 31, 2021
Goodwill
Accumulated impairment loss
Goodwill acquired during the year
Net foreign exchange-goodwill
Net foreign exchange-impairment loss
Balance at December 31, 2022
Goodwill
Accumulated impairment loss
2,664
(4)
2,660
372
—
—
3,036
(4)
3,032
—
—
—
3,036
(4)
3,032
2,768
(440)
2,328
6
(278)
44
2,496
(396)
2,100
4
70
(11)
2,570
(407)
2,163
5,432
(444)
4,988
378
(278)
44
5,532
(400)
5,132
4
70
(11)
5,606
(411)
5,195
The goodwill of legacy Huazhu was not impaired for the years ended December 31, 2021 and 2022. The Group recorded an impairment
loss of RMB437 against goodwill of legacy DH for the year ended December 31, 2020. As the estimated fair value of the reporting unit of
legacy DH exceeded its carrying value, no impairment loss was recorded for the years ended December 31, 2021 and 2022.
As of December 31, 2021 and 2022, the estimated fair value of the reporting unit of legacy Huazhu exceeded over 100% of its carrying
value. As of December 31, 2021 and 2022, the estimated fair value of the reporting unit of legacy DH exceeded its carrying value by
approximately RMB421 and RMB769, which accounted for 13% and 25% of its carrying value, respectively. A 5% decline in the underlying
projected cash flow or increase in the discount rate could have resulted in goodwill impairment loss of approximately RMB313 and RMB359
in 2021. A 5% decline in the underlying projected cash flows or increase in the discount rate could not result in an impairment loss in 2022.
F-24
Table of Contents
9. DEBT
The short-term and long-term debt as of December 31, 2021 and 2022 were as follows:
Short-term debt:
Long-term bank borrowings, current portion
Short-term bank borrowings
Convertible senior notes, current portion
FF&E liability, current portion
Total
Long-term debt:
Long-term bank borrowings, non-current portion
Convertible senior notes, non-current portion
FF&E liability, non-current portion
Others
Total
Bank borrowings
As of December 31,
2021
2022
2,464
692
3,029
47
6,232
211
3,158
180
16
3,565
208
3,035
—
45
3,288
2,929
3,463
228
15
6,635
In December 2019, the Group entered into a EUR440 million term facility and US$500 million revolving credit facility agreement with
several banks. As of December 31, 2021, the outstanding loan amount was EUR338 million and had been reclassified to long-term bank
borrowings, current portion. As of December 31, 2022, the outstanding loan amount of EUR338 million has been fully paid off.
In January 2021, the Group entered into a twelve-year syndicated loan contract with facility amount of RMB650 expiring in December
2032. The loan is used for the construction project of the Group’s headquarters buildings. The interest rate resets every year, and is based on
the People’s Bank of China five-year benchmark LPR minus certain basis points on the pricing date. The mortgage ratio covenant is related to
this facility. The Group was fully in compliance with the further amended covenants as of December 31, 2022. As of December 31, 2021 and
2022, the outstanding loan amount is RMB53 and RMB53 respectively. The weighted average interest rate of borrowings drawn under this
agreement was 4.41% and 4.19%, respectively. The interest was fully capitalized and with the amount of RMB1 and RMB2 million for the
years ended December 31, 2021 and 2022, respectively.
In August 2022, the Group entered into a 3-year long-term facility of EUR220 million and RMB-equivalent of EUR110 million term
facility, and EUR70 million revolving credit facility agreement with several banks. The EUR70 million revolving credit facility is available for
35 months after the date of the agreement. The interest rate on the loan for each interest period is the aggregate of the applicable Margin and
EURIBOR or one-year benchmark LPR. The margin for each loan depends on the currency of loan, a loan denominated in EUR means 1.55%
per annum and a loan denominated in RMB means -0.15% per annum. There are some financial covenants including interest cover, leverage
and book equity related to this facility. As of December 31, 2022, the Group had drawn down EUR220 million, RMB equivalent of EUR110
million and EUR70 million under the facility agreement and repaid nil. For the year ended December 31, 2022, the weighted average interest
rate of borrowings drawn under this agreement was 3.01%.
In October 2022, the Group entered into a one-year uncommitted term loan facility of up to US$123 million which is to be made by single
drawing only. The Group had drawn down US$121 million under this agreement, the interest rate was fixed at 5.4% per annum. As of
December 31, 2022, the outstanding loan amount was US$121 million.
In October 2022, the Group entered into a one-year USD dominated facility agreement that it could draw down no more than RMB1,000
with interest rate to be determined case-by-case. The Group had drawn down US$65 million as of December 31, 2022 under the facility
agreement and repaid all the bank borrowings in advance in January 2023.
F-25
Table of Contents
Convertible Senior Notes due 2022
On November 3, 2017, the Company issued US$475 million of Convertible Senior Notes (the “2022 Notes”). The 2022 Notes mature on
November 1, 2022 and bear interest at a rate of 0.375% per annum, payable in arrears semi-annually on May 1 and November 1, beginning
May 1, 2018.
Holders of the 2022 Notes have the option to convert their Notes at any time prior to the close of business on the second business day
immediately preceding the maturity date. The 2022 Notes can be converted into the Company’s ADSs at an initial conversion rate of 5.4869,
before the ADSs split, of the Company’s ADSs per US$1,000 principal amount of the 2022 Notes (equivalent to an initial conversion price of
US$182.25 per ADS before the ADSs split effected in May 2018). The conversion rate is subject to adjustment in some events but is not
adjusted for any accrued and unpaid interest. In addition, following a make-whole fundamental change (as defined in the Indenture) that occur
prior to the maturity date or following the Company’s delivery of a notice of a tax redemption, the Company will increase the conversion rate
for a holder who elects to convert its notes in connection with such a corporate event or such tax redemption.
The holders were able to require the Company to repurchase all or portion of the 2022 Notes for cash on November 2, 2020, or upon a
fundamental change, at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest.
During the years ended December 31, 2020 and 2021, RMB0.06 and RMB0.04 of the 2022 Notes had been converted into 202 ADSs and
134 ADSs upon the holders’ request, respectively. As of December 31, 2021, the Group reclassified the 2022 Notes as short-term debt as the
2022 Notes mature on November 1, 2022. The Group had redeemed the remaining part of US$475 million of 2022 Notes on November 1,
2022.
ADS Lending Arrangement
Concurrent with the offering of the 2022 Notes, the Company entered into ADS lending agreements with the affiliates of the initial
purchasers of the 2022 Notes (“ADS Borrowers”), pursuant to which the Company lent to the ADS Borrowers 2,606,278 ADSs (the “Loaned
ADSs”) at a price equal to par, or $0.0004 per ADS before the ADSs split (“ADS lending arrangement”). The purpose of the ADS lending
arrangements is to facilitate privately negotiated transactions in which the ultimate holders of the 2022 Notes may elect to hedge their
investment in the related notes.
The Loaned ADSs must be returned to the Company by the earliest of (a) the maturity date of the 2022 Notes, November 1, 2022,
(b) upon the Company’s election to terminate the ADS lending agreement at any time after the later of (x) the date on which the entire
principal amount of the 2022 Notes ceases to be outstanding, and (y) the date on which the entire principal amount of any additional
convertible securities that the Company has in writing consented to permit the ADS Borrower to hedge under the ADS lending agreement
ceases to be outstanding, in each case, whether as a result of conversion, redemption, repurchase, cancellation or otherwise; and (c) the
termination of the ADS lending agreement. The Company is not required to make any payment to the initial purchasers or ADS Borrower upon
the return of the Loaned ADSs. The ADS Borrowers do not have the choice or option to pay cash in exchange for the return of the Loaned
ADSs.
No collateral is required to be posted for the Loaned ADSs. The initial purchasers are required to remit to the Company any dividends paid
to the holders of the Loaned ADSs. An ADS Borrower has the ability to vote without restriction. However, the ADS Borrowers have agreed
not to vote on the Loaned ADSs.
In May 2018, the Company changed the ADS to ordinary share ratio from one ADS representing four ordinary shares to one ADS
representing one ordinary share. Therefore, as of December 31, 2020 and 2021, the outstanding number of Loaned ADSs was 10,425,112. All
these Loaned ADSs had been returned to the Company with the maturity of 2022 Notes, and was accounted for as an increase to the treasury
shares.
F-26
Table of Contents
Capped Call Options
In connection with the issuance of the 2022 Notes, the Group entered into capped call option transactions with some of the initial
purchasers or their affiliates (the “Option Counterparties”) to reduce the potential dilution to existing shareholders of the Group upon
conversion of the 2022 Notes. In June 2022, the Group and Option Counterparties terminated these capped call transactions before the
conversion date of convertible notes on November 1, 2022 with the settlement amount of US$12.8 million, which was received by the Group
in July 2022. The settlement amount of US$12.8 million was recorded as an increase to additional paid-in capital.
Convertible Senior Notes due 2026
On May 12, 2020, the Company issued US$450 million Convertible Senior Notes (the “2026 Notes”). On May 26, 2020, the Company
issued an additional US$50 million in aggregate principal amount of the 2026 Notes pursuant to the exercise in full by the initial purchasers of
an option to purchase additional notes. The 2026 Notes will mature on May 1, 2026 and bear interest at a rate of 3.00% per annum, payable in
arrears semi-annually on May 1 and November 1 of each year, beginning on November 1, 2020. In 2020, proceeds to the Company were
RMB3,499 (equivalently US$493 million), net of issuance costs of RMB49 (equivalently US$7 million).
Holders of the 2026 Notes have the option to convert their Notes at any time prior to the close of business on the second business day
immediately preceding the maturity date. The 2026 Notes can be converted into the Company’s ADSs at an initial conversion rate of 23.971 of
the Company’s ADSs per US$1,000 principal amount of the 2026 Notes (equivalent to an initial conversion price of US$41.72 per ADS). The
conversion rate is subject to adjustment in some events but is not adjusted for any accrued and unpaid interest. In addition, following a make-
whole fundamental change (as defined in the Indenture) that occur prior to the maturity date or following the Company’s delivery of a notice of
a tax redemption, the Company will increase the conversion rate for a holder who elects to convert its notes in connection with such a
corporate event or such tax redemption.
The holders may require the Company to repurchase all or portion of the 2026 Notes for cash on May 1, 2024, or in the event of certain
fundamental changes, at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest.
The Company accounted for the 2026 Notes as a single instrument. Issuance costs related to the 2026 Notes is recorded in consolidated
balance sheet as a direct deduction from the principal amount of the 2026 Notes, and is amortized over the period from May 12, 2020, the date
of issuance, to May 1, 2024, the first put date of the 2026 Notes, using the effective interest method.
FF&E Liability
The Group entered into several contracts with lessors to install furniture, fixtures and equipment (“FF&E”) in various leased hotels prior
to the respective commencement date. Those transactions are classified as “failed” sale and leaseback transactions, as the control of the
furniture, fixtures and equipment does not transfer to the lessor. Consequently, the received consideration from the lessor is accounted for as a
liability. The current portion and non-current portion of FF&E liability are recorded in short-term debt and long-term debt, respectively.
Debt Maturities
The contractual maturities of the Group’s debt as of December 31, 2022 were as follows:
Year Ending December 31,
2023
2024
2025
2026
2027
Thereafter
Total
F-27
Principal Amounts
3,287
3,755
2,735
34
28
100
9,939
Table of Contents
10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Payable to franchisees
Other payables
Accrued utilities and other accrued expenses
Liabilities related to customer loyalty program
Value-added tax, other tax and surcharge payables
Advance from noncontrolling interest holders
Total
11. HOTEL OPERATING COSTS
As of December 31,
2021
2022
710
535
209
135
132
117
1,838
652
850
332
166
234
103
2,337
Hotel operating costs include all direct costs incurred in the operation of the leased and owned hotels, manachised and franchised hotels
and consist of the following:
Rents
Utilities
Personnel costs
Depreciation and amortization
Consumable, food and beverage
Others
Total
12. PRE-OPENING EXPENSES
Years Ended December 31,
2021
2020
2022
3,485
478
2,501
1,316
885
1,064
9,729
3,900
507
3,022
1,413
969
1,471
11,282
3,927
603
3,683
1,414
1,026
1,607
12,260
The Group expenses all costs incurred in connection with start-up activities, including pre-operating costs associated with new hotel
facilities and costs incurred with the formation of the subsidiaries, such as organization costs. Pre-opening expenses primarily include rental
expenses and employee costs incurred during the hotel pre-opening period.
Rents
Personnel costs
Others
Total
2020
Years Ended December 31,
2021
2022
251
15
22
288
68
5
8
81
84
5
6
95
F-28
Table of Contents
13. SHARE-BASED COMPENSATION
In February 2007, the Group adopted the 2007 Global Share Plan which allows the Group to offer incentive awards to employees, officers,
directors and consultants or advisors (the “Participants”). Under the 2007 Global Share Plan, the Group may issue incentive awards to the
Participants to purchase not more than 100,000,000 ordinary shares. In June 2007, the Group adopted the 2008 Global Share Plan which
allows the Group to offer incentive awards to Participants to purchase up to 30,000,000 ordinary shares. In October 2008, the Group increased
the maximum number of incentive awards available under the 2008 Global Share Plan to 70,000,000. In September 2009, the Group adopted
the 2009 Share Incentive Plan which allows the Group to offer incentive awards to Participants. Under the 2009 Share Incentive Plan, the
Group may issue incentive awards to purchase up to 30,000,000 ordinary shares. In August 2010, the Group increased the maximum number
of incentive awards available under the 2009 Share Incentive Plan to 150,000,000. In March 2015, the Group increased the maximum number
of incentive awards available under the 2009 Share Incentive Plan to 430,000,000. The 2007 and 2008 Global Share Plans and 2009 Share
Incentive Plan (collectively, the “Incentive Award Plans”) contain the same terms and conditions. The incentive awards granted under the
Incentive Award Plans typically have a maximum life of ten years and vest in typical ways as listed below:
a.) Vest 50% on the second anniversary of the stated vesting commencement date with the remaining 50% vesting ratably over the
following two years;
b.) Vest over a period of ten years in equal yearly installments;
As of December 31, 2022, the Group had granted a total of 245,776,690 options and 277,921,390 nonvested restricted stocks in total,
which were subject to adjustment on performance condition.
Share options
No share options were outstanding as of December 31, 2022.
Nonvested restricted stocks
The fair value of nonvested restricted stock with service conditions or performance conditions is based on the fair market value of the
underlying ordinary shares on the date of grant.
In 2020, 2021 and 2022, the Group granted nil, nil and 31,683,100 nonvested restricted stocks, respectively to senior officers and
managers, each was in ten tranches with performance conditions. Each tranche is accounted for as a separate award with the same grant date,
its own service inception date and requisite service period. The share-based compensation cost is recognized for each vesting tranche during
the respective service period based on the estimated performance conditions at the service inception date. The Group reassesses the
performance condition at each reporting period for true up. For each tranche, 50% vests on the second anniversary of the vesting
commencement date with the remaining 50% vesting ratably over the following two years.
The following table summarized the Group’s nonvested restricted stock activities in 2022.
Nonvested restricted stocks outstanding at January 1, 2022
Granted
Forfeited
Vested
Adjusted for performance conditions
Nonvested restricted stocks outstanding at December 31, 2022
F-29
Number of Restricted
Stocks
Weighted Average Grant
Date
Fair Value
US$
53,696,490
39,153,240
(2,157,320)
(9,462,340)
(4,290,920)
76,939,150
1.20
2.53
1.41
1.40
0.63
1.88
Table of Contents
For the years ended December 31, 2020, 2021 and 2022, the Group recognized share-based compensation expenses of RMB122, RMB109
and RMB87, respectively, which were classified as follows:
Hotel operating costs
Selling and marketing expenses
General and administrative expenses
Total
2020
Years Ended December 31,
2021
2022
42
4
76
122
39
4
66
109
33
4
50
87
As of December 31, 2022, there was RMB823 in unrecognized compensation costs, net of estimated forfeitures, related to unvested
restricted stocks, which is expected to be recognized over a weighted-average period of 3.62 years.
14. EARNINGS (LOSSES) PER SHARE
The following table sets forth the computation of basic and diluted earnings (losses) per share for the years indicated:
Net loss attributable to ordinary shareholders — basic
Net loss attributable to ordinary shareholders — diluted
Weighted average ordinary shares outstanding — basic
Incremental weighted-average ordinary shares from assumed exercise of share
options and nonvested restricted stocks using the treasury stock method
Dilutive effect of convertible senior notes
Weighted average ordinary shares outstanding — diluted
Basic earnings (losses) per share
Diluted earnings (losses) per share
2020
Years Ended December 31,
2021
(2,192)
(2,192)
2,927,398,409
(465)
(465)
3,114,124,244
—
—
2,927,398,409
(0.75)
(0.75)
—
—
3,114,124,244
(0.15)
(0.15)
2022
(1,821)
(1,821)
3,111,196,757
—
—
3,111,196,757
(0.59)
(0.59)
For the years ended December 31, 2020, 2021 and 2022, the Group had securities which could potentially dilute basic earnings per share
in the future, but which were excluded from the computation of diluted earnings per share as their effects would have been anti-dilutive. Such
outstanding securities consist of the following at non-weighted basis:
Outstanding employee options and nonvested restricted stocks
Shares of convertible senior notes
Total
2020
70,954,080
226,827,410
297,781,490
As of December 31,
2021
53,696,490
226,827,410
280,523,900
2022
76,939,150
120,601,000
197,540,150
In accordance with ASC Topic 470-20, although legally issued, the loaned ADSs are not considered outstanding, and then excluded from
basic and diluted earnings per share unless default of the ADS lending arrangement occurs, at which time the Loaned ADSs would be included
in the basic and diluted earnings per share calculation.
The loaned shares under the ADS lending agreement are excluded from both the basic and diluted earnings (losses) per share calculation
for the years ended December 31, 2020, 2021 and 2022.
F-30
Table of Contents
15. SEGMENT
The Group’s chief operating decision maker (“CODM”) has been identified as the chief executive officer. CODM regularly reviews the
operating data, EBITDA, which is defined as earnings before interest income, interest expense, income tax expense (benefit) and depreciation
and amortization. Therefore, in January 2020, the Group modified its operating segment structure to be two operating segments which are
legacy Huazhu and legacy DH as a result of a change in the way management intends to evaluate results and allocate resources within the
Group. In identifying its reportable segments, the Group assesses nature of operating segments and evaluates the operating results of each
reporting segments. Both operating segments meet the quantitative thresholds and should be considered as two reportable segments.
The following table provides a summary of the Group’s operating segment results for the years ended December 31, 2021 and 2022. The
Group presents segment information after elimination of intercompany transactions.
2020
Years Ended December 31,
2021
2022
Legacy Huazhu Legacy DH Total
Legacy Huazhu Legacy DH Total
Legacy Huazhu Legacy DH Total
Total revenues
EBITDA
Interest income
Interest expense
Income tax expense
(benefit)
Depreciation and
amortization
Net (loss) income
attributable to H
World Group
Limited
8,664
736
1,532 10,196
(631)
(1,367)
119
533
(215)
1,362
(2,192)
11,247
1,827
1,538 12,785
(461)
1,366
10,655
282
3,207
(118)
89
405
12
1,503
(465)
13,862
164
87
409
207
1,456
(1,821)
The following table presents total assets for operating segments, reconciled to consolidated amounts:
Total assets
2021
2022
As of December 31,
Legacy Huazhu Legacy DH Total
Legacy Huazhu Legacy DH Total
45,353
17,916 63,269
43,729
17,778
61,507
The following tables represent revenues and property and equipment, net, intangible assets, net, right-of-use assets, land use rights, net and
goodwill by geographical region.
Revenues:
China
Germany
All others
Total
Years Ended December 31,
2021
11,231
1,263
291
12,785
2022
10,637
2,458
767
13,862
F-31
Table of Contents
Property and equipment, net, intangible assets, net, right-of-use assets, land use rights, net and goodwill:
China
Germany
All others
Total
As of December 31,
2021
33,143
13,884
2,929
49,956
2022
31,684
13,501
3,288
48,473
Other than China and Germany, there were no countries that individually represented more than 10% of the total revenue and certain long
lived assets for the years ended and as of December 31, 2021 and 2022.
16. CASH DIVIDEND
The Group did not declare cash dividend to its shareholders in 2020 and 2021.
On March 03, 2022, the Group approved and declared a cash dividend of US$0.021 per ordinary share on its outstanding shares as of the
close of trading on March 24, 2022. Such dividend equivalent of RMB416 was fully paid in April 2022.
17. LEASES
The Group’s leases mainly related to building and the rights to use the land. The total expense related to short-term leases were
insignificant for period of 2020, 2021 and 2022, and sublease income of the Group which is recognized in revenues in the consolidated
statements of comprehensive income were RMB112, RMB134 and RMB119 for the years ended December 31, 2020, 2021 and 2022,
respectively. The Group recognizes a negative lease expense of RMB88 and RMB281 for 2021 and 2022 under the relief of lease concession
from COVID-19 as the Group elects using the variable lease expense approach.
A summary of supplemental information related to operating leases in 2021 and 2022 is as follows:
Lease cost:
Operating fixed lease cost
Finance lease cost
— Amortization of ROU assets
— Interest on lease liabilities
Short term lease cost
Operating variable lease cost
Total lease cost
Other information:
Weighted average remaining lease term
Operating leases
Finance leases
Weighted average discount rate
Operating leases
Finance leases
F-32
Years Ended December 31,
2021
2022
4,074
79
96
0
(25)
4,224
4,186
93
116
0
(144)
4,251
13 years
28 years
13 years
28 years
6.31 %
3.97 %
6.28 %
3.98 %
Table of Contents
As of December 31, 2022, the maturities of lease liabilities in accordance with ASC 842 in each of the next five years and thereafter are as
follows:
Year Ending December 31,
2023
2024
2025
2026
2027
Thereafter
Total minimum lease payments
Less: amount representing interest
Present value of minimum lease payments
Total Operating Leases
Total Finance Leases
4,209
4,196
3,989
3,793
3,605
24,547
44,339
12,929
31,410
142
146
146
148
151
3,539
4,272
1,718
2,554
As of December 31, 2022, the Group has entered 34 lease contracts that the Group expects to account for as operating or finance leases,
the future undiscounted lease payments for these non-cancellable lease contracts are RMB8,387, which is not reflected in the consolidated
balance sheets.
As of December 31, 2021, the maturities of lease liabilities in accordance with ASC 842 in each of the next five years and thereafter were
as follows:
Year Ending December 31,
2022
2023
2024
2025
2026
Thereafter
Total minimum lease payments
Less: amount representing interest
Present value of minimum lease payments
Total Operating Leases
Total Finance Leases
4,055
4,066
4,037
3,871
3,655
26,035
45,719
14,079
31,640
140
155
157
157
158
3,824
4,591
1,866
2,725
Supplemental cash flow information related to leases for the years ended December 31, 2021 and 2022 are as follows:
Cash paid for amounts included in the measurement of operating lease liabilities
Cash paid for amounts included in the measurement of finance lease liabilities
Non-cash right-of-use assets obtained in exchange for operating lease liabilities
Non-cash right-of-use assets obtained in exchange for finance lease liabilities, net of reassessment of finance
lease payments
Non-cash right-of-use assets obtained in acquisition for operating lease
Non-cash lease liabilities obtained in acquisition for operating lease
18. INCOME TAXES
Years Ended December, 31
2022
2021
3,770
92
2,565
501
1,710
1,692
3,295
106
1,010
(161)
171
144
The Group is subject to different income tax rates in various countries and jurisdictions under laws and relevant interpretations depending
on the place of formation.
F-33
Table of Contents
Under the Law of the People’s Republic of China on Enterprise Income Tax (“EIT Law”), which was effective from January 1, 2008,
domestically-owned enterprises and foreign-invested enterprises are subject to a uniform tax rate of 25%, and the industries and projects that
are encouraged and supported by the State may enjoy tax preferential treatment. Jizhu Information and Technology (Shanghai) Co., Ltd.
(“Jizhu Shanghai”), which once called Mengguang Information and Technology (Shanghai) Co., Ltd, is a recognized software development
entity located in Shanghai of PRC. In November 2018, Jizhu Shanghai was qualified as high and new tech enterprise, resulting Jizhu Shanghai
subject to a reduced tax rate of 15% in 2018, 2019 and 2020. In December 2021, Jizhu Shanghai was qualified as high and new tech enterprise,
resulting Jizhu Shanghai subject to a reduced tax rate of 15% in 2021, 2022 and 2023. H-World Information and Technology Co., Ltd. (“H-
World Information”) is qualified as high and new tech enterprise, resulting H-World Information and Technology Co., Ltd. subject to a reduced
tax rate of 15% in 2019, 2020 and 2021. In December 2022, H-World Information was qualified as high and new tech enterprise, resulting H-
World Information subject to a reduced tax rate of 15% in 2022, 2023 and 2024. Pursuant to the relevant regulations applicable to small and
micro businesses, several PRC subsidiaries enjoy a preferential tax rate of 20% with a discount to taxable income. From January 1, 2019 to
December 31, 2020, for taxable income less than RMB1, 75% of the taxable income would be exempted in tax computation, and for taxable
income over RMB1 but less than RMB3, the discount would be 50%. From January 1, 2021 to December 31, 2021, for taxable income less
than RMB1, 87.5% of the taxable income would be exempted in tax computation, and for taxable income over RMB1 but less than RMB3, the
discount would be 50%. From January 1, 2022 to December 31, 2022, for taxable income less than RMB1, 87.5% of the taxable income would
be exempted in tax computation, and for taxable income over RMB1 but less than RMB3, the discount would be 75%. From January 1, 2023
to December 31, 2024, for taxable income less than RMB3, 75% of the taxable income would be exempted in tax computation. Entities
qualified as small and micro businesses shall be engaged in industries not restricted or prohibited by the state, which simultaneously meet the
following three conditions: annual taxable income does not exceed RMB3, the number of employees does not exceed 300, and the total assets
does not exceed RMB50.
Under the current laws of Germany, companies are subject to income tax at a standard rate of 15% (15.825% including solidarity
surcharge), plus municipal trade tax of 7%-21%. The income tax rates in other countries and jurisdictions are of little effect on the financial
statements. In other major jurisdictions, including Austria, Netherlands and Belgium, the Group is subject to a range from 9% to 25% of the
statutory income tax rate, respectively.
Income (loss) before income taxes consists of:
PRC including Hong Kong and Taiwan
Germany
Other
Total
Income tax expense (benefit) is comprised of the following:
Current Tax
Deferred Tax
Total
F-34
2020
Years Ended December 31,
2021
2022
(392)
(1,606)
(281)
(2,279)
617
(632)
(393)
(408)
(483)
(410)
(713)
(1,606)
2020
Years Ended December 31,
2021
2022
338
(553)
(215)
555
(543)
12
475
(268)
207
Table of Contents
A reconciliation between the effective income tax rate and the PRC statutory income tax rate is as follows:
PRC statutory tax rate
Tax effect of non-deductible expenses and non-taxable income in determining taxable profit
Effect of different tax rate of group entities operating in other jurisdictions
Effect of change in valuation allowance
Effect of tax holiday
Effect of cash dividends
Effect of excess tax benefit of share-based rewards
Effective tax rate
The aggregate amount and per share effect of the tax holidays are as follows:
Aggregate amount
Per share effect—basic
Per share effect—diluted
Years Ended December 31,
2021
2022
2020
25 %
(6)%
(2)%
(10)%
1 %
0 %
1 %
9 %
25 %
(6)%
(6)%
(24)%
9 %
(8)%
7 %
(3)%
25 %
(6)%
(10)%
(15)%
1 %
(6)%
(2)%
(13)%
2020
Years Ended December 31,
2021
2022
31
0.01
0.01
37
0.01
0.01
22
0.01
0.01
The principal components of the Group’s deferred income tax assets and liabilities as of December 31, 2021 and 2022 are as follows:
Deferred tax assets:
Net loss carryforward
Deferred revenue
Long-term assets
Bad debt provision
Accrued payroll
Other accrued expenses
Share-based compensation
Others
Valuation allowance
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Fair value adjustment for Building, land use rights and identified intangible assets due to acquisition
Others
Total deferred tax liabilities
Net deferred tax assets
Analysis as:
Deferred tax assets
Deferred tax liabilities
Net deferred tax assets
As of December 31,
2021
2022
1,271
326
238
40
45
3
29
150
(466)
1,636
1,596
31
1,627
9
862
853
9
1,678
349
303
59
41
(9)
31
150
(731)
1,871
1,596
40
1,636
235
1,093
858
235
Deferred tax assets and liabilities have been offset where the Group has a legally enforceable right to do so, and intends to settle on a net
basis.
F-35
Table of Contents
The Group considers positive and negative evidence to determine whether some portion or all of the deferred tax assets will more likely
than not be realized. This assessment considers, among other matters, the nature, frequency and severity of recent losses, forecasts of future
profitability, the duration of statutory carryforward periods, the Group’s experience with tax attributes expiring unused and tax planning
alternatives. Valuation allowances have been established for deferred tax assets based on a more likely than not threshold. The Group’s ability
to realize deferred tax assets depends on its ability to generate sufficient taxable income within the carryforward periods provided for in the tax
law. Movement of the valuation allowance is as follows:
Balance at the beginning of the year
Provided
Reversed
Written off
Balance at the end of the year
2020
Years Ended December 31,
2021
2022
(152)
(249)
32
—
(369)
(369)
(151)
37
17
(466)
(466)
(338)
41
32
(731)
As of December 31, 2022, the Group’s PRC subsidiaries had tax loss carryforwards of RMB4,901, which will expire between 2023 and
2027 if not used. The Germany Companies had tax loss carry forwards of RMB1,555, which can be offset in the future without anytime
restriction.
The Group determines whether or not a tax position is “more-likely-than-not” of being sustained upon audit based solely on the technical
merits of the position. At December 31, 2021 and 2022, the Group had recorded liabilities for uncertain tax benefit of approximately RMB60
and RMB65 mainly associated with the interests on intercompany loans and other permanent differences related to Corporate Income and
Trade Taxes, respectively. No interest or penalty expense was recorded for the years ended December 31, 2020, 2021 and 2022. In 2023, the
Group will decrease its income tax liability by RMB 0.1 for unrecognized tax benefits previously recorded in 2013 as the statute of limitations
for the tax liabilities of certain tax positions will expire under the PRC Tax Administration and Collection Law.
Balance at January 1
Addition for tax positions
Balance at December 31
2020
Years Ended December 31,
2021
2022
18
32
50
50
10
60
60
5
65
In accordance with the EIT Law, dividends, which arise from profits of foreign invested enterprises (“FIEs”) earned after January 1, 2008,
are subject to a 10% withholding income tax. If there is a favorable tax treaty between mainland China and the jurisdiction of the foreign
holding company, the income tax rate may be reduced. For example, holding companies in Hong Kong that are also tax residents in Hong
Kong are eligible for a 5% withholding tax on dividends under the Tax Memorandum between China and the Hong Kong Special
Administrative Region if the holding company is the beneficial owner of the dividends and holds more than 25% of the PRC company. Under
applicable accounting principles, a deferred tax liability should be recorded for taxable temporary differences attributable to the excess of
financial reporting basis over tax basis in a domestic subsidiary. In 2018, the Group revised its dividend policy that it may make a moderate
dividend distribution every year with the range of 0.5% to 2.0% of its market capitalization from current year net income starting from 2018.
The Group’s board of directors has complete discretion in deciding whether to distribute dividends and the dividend amounts within the
approved range. The Group was restricted from distributing cash dividends until June 30, 2021 pursuant to the waiver from certain financial
covenants that the Group obtained on April 17, 2020 for the syndicated bank loans and therefore did not accrue PRC dividend withholding tax
in 2020. In March 2022, the Group announced that its board of directors declared a cash dividend of approximately US$68 million. To
facilitate this dividend distribution and meet the oversea treasury demand, certain amount of dividends from the Group’s PRC subsidiaries to
its oversea subsidiaries was planned. PRC dividend withholding tax of RMB32 was accrued as of December 31, 2021. PRC dividend
withholding tax of RMB100 was accrued as of December 31, 2022. Other than these dividends distributions, the Group intends to indefinitely
reinvest the remaining undistributed earnings of PRC subsidiaries, and therefore, no additional provision for PRC dividend withholding tax
was accrued.
F-36
Table of Contents
According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of income taxes
is due to computational errors made by the taxpayer. The statute of limitations will be extended to five years under special circumstances,
which are not clearly defined, but an underpayment of income tax liability exceeding RMB0.1 is specifically listed as a special circumstance.
In the case of a transfer pricing related adjustment, the statute of limitations is ten years. There is no statute of limitations in the case of tax
evasion. The Group’s PRC subsidiaries are therefore subject to examination by the PRC tax authorities from 2018 through 2022 on non-
transfer pricing matters, and from 2013 through 2022 on transfer pricing matters. Generally, the statute of limitations for the assessment and
collection of taxes is four years. The four-year period usually starts at the end of the year in which the tax return is filed. If no tax return is
filed, the statute of limitations starts with the end of the third year following the year in which the tax arose. Extended limitations of 5 and 10
years will apply in the event of tax evasion or tax fraud. The statute of limitations may be suspended for a variety of reasons, for example,
appeal of assessment by taxpayers, announcement or start of a tax audit, obvious mistake in tax assessment, etc.
According to the German General Fiscal Code, the statute of limitations for the assessment and collection of taxes is four years. The four-
year period usually starts at the end of the year in which the tax return is filed. If no tax return is filed, the statute of limitations starts with the
end of the third year following the year in which the tax arose. Extended limitations of 5 and 10 years will apply in the event of tax evasion or
tax fraud. The statute of limitations may be suspended for a variety of reasons, for example, appeal of assessment by taxpayers, announcement
or start of a tax audit, obvious mistake in tax assessment, etc.
19. EMPLOYEE BENEFIT PLANS
a. Defined Benefit Plans
The Group maintains a German pension plan after the completion of the acquisition of DH.
As of December 31, 2021 and 2022, accumulated benefit obligation net of plan assets recognized in the consolidated balance sheets
consist of the following:
Salary and welfare payables
Retirement benefit obligation
Liability in the balance sheet
b. Defined Contribution Plans
As of December 31,
2021
2022
8
144
152
10
110
120
Full time employees of the Group in the PRC participate in a government-mandated defined contribution plan pursuant to which certain
pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. PRC
labor regulations require the Group to accrue for these benefits based on a certain percentage of the employees’ salaries. The total contribution
for such employee benefits were RMB283, RMB544 and RMB645 for the years ended December 31, 2020, 2021 and 2022, respectively. The
Group has no ongoing obligation to its employees subsequent to its contribution to the PRC plan. In an attempt to mitigate the adverse
financial effects of the COVID-19 pandemic on employers, the Chinese Government had announced temporary reductions in, and exemptions
from, the payment of contributions in 2020. The supportive policies have been gradually reduced since 2021.
Furthermore, the Group pays contribution to governmental and private pension insurance organizations based on legal regulations in some
countries out of China. The contributions are recognized as expense and amount RMB129, RMB55 and RMB74 for the years ended December
31, 2020, 2021 and 2022.
F-37
Table of Contents
20. RESTRICTED NET ASSETS
Pursuant to laws applicable to entities incorporated in the PRC, our subsidiaries in the PRC must make appropriations from after-tax profit
to non-distributable reserve funds. In particular, subject to certain cumulative limits, the statutory reserve fund requires an annual appropriation
of 10% of after-tax profit (as determined under accounting principles generally accepted in the PRC at each year-end) until the accumulative
amount of such reserve fund reaches 50% of a PRC subsidiary’s registered capital. These reserve funds can only be used for such specific
purposes as provided in PRC laws, and are not distributable as cash dividends, amounted to RMB771, RMB826 and RMB904 as of
December 31, 2020, 2021 and 2022, respectively. In addition, due to restrictions on the distribution of share capital from the Group’s PRC
subsidiaries, the PRC subsidiaries share capital of RMB2,831 at December 31, 2022 is considered restricted. As a result of these PRC laws and
regulations, as of December 31, 2022, approximately RMB3,735 is not available for distribution to the Group by its PRC subsidiaries in the
form of dividends, loans or advances.
21. RELATED PARTY TRANSACTIONS AND BALANCES
Parties are considered to be related if one party has the ability, directly or indirectly, to control the other party or exercise significant
influence over the other party in making financial and operational decisions. Parties are also considered to be related if they are subject to
common control or common significant influence. Related parties may be individuals or corporate entities.
The following entities are considered to be related parties to the Group. The related parties mainly act as service providers and service
recipients to the Group. The Group is not obligated to provide any type of financial support to these related parties.
Related Party
Trip.com Group Limited (“Trip.com”)
Sheen Star Group Limited (“Sheen
Star”)
Accor Hotels (“Accor”)
China Cjia Group Limited (“Cjia
Group”)
Shanghai Zhuchuang Enterprise
Nature of the Party
Relationship with the Group
Online travel services provider
Mr. Qi Ji is a director
Investment holding company
Hotel Group
Equity method investee of the Group, controlled by Mr. Qi Ji
Shareholder of the Group up to December 2021
Apartment Management Group Equity method investee of the Group
Management Co., Ltd. (“Zhuchuang”) Staged office space company
Equity method investee of the Group
China Hospitality JV, Ltd. (“China
Hospitality JV”)
Property management company Equity method investee of the Group
Shanghai Lianquan Hotel Management
Co., Ltd. (“Lianquan”)
Hotel management company
Equity method investee of the Group
Suzhou Huali Jinshi Construction
Decoration Co., Ltd.
(“Huali Jinshi”)
Building decoration company
Equity method investee of the Group up to August 2022
Shenzhen Hitone Investment Fund
Partnership (LLP) ( “Hitone”)
Fund
Equity method investee of the Group
F-38
Table of Contents
(a) Related party balances
Amounts due from related parties consist of the following:
Trip.com
Lianquan
Sheen Star
Cjia Group
Zhuchuang
Others
Allowance for expected credit losses
Total
Amounts due to related parties consist of the following:
Trip.com
Cjia Group
Huali Jinshi
Others
Total
(b) Related party transactions
As of December 31,
2021
2022
17
49
33
29
27
12
(17)
150
73
46
29
28
24
21
(37)
184
As of December 31,
2021
2022
44
101
47
5
197
38
26
—
7
71
55
19
31
—
—
—
4
—
—
93
—
4
12
5
—
—
—
—
During the years ended December 31, 2020, 2021 and 2022, significant related party transactions were as follows:
Commission expenses to Trip.com
Lease expenses to Trip.com
Lease expenses to Cjia Group
Service fee to Huali Jinshi
Service fee to Cjia Group
Brand use fee, reservation fee and other related service fee to Accor
Goods sold and service provided to Cjia Group
Early termination compensation of sublease to Cjia Group
Loan payment to Hitone
Service fee from Trip.com
Service fee from Accor
Service fee from Sheen Star
Sublease income from Lianquan
Sublease income from Cjia Group
Early termination compensation of franchise agreement from China Hospitality JV
Purchase of property and equipment from Cjia Group
Business acquisition of CitiGO from Cjia Group
Business acquisition of one individual company from Cjia Group
22. COMMITMENTS AND CONTINGENCIES
(a) Commitments
Years Ended December 31,
2021
2020
2022
78
18
—
41
17
17
18
8
—
66
3
4
12
9
26
11
—
—
99
19
12
42
—
22
11
—
5
62
3
5
10
6
—
—
783
51
As of December 31, 2022, the Group’s commitments related to leasehold improvements and installation of equipment for hotel operations
was RMB294, which is expected to be incurred within one to two year.
F-39
Table of Contents
(b) Contingencies
The Group is subject to periodic legal or administrative proceedings in the ordinary course of the Group’s business, including lease
contract terminations and disputes, and management agreement disputes. The Group does not believe that any currently pending legal or
administrative proceeding to which the Group is a party will have a material adverse effect on the financial statements. As of December 31,
2022, there are no accrued contingent liabilities from such proceedings.
23. SUBSEQUENT EVENTS
In January 2023, the Group successfully completed a follow-on public offering of 7,118,500 ADSs with proceeds of approximately
US$300 million (equivalent of RMB2,012).
In March 2023, the Group disposed all of its holdings in Accor’s ordinary share for net proceeds to approximately EUR300 million
(equivalent of RMB2,185).
In April 2023, the Group repaid the outstanding principal and interests of EUR220 million term loan (equivalent of RMB1,608) and
EUR70 million revolving credit facility (equivalent of RMB525).
F-40
Table of Contents
ADDITIONAL FINANCIAL INFORMATION — FINANCIAL STATEMENTS SCHEDULE I
H WORLD GROUP LIMITED
FINANCIAL INFORMATION FOR PARENT COMPANY
BALANCE SHEETS
(Renminbi in millions, except share and per share data, unless otherwise stated)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Other current assets
Total current assets
Investment in and amount due from subsidiaries
Total assets
Liabilities and equity
Current liabilities:
Short-term debt
Amount due to subsidiaries
Accrued expenses and other current liabilities
Total current liabilities
Long-term debt
Other non-current liabilities
Total liabilities
Equity:
Ordinary shares (US$0.00001 par value per share; 80,000,000,000 shares authorized;
3,255,971,250 and 3,265,433,590 shares issued as of December 31, 2021 and 2022, and
3,120,746,090 and 3,112,413,730 shares outstanding as of December 31, 2021 and 2022,
respectively)
Treasury shares (30,974,040 and 153,019,860 shares as of December 31, 2021 and 2022,
respectively)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total equity
Total liabilities and equity
F-41
2021
As of December 31,
2022
2022
US$’ in millions
(Note 2)
581
81
1
663
16,928
17,591
3,028
257
213
3,498
3,158
—
6,656
1,204
87
8
1,299
12,390
13,689
453
858
181
1,492
3,463
5
4,960
0
0
(107)
9,964
1,037
41
10,935
17,591
(441)
10,138
(1,200)
232
8,729
13,689
175
13
1
189
1,796
1,985
66
124
26
216
502
1
719
0
(64)
1,470
(174)
34
1,266
1,985
Table of Contents
ADDITIONAL FINANCIAL INFORMATION — FINANCIAL STATEMENTS SCHEDULE I
H WORLD GROUP LIMITED
FINANCIAL INFORMATION FOR PARENT COMPANY
STATEMENTS OF COMPREHENSIVE INCOME
(Renminbi in millions, unless otherwise stated)
Operating costs and expenses:
General and administrative expenses
Total operating costs and expenses
Loss from operations
Interest income
Interest expense
Foreign exchange gain (loss)
Other income, net
Loss from fair value changes of equity securities, net
Income (loss) in investment in subsidiaries
Net income (loss) attributable to H World Group Limited
Other comprehensive (loss) income, net of tax
Comprehensive income (loss)
F-42
2020
Years Ended December 31,
2021
2022
2022
US$’ in millions
(Note 2)
155
155
(155)
2
154
(8)
32
(10)
(1,899)
(2,192)
176
(2,016)
110
110
(110)
8
128
(3)
15
(2)
(245)
(465)
(86)
(551)
93
93
(93)
15
130
(223)
6
(1)
(1,395)
(1,821)
191
(1,630)
14
14
(14)
2
19
(32)
1
(0)
(202)
(264)
27
(237)
Table of Contents
ADDITIONAL FINANCIAL INFORMATION — FINANCIAL STATEMENTS SCHEDULE I
H WORLD GROUP LIMITED
FINANCIAL INFORMATION FOR PARENT COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Renminbi in millions, unless otherwise stated)
Years Ended December 31,
2020
2021
2022
2022
US$’ in millions
(Note 2)
Net cash (used in) provided by operating activities
Investing activities:
Loans to subsidiaries
Repayment of loans by subsidiaries
Purchase of short-term investments
Net cash (used in) provided by investing activities
Financing activities:
Proceeds from issuance of ordinary shares in Hong Kong public offering
Proceeds from termination of Capped Call
Payment of ordinary share issuance costs
Net settlement on shares repurchased for withholding taxes related to share-based awards
Payment of share repurchase
Loans from subsidiaries
Net proceeds from issuance of ordinary shares upon exercise of option
Proceeds from short-term bank borrowings
Repayment of short-term bank borrowings
Proceeds from issuance of convertible senior notes
Repayment of convertible senior notes
Debt financing costs paid
Dividends paid
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash, cash equivalents at the beginning of the year
Cash, cash equivalents at the end of the year
49
9
(136)
(6,267)
—
—
(6,267)
(1,050)
—
(34)
(1,084)
6,018
—
(10)
—
—
—
1
—
(282)A
3,499
(0)
(9)
(678)
8,539
(790)
1,531
361
1,892
—
—
(15)
50
(0)
—
1
—
—
—
(0)
—
—
36
(272)
(1,311)
1,892
581
(750)
4,165
—
3,415
—
86
(0)
—
(334)
798
—
453
—
—
(3,406)
—
(416)
(2,819)
163
623
581
1,204
(19)
(109)
604
—
495
—
12
(0)
—
(48)
116
—
66
—
—
(494)
—
(60)
(408)
24
91
84
175
A—In 2020, Except for repayment of short-term bank borrowings by cash, short-term bank borrowings of RMB 4,628 was settled by
investment in subsidiaries.
The accompanying notes are an integral part of these consolidated financial statements
F-43
Table of Contents
Note to Schedule I
ADDITIONAL FINANCIAL INFORMATION — FINANCIAL STATEMENTS SCHEDULE I
H WORLD GROUP LIMITED
FINANCIAL INFORMATION FOR PARENT COMPANY
Schedule I has been provided pursuant to the requirements of Rule 12-04(a) and 5-04-(c) of Regulation S-X, which require condensed
financial information as to the financial position, change in financial position and results of operations of a parent company as of the same
dates and for the same periods for which audited consolidated financial statements have been presented when the restricted net assets of
consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year.
The condensed financial information has been prepared using the same accounting policies as set out in the accompanying consolidated
financial statements except that the equity method has been used to account for investments in its subsidiaries. Such investments in subsidiaries
are presented on the balance sheets as investment in subsidiaries and the profit of the subsidiaries is presented as income in investment in
subsidiaries.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or omitted. The footnote disclosures contain supplemental
information relating to the operations of the Company and, as such, these statements should be read in conjunction with the notes to the
accompanying consolidated financial statements.
As of December 31, 2022, there are no material contingencies, mandatory dividend, and significant provision of long-term obligation or
guarantee of the Company, except for those which have separately disclosed in the consolidated financial statements.
F-44
Table of Contents
ADDITION INFORMATION — FINANCIAL STATEMENTS SCHEDULE II
H WORLD GROUP LIMITED
This financial information has been prepared in conformity with accounting principles generally accepted in the United States.
Allowance for accounts receivable, loan
receivables and other financial assets:
2020
2021
2022
Valuation allowance for deferred tax assets
2020
2021
2022
VALUATION AND QUALIFYING ACCOUNTS
Balance at
Beginning of
Year
Charge to Costs and
Expenses
Charge to Other
Accounts
Charge Taken
Against Allowance Write off
Balance at
End of Year
(Renminbi in millions)
22
87
128
152
369
466
65
105
82
249
151
338
7
—
—
—
—
—
—
—
—
(32)
(37)
(41)
(7)
(64)
(7)
—
(17)
(32)
87
128
203
369
466
731
******
F-45
Exhibit 2.5
Description of Rights of Each Class of Securities Registered under Section 12 of the Securities Exchange Act of 1934
American Depositary Shares (“ADSs”), each representing ten ordinary shares of H World Group Limited (our company) are listed on the Nasdaq Global
Select Market and the shares are registered under Section 12(b) of the Exchange Act. Shares underlying the ADSs are held by Citibank, N.A., as depositary,
and holders of ADSs will not be treated as holders of the ordinary shares. Ordinary shares of our company are listed on the Hong Kong Stock Exchange. This
exhibit contains a description of the rights of (i) the holders of ordinary shares and (ii) ADS holders.
Description of Ordinary Shares (Items 9.A.3, 9.A.5, 9.A.6, 10.B.3, 10.B.4, 10.B.6, 10.B.7, 10.B.8, 10.B.9 and 10.B.10 of Form 20-F)
General
All of our issued and outstanding ordinary shares are fully paid and non-assessable. Certificates representing the ordinary shares are issued in
registered form. Our shareholders who are non-residents of the Cayman Islands may freely hold and vote their shares. Each of our ordinary shares has a par
value US$0.00001.
Preemptive Rights
The shareholders of us do not have preemptive rights.
Transfer of Shares
Subject to any applicable restrictions set forth in our amended and restated articles of association, including, for example, the board of directors’
discretion to refuse to register a transfer of any share (not being a fully paid up share) to a person of whom it does not approve, or any share issued under the
share incentive plans for employees upon which a restriction on transfer imposed thereby still subsists, any of our shareholders may transfer all or any of his or
her shares by an instrument of transfer in the usual or common form or in a form prescribed by the NASDAQ Global Select Market or the Hong Kong Stock
Exchange or in another form that our directors may approve.
Our directors may decline to register any transfer of any share which is not paid up or on which we have a lien. Our directors may also decline to
register any transfer of any share unless:
•
directors may reasonably require to show the right of the transferor to make the transfer;
the instrument of transfer is lodged with us accompanied by the certificate for the shares to which it relates and such other evidence as our
•
•
•
the instrument of transfer is in respect of only one class of share;
the instrument of transfer is properly stamped (in circumstances where stamping is required);
in the case of a transfer to joint holders, the number of joint holders to whom the share is to be transferred does not exceed four; and
•
lesser sum as our directors may from time to time require is paid to us in respect thereof.
fee of such maximum sum as the NASDAQ Global Select Market or the Hong Kong Stock Exchange may determine to be payable or such
If our directors refuse to register a transfer, they shall, within two months after the date on which the instrument of transfer was lodged, send to each
of the transferor and the transferee notice of such refusal.
The registration of transfers may, on notice being given by advertisement in such one or more newspapers or by any other means in accordance with
the requirements of the NASDAQ Global Select Market or the Hong Kong Stock Exchange, be suspended and the register closed at such times and for such
periods as our directors may from time to time determine; provided, however, that the registration of transfers shall not be suspended nor the register closed for
more than 30 days in any year as our directors may determine.
Limitations or Qualifications
The rights of our shareholders are not materially limited or qualified.
Dividends
Subject to the Companies Act, our company in general meeting or our directors may declare dividends in any currency to be paid to our shareholders.
Dividends may be declared and paid out of our profits, realized or unrealized, or from any reserve set aside from profits which our directors determine is no longer
needed. Our board of directors may also declare and pay dividends out of the share premium account or any other fund or account that can be authorized for this
purpose in accordance with the Companies Act.
Except in so far as the rights attaching to, or the terms of issue of, any share otherwise provides (i) all dividends shall be declared and paid according to the
amounts paid up on the shares in respect of which the dividend is paid, but no amount paid up on a share in advance of calls shall be treated for this purpose as
paid up on that share and (ii) all dividends shall be apportioned and paid pro rata according to the amounts paid up on the shares during any portion or portions
of the period in respect of which the dividend is paid.
Our directors may deduct from any dividend or bonus payable to any shareholder all sums of money (if any) presently payable by such shareholder to
us on account of calls or otherwise.
No dividend or other money payable by us on or in respect of any share shall bear interest against us.
In respect of any dividend proposed to be paid or declared on our share capital, our directors may resolve and direct that (i) such dividend be satisfied
wholly or in part in the form of an allotment of shares credited as fully paid up, provided that our shareholders entitled thereto will be entitled to elect to
receive such dividend (or part thereof if our directors so determine) in cash in lieu of such allotment or (ii) the shareholders entitled to such dividend will be
entitled to elect to receive an allotment of shares credited as fully paid up in lieu of the whole or such part of the dividend as our directors may think fit. On the
recommendation of our directors, we may also by ordinary resolution resolve in respect of any particular dividend that, notwithstanding the foregoing, a
dividend may be satisfied wholly in the form of an allotment of shares credited as fully paid up without offering any right to shareholders to elect to receive
such dividend in cash in lieu of such allotment.
Any dividend interest or other sum payable in cash to the holder of shares may be paid by check or warrant sent by mail addressed to the holder at his
registered address, or addressed to such person and at such addresses as the holder may in writing direct. Every check or warrant shall, unless the holder or
joint holders otherwise direct, be made payable to the order of the holder or, in the case of joint holders, to the order of the holder whose name stands first on
the register in respect of such shares, and shall be sent at his or their risk and payment of the check or warrant by the bank on which it is drawn shall constitute
a good discharge to us.
All dividends unclaimed for one year after having been declared may be invested or otherwise made use of by our board of directors for the benefit of
our company until claimed. Any dividend unclaimed after a period of six years from the date of declaration of such dividend shall be forfeited and reverted to
us.
Whenever our directors or our company in general meeting have resolved that a dividend be paid or declared, our directors may further resolve that
such dividend be satisfied wholly or in part by the distribution of specific assets of any kind, and in particular of paid up shares, debentures or warrants to
subscribe for our securities or securities of any other company. Where any difficulty arises with regard to such distribution, our directors may settle it as they
think expedient. In particular, our directors may issue fractional certificates, ignore fractions altogether or round the same up or down, fix the value for
distribution purposes of any such specific assets, determine that cash payments shall be made to any of our shareholders upon the footing of the value so fixed
in order to adjust the rights of the parties, vest any such specific assets in trustees as may seem expedient to our directors, and appoint any person to sign any
requisite instruments of transfer and other documents on behalf of the persons entitled to the dividend, which appointment shall be effective and binding on
our shareholders.
Voting Rights
Subject to any special rights or restrictions as to voting for the time being attached to any shares, at any general meeting every shareholder who is
present in person or by proxy (or, in the case of a shareholder being a corporation, by its duly authorized representative) shall have one vote on a show of
hands, and on a poll every shareholder present in person or by proxy (or, in the case of a shareholder being a corporation, by its duly appointed representative)
shall have one vote for each fully paid share of which such shareholder is the holder.
No shareholder shall be entitled to attend and vote or be reckoned in a quorum at any general meeting unless such shareholder is duly registered as
our shareholder at the applicable record date for that meeting and all calls or other sums due by such shareholder to us have been paid.
If a clearing house (or its nominee(s)), being a corporation, is our shareholder, it may authorize such person or persons as it thinks fit to act as its
representative(s) at any meeting or at any meeting of any class of shareholders provided that the authorization shall specify the number and class of shares in
respect of which each such person is so authorized. A person authorized pursuant to this provision is entitled to exercise the same powers on behalf of the
recognized clearing house (or its nominee(s)) as if such person was the registered holder of our shares held by that clearing house (or its nominee(s)) including
the right to vote individually on a show of hands.
While there is nothing under the laws of the Cayman Islands which specifically prohibits or restricts the creation of cumulative voting rights for the
election of our directors, it is not a concept that is accepted as a common practice in the Cayman Islands, and our company has made no provisions in its
amended and restated articles of association to allow cumulative voting for such elections.
Liquidation
Subject to any special rights, privileges or restrictions as to the distribution of available surplus assets on liquidation for the time being attached to any
class or classes of shares: (i) if we are wound up and the assets available for distribution among our shareholders are more than sufficient to repay the whole of
the capital paid up at the commencement of the winding up, the excess shall be distributed pari passu among those shareholders in proportion to the amount
paid up on the shares held by them, respectively and (ii) if we are wound up and the assets available for distribution among the shareholders as such are
insufficient to repay the whole of the paid-up capital, those assets shall be distributed so that, as nearly as may be, the losses shall be borne by the shareholders
in proportion to the capital paid up at the commencement of the winding up on the shares held by them, respectively.
If we are wound up, the liquidator may with the sanction of our special resolution and any other sanction required by the Companies Act, divide
among our shareholders in specie or kind the whole or any part of our assets (whether or not they shall consist of property of the same kind) and may, for such
purpose, set such value as the liquidator deems fair upon any property to be divided and may determine how such division shall be carried out as between the
shareholders or different classes of shareholders. The liquidator may also vest the whole or any part of these assets in trustees upon such trusts for the benefit
of the shareholders as the liquidator shall think fit, but so that no shareholder will be compelled to accept any assets, shares or other securities upon which
there is a liability.
Share Repurchase
We are empowered by the Companies Act and our amended and restated articles of association to purchase our own shares, subject to certain
restrictions. Our directors may only exercise this power on behalf of us, subject to the Companies Act, our amended and restated memorandum and articles of
association and to any applicable requirements imposed from time to time by the NASDAQ Global Select Market, the SEC, or by any other recognized stock
exchange on which our securities are listed.
Sinking Fund Provision
There are no sinking fund provisions applicable to our ordinary shares.
Calls on Shares and Forfeiture of Shares
Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their shares in a notice served to such
shareholders at least 14 clear days prior to the specified time of payment. Shares that have been called upon and remain unpaid on the specified time are
subject to forfeiture.
Modification of Rights of Shares
Except with respect to share capital and the location of the registered office, alterations to our amended and restated memorandum and articles of
association may only be made by special resolution, meaning a majority of not less than two-thirds of votes cast at a shareholders meeting.
Subject to the Companies Act, all or any of the special rights attached to shares of any class (unless otherwise provided for by the terms of issue of
the shares of that class) may be varied, modified or abrogated, with the sanction of a special resolution, passed at a separate general meeting of the holders of
the shares of that class. The provisions of our amended and restated articles of association relating to general meetings shall apply similarly to every such
separate general meeting, but so that the quorum for the purposes of any such separate general meeting or at its adjourned meeting shall be a person or persons
together holding (or represented by proxy) on the date of the relevant meeting not less than one-third in nominal value of the issued shares of that class, that
every holder of shares of the class shall be entitled on a poll to one vote for every such share held by such holder and that any holder of shares of that class
present in person or by proxy may demand a poll.
The special rights conferred upon the holders of any class of shares shall not, unless otherwise expressly provided in the rights attaching to or the
terms of issue of such shares, be deemed to be varied by the creation or issue of further shares ranking pari passu therewith.
Anti-takeover Provisions in the Amended and Restated Memorandum and Articles of Association
Our amended and restated memorandum and articles of association contain provisions which may have the effect of limiting the ability of others to
acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders
of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in
a tender offer or similar transaction. Our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or
more classes or series and to fix their designations, powers, preferences, and relative participating, optional or other rights and the qualifications, limitations or
restrictions, including, without limitation, dividend rights, conversion rights, voting rights, terms of redemption privileges and liquidation preferences, any or
all of which may be greater than the rights associated with our ordinary shares, in the form of ADSs or otherwise. In the event these preferred shares have
better voting rights than our ordinary shares, in the form of ADSs or otherwise, they could be issued quickly with terms calculated to delay or prevent a change
in control of our company or make removal of management more difficult.
Disclosure of Shareholder Ownership
There are no provisions under Cayman Islands law applicable to our company, or in our amended and restated memorandum and articles of
association that require our company to disclose the ownership threshold above which shareholder ownership must be disclosed.
General Meetings of Shareholders
Shareholders’ meetings may be convened by our board of directors. Advance notice of at least 14 clear days is required for the convening of our
annual general shareholders’ meeting and any other general meeting of our shareholders, subject to exceptions in certain circumstances as set out in our
amended and restated memorandum and articles of association. A quorum for a meeting of shareholders consists of members holding not less than one-third in
nominal value of the total issued voting shares in our company present in person or by proxy.
Registered Office and Objects
Our registered office in the Cayman Islands is located at the offices of Cricket Square, Hutchins Drive, P.O. Box 2681, Grand Cayman KY1-1111, Cayman
Islands, or at such other location within the Cayman Islands as our directors may from time to time determine. The objects for which we are established are
unrestricted and we have full power and authority to carry out any object not prohibited by the Companies Act or any other law of the Cayman Islands.
Differences in Corporate Law
The Companies Act is modeled after similar laws in the United Kingdom but does not follow recent changes in United Kingdom laws. In addition, the
Companies Act differs from laws applicable to United States corporations and their shareholders. Set forth below is a summary of the significant differences
between the provisions of the Companies Act applicable to us and the laws applicable to companies incorporated in the United States.
Mergers and Similar Arrangements. Under the laws of the Cayman Islands, two or more companies may merge or consolidate in accordance with
Section 233 of the Companies Act. A merger means the merging of two or more constituent companies and the vesting of their undertaking, property and
liabilities in one of such constituent companies as the surviving company. A consolidation means the combination of two or more constituent companies into a
new consolidated company and the vesting of the undertaking, property and liabilities of such constituent companies in the new consolidated company. In
order to merge or consolidate, the directors of each constituent company must approve a written plan of merger or consolidation which must be authorized by
each constituent company by a special resolution of the shareholders and such other authorization as may be specified in such company's articles of
association. The consent of each holder of a fixed or floating security interest of a constituent company in a proposed merger or consolidation must also be
obtained.
For a director who has a financial interest in the plan of merger or consolidation, he should declare the nature of his interest at the board meeting
where the plan was considered. Following such declaration, subject to any separate requirement for Audit Committee
approval under the applicable law or any applicable requirements imposed from time to time by the NASDAQ Global Select Market, the SEC, or by any other
recognized stock exchange on which the securities are listed, and unless disqualified by the chairman of the relevant board meeting, he may vote on the plan of
merger or consolidation.
A shareholder resolution is not required if a Cayman Islands incorporated parent company is seeking to merge with one or more of its Cayman Islands
incorporated subsidiary companies (i.e., companies where at least ninety per cent (90%) of the issued shares of which (of one or more classes) that are entitled
to vote are owned by the parent company). In any event, all shareholders must be given a copy of the plan of merger or consolidation irrespective of whether
they are entitled to vote at the meeting or consent to the written resolution to approve the plan of merger or consolidation.
The shareholders of the constituent companies are not required to receive shares of the surviving or consolidated company but may receive debt
obligations or other securities of the surviving or consolidated company, or money and other assets or a combination thereof. Further, some or all of the shares
of a class or series may be converted into a kind of asset while the other shares of the same class or series may receive a different kind of asset. As such, not all
the shares of a class or series must receive the same kind of consideration.
After the plan of merger or consolidation has been approved by the directors, authorized by a resolution of the shareholders and the holders of fixed
or floating security interest have given their consent, the plan of merger or consolidation is executed by each company and filed, together with certain ancillary
documents, with the Registrar of Companies in the Cayman Islands.
A shareholder may dissent from a merger or consolidation. A shareholder properly exercising his dissent rights is entitled to payment in cash of the
fair value of his shares. Such dissent rights are unavailable in respect of shares subject to a plan of merger or consolidation for which an open market exists on
a recognized stock exchange or recognized interdealer quotation system at the expiry date of the period allowed for written notice of an election to dissent
subject to the provisions of the Companies Act.
A shareholder dissenting from a merger or consolidation must object in writing to the merger or consolidation before the vote by the shareholders on
the merger or consolidation. If the merger or consolidation is approved by the shareholders, the company must within 20 days give notice of this fact to each
shareholder who gave written objection. Such shareholders then have 20 days to give to the company their written election in the form specified by the
Companies Act to dissent from the merger or consolidation.
Upon giving notice of his election to dissent, a shareholder ceases to have any rights of a shareholder except the right to be paid the fair value of his
shares. As such, the merger or consolidation may proceed in the ordinary course notwithstanding the dissent.
Within seven days of the later of the delivery of the notice of election to dissent and the effective date of the merger or consolidation, the company
must make a written offer to each dissenting shareholder to purchase his shares at a specified price that the company determines to be their fair value. The
company and the shareholder then have 30 days to agree upon the price. If the company and a shareholder fail to agree on the price within the 30 days, then
within 20 days thereafter, the company shall or any dissenting shareholder may file a petition with the Grand Court for a determination of the fair value of the
shares of all dissenting shareholders. At the petition hearing, the Grand Court shall determine the fair value of the shares of such dissenting shareholders as it
finds are involved, together with a fair rate of interest, if any, to be paid by our company upon the amount determined to be the fair value.
Shareholders' Suits. In principle, we will normally be the proper plaintiff and a derivative action may not be brought by a minority shareholder.
However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, the Cayman Islands court can be
expected to follow and apply the common law principles (namely the rule in Foss v. Harbottle and the exceptions thereto) so that a non-controlling shareholder
may be permitted to commence a class action against or derivative actions in the name of the company to challenge actions where:
●
a company is acting or proposing to act illegally or beyond the scope of its authority;
●
vote which has not been obtained; or
the act complained of, although not beyond the scope of its authority, could only be effected duly if authorized by more than a simple majority
●
those who control the company are perpetrating a "fraud on the minority."
Corporate Governance. Cayman Islands laws do not restrict transactions with directors, requiring only that directors exercise a duty of care and owe a
fiduciary duty to the companies for which they serve. Under our amended and restated memorandum and articles of association, subject to any separate
requirement for audit committee approval under the applicable rules of the NASDAQ Global Select Market or unless disqualified by the chairman of the
relevant board meeting, so long as a director discloses the nature of his interest in any contract or arrangement which he is interested in, such a director may
vote in respect of any contract or proposed contract or arrangement in which such director is interested and may be counted in the quorum at such a meeting.
Restructuring. A company may present a petition to the Grand Court of the Cayman Islands for the appointment of a restructuring officer on the
grounds that the company:
(a)
(b)
is or is likely to become unable to pay its debts; and
intends to present a compromise or arrangement to its creditors (or classes thereof) either pursuant to the Companies Act, the law of a
foreign country or by way of a consensual restructuring.
The Grand Court may, among other things, make an order appointing a restructuring officer upon hearing of such petition, with such powers and to
carry out such functions as the court may order. At any time (i) after the presentation of a petition for the appointment of a restructuring officer but before an
order for the appointment of a restructuring officer has been made, and (ii) when an order for the appointment of a restructuring officer is made, until such
order has been discharged, no suit, action or other proceedings (other than criminal proceedings) may be proceeded with or
commenced against the company, no resolution to wind up the company may be passed, and no winding up petition may be presented against the company,
except with the leave of the court. However, notwithstanding the presentation of a petition for the appointment of a restructuring officer or the appointment of
a restructuring officer, a creditor who has security over the whole or part of the assets of the company is entitled to enforce the security without the leave of the
court and without reference to the restructuring officer appointed.
Description of Debt Securities, Warrants and Rights and Other Securities (Items 9.A.7, 12.A, 12.B and 12.C of Form 20-F)
Not applicable.
Description of American Depositary Shares (Items 12.D.1 and 12.D.2 of Form 20-F)
Citibank, N.A. acts as the depositary for the American Depositary Shares. Citibank's depositary offices are located at 388 Greenwich Street, New
York, New York 10013. American Depositary Shares are frequently referred to as "ADSs" and represent ownership interests in securities that are on deposit
with the depositary. ADSs may be represented by certificates that are commonly known as "American Depositary Receipts" or "ADRs." The depositary
typically appoints a custodian to safe-keep the securities on deposit. In this case, the custodian is Citibank, N.A.-Hong Kong, located at 9/F, Citi Tower, One
Bay East, 83 Hoi Bun Road, Kwun Tong, Kowloon, Hong Kong.
We have appointed Citibank as depositary pursuant to a deposit agreement. A copy of the deposit agreement is on file with the SEC, under cover of a
Registration Statement on Form F-6 (Registration No. 333-225171). You may obtain a copy of the deposit agreement from the SEC's Public Reference Room
at 100 F Street, N.E., Washington, D.C. 20549 and from the SEC's website (www.sec.gov).
We are providing you with a summary description of the material terms of the ADSs and of your material rights as an owner of ADSs. Please
remember that summaries by their nature lack the precision of the information summarized and that the rights and obligations of an owner of ADSs will be
determined by reference to the terms of the deposit agreement and not by this summary. For the complete information, you should read the entire deposit
agreement and the form of American Depositary Receipt. The portions of this summary description that are italicized describe matters that may be relevant to
the ownership of ADSs but that may not be contained in the deposit agreement.
Each ADS represents the right to receive, and to exercise the beneficial ownership interests in, ten (10) ordinary shares on deposit with the depositary
and/or the custodian. An ADS also represents the right to receive, and to exercise the beneficial interests in, any other property received by the depositary or
the custodian on behalf of the owner of the ADS but that has not been distributed to the owners of ADSs because of legal restrictions or practical
considerations. We and the depositary may agree to change the ADS-to-ordinary shares ratio by amending the deposit agreement. This amendment may give
rise to, or change, the depositary fees payable by ADS owners. The custodian, the depositary and their respective nominees will hold all deposited property for
the benefit of the holders and beneficial owners of ADSs. The deposited property does not constitute the proprietary assets of the depositary, the custodian or
their nominees. Beneficial ownership in the deposited property will under the terms of the deposit agreement be vested in the beneficial owners of the ADSs.
The depositary, the custodian and their respective nominees will be the record holders of the deposited property represented by the ADSs for the benefit of the
holders and beneficial owners of the corresponding ADSs. A beneficial owner of ADSs may or may not be the holder of ADSs. Beneficial owners of ADSs
will be able to receive, and to exercise beneficial ownership interests in, the deposited property only through the registered holders of our ADSs, the registered
holders of our ADSs (on behalf of the applicable ADS owners) only through the depositary, and the depositary (on behalf of the owners of the corresponding
ADSs) directly, or indirectly, through the custodian or their respective nominees, in each case upon the terms of the deposit agreement.
If you become an owner of ADSs, you will become a party to the deposit agreement and therefore will be bound to its terms and to the terms of any
ADR that represents your ADSs. The deposit agreement and the ADR specify our rights and obligations as well as your rights and obligations as an owner of
ADSs and those of the depositary. As an ADS holder, you appoint the depositary to act on your behalf in certain circumstances. The deposit agreement and the
ADRs are governed by New York law. However, our obligations to the holders of ordinary shares will continue to be governed by the laws of the Cayman
Islands, which may be different from the laws in the United States.
In addition, applicable laws and regulations may require you to satisfy reporting requirements and obtain regulatory approvals in certain
circumstances. You are solely responsible for complying with such reporting requirements and obtaining such approvals. Neither the depositary, the custodian,
our company or any of their or our respective agents or affiliates shall be required to take any actions whatsoever on your behalf to satisfy such reporting
requirements or obtain such regulatory approvals under applicable laws and regulations.
We will not treat you, being an owner of ADSs, as one of our shareholders and you will not have direct shareholder rights. The depositary will hold
on your behalf the shareholder rights attached to the ordinary shares underlying your ADSs. As an owner of ADSs you will be able to exercise the
shareholders rights for the ordinary shares represented by your ADSs through the depositary only to the extent contemplated in the deposit agreement. To
exercise any shareholder rights not contemplated in the deposit agreement you will, as an ADS owner, need to arrange for the cancellation of your ADSs and
become a direct shareholder.
The manner in which you own the ADSs (e.g., in a brokerage account vs. as registered holder, or as holder of certificated vs. uncertificated ADSs)
may affect your rights and obligations, and the manner in which, and extent to which, the depositary’s services are made available to you. As an owner of
ADSs, you may hold your ADSs either by means of an ADR registered in your name, through a brokerage or safekeeping account, or through an account
established by the depositary in your name reflecting the registration of uncertificated ADSs directly on the books of the depositary (commonly referred to as
the “direct registration system” or “DRS”). The direct registration system reflects the uncertificated (book-entry) registration of ownership of ADSs by the
depositary. Under the direct registration system, ownership of ADSs is evidenced by periodic statements issued by the depositary to the holders of our ADSs.
The direct registration system includes automated transfers between the depositary and The Depository Trust Company (“DTC”), the central book-entry
clearing and settlement system for equity securities in the United States. If you decide to hold your ADSs through your brokerage or safekeeping account, you
must rely on the procedures of your broker or bank to assert your rights as ADS owner. Banks and brokers typically hold securities such as the ADSs through
clearing and settlement systems such as DTC. The procedures of such clearing and settlement systems may limit your ability to exercise your rights as an
owner of ADSs. Please consult with your broker or bank if you have any questions concerning these limitations and procedures. All ADSs held through DTC
will be registered in the name of a nominee of DTC. This summary description assumes you have opted to own the ADSs directly by means of an ADS
registered in your name and, as such, we will refer to you as the “holder.” When we refer to “you,” we assume the reader owns ADSs and will own ADSs at
the relevant time.
The registration of the ordinary shares in the name of the depositary or the custodian shall, to the maximum extent permitted by applicable law, vest
in the depositary or the custodian the record ownership in the applicable ordinary shares with the beneficial ownership rights and interests in such ordinary
shares being at all times vested with the beneficial owners of the ADSs representing the ordinary shares. The depositary or the custodian shall at all times be
entitled to exercise the beneficial ownership rights in all deposited property, in each case only on behalf of the holders and beneficial owners of the ADSs
representing the deposited property.
Dividends and Distributions
As a holder of ADSs, you generally have the right to receive the distributions we make on the securities deposited with the custodian. Your receipt of
these distributions may be limited, however, by practical considerations and legal limitations. Holders of ADSs will receive such distributions under the terms
of the deposit agreement in proportion to the number of ADSs held as of a specified record date, after deduction of the applicable fees, taxes and expenses.
Distributions of Cash
Whenever we make a cash distribution for the securities on deposit with the custodian, we will deposit the funds with the custodian. Upon receipt of
confirmation of the deposit of the requisite funds, the depositary will arrange for the funds received in a currency other than U.S. dollars to be converted into
U.S. dollars and for the distribution of the U.S. dollars to the holders, subject to the applicable laws and regulations.
The conversion into U.S. dollars will take place only if practicable and if the U.S. dollars are transferable to the United States. The amounts
distributed to holders will be net of the fees, expenses, withheld taxes and governmental charges payable by holders under the terms of the deposit agreement.
The depositary will apply the same method for distributing the proceeds of the sale of any property (such as undistributed rights) held by the custodian in
respect of securities on deposit.
Distributions of Ordinary Shares
Whenever we make a free distribution of ordinary shares for the securities on deposit with the custodian, we will deposit the applicable number of
ordinary shares with the custodian. Upon receipt of confirmation of such deposit, the depositary will either distribute to holders new ADSs representing the
ordinary shares deposited or modify the ADS-to-ordinary shares ratio, in which case each ADS you hold will represent rights and interests in the additional
ordinary shares so deposited. Only whole new ADSs will be distributed. Fractional entitlements will be sold and the proceeds of such sale will be distributed
as in the case of a cash distribution.
The distribution of new ADSs or the modification of the ADS-to-ordinary shares ratio upon a distribution of ordinary shares will be made net of the
fees, expenses, withheld taxes and governmental charges payable by holders under the terms of the deposit agreement. In order to pay such taxes or
governmental charges, the depositary may sell all or a portion of the new ordinary shares so distributed.
No such distribution of new ADSs will be made if it would violate a law (e.g., the U.S. securities laws) or if it is not operationally practicable. If the
depositary does not distribute new ADSs as described above, it may sell the ordinary shares received upon the terms described in the deposit agreement and
will distribute the proceeds of the sale as in the case of a distribution of cash.
Distributions of Rights
Whenever we intend to distribute rights to subscribe for additional ordinary shares, we will give prior notice to the depositary and we will assist the
depositary in determining whether it is lawful and reasonably practicable to distribute rights to subscribe for additional ADSs to holders.
The depositary will establish procedures to distribute rights to purchase additional ADSs to holders and to enable such holders to exercise such rights
if it is lawful and reasonably practicable to make the rights available to holders of ADSs, and if we provide all of the documentation contemplated in the
deposit agreement (such as opinions to address the lawfulness of the transaction). You may have to pay fees, expenses, taxes and other governmental charges
to purchase the new ADSs upon the exercise of your rights. The depositary is not obligated to establish procedures to facilitate the distribution and exercise by
holders of rights to purchase new ordinary shares other than in the form of ADSs.
The depositary will not distribute the rights to you if:
we do not timely request that the rights be distributed to you or we request that the rights not be distributed to you; or
we fail to deliver satisfactory documents to the depositary; or
it is not reasonably practicable to distribute the rights.
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The depositary will sell the rights that are not exercised or not distributed if such sale is lawful and reasonably practicable. The proceeds of such sale
will be distributed to holders as in the case of a cash distribution. If the depositary is unable to sell the rights, it will allow the rights to lapse.
Elective Distributions
Whenever we intend to distribute a dividend payable at the election of shareholders either in cash or in additional shares, we will give prior notice
thereof to the depositary and will indicate whether we wish the elective distribution to be made available to you. In such case, we will assist the depositary in
determining whether such distribution is lawful and reasonably practicable.
The depositary will make the election available to you only if we timely request it to do so, if it is reasonably practicable and if we have provided all
of the documentation contemplated in the deposit agreement. In such case, the depositary will establish procedures to enable you to elect to receive either cash
or additional ADSs in each case as described in the deposit agreement. The depositary is not obligated to establish procedures to facilitate the distribution and
exercise by holders of elective distributions to purchase new ordinary shares other than in the form of ADSs.
If the election is not made available to you, you will receive either cash or additional ADSs, depending on what a shareholder would receive upon
failing to make an election, as more fully described in the deposit agreement.
Other Distributions
Whenever we intend to distribute property other than cash, ordinary shares or rights to purchase additional ordinary shares, we will notify the
depositary in advance and will indicate whether we wish such distribution to be made to you. If so, we will assist the depositary in determining whether such
distribution to holders is lawful and reasonably practicable.
If it is reasonably practicable to distribute such property to you, if we timely request the depositary to do so and if we provide to the depositary all of
the documentation contemplated in the deposit agreement, the depositary will distribute the property to the holders in a manner it deems practicable.
The distribution will be made net of fees, expenses, withheld taxes and governmental charges payable by holders under the terms of the deposit
agreement. In order to pay such taxes and governmental charges, the depositary may sell all or a portion of the property received.
The depositary will not distribute the property to you and will sell the property if:
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we do not request that the property be distributed to you or if we ask that the property not be distributed to you; or
we do not deliver satisfactory documents to the depositary; or
the depositary determines that all or a portion of the distribution to you is not reasonably practicable.
The proceeds of such a sale will be distributed to holders as in the case of a cash distribution.
Redemption
Whenever we decide to redeem any of the securities on deposit with the custodian, we will timely notify the depositary. If it is reasonably practicable
and if we provide all of the documentation contemplated in the deposit agreement, the depositary will provide notice of the redemption to the holders.
The custodian will be instructed to surrender the shares being redeemed against payment of the applicable redemption price. The depositary will
convert the redemption funds received in a currency other than U.S. dollars into U.S. dollars upon the terms of the deposit agreement and will establish
procedures to enable holders to receive the net proceeds from the redemption upon surrender of their ADSs to the depositary. You may have to pay fees,
expenses, taxes and other governmental charges upon the redemption of your ADSs. If less than all ADSs are being redeemed, the ADSs to be retired will be
selected by lot or on a pro rata basis, as the depositary may determine.
Changes Affecting Ordinary Shares
The ordinary shares held on deposit for your ADSs may change from time to time. For example, there may be a change in nominal or par value, a
split-up, cancellation, consolidation or reclassification of such ordinary shares or a recapitalization, reorganization, merger, consolidation or sale of assets.
If any such change were to occur, your ADSs would, to the extent permitted by law and the deposit agreement, represent the right to receive the
property received or exchanged in respect of the ordinary shares held on deposit. The depositary may in such circumstances deliver new ADSs to you, amend
the deposit agreement, the ADRs and the applicable Registration Statement(s) on Form F-6, call for the exchange of your existing ADSs for new ADSs and
take any other actions that are appropriate to reflect as to the ADSs the change affecting the ordinary shares. If the depositary may not lawfully distribute such
property to you, the depositary may sell such property and distribute the net proceeds to you as in the case of a cash distribution.
Issuance of ADSs upon Deposit of Ordinary Shares
The depositary may create ADSs on your behalf if you or your broker deposit ordinary shares with the custodian. The depositary will deliver these
ADSs to the person you indicate only after you pay any applicable issuance fees and any charges and taxes payable for the transfer of the ordinary shares to the
custodian. Your ability to deposit ordinary shares and receive ADSs may be limited by legal considerations applicable at the time of deposit.
The issuance of ADSs may be delayed until the depositary or the custodian receives confirmation that all required approvals have been given and that
the ordinary shares have been duly transferred to the custodian. The depositary will only issue ADSs in whole numbers.
When you make a deposit of ordinary shares, you will be responsible for transferring good and valid title to the depositary. As such, you will be
deemed to represent and warrant that:
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The ordinary shares are duly authorized, validly issued, fully paid, non-assessable and legally obtained.
All preemptive (and similar) rights, if any, with respect to such ordinary shares have been validly waived or exercised.
You are duly authorized to deposit the ordinary shares.
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are not, and the ADSs issuable upon such deposit will not be, "restricted securities" (as defined in the deposit agreement).
The ordinary shares presented for deposit are free and clear of any lien, encumbrance, security interest, charge, mortgage or adverse claim, and
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The ordinary shares presented for deposit have not been stripped of any rights or entitlements.
If any of the representations or warranties are incorrect in any way, we and the depositary may, at your cost and expense, take any and all actions
necessary to correct the consequences of the misrepresentations.
Transfer, Combination and Split Up of ADRs
As an ADR holder, you will be entitled to transfer, combine or split up your ADRs and the ADSs evidenced thereby. For transfers of ADRs, you will
have to surrender the ADRs to be transferred to the depositary and also must:
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ensure that the surrendered ADR certificate is properly endorsed or otherwise in proper form for transfer;
provide such proof of identity and genuineness of signatures as the depositary deems appropriate;
provide any transfer stamps required by the State of New York or the United States; and
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agreement, upon the transfer of ADRs.
pay all applicable fees, charges, expenses, taxes and other government charges payable by ADR holders pursuant to the terms of the deposit
To have your ADRs either combined or split up, you must surrender the ADRs in question to the depositary with your request to have them combined
or split up, and you must pay all applicable fees, charges and expenses payable by ADR holders, pursuant to the terms of the deposit agreement, upon a
combination or split up of ADRs.
Withdrawal of Ordinary Shares Upon Cancellation of ADSs
As a holder, you will be entitled to present your ADSs to the depositary for cancellation and then receive the corresponding number of underlying
ordinary shares at the custodian’s offices. Your ability to withdraw the ordinary shares held in respect of the ADSs may be limited by U.S. and Cayman Islands
legal considerations applicable at the time of withdrawal. In order to withdraw the ordinary shares represented by your ADSs, you will be required to pay to
the depositary the fees for cancellation of ADSs and any charges and taxes payable upon the transfer of the ordinary shares being withdrawn. You assume the
risk for delivery of all funds and securities upon withdrawal. Once canceled, the ADSs will not have any rights under the deposit agreement.
If you hold ADSs registered in your name, the depositary may ask you to provide proof of identity and genuineness of any signature and such other
documents as the depositary may deem appropriate before it will cancel your ADSs. The withdrawal of the ordinary shares represented by your ADSs may be
delayed until the depositary receives satisfactory evidence of compliance with all applicable laws and regulations. Please keep in mind that the depositary will
only accept ADSs for cancellation that represent a whole number of securities on deposit.
You will have the right to withdraw the securities represented by your ADSs at any time except for:
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immobilized on account of a shareholders' meeting or a payment of dividends;
temporary delays that may arise because (i) the transfer books for the ordinary shares or ADSs are closed, or (ii) ordinary shares are
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obligations to pay fees, taxes and similar charges; and
restrictions imposed because of laws or regulations applicable to ADSs or the withdrawal of securities on deposit.
The deposit agreement may not be modified to impair your right to withdraw the securities represented by your ADSs except to comply with
mandatory provisions of law.
Voting Rights
As a holder, you generally have the right under the deposit agreement to instruct the depositary to exercise the voting rights for the ordinary shares
represented by your ADSs. The voting rights of holders of ordinary shares are described in “Description of Ordinary Shares —Voting Rights” above.
At our request, the depositary will distribute to you any notice of shareholders’ meeting received from us together with information explaining how to
instruct the depositary to exercise the voting rights of the securities represented by ADSs. In lieu of distributing such materials, the depositary may distribute
to holders of ADSs instructions on how to retrieve such materials upon request.
If the depositary timely receives voting instructions from a holder of ADSs, it will endeavor to vote the securities represented by the holder’s ADSs.
In the event voting takes place at a shareholders’ meeting by show of hands, the depositary will instruct the custodian to vote in accordance with the voting
instructions received from a majority of holders of ADSs who provided voting instructions. In the event voting takes place at a shareholders’ meeting by poll,
the depositary will instruct the custodian to vote in accordance with the voting instructions received from the holders of ADSs.
In the event of voting by poll, holders of ADSs in respect of which no timely voting instructions have been received shall be deemed to have
instructed the depositary to give a discretionary proxy to a person designated by us to vote the ordinary shares represented by such holders’ ADSs; provided,
that no such instructions shall be deemed given and no such discretionary proxy shall be given with respect to any matter as to which we inform the depositary
that (i) we do not wish such proxy to be given, (ii) substantial opposition exists or (iii) the rights of our shareholders may be adversely affected. No
discretionary proxy shall be given with respect to any vote by show of hands.
Please note that the ability of the depositary to carry out voting instructions may be limited by practical and legal limitations and the terms of the
securities on deposit. We cannot assure you that you will receive voting materials in time to enable you to return voting instructions to the depositary in a
timely manner.
The depositary will not join in demanding a vote by poll. A holder of ADSs will not be able to exercise any rights that may attach to the ordinary
shares represented by such ADSs to requisition a shareholder meeting or propose resolutions for a shareholder vote. At our request, the depositary will
represent deposited ordinary shares for the purpose of establishing a quorum regardless of whether voting instructions have been provided with respect thereto.
Fees and Expenses
ADS holders will be required to pay the following fees under the terms of the deposit agreement:
Service
Fees
Issuance of ADSs
Cancelation of ADSs
Distribution of cash dividends or other cash distributions (e.g., sale of rights
and other entitlements)
Up to US$0.05 per ADS issued
Up to US$0.05 per ADS canceled
Up to US$0.05 per ADS held
Distribution of ADSs pursuant to stock dividends, other free stock
distributions or exercise of rights to purchase additional ADSs
Up to US$0.05 per ADS held
Distribution of securities other than ADSs or rights to purchase additional
ADSs
Up to US$0.05 per ADS held
Depositary services
Up to US$0.05 per ADS held on the applicable record date(s) established by
the depositary
As an ADS holder, you will also be responsible to pay certain charges such as:
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(i.e., upon deposit and withdrawal of ordinary shares);
fees for the transfer and registration of ordinary shares charged by the registrar and transfer agent for the ordinary shares in the Cayman Islands
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expenses incurred for converting foreign currency into U.S. dollars;
expenses for cable, telex and fax transmissions and for delivery of securities;
taxes (including applicable interest and penalties) and other governmental charges;
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requirements; and
fees and expenses incurred by the depositary in connection with compliance with exchange control regulations and other applicable regulatory
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fees and expenses incurred in connection with the delivery or servicing of ordinary shares on deposit.
Depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary by the brokers (on behalf of their clients)
receiving the newly issued ADSs from the depositary and by the brokers (on behalf of their clients) delivering the ADSs to the depositary for cancellation. The
brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the
depositary services fee are charged by the depositary to the holders of record of ADSs as of the applicable ADS record date.
The depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash
(i.e., stock dividend, rights), the depositary charge the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs
registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary send invoices to the applicable record date
ADS holders. In the case of ADSs held in brokerage and custodian accounts (via DTC), the depositary generally collects its fees through the systems provided
by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers
and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary.
In the event of refusal to pay the depositary fees, the depositary may, under the terms of the deposit agreement, refuse the requested service until
payment is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder.
Note that the fees and charges you may be required to pay may vary over time and may be changed by us and by the depositary. You will receive prior
notice of such changes.
The depositary may reimburse us for certain expenses incurred by us in respect of the ADR program established pursuant to the deposit agreement, by
making available a portion of the depositary fees charged in respect of the ADR program or otherwise, upon such terms and conditions as we and the
depositary may agree from time to time.
Amendments and Termination
We may agree with the depositary to modify the deposit agreement at any time without your consent. We undertake to give holders 30 days' prior
notice of any modifications that would materially prejudice any of their substantial rights under the deposit agreement. We will not consider to be materially
prejudicial to your substantial rights any modifications or supplements that are reasonably necessary for the ADSs to be registered under the Securities Act or
to be eligible for book-entry settlement, in each case without imposing or increasing the fees and charges you are required to pay. In addition, we may not be
able to provide you with prior notice of any modifications or supplements that are required to accommodate compliance with applicable provisions of law.
You will be bound by the modifications to the deposit agreement if you continue to hold your ADSs after the modifications to the deposit agreement
become effective. The deposit agreement cannot be amended to prevent you from withdrawing the ordinary shares represented by your ADSs (except as
permitted by law).
We have the right to direct the depositary to terminate the deposit agreement. Similarly, the depositary may in certain circumstances on its own
initiative terminate the deposit agreement. In either case, the depositary must give notice to the holders at least 30 days before termination. Until termination,
your rights under the deposit agreement will be unaffected.
After termination, the depositary will continue to collect distributions received (but will not distribute any such property until you request the
cancellation of your ADSs) and may sell the securities held on deposit. After the sale, the depositary will hold the proceeds from such sale and any other funds
then held for the holders of ADSs in a non-interest bearing account. At that point, the depositary will have no further obligations to holders other than to
account for the funds then held for the holders of ADSs still outstanding (after deduction of applicable fees, taxes and expenses) or as may be required by law.
Books of Depositary
The depositary will maintain ADS holder records at its depositary office. You may inspect such records at such office at all reasonable times but
solely for the purpose of communicating with other holders in the interest of business matters relating to the ADSs and the deposit agreement.
The depositary will maintain in New York facilities to record and process the issuance, cancellation, combination, split-up and transfer of ADSs.
These facilities may be closed from time to time, to the extent not prohibited by law.
The depositary may close the transfer books at any time and from time to time, when deemed necessary or at the reasonable written request of us, to
the extent not prohibited by law.
Limitations on Obligations and Liabilities
The deposit agreement limits our obligations and the depositary's obligations to you. Please note the following:
We and the depositary are obligated only to take the actions specifically stated in the deposit agreement without negligence or bad faith. Without
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limiting the foregoing, neither we nor the depositary is obligated to participate in any action, suit or other proceeding relating to deposited property or the
ADSs without satisfactory indemnity. The depositary disclaims any liability for any failure to carry out voting instructions, for any manner in which a vote is
cast or for the effect of any vote, provided it acts in good faith and in accordance with the terms of the deposit agreement.
The depositary disclaims any liability for any failure to determine the lawfulness or practicality of any action, for the content of any document
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forwarded to you on behalf of us or for the accuracy of any translation of such a document, for the investment risks associated with investing in ordinary
shares, for the validity or worth of the ordinary shares, for any tax consequences that result from the ownership of ADSs, for the credit-worthiness of any third
party, for allowing any rights to lapse under the terms of the deposit agreement, for the timeliness of any of our notices or for our failure to give notice.
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We and the depositary will not be obligated to perform any act that is inconsistent with the terms of the deposit agreement.
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We and the depositary disclaim any liability if we are prevented or forbidden from acting on account of any law or regulation, any provision of
our amended and restated Memorandum and Articles of Association, any provision of any securities on deposit or by reason of any act of God or war or other
circumstances beyond our control.
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agreement or in our amended and restated Memorandum and Articles of Association or in any provisions of securities on deposit.
We and the depositary disclaim any liability by reason of any exercise of, or failure to exercise, any discretion provided for the deposit
We and the depositary further disclaim any liability for any action or inaction in reliance on the advice or information received from legal
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counsel, accountants, any person presenting ordinary shares for deposit, any holder of ADSs or authorized representatives thereof, or any other person believed
by either of us in good faith to be competent to give such advice or information.
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made available to holders of ordinary shares but is not, under the terms of the deposit agreement, made available to you.
We and the depositary also disclaim liability for the inability by a holder to benefit from any distribution, offering, right or other benefit which is
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been signed or presented by the proper parties.
We and the depositary may rely without any liability upon any written notice, request or other document believed to be genuine and to have
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We and the depositary also disclaim liability for any consequential or punitive damages for any breach of the terms of the deposit agreement.
No disclaimer of any Securities Act liability is intended by any provision of the deposit agreement.
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you as an ADS holder.
Nothing in the deposit agreement gives rise to a partnership or joint venture, or establishes a fiduciary relationship, among us, the depositary and
Nothing in the deposit agreement precludes Citibank (or its affiliates) from engaging in transactions in which parties adverse to us or the ADS
●
owners have interests, and nothing in the deposit agreement obligates Citibank to disclose those transactions, or any information obtained in the course of
those transactions, to us or to the ADS owners, or to account for any payment received as part of those transactions.
Taxes
You will be responsible for the taxes and other governmental charges payable on the ADSs and the securities represented by the ADSs. We, the
depositary and the custodian may deduct from any distribution the taxes and governmental charges payable by holders and may sell any and all property on
deposit to pay the taxes and governmental charges payable by holders. You will be liable for any deficiency if the sale proceeds do not cover the taxes that are
due.
The depositary may refuse to issue ADSs, to deliver, transfer, split and combine ADRs or to release securities on deposit until all taxes and charges
are paid by the applicable holder. The depositary and the custodian may take reasonable administrative actions to obtain tax refunds and reduced tax
withholding for any distributions on your behalf. However, you may be required to provide to the depositary and to the custodian proof of taxpayer status and
residence and such other information as the depositary and the custodian may require to fulfill legal obligations. You are required to indemnify us, the
depositary and the custodian for any claims with respect to taxes based on any tax benefit obtained for you.
Foreign Currency Conversion
The depositary will arrange for the conversion of all foreign currency received into U.S. dollars if such conversion is practical, and it will distribute
the U.S. dollars in accordance with the terms of the deposit agreement. You may have to pay fees and
expenses incurred in converting foreign currency, such as fees and expenses incurred in complying with currency exchange controls and other governmental
requirements.
If the conversion of foreign currency is not practical or lawful, or if any required approvals are denied or not obtainable at a reasonable cost or within
a reasonable period, the depositary may take the following actions in its discretion:
●
distribution is lawful and practical.
Convert the foreign currency to the extent practical and lawful and distribute the U.S. dollars to the holders for whom the conversion and
●
●
Distribute the foreign currency to holders for whom the distribution is lawful and practical.
Hold the foreign currency (without liability for interest) for the applicable holders.
Governing Law
The deposit agreement, the ADRs and the ADSs will be interpreted in accordance with the laws of the State of New York. The rights of holders of
ordinary shares (including ordinary shares represented by ADSs) are governed by the laws of the Cayman Islands. We and the depositary have agreed that the
federal or state courts in the City of New York shall have jurisdiction to hear and determine any suit, action or proceeding and to settle any dispute between us
that may arise out of or in connection with the Deposit Agreement. We also submitted to the jurisdiction of these courts, and we have appointed an agent for
service of process in the City of New York.
Conversion Between Ordinary Shares Trading in Hong Kong and ADSs (Items 12.D.1 and 12.D.4 of Form 20-F)
In connection with the initial public offering of our shares in Hong Kong, we established a branch register of members in Hong Kong, or the Hong
Kong share register, which is maintained by our Hong Kong share registrar, Computershare Hong Kong Investor Services Limited. Our principal register of
members, or the Cayman share register, will continue to be maintained by our principal share registrar, Conyers Trust Company (Cayman) Limited.
As described in further detail below, holders of ordinary shares registered on the Hong Kong share register will be able to convert these ordinary shares into
ADSs, and vice versa.
Our ADSs
Our ADSs are traded on NASDAQ. Dealings in our ADSs on NASDAQ are conducted in U.S. dollars.
ADSs may be held either:
●
depositary may register the ownership of uncertificated ADSs, which ownership shall be evidenced by periodic statements issued by the depositary to the ADS holders
entitled thereto; or
by having a certificated ADS, or an ADR, registered in the holder’s name, or by holding in the direct registration system, pursuant to which the
●
indirectly, through the holder’s broker or other financial institution.
The depositary for our ADSs is Citibank, N.A., whose office is located at 388 Greenwich Street, New York, New York 10013, United States.
Converting Ordinary Shares Trading in Hong Kong into ADSs
An investor who holds ordinary shares registered in Hong Kong and who intends to convert them to ADSs to trade on NASDAQ must deposit or
have his or her broker deposit the ordinary shares with the depositary’s Hong Kong custodian, Citibank, N.A., Hong Kong, or the custodian, in exchange for
ADSs.
A deposit of ordinary shares trading in Hong Kong in exchange for ADSs involves the following procedures:
●
If ordinary shares have been deposited with CCASS, the investor must transfer ordinary shares to the depositary’s account with the custodian
within CCASS by following the CCASS procedures for transfer and submit and deliver a duly completed and signed conversion form to the depositary via his
or her broker.
If ordinary shares are held outside CCASS, the investor must arrange to deposit, his or her shares into CCASS for delivery to the depositary’s
●
account with the custodian within CCASS, submit and deliver a request for conversion form to the custodian and after duly completing and signing such
conversion form, deliver such conversion form to the custodian.
Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, if applicable, the
●
depositary will issue the corresponding number of ADSs in the name(s) requested by an investor and will deliver the ADSs to the designated DTC account of
the person(s) designated.
For ordinary shares deposited in CCASS, under normal circumstances, the above steps generally require two business days. For ordinary shares held
outside CCASS in physical form, the above steps may take 14 business days, or more, to complete. Temporary delays may arise. For example, the transfer
books of the depositary may from time to time be closed to ADS issuances. The investor will be unable to trade the ADSs until the procedures are completed.
Converting ADSs to Ordinary Shares Trading in Hong Kong
An investor who holds ADSs and who intends to convert his/her ADSs into ordinary shares to trade on the Hong Kong Stock Exchange must cancel
the ADSs the investor holds and withdraw ordinary shares from our ADS program and cause his or her broker or other financial institution to trade such
ordinary shares on the Hong Kong Stock Exchange.
An investor that holds ADSs indirectly through a broker should follow the broker’s procedure and instruct the broker to arrange for cancelation of
the ADSs, and transfer of the underlying ordinary shares from the depositary’s account with the custodian within the CCASS system to the investor’s Hong
Kong stock account.
For investors holding ADSs directly, the following steps must be taken:
●
(and the applicable ADR(s) if the ADSs are held in certificated form), and send an instruction to cancel such ADSs to the depositary.
To withdraw ordinary shares from our ADS program, an investor who holds ADSs may turn in such ADSs at the office of the depositary
●
Upon payment or net of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, if applicable,
the depositary will cancel the ADSs and instruct the custodian to deliver ordinary shares underlying the canceled ADSs to the CCASS account designated by
an investor.
●
withdrawal from CCASS. Investors can then obtain a transfer form signed by HKSCC Nominees Limited (as the transferor) and register ordinary shares in their own
names with the Hong Kong share registrar.
If an investor prefers to receive ordinary shares outside CCASS, he or she must receive ordinary shares in CCASS first and then arrange for
For ordinary shares to be received in CCASS, under normal circumstances, the above steps generally require two business days. For ordinary shares
to be received outside CCASS in physical form, the above steps may take 14 business days, or more, to complete. The investor will be unable to trade the
ordinary shares on the Hong Kong Stock Exchange until the procedures are completed.
Temporary delays may arise. For example, the transfer books of the depositary may from time to time be closed to ADS cancelations. In addition,
completion of the above steps and procedures is subject to there being a sufficient number of ordinary shares on the Hong Kong share register to facilitate a
withdrawal from the ADS program directly into the CCASS system.
We are not under any obligation to maintain or increase the number of ordinary shares on the Hong Kong share register to facilitate such
withdrawals.
Depositary Requirements
Before the depositary issues ADSs or permits withdrawal of ordinary shares, the depositary may require:
●
production of satisfactory proof of the identity and genuineness of any signature or other information it deems necessary; and
●
presentation of transfer documents.
compliance with procedures it may establish, from time to time, consistent with the deposit agreement, including but not limited to
The depositary may refuse to deliver, transfer or register issuances, transfers and cancelations of ADSs generally when the transfer books of the
depositary or our Hong Kong share registrar are closed or at any time if the depositary or we determine it advisable to do so.
All costs attributable to the transfer of ordinary shares to effect a withdrawal from or deposit of ordinary shares into our ADS program will be borne by the
investor requesting the transfer. In particular, holders of ordinary shares and ADSs should note that the Hong Kong share registrar will charge between HK$2.50 to
HK$20, depending on the speed of service (or such higher fee as may from time to time be permitted under the Hong Kong Listing Rules), for each transfer of ordinary
shares from one registered owner to another, each share certificate canceled or issued by it and any applicable fee as stated in the share transfer forms used in Hong
Kong.
In addition, holders of ordinary shares and ADSs must pay up to US$5.00 per 100 ADSs for each issuance of ADSs and each cancelation of ADSs, as the case
may be, in connection with the deposit of ordinary shares into, or withdrawal of ordinary shares from, our ADS program.
List of subsidiaries of H World Group Limited
Exhibit 8.1
List of Subsidiaries
I. Directly-Owned Subsidiaries:
China Lodging Investment Limited (Cayman Islands)
China Lodging Holdings (HK) Limited (Hong Kong)
H World Holdings Singapore Pte. Ltd. (Singapore)
Sheen Step Group Limited (Seychelles)
CLG Special Investments Limited (Cayman Islands)
City Home Group Limited (Cayman Islands)
HanTing (Tianjin) Investment Consulting Co., Ltd. (PRC)
II. Indirectly-Owned Subsidiaries:
1.
100% Owned Subsidiaries
1.001 Starway Hotels (Hong Kong) Limited (Hong Kong)
1.002 Crystal Orange Hotel Holdings Limited (BVI)
1.003 Orange Hotel Hong Kong Limited (Hong Kong)
1.004 ACL Greater China Limited (Hong Kong)
1.005 Ibis China Investment Limited (Hong Kong)
1.006 TAHM Investment Limited (Hong Kong)
1.007 Huazhu Investment I Limited (Hong Kong)
1.008 Huazhu Investment II Limited (Hong Kong)
1.009 Starway Hotel Holdings Limited (BVI)
1.010 Hi Inn Hotel Holdings Limited (BVI)
1.011 Hi Inn Hotel (Hong Kong) Limited (Hong Kong)
1.012 Starway Lodging (Hong Kong) Limited (Hong Kong)
1.013 City Home Investment Limited (Hong Kong)
1.014 Huazhu K.K. (Japan)
1.015 Huazhu Investment GmbH (Germany)
1.016 DH Group GmbH & Co. KG (Germany)
1.017 Huazhu Hospitality Inc (BVI)
1.018 Huazhu Hospitality (Hong Kong) Limited (Hong Kong)
1.019 Steigenberger Hotels GmbH (Germany)
1.020 IntercityHotel GmbH (Germany)
1.021 H.E.A.D. HOTEL EQUIPMENT AND DESIGN GmbH (Germany)
1.022 Sourcify GmbH (Germany)
1.023 Steigenberger Consulting GmbH (Germany)
1.024 Deutsche Hospitality Asset GmbH (Germany)
1.025 DH Lifestyle GmbH (Germany)
1.026 Steigenberger Spa GmbH (Germany)
1.027 MAXX Hotel GmbH (Germany)
1.028 STAG Hotelverwaltungs-Gesellschaft mbH (Austria)
1.029 Steigenberger Hotels AG (Switzerland)
1.030 STAG Hotels Netherlands B.V. (Netherlands)
1.031 Scheveningen Hotel Holding B.V. (Netherlands)
1.032 STAG Belgium N.V. (Belgium)
1.033 Steigenberger Italia S.r.l. (Italy)
1.034 Steigenberger DMCC (UAE)
1.035 Tunisian Hospitality Group SARL (Tunisia)
1.036 Zleep Hotel GmbH (Germany)
1.037 STAG Hotels Hungary Szállodaipari Kft. (Hungary)
1.038 Deutsche Hospitality Hotels Spain S.L. (Spain)
1.039 Steigenberger Akademie GmbH (Germany)
1.040 STEIGENBERGER HOTELFACHSCHULE GmbH (Germany)
1.041 Steigenberger Berufsfachschule für Assistenten im Hotel- und Tourismusmanagement gGmbH (Germany)
1.042 STEIGENBERGER HOTELBERUFSFACHSCHULE GmbH (Germany)
1.043 Yagao Meihua Hotel Management Co., Ltd.
1.044 Tianjin Yagao Hotel Management Co., Ltd.
1.045 Starway Hotel Management (Shanghai) Co., Ltd.
1.046 Orange Hotel Management (China) Co., Ltd.
1.047 Beijing Crystal Orange Hotel Management Consulting Co., Ltd.
1.048 Beijing Orange Times Softwares Technology Co., Ltd.
1.049 Yiju (Shanghai) Hotel Management Co., Ltd.
1.050 Shanghai HanTing Hotel Management Group, Ltd.
1.051 HanTing Xingkong (Shanghai) Hotel Management Co., Ltd.
1.052 Hanting (Shanghai) Enterprise Management Co., Ltd.
1.053 Huazhu (Hainan) Hotel Management Co., Ltd
1.054 Shanghai Huaxiang Catering Management Co., Ltd.
1.055 Hai Haiyou Hotel Management (Ningbo) Co., Ltd.
1.056 Xingji Hotel Management (Ningbo) Co., Ltd.
1.057 Suzhou Ibis Hotel Limited
1.058 Nanjing Yiya Hotel Management Co., Limited
1.059 Wuxi Ibis Hotel Limited
1.060 Tianjin Ibis Hotel Limited
1.061 Chengdu Kehua Ibis Hotel Limited
1.062 Chengdu Ibis Hotel Limited
1.063 Ya’an Ibis Hotel Limited
1.064 Huasu (Hainan) Enterprise Management Co., Ltd.
1.065 Jizhu Information Technology (Shanghai) Co., Ltd.
1.066 Huazhu Hotel Management (Ningbo) Co., Ltd.
1.067 Huazhu Xingshun (Suzhou) Tourism Investment Co., Ltd.
1.068 Shanghai Chengge Hotel Management Co., Ltd.
1.069 Huazhu Hotel Management (Shenzhen) Co., Ltd.
1.070 Shanghai Shuohong Hotel Management Co., Ltd.
1.071 Shanghai Ibis Hotel Management Co., Limited
1.072 Nanjing Meiyue Hotel Management Co., Ltd.
1.073 Xi’an Anruosi Hotel Management Co., Ltd.
1.074 Xi’an Yusi Hotel Management Co., Ltd.
1.075 Ibis Xiamen Hotel Limited
1.076 Tianjin Jingjingjing Catering Service Co., Ltd.
1.077 Beijing Yaoting Hotel Management Co., Ltd.
1.078 Beijing Xiting Hotel Management Co., Ltd.
1.079 Shanghai Meiting Hotel Management Co., Ltd.
1.080 Shanghai Yiju Hotel Management Co., Ltd. （上海逸居酒店管理有限公司）
1.081 Wuxi Yiju Hotel Management Co., Ltd.
1.082 Shanghai Yate Hotel Management Co., Ltd.
1.083 Shanghai Songting Hotel Management Co., Ltd.
1.084 Shanghai Xinting Hotel Management Co., Ltd.（上海鑫庭酒店管理有限公司）
1.085 Shanghai Qinting Hotel Management Co., Ltd. （上海沁庭酒店管理有限公司）
1.086 Shanghai Lingting Hotel Management Co., Ltd.
1.087 Shanghai Xinting Hotel Management Co., Ltd.（上海新庭酒店管理有限公司）
1.088 Shanghai Pengting Hotel Management Co., Ltd.
1.089 Shanghai Luting Hotel Management Co., Ltd.
1.090 Shanghai Haoting Hotel Management Co., Ltd. （上海灏庭酒店管理有限公司）
1.091 Shanghai Changting Hotel Management Co., Ltd.（上海长庭酒店管理有限公司）
1.092 Shanghai Guiting Hotel Management Co., Ltd.
1.093 Shanghai Jiating Hotel Management Co., Ltd.
1.094 Shanghai Senting Hotel Management Co., Ltd.
1.095 Shanghai Xiting Hotel Management Co., Ltd.
1.096 Shanghai Yaogu Shangwu Hotel Management Co., Ltd.
1.097 Shanghai Aiting Hotel Management Co., Ltd.
1.098 Shanghai Yiju Hotel Management Co., Ltd. （上海宜居酒店管理有限公司）
1.099 Shanghai Qinting Hotel Management Co., Ltd. （上海钦庭酒店管理有限公司）
1.100 Shanghai Changting Hotel Management Co., Ltd.（上海畅庭酒店管理有限公司）
1.101 Hangzhou Muting Hotel Management Co., Ltd.
1.102 Hangzhou Anting Hotel Management Co., Ltd.
1.103 Hangzhou Qiuting Hotel Management Co., Ltd.
1.104 Hangzhou Yishitan Investment and Management Co., Ltd.
1.105 Hangzhou Senting Hotel Management Co., Ltd.
1.106 Beijing Zhongting Hotel Management Co., Ltd.
1.107 Beijing HanTing Jiamei Hotel Management Co., Ltd.
1.108 Beijing HanTing Ruijing Hotel Management Co., Ltd.
1.109 Beijing Dongting Hotel Management Co., Ltd.
1.110 Beijing Jiating Hotel Management Co., Ltd.
1.111 Beijing Anting Hotel Management Co., Ltd.
1.112 Tianjin Yiting Hotel Management Co., Ltd.
1.113 Tianjin HanTing Xingkong Hotel Management Co., Ltd.
1.114 Xi’an HanTing Fukai Hotel Management Co., Ltd.
1.115 Xi’an Fengting Hotel Management Co., Ltd.
1.116 Jinan Hanting Hotel Management Co., Ltd.
1.117 Zibo HanTing Hotel Management Co., Ltd.
1.118 Xiamen Wuting Hotel Co., Ltd.
1.119 Xiamen Tingju Hotel Co., Ltd.
1.120 Xiamen Xiating Hotel Co., Ltd.
1.121 Guangzhou Chengting Hotel Management Co., Ltd.
1.122 Guangzhou Shangbin Hotel Co., Ltd.
1.123 Guangzhou Mengting Hotel Management Co., Ltd.
1.124 Guangzhou Huiting Hotel Management Co., Ltd.
1.125 Guangzhou Meiting Hotel Management Co., Ltd.
1.126 Shenzhen Shenting Hotel Management Co., Ltd.
1.127 Shenzhen HanTing Hotel Management Co., Ltd.
1.128 Taiyuan Hanting Jiangnan Hotel Management Co., Ltd.
1.129 Wuhan Changting Hotel Management Co., Ltd.
1.130 Shenyang Maruika Hotel Management Co., Ltd.
1.131 Kunming Xiting Hotel Management Co., Ltd.
1.132 Baotoushi Anting Hotel Management Co., Ltd.
1.133 Huazhu Hotel Management Co., Ltd.
1.134 Hanting Technology (Suzhou) Co., Ltd.
1.135 Tianjin Huasu Enterprise Management Co., Ltd.
1.136 Shanghai Keting E-Commerce Co., Ltd.
1.137 Shanghai Huazhu Commercial Factoring Co., Ltd.
1.138 Shanghai Zhiyu Information Consulting Co., Ltd.
1.139 Shanghai Huazhu Hanting Xiyue Enterprise Management Co., Ltd.
1.140 Jiangsu Youxiang Financial Consulting Co., Ltd.
1.141 Banma Yigou E-Commerce Co., Ltd.
1.142 Shanghai Huiting Hotel Management Co., Ltd. （上海荟庭酒店管理有限公司）
1.143 Shanghai Huiyue Hotel Management Co., Ltd.
1.144 Shanghai Fanting Hotel Management Co., Ltd.
1.145 Shanghai Yinting Hotel Management Co., Ltd.
1.146 Shanghai Rongting Hotel Management Co., Ltd.
1.147 Shanghai Guangting Hotel Management Co., Ltd.
1.148 Shanghai Lanting Hotel Management Co., Ltd.
1.149 Shanghai Baiting Hotel Management Co., Ltd.
1.150 Shanghai HanTing Service Apartment Hotel Management Co., Ltd.
1.151 Shanghai Jiangting Hotel Management Co., Ltd.
1.152 Shanghai Xingting Hotel Management Co., Ltd.
1.153 Shanghai Baoting Hotel Management Co., Ltd.
1.154 Shanghai Fangpu Hotel Management Co., Ltd.
1.155 Shanghai Manao Hotel Management Co., Ltd.
1.156 Hangzhou Pingting Hotel Management Co., Ltd.
1.157 Hangzhou Wenxuan Hotel Management Co., Ltd.
1.158 Hangzhou Miaoting Hotel Management Co., Ltd.
1.159 Jinan Luoting Hotel Management Co., Ltd.
1.160 Xi’an Yahua Hotel Management Co., Ltd.
1.161 Kunshan Siting Enterprise Management Co., Ltd.
1.162 Kunshan Bizhu Enterprise Management Co., Ltd.
1.163 Hangzhou Yilai Hotel Chain Co., Ltd.
1.164 Huazhu Enterprise Management Co., Ltd.
1.165 Shanghai Aiqu Enterprise Management Co., Ltd.
1.166 Shanghai Wuqin Equity Fund Co., Ltd.
1.167 Huazhu Investment (Shanghai) Co., Ltd.
1.168 Shanghai Jijing Catering Co., Ltd.
1.169 Shanghai Yiju Hotel Management Co., Ltd. （上海宜桔酒店管理有限公司）
1.170 Shanghai Shangting Hotel Management Co., Ltd.
1.171 Shanghai Hongting Hotel Management Co., Ltd.
1.172 Shanghai Duting Hotel Management Co., Ltd.
1.173 Shanghai Hongxi Hotel Management Co., Ltd.
1.174 Shanghai Haoting Hotel Management Co., Ltd. （上海郝庭酒店管理有限公司）
1.175 Shanghai Tongji Hotel Management Co., Ltd.
1.176 Shanghai Chunting Hotel Management Co., Ltd.
1.177 Shanghai Moting Hotel Management Co., Ltd.
1.178 Hangzhou Ansheng Hotel Management Co., Ltd.
1.179 Suzhou Lishan Yatai Hotel Management Co., Ltd.
1.180 Suzhou Yongchangjiahe Hotel Management Co., Ltd.
1.181 Wantong Yiguan (Beijing) Hotel Management Co., Ltd.
1.182 Beijing Dongnian Hotel Co., Ltd.
1.183 Zhuhai Manneijiali Investment Development Company Limited
1.184 Guangzhou Zhongting Quanji Hotel Management Co., Ltd.
1.185 Guangzhou Didu Hotel Management Co., Ltd.
1.186 Guangzhou Bihua Hotel Management Co., Ltd.
1.187 Shanghai Hegao Hotel Management Co., Ltd.
1.188 Tianjin Lanyuan Hotel Management Co., Ltd.
1.189 Shenzhen Chengxuan Hotel Management Co., Ltd.
1.190 Shenzhen Qiquan Hotel Management Co., Ltd.
1.191 Shenzhen Quanji Shennan Hotel Management Co., Ltd.
1.192 Shanghai Jizhu Investment Management Co., Ltd.
1.193 Kunshan Hanka Catering Management Co., Ltd.
1.194 Ningbo Huating Investment Consulting Co., Ltd.
1.195 Ningbo Huating Galaxy Investment Management Co., Ltd.
1.196 Shanghai Huazhu Chengxing Management Consulting Co., Ltd.
1.197 Shanghai Yate Zhongtan Hotel Management Co., Ltd.
1.198 Hangzhou Yueli Yilai Hotel Co., Ltd.
1.199 Hangzhou Maolu Yilai Hotel Co., Ltd.
1.200 Hangzhou Qiandaohu Yilai Resort Co., Ltd.
1.201 Beijing Qitian Holiday Hotel Co., Ltd.
1.202 Beijing Crystal Orange Hotel Management Co., Ltd.
1.203 Beijing Orange Times Hotel Management Co., Ltd.
1.204 Beijing Crystal Orange Times Hotel Management Co., Ltd.
1.205 Shanghai Juchao Department Management Co., Ltd.
1.206 Guiyang Yangguang Hotel Management Co., Ltd.
1.207 Beijing Yuecheng Hotel Management Co., Ltd.
1.208 Hangzhou Zhongcheng Hotel Management Co., Ltd.
1.209 He Garden Hotel (Beijing) Co., Ltd.
1.210 Xi 'an Chengjia Fukai Hotel Management Co., Ltd.
1.211 Shanghai Shiju Catering Service Co., Ltd.
1.212 Tianjin Jizhu Information Technology Co., Ltd.
1.213 Ningbo Futing Enterprise Management Co., Ltd.
1.214 Huanmei Information Technology (Shanghai) Co., Ltd.
1.215 Huanmei International Travel Service (Shanghai) Co., Ltd.
1.216 Hanting Hesheng (Suzhou) Hotel Management Co., Ltd.
1.217 Beijing Hanting Hotel Management Co., Ltd.
1.218 Shanghai HanTing Guancheng Hotel Management Co., Ltd.
1.219 Tianjin Huazhu Finance Leasing Co., Ltd.
1.220 Jiangsu Keting Commercial and Trade Co., Ltd
1.221 Ningbo Jishi Investment Management LLP
1.222 Ningbo Jisu Investment Management LLP
1.223 Ningbo Qiji Galaxy Investment Management Center LLP
1.224 Blossom Hotel Investment Management (Kunshan) Co., Ltd.
1.225 Shanghai Keting Cultural Communication Co., Ltd.
1.226 Shanghai Blossom House Investment Management Co., Ltd.
1.227 Shanghai Blossom Hotel Management Co., Ltd.
1.228 Shanghai Changguan Investment Management Co., Ltd.
1.229 Kunshan Blossom Commercial and Trading Co., Ltd.
1.230 Wuxi Blossom House Culture Tourism Investment Co., Ltd.
1.231 Suzhou Blossom Hotel Investment Management Co., Ltd.
1.232 Huzhou Blossom House Hotel Investment Management Co., Ltd.
1.233 Ningbo Blossom House Hotel Management Co., Ltd.
1.234 Lijiang Blossom House Hotel Management Co., Ltd.
1.235 Diqingzhou Blossom House Hotel Management Co., Ltd.
1.236 Guangzhou Huange Hotel Management Co., Ltd.
1.237 H World Technologies Pte. Ltd.
1.238 H Rewards Pte. Ltd.
1.239 Jisu Enterprise Management Co., Ltd.
1.240 Changsha Changting Hotel Management Co., Ltd.
1.241 Nanjing Yangting Hotel Management Co., Ltd.
1.242 Shanghai Huaxiang Six Catering Management Co., Ltd.
1.243 Nanjing Hongying Hotel Management Co., Ltd.
1.244 Wuxi Hanting Hotel Management Co., Ltd.
2. Majority-Owned Subsidiaries
2.01 Elan Hotel Holdings Limited (BVI)
2.02 Elan Hotel (Hong Kong) Limited (Hong Kong)
2.03 Jihao Hotel Management (Shanghai) Co., Ltd.
89.13% equity interests owned by China Lodging Holdings (HK) Limited
100%
100%
equity interests owned by
equity interests owned by
2.04 Shanghai Leshu Hotel Management Co., Ltd.
2.05 Shanghai Mingxin Hotel Management Co., Ltd.
2.06 Shanghai Mingjing Hotel Investment Management
100%
100%
100%
equity interests owned by
equity interests owned by
equity interests owned by
Co., Ltd.
2.07 Xiamen Leshu Hotel Management Co., Ltd.
2.08 Fuzhou Leshu Hotel Management Co., Ltd.
2.09 Wuhan Liye Yuchuang Enterprises Management
100%
100%
100%
equity interests owned by
equity interests owned by
equity interests owned by
Co., Ltd.
2.10 Changxing Longguan Culture Development Co.,
100%
equity interests owned by
Ltd.
Elan Hotel Holdings Limited (BVI)
Elan Hotel (Hong Kong) Limited (Hong
Kong)
Shanghai Ruiji Hotel Management Co., Ltd.
Shanghai Ruiji Hotel Management Co., Ltd.
Shanghai Ruiji Hotel Management Co., Ltd.
Shanghai Ruiji Hotel Management Co., Ltd.
Shanghai Ruiji Hotel Management Co., Ltd.
Shanghai Yuchuang Investment Management
Co. Ltd.
Shanghai Longhua Investment Management
Co. Ltd.
2.11 Shanghai Mengxu Intelligent Technology Co., Ltd. 100%
equity interests owned by H-World Information and Technology Co.,
Ltd.
2.12 Beijing Tiandui Information Technology Co., Ltd. 100%
equity interests owned by H-World Information and Technology Co.,
Ltd.
2.13 Suzhou Zhongzhou Express Hotel Co. Ltd.
100%
equity interests owned by Henan Zhongzhou Express Hotel Investment
Co., Ltd.
2.14 Jiaozuo Zhongzhou Express Hotel Co. Ltd.
100%
equity interests owned by Henan Zhongzhou Express Hotel Investment
2.15 Hangzhou Yuexi Hotel Management Co., Ltd.
91.83% equity interests owned by Blossom Hotel Investment Management
(Kunshan) Co., Ltd.
Co., Ltd.
2.16 Suzhou Blossom House Hotel Management Co.,
60%
equity interests owned by Blossom Hotel Investment Management
Ltd.
(Kunshan) Co., Ltd.
2.17 Kunshan Zhouzhuang Blossom House Hotel
60%
equity interests owned by Blossom Hotel Investment Management
51%
equity interests owned by Blossom Hotel Investment Management
(Kunshan) Co., Ltd.
2.19 Shanghai Longhua Investment Management Co.,
51%
equity interests owned by
Investment Management Co., Ltd.
2.18 Sichuan Blossom House Hotel Investment
Management Co., Ltd.
Ltd.
2.20 Guangzhou Yahua Puxin Hotel Co., Ltd.
2.21 Shanghai Meixie Hotel Management Co., Ltd.
2.22 Wuhu Jiangting Hotel Management Co., Ltd.
80%
60%
99.97% equity interests owned by
equity interests owned by Yagao Meihua Hotel Management Co., Ltd.
equity interests owned by Yagao Meihua Hotel Management Co., Ltd.
2.23 Shanghai Suting Hotel Management Co., Ltd.
99%
equity interests owned by
2.24 Beijing Hanting Oriental Hotel Management Co.,
99%
equity interests owned by
Ltd.
2.25 Urumqi Luting Hotel Management Co., Ltd.
99%
equity interests owned by
2.26 Urumqi Qiting Hotel Management Co., Ltd.
99%
equity interests owned by
2.27 Chongqi Yiting Hotel Management Co., Ltd.
99%
equity interests owned by
2.28 Xi’an Shengting Hotel Management Co., Ltd.
99%
equity interests owned by
2.29 Xi’an Bangting Hotel Management Co., Ltd.
99%
equity interests owned by
2.30 Shanghai Liansheng Hotel Co., Ltd.
90%
equity interests owned by
2.31 Chengdu Changting Hotel Management Co., Ltd. 80%
equity interests owned by
2.32 Nanjing Leting Hotel Management Co., Ltd.
80%
equity interests owned by
2.33 Chengdu Yuting Hotel Management Co., Ltd.
60%
equity interests owned by
2.34 Shanghai Huiting Hotel Management Co., Ltd.
55%
equity interests owned by
（上海辉庭酒店管理有限公司）
2.35 Chengdu HanTing Yangchen Hotel Management
51%
equity interests owned by
Co., Ltd.
(Kunshan) Co., Ltd.
Shanghai Changguan Investment
Management Co., Ltd.
Shanghai HanTing Hotel Management
Group, Ltd.
Shanghai HanTing Hotel Management
Group, Ltd.
Shanghai HanTing Hotel Management
Group, Ltd.
Shanghai HanTing Hotel Management
Group, Ltd.
Shanghai HanTing Hotel Management
Group, Ltd.
Shanghai HanTing Hotel Management
Group, Ltd.
Shanghai HanTing Hotel Management
Group, Ltd.
Shanghai HanTing Hotel Management
Group, Ltd.
Shanghai HanTing Hotel Management
Group, Ltd.
Shanghai HanTing Hotel Management
Group, Ltd.
Shanghai HanTing Hotel Management
Group, Ltd.
Shanghai HanTing Hotel Management
Group, Ltd.
Shanghai HanTing Hotel Management
Group, Ltd.
Shanghai HanTing Hotel Management
Group, Ltd.
2.36 Jinan Hanjia Hotel Management Co., Ltd.
99%
equity interests owned by HanTing Xingkong (Shanghai) Hotel
Management Co., Ltd.
2.37 Shanghai Dingting Hotel Management Co., Ltd.
55%
equity interests owned by HanTing Xingkong (Shanghai) Hotel
2.38 Nanjing Zhuting Hotel Management Co., Ltd.
51%
equity interests owned by HanTing Xingkong (Shanghai) Hotel
Management Co., Ltd.
Management Co., Ltd.
2.39 Hangzhou Chenji Hotel Management Co., Ltd.
51%
equity interests owned by HanTing Xingkong (Shanghai) Hotel
2.40 Xi’an Jvting Hotel Management Co., Ltd.
2.41 Henan Zhongzhou Express Hotel Investment Co.,
90%
85%
equity interests owned by Huazhu Hotel Management Co., Ltd.
equity interests owned by Huazhu Hotel Management Co., Ltd.
Management Co., Ltd.
Ltd.
2.42 Suzhou Zhujiangnan Hotel Management Co., Ltd. 66%
2.43 Shanghai Huawei Education Technology Co., Ltd. 60%
60%
2.44 Beijing Huazhu Ruijing Hotel Management Co.,
equity interests owned by Huazhu Hotel Management Co., Ltd.
equity interests owned by Huazhu Hotel Management Co., Ltd.
equity interests owned by Huazhu Hotel Management Co., Ltd.
Ltd.
2.45 Shanghai Junrui Hotel Co., Ltd.
2.46 Wenzhou Yaozhu Hotel Management Co., Ltd.
2.47 Xi’an Quanji Maoting Hotel Management Co.,
60%
60%
51%
equity interests owned by Huazhu Hotel Management Co., Ltd.
equity interests owned by Huazhu Hotel Management Co., Ltd.
equity interests owned by Huazhu Hotel Management Co., Ltd.
Ltd.
2.48 Yongle Huazhu Hotel & Resort Group
50%
equity interests owned by Huazhu Hospitality (Hong Kong) Limited
2.49 Beijing Shenzhou Business Travel Hotel
Investment Management Co., Ltd.
2.50 Shenzhen Shijie Chengjia Hotel Management Co.,
51%
equity interests owned by
Ltd.
2.51 Shanghai Ruicheng Hotel Management Co., Ltd. 50%
equity interests owned by
Co., Ltd.
Shanghai Chengge Hotel Management Co.,
Ltd.
Shanghai Chengge Hotel Management Co.,
Ltd.
85%
equity interests owned by Hanting (Shanghai) Enterprise Management
2.52 Shanghai Shenzhou Business Travel Hotel Co.,
100%
equity interests owned by Beijing Shenzhou Business Travel Hotel
Ltd.
Investment Management Co., Ltd.
2.53 Shanghai Yuchuang Investment Management Co.
91.67% equity interests owned by Huazhu Investment (Shanghai) Co., Ltd.
Ltd.
2.54 Shanghai Ruiji Hotel Management Co., Ltd.
2.55 Nanjing Starway Hotel Management Co., Ltd.
2.56 Beijing Hualige Hotel Management Co., Ltd.
40%
equity interests owned by
50%
99.89712%equity interests owned by
equity interests owned by Huazhu Investment (Shanghai) Co., Ltd.
Starway Hotel Management (Shanghai) Co.,
Ltd.
Starway Hotel Management (Shanghai) Co.,
Ltd.
2.57 Hefei Jucheng Hotel Management Consulting Co.,
70%
equity interests owned by Beijing Crystal Orange Hotel Management
Ltd.
Consulting Co., Ltd.
2.58 Shanghai Hua Yu Zhou enterprise Management
55%
equity interests owned by Huazhu Enterprise Management Co., Ltd.
Co., Ltd.
2.59 Tianjin Huarui Hotel Management Co., Ltd.
2.60 H-World Information and Technology Co., Ltd.
2.61 Nanjing Jinlv Huazhu Mingri City Hotel Co., Ltd. 100%
50.9804% equity interests owned by Huazhu Enterprise Management Co., Ltd.
86.85% equity interests owned by Huazhu Hotel Management Co., Ltd.
equity interests owned by
Jiangsu Jinlv Huazhu Hotel Management
Co., Ltd.
2.62 Shanghai Xingqing Hotel Management Co., Ltd. 30% equity interests owned by Yagao Meihua Hotel Management Co., Ltd., and 60%
2.63 Shanghai Qiting Hotel Management Co., Ltd.
2.64 Zhengzhou Tiancheng Express Hotel Co. Ltd.
equity interests owned by Hanting Xingkong (Shanghai) Hotel Management Co.,
Ltd.
99.9999% equity interests owned by Ningbo Hongting Investment Management
Center LLP, and 0.0001% equity interests owned by Ningbo Huating Investment
Consulting Co., Ltd.
65% equity interests owned by Henan Zhongzhou Express Hotel Investment Co.,
Ltd., and 35% equity interests owned by Huazhu Hotel Management Co., Ltd.
2.65 Jiangsu Jinlv Huazhu Hotel Management Co., Ltd. 39% equity interests owned by Huazhu Hotel Management Co., Ltd., and 15% equity
2.66 Ningbo Hongting Investment Management Center
LLP
interests owned by Ningbo Futing Enterprise Management Co., Ltd.
Ningbo Qiji Galaxy Investment Management Center LLP acts as the GP and holds
12.09% of partnership share, Huazhu Hotel Management Co., Ltd. acts as the LP and
holds 27.91% of partnership share
Exhibit 12.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
I, Hui Jin, certify that:
1.
I have reviewed this annual report on Form 20-F of H World Group Limited;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
3.
material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
4.
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rules 13a-15(f) and 15d-15(f)) for the company and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
(b)
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions
(c)
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period
(d)
covered by this annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over
financial reporting;
5.
The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the
equivalent functions):
(a)
which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
(b)
company’s internal control over financial reporting.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
Date: April 27, 2023
By:
/s/ Hui Jin
Name: Hui Jin
Title: Chief Executive Officer
Exhibit 12.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
I, Jihong He, certify that:
1.
I have reviewed this annual report on Form 20-F of H World Group Limited;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to
the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
3.
material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
4.
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange
Act Rule 13a-15(f) and 15d-15(f)) for the company and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
(b)
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions
(c)
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
and
Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period
(d)
covered by this annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over
financial reporting;
The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
5.
financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the
equivalent functions):
(a)
which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
(b)
company’s internal control over financial reporting.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the
Date:
April 27, 2023
By:
/s/ Jihong He
Name: Jihong He
Title: Chief Financial Officer
Exhibit 13.1
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
The certification set forth below is being submitted to the Securities and Exchange Commission in connection with the Annual Report
on Form 20-F for the year ended December 31, 2022 (the “Report”) of H World Group Limited (the “Company”) for the purpose of complying
with Rule 13a-14(b) or Rule 15d14(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Section 1350 of Chapter 63 of Title
18 of the United States Code.
Hui Jin, the Chief Executive Officer of the Company, and Jihong He, the Chief Financial Officer of the Company, each certifies that, to
the best of his or her knowledge:
(1)
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and
(2)
of the Company.
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
Date: April 27, 2023
By:
By:
/s/ Hui Jin
Name: Hui Jin
Title: Chief Executive Officer
/s/ Jihong He
Name: Jihong He
Title: Chief Financial Officer
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos.333-258001 and 333-269169 on Form F-3
and Registration Statement Nos.333-166179, 333-192295 and 333-203460 on Form S-8 of our reports dated April 27,
2023, relating to the financial statements of H World Group Limited (previous known as Huazhu Group Limited) and
the effectiveness of H World Group Limited’s internal control over financial reporting appearing in this Annual Report
on Form 20-F for the year ended December 31, 2022.
Exhibit 15.1
/s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP
Shanghai, China
April 27, 2023
EXHIBIT 15.2
26/F, HKRI Centre One, HKRI Taikoo Hui
288 Shimen Road （No.1）
Shanghai 200041, P. R. China
T: (86-21) 5298-5488
F: (86-21) 5298-5492
April 27, 2023
H World Group Limited
No. 699 Wuzhong Road
Minhang District
Shanghai 201103
People’s Republic of China
Dear Sir/Madam:
We hereby consent to the references to our firm’s name under the headings “Item 3. Key Information” in H World Group Limited’s annual
report on Form 20-F for the fiscal year ended 2022 (the “Annual Report”), which will be filed with the Securities and Exchange Commission
(the “SEC”) on the date hereof. We also consent to the filing of this consent letter with the SEC as an exhibit to the Annual Report.
In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, or under the Securities Exchange Act of 1934, in each case, as amended, or the regulations promulgated thereunder.
Very truly yours,
JunHe LLP
/s/ Junhe LLP
Beijing Head Office
Tel: (86-10) 8519-1300
Fax: (86-10) 8519-1350
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Tel: (86-898) 6851-2544
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Tel: (1-212) 703-8702
Fax: (1-212) 703-8720
Shanghai Office
Tel: (86-21) 5298-5488
Fax: (86-21) 5298-5492
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Tel: (86-22) 5990-1301
Fax: (86-22) 5990-1302
Silicon Valley Office
Tel: (1-888) 886-8168
Fax: (1-888) 808-2168
Shenzhen Office
Tel: (86-755) 2587-0765
Fax: (86-755) 2587-0780
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Tel: (86-532) 6869-5000
Fax: (86-532) 6869-5010
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Tel: (86-20) 2805-9088
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