UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of September 2020

 

Commission File Number: 001-34656

 

Huazhu Group Limited

 

No. 699 Wuzhong Road
Minhang District
Shanghai 201103
People’s Republic of China
(86) 21 6195-2011

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F. Form 20-F x  Form 40-F o

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b) (1): o

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b) (7): o

 

 

 


 

This current report on Form 6-K (including all the exhibits hereto) shall be incorporated by reference into the Registrant’s Registration Statement on Form F-3 initially filed on October 26, 2017 (No. 333-221129).

 

EXHIBIT INDEX

 

Exhibit Number

 

Description

 

 

 

Exhibit 23.1

 

Consent of PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft

Exhibit 23.2

 

Consent of Frost & Sullivan International Limited

Exhibit 23.3

 

Consent of D&P China (HK) Limited

Exhibit 99.1

 

Audited consolidated financial statements of Huazhu Group Limited as of and for the three months ended March 31, 2020

Exhibit 99.2

 

Unaudited condensed consolidated financial information of Huazhu Group Limited as of and for the three months ended June 30, 2020

Exhibit 99.3

 

Unaudited Pro Forma Condensed Combined Financial Information

Exhibit 99.4

 

Supplemental and Updated Disclosures of Huazhu Group Limited

Exhibit 99.5

 

Undertaking by the Registrant to the Hong Kong Stock Exchange dated September 8, 2020

Exhibit 99.6

 

Undertaking by AAPC Hong Kong Limited to the Registrant dated September 1, 2020

Exhibit 99.7

 

Undertaking by Trip.com Group Limited to the Registrant dated September 2, 2020

Exhibit 99.8

 

Undertaking by Mr. Qi Ji to the Registrant dated September 7, 2020

Exhibit 99.9

 

Undertaking by Mr. John Jiong Wu to the Registrant dated September 7, 2020

Exhibit 99.10

 

Property Valuation Report of D&P China (HK) Limited dated September 9, 2020

 

2


 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

Huazhu Group Limited

 

 

(Registrant)

 

 

 

 

 

 

Date: September 9, 2020

By:

/s/ Qi Ji

 

Name:

Qi Ji

 

Title:

Executive Chairman of the Board of Directors, Chief Executive Officer

 

3


Exhibit 23.1

 

CONSENT OF INDEPENDENT AUDITORS

 

We hereby consent to the incorporation by reference in the Registration Statement on Form F-3 (No.  333-221129) of Huazhu Group Limited of our report dated April 30, 2020 relating to the financial statements of Steigenberger Hotels AG, which appears in Huazhu Group Limited’s current report on Form 6-K dated May 1, 2020.

 

Frankfurt, Germany

September 9, 2020

 

PricewaterhouseCoopers GmbH

Wirtschaftsprüfungsgesellschaft

 

/s/Thomas Heck

 

/s/Sonia Nixdorf

Wirtschaftsprüfer

 

Wirtschaftsprüferin

(German Public Auditor)

 

(German Public Auditor)

 


Exhibit 23.2

 

1018, Tower B

500 Yunjin Road

Shanghai, 200232, China

Tel:  86 (21) 5407 5836

Fax:  86 (21) 3209 8500

www.frost.com

 

 

September 9, 2020

 

Huazhu Group Limited

No. 699 Wuzhong Road

Minhang District

Shanghai 201103

People’s Republic of China

 

To whom it may concern:

 

We hereby consent to the use of our name, Frost & Sullivan (Beijing) Inc., Shanghai Branch Co., and our industry data and forecasts in (i) the Registration Statement (File No. 333-221129) on Form F-3 (the “Registration Statement”) of Huazhu Group Limited (the “Company”) filed on October 26, 2017, including post-effective amendments, and supplements to the Registration Statement and in any related prospectus, relating to the Company’s public offering of its securities, (ii) any other registration statement filed by the Company with the Securities and Exchange Commission (the “SEC”) and any amendment or supplement thereto (including the Company’s Registration Statement on Form S-8 (File No. 333-203460)), (iii) any document offering securities in the Company and (iv) any filings on Form 20-F or Form 6-K or other filings by the Company with the SEC (collectively, the “SEC Filings”). We further consent to the filing of this letter as an exhibit to the Registration Statement or a Current Report on Form 6-K incorporated by reference therein, and as an exhibit to any other SEC Filings. The Company has agreed to provide Frost & Sullivan with copies of all applicable sections of filings with the SEC prior to filing.

 

 

Frost & Sullivan (Beijing) Inc., Shanghai Branch Co.

 

 

/s/ Fox Hu

 

Name:

Fox Hu

 

Title:

Managing Director

 


Exhibit 23.3

 

 

September 9, 2020

 

Huazhu Group Limited

No. 699 Wuzhong Road

Minhang District

Shanghai 201103

People’s Republic of China

 

Ladies and Gentlemen,

 

We hereby consent to the references to our name and the inclusion of information, data and statements from our independent valuation reports and amendments thereto (collectively, the “Reports”), and any subsequent amendments to the Reports, as well as the citation of the Reports, in the Registration Statement and any amendments thereto, in any other future filings with the Securities and Exchange Commission (the “SEC”) by the Company, including, without limitation, (i) the Registration Statement (File No. 333-221129) on Form F-3 (the “Registration Statement”) of Huazhu Group Limited (the “Company”) filed on October 26, 2017, including post-effective amendments, and supplements to the Registration Statement and in any related prospectus, relating to the Company’s public offering of its securities, (ii) any other registration statement filed by the Company with the SEC and any amendment or supplement thereto (including the Company’s Registration Statement on Form S-8 (File No. 333-203460)), (iii) any document offering securities in the Company and (iv) any filings on Form 20-F or Form 6-K or other filings by the Company with the SEC (collectively, the “SEC Filings”).

 

We further hereby consent to the filing of this letter as an exhibit to the Registration Statement, as well as to a Current Report on Form 6-K incorporated by reference therein, and as an exhibit to any other SEC Filings. We also give our consent to the reference to our firm under the caption “Experts” in the prospectus supplement dated September 9, 2020 to the base prospectus contained in the Registration Statement.

 

Yours faithfully,

For and on behalf of

D&P China (HK) Limited

 

/s/ Calvin Chan

 

Name:

Calvin Chan

 

Title:

Director

 

 

 

D&P China (HK) Limited

 

T +852 2281 0147

Level 3, Three Pacific Place

 

F +852 2511 9626

1 Queen’s Road East

 

 

Hong Kong

 

calvin.chan@duffandphelps.com

 

 

www.duffandphelps.com

 


Exhibit 99.1

 

HUAZHU GROUP LIMITED

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Consolidated Balance Sheets as of December 31, 2019 and March 31, 2020

 

F-2

 

 

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and 2020

 

F-3

 

 

 

Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2019 and 2020

 

F-4

 

 

 

Consolidated Statements of Cash Flows for the Three months Ended March 31, 2019 and 2020

 

F-5

 

 

 

Notes to the Consolidated Financial Statements

 

F-7

 

F-1


 

HUAZHU GROUP LIMITED

 

CONSOLIDATED BALANCE SHEETS

(RMB in millions, except share and per share data, unless otherwise stated)

 

 

 

As of December 31,

 

As of March 31,

 

 

 

2019

 

2020

 

2020

 

 

 

 

 

 

 

US$’million
(Note 2)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

3,234

 

1,800

 

254

 

Restricted cash

 

10,765

 

1,675

 

237

 

Short-term investments measured at fair value

 

2,908

 

1,539

 

217

 

Accounts receivable, net of allowance of RMB17 and RMB21 as of December 31, 2019 and March 31, 2020, respectively

 

218

 

405

 

57

 

Loan receivables-current, net

 

193

 

222

 

31

 

Amounts due from related parties

 

182

 

220

 

31

 

Inventories

 

57

 

90

 

13

 

Other current assets, net

 

699

 

859

 

121

 

Total current assets

 

18,256

 

6,810

 

961

 

Property and equipment, net

 

5,854

 

6,471

 

914

 

Intangible assets, net

 

1,662

 

5,854

 

827

 

Operating lease right-of-use assets

 

20,875

 

29,567

 

4,176

 

Finance lease right-of-use assets

 

 

1,776

 

251

 

Land use rights, net

 

215

 

213

 

30

 

Long-term investments, including marketable securities measured at fair value of nil as of December 31, 2019 and March 31, 2020, respectively

 

1,929

 

1,920

 

271

 

Goodwill

 

2,657

 

5,339

 

754

 

Loan receivables, net

 

280

 

297

 

42

 

Other assets, net

 

707

 

672

 

95

 

Deferred tax assets

 

548

 

759

 

107

 

Total assets

 

52,983

 

59,678

 

8,428

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Short-term debt

 

8,499

 

5,782

 

816

 

Accounts payable

 

1,176

 

1,143

 

161

 

Amounts due to related parties

 

95

 

77

 

11

 

Salary and welfare payables

 

491

 

547

 

77

 

Deferred revenue

 

1,179

 

1,230

 

174

 

Operating lease liabilities, current

 

3,082

 

3,388

 

478

 

Finance lease liabilities, current

 

 

23

 

3

 

Accrued expenses and other current liabilities

 

1,856

 

1,330

 

188

 

Dividends payable

 

678

 

 

 

Income tax payable

 

231

 

168

 

24

 

Total current liabilities

 

17,287

 

13,688

 

1,932

 

 

 

 

 

 

 

 

 

Long-term debt

 

8,084

 

7,810

 

1,103

 

Operating lease liabilities, non-current

 

18,496

 

27,618

 

3,900

 

Finance lease liabilities, non-current

 

 

2,168

 

306

 

Deferred revenue

 

559

 

546

 

77

 

Other long-term liabilities

 

566

 

659

 

93

 

Retirement benefit obligations

 

 

126

 

18

 

Deferred tax liabilities

 

491

 

1,787

 

253

 

Total liabilities

 

45,483

 

54,402

 

7,682

 

Commitments and contingencies (Note 21)

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

Ordinary shares (US$0.0001 par value per share; 8,000,000,000 shares authorized; 299,424,485 and 299,952,102 shares issued as of December 31, 2019 and March 31, 2020, and 285,902,609 and 286,430,226 shares outstanding as of December 31, 2019 and March 31, 2020, respectively)

 

0

 

0

 

0

 

Treasury shares (3,096,764 shares as of December 31, 2019 and March 31, 2020, respectively)

 

(107

)

(107

)

(15

)

Additional paid-in capital

 

3,834

 

3,863

 

546

 

Retained earnings

 

3,701

 

1,559

 

220

 

Accumulated other comprehensive income (loss)

 

(49

)

(115

)

(16

)

Total Huazhu Group Limited shareholders’ equity

 

7,379

 

5,200

 

735

 

Noncontrolling interest

 

121

 

76

 

11

 

Total equity

 

7,500

 

5,276

 

746

 

Total liabilities and equity

 

52,983

 

59,678

 

8,428

 

 

F-2


 

HUAZHU GROUP LIMITED

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(RMB in millions, except share and per share data, unless otherwise stated)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2020

 

2020

 

 

 

(Unaudited)

 

 

 

US$’million
(Note 2)

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

Leased and owned hotels

 

1,706

 

1,516

 

214

 

Manachised and franchised hotels

 

663

 

465

 

66

 

Others

 

18

 

32

 

4

 

Net revenues

 

2,387

 

2,013

 

284

 

Operating costs and expenses:

 

 

 

 

 

 

 

Hotel operating costs

 

1,735

 

2,377

 

336

 

Other operating costs

 

7

 

8

 

1

 

Selling and marketing expenses

 

77

 

146

 

21

 

General and administrative expenses

 

206

 

316

 

45

 

Pre-opening expenses

 

104

 

111

 

16

 

Total operating costs and expenses

 

2,129

 

2,958

 

419

 

Other operating (expenses) income, net

 

6

 

88

 

13

 

Income(loss) from operations

 

264

 

(857

)

(122

)

Interest income

 

33

 

29

 

4

 

Interest expense

 

77

 

137

 

19

 

Other income(expense), net

 

65

 

(102

)

(14

)

Unrealized gains (losses) from fair value changes of equity securities

 

(90

)

(1,003

)

(142

)

Foreign exchange gain (loss)

 

(32

)

(58

)

(8

)

Income (loss) before income taxes

 

163

 

(2,128

)

(301

)

Income tax expense (benefit)

 

31

 

(30

)

(4

)

Income (loss) from equity method investments

 

(33

)

(60

)

(8

)

Net income(loss)

 

99

 

(2,158

)

(305

)

Less: net (loss) income attributable to noncontrolling interest

 

(7

)

(23

)

(4

)

Net income (loss) attributable to Huazhu Group Limited

 

106

 

(2,135

)

(301

)

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

Gain arising from defined benefit plan, net of tax nil (unaudited) and 0.1 for the three months ended March 31, 2019 (unaudited) and 2020, respectively

 

 

3

 

0

 

Foreign currency translation adjustments, net of tax of nil for three months ended March 31, 2019 and 2020, respectively

 

93

 

(69

)

(9

)

Comprehensive income (loss)

 

192

 

(2,224

)

(314

)

Less: comprehensive (loss) income attributable to the noncontrolling interest

 

(7

)

(23

)

(4

)

Comprehensive income (loss) attributable to Huazhu Group Limited

 

199

 

(2,201

)

(310

)

 

 

 

 

 

 

 

 

Earnings(loss) per share:

 

 

 

 

 

 

 

Basic

 

0.37

 

(7.46

)

(1.05

)

Diluted

 

0.36

 

(7.46

)

(1.05

)

Weighted average number of shares used in computation:

 

 

 

 

 

 

 

Basic

 

283,251,520

 

286,013,704

 

286,013,704

 

Diluted

 

293,449,989

 

286,013,704

 

286,013,704

 

 

F-3


 

HUAZHU GROUP LIMITED

 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(RMB in millions, except share and per share data, unless otherwise stated)

 

 

 

Ordinary Shares

 

Treasury Shares

 

 

 

 

 

Accumulated Other

 

 

 

 

 

 

 

Issued
shares

 

Outstanding
shares

 

Amount

 

Shares

 

Amount

 

Additional Paid-in
Capital

 

Retained Earnings

 

Comprehensive (Loss)
Income

 

Noncontrolling
Interest

 

Total Equity

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2019

 

296,597,888

 

283,076,012

 

0

 

3,096,764

 

(107

)

3,713

 

2,610

 

(42

)

145

 

6,319

 

Issuance of ordinary shares upon exercise of options and vesting of restricted stocks

 

815,022

 

815,022

 

0

 

 

 

4

 

 

 

 

4

 

Share-based compensation

 

 

 

 

 

 

26

 

 

 

 

26

 

Net income

 

 

 

 

 

 

 

106

 

 

(7

)

99

 

Dividends paid to noncontrolling interest holders

 

 

 

 

 

 

 

 

 

(1

)

(1

)

Capital contribution from noncontrolling interest holders

 

 

 

 

 

 

 

 

 

6

 

6

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

93

 

 

93

 

Balance at March 31, 2019

 

297,412,910

 

283,891,034

 

0

 

3,096,764

 

(107

)

3,743

 

2,716

 

51

 

143

 

6,546

 

 

 

 

Ordinary Shares

 

Treasury Shares

 

 

 

 

 

Accumulated Other

 

 

 

 

 

 

 

Issued
shares

 

Outstanding
shares

 

Amount

 

Shares

 

Amount

 

Additional Paid-in
Capital

 

Retained Earnings

 

Comprehensive (Loss)
Income

 

Noncontrolling
Interest

 

Total Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

299,424,485

 

285,902,609

 

0

 

3,096,764

 

(107

)

3,834

 

3,701

 

(49

)

121

 

7,500

 

Cumulative effect of the adoption of ASU 2016-13

 

 

 

 

 

 

 

(7

)

 

 

(7

)

Balance at January 1, 2020

 

299,424,485

 

285,902,609

 

0

 

3,096,764

 

(107

)

3,834

 

3,694

 

(49

)

121

 

7,493

 

Issuance of ordinary shares upon exercise of options and vesting of restricted stocks

 

527,617

 

527,617

 

0

 

 

 

0

 

 

 

 

0

 

Share-based compensation

 

 

 

 

 

 

29

 

 

 

 

29

 

Net income (loss)

 

 

 

 

 

 

 

(2,135

)

 

(23

)

(2,158

)

Dividends paid to noncontrolling interest holders

 

 

 

 

 

 

 

 

 

(1

)

(1

)

Capital contribution from noncontrolling interest holders

 

 

 

 

 

 

 

 

 

0

 

0

 

Acquisition of noncontrolling interest

 

 

 

 

 

 

 

 

 

(22

)

(22

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

(69

)

 

(69

)

Noncontrolling interest recognized from partial disposal

 

 

 

 

 

 

 

 

 

1

 

1

 

Pension liability adjustment

 

 

 

 

 

 

 

 

3

 

 

3

 

Balance at March 31, 2020

 

299,952,102

 

286,430,226

 

0

 

3,096,764

 

(107

)

3,863

 

1,559

 

(115

)

76

 

5,276

 

 

F-4


 

HUAZHU GROUP LIMITED

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(RMB in millions, unless otherwise stated)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2020

 

2020

 

 

 

(Unaudited)

 

 

 

US$’million
(Note 2)

 

Operating activities:

 

 

 

 

 

 

 

Net income (loss)

 

99

 

(2,158

)

(305

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Share-based compensation

 

26

 

29

 

4

 

Depreciation and amortization

 

231

 

321

 

45

 

Amortization of issuance cost of convertible senior notes and upfront fee of bank borrowings

 

6

 

15

 

3

 

Deferred taxes

 

5

 

(47

)

(7

)

Bad debt expenses

 

(2

)

13

 

2

 

Loss (gain) from disposal of property and equipment

 

 

(2

)

(0

)

Impairment loss

 

 

102

 

14

 

Loss (income) from equity method investments, net of dividends

 

33

 

60

 

8

 

Investment (income) loss

 

77

 

1,088

 

154

 

Interest accretion for finance lease

 

 

9

 

1

 

Noncash lease expense

 

339

 

545

 

77

 

Changes in operating assets and liabilities, net of effect of acquisitions:

 

 

 

 

 

 

 

Accounts receivable

 

(29

)

43

 

6

 

Inventories

 

(0

)

(3

)

(0

)

Amounts due from related parties

 

(20

)

(34

)

(5

)

Other current assets

 

2

 

(51

)

(7

)

Other assets

 

(26

)

(62

)

(9

)

Accounts payable

 

(19

)

(133

)

(19

)

Amounts due to related parties

 

5

 

(29

)

(4

)

Salary and welfare payables

 

(167

)

(21

)

(3

)

Deferred revenue

 

69

 

(202

)

(29

)

Accrued expenses and other current liabilities

 

38

 

(696

)

(98

)

Operating lease liabilities

 

(360

)

(46

)

(6

)

Income tax payable

 

(183

)

(94

)

(13

)

Other long-term liabilities

 

23

 

7

 

1

 

Net cash provided by (used in) operating activities

 

147

 

(1,346

)

(190

)

 

 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

(384

)

(483

)

(68

)

Purchases of intangibles

 

 

(1

)

(0

)

Acquisitions, net of cash received

 

(36

)

(5,056

)

(714

)

Proceeds from disposal of subsidiary and branch, net of cash disposed

 

(0

)

3

 

1

 

Proceeds from maturity/sale and return of long-term investments

 

188

 

336

 

47

 

Payment for shareholder loan to equity investees

 

(27

)

 

 

Payment for the origination of loan receivables

 

(159

)

(58

)

(8

)

Proceeds from collection of loan receivables

 

40

 

24

 

3

 

Net cash (used in) investing activities

 

(378

)

(5,235

)

(739

)

 

 

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

 

 

Net proceeds from issuance of ordinary shares upon exercise of options

 

1

 

0

 

0

 

Proceeds from short-term bank borrowings

 

949

 

800

 

113

 

Repayment of short-term bank borrowings

 

(632

)

(112

)

(16

)

Proceeds from long-term bank borrowings

 

1695

 

 

 

Repayment of long-term bank borrowings

 

(1,551

)

(3,902

)

(551

)

Repayment of funds advanced from noncontrolling interest holders

 

(3

)

(2

)

(0

)

Acquisitions of noncontrolling interest

 

 

(22

)

(3

)

Contribution from noncontrolling interest holders

 

6

 

0

 

0

 

Proceeds from long-term finance liabilities (failed SLB)

 

 

36

 

5

 

Repayment of long-term finance liabilities (failed SLB)

 

 

(7

)

(1

)

Dividends paid to noncontrolling interest holders

 

(1

)

(1

)

(0

)

Dividends paid

 

(658

)

(677

)

(96

)

 

 

 

 

 

 

 

 

Principal payments of finance lease

 

 

(6

)

(1

)

 

F-5


 

HUAZHU GROUP LIMITED

 

CONSOLIDATED STATEMENTS OF CASH FLOWS - continued

(RMB in millions, unless otherwise stated)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2020

 

2020

 

 

 

(Unaudited)

 

 

 

US$’million
(Note 2)

 

Net cash (used in) provided by financing activities

 

(194

)

(3,893

)

(550

)

Effect of exchange rate changes on cash and cash equivalents, and restricted cash

 

(2

)

(50

)

(7

)

Net increase in cash, cash equivalents and restricted cash

 

(427

)

(10,524

)

(1,486

)

Cash, cash equivalents and restricted cash at the beginning of the year/period

 

4,884

 

13,999

 

1,977

 

Cash, cash equivalents and restricted cash at the end of the year/period

 

4,457

 

3,475

 

491

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Interest paid, net of amounts capitalized

 

82

 

87

 

12

 

Income taxes paid

 

207

 

112

 

16

 

Cash paid for amounts included in the measurement of operating lease liabilities

 

775

 

459

 

65

 

Cash paid for amounts included in the measurement of finance lease liabilities

 

 

18

 

3

 

Non-cash right-of-use assets obtained in exchange for operating lease liabilities

 

1,916

 

628

 

89

 

 

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

Purchases of property and equipment included in payables

 

591

 

790

 

112

 

Consideration payable for business acquisition

 

44

 

11

 

2

 

Purchase of intangible assets included in payables

 

4

 

4

 

1

 

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the balance sheets that sum to the total of the same such amounts shown in the statements of cash flows.

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2020

 

2020

 

 

 

(Unaudited)

 

 

 

US$’million
(Note 2)

 

Cash and cash equivalents

 

3,840

 

1,800

 

254

 

Restricted cash

 

617

 

1,675

 

237

 

Total Cash and cash equivalents, and restricted cash shown in the statement of cash flows

 

4,457

 

3,475

 

491

 

 

F-6


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

1.             ORGANIZATION AND PRINCIPAL ACTIVITIES

 

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”).

 

On January 2, 2020, the Group completed the acquisition of 100% equity interest of Steigenberger Hotels Aktiengesellschaft Germany (“Deutsche Hospitality” or “DH”) with the aggregated consideration of EUR720 million. 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.

 

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, 2019 and March 31, 2020, the Group had 688 and 756 leased and owned hotels in operation, respectively.

 

Manachised and franchised hotels

 

Typically the Group enters into certain 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 the hotel renovation and operation. Those hotels are classified as manachised hotels. Under typical franchise and management agreements, the franchisee is required to pay an initial franchise fee and ongoing franchise and management service fees, the majority of which are 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 term of the franchise and management agreements are typically eight to ten years for legacy Huazhu and 15 to 20 years for manachised hotels and 10 to 15 years for franchised hotels under legacy Deutsche Hospitality and are renewable upon mutual agreement between the Group and the franchisee. The Group also has some franchised hotels in which cases the Group does not provide a hotel general manager. As of December 31, 2019 and March 31, 2020, the Group had 4,519 and 4,820 manachised hotels in operation and 411 and 377 franchised hotels in operation, respectively.

 

2.             SUMMARY OF PRINCIPAL ACCOUNTING POLICIES

 

Basis of presentation

 

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission, regarding interim financial reporting, and include all normal and recurring adjustments that management of the Group considers necessary for a fair presentation of its financial position and operation results. Certain information and footnote disclosures normally included in financial statements prepared in conformity with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these statements should be read in conjunction with the Group’s consolidated financial statements as of and for the year ended December 31, 2019.

 

Basis of consolidation

 

The consolidated financial statements includes 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.

 

F-7


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

2.              SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued

 

Basis of consolidation - continued

 

The accompanying consolidated financial statements have been prepared assuming that the Group will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Group’s ability to generate cash flows from operations, and the Group’s ability to arrange adequate financing arrangements, to support its working capital requirements.

 

Due to the outbreak of COVID-19, the Group’s businesses have been significantly impacted and began to experience operating losses and negative operating cash flows in the first quarter of 2020. The Group had a net loss attributable to the Company of RMB2,135 and a net cash outflows from operating activities of RMB1,346 for the three months ended March 31, 2020. The net current liabilities was RMB6,878 as of March 31, 2020. As of March 31, 2020, the Group had cash and cash equivalents and restricted cash of RMB3,475.

 

With China’s significant efforts in containing the spread of COVID-19, domestic travel is gradually rebuilding with eased travel restrictions and national policy for resuming production and work. As of June 30, 2020 approximately 96% of legacy Huazhu’s hotels (excluding hotels under governmental requisition) had resumed operations with an occupancy rate of approximately 83%. In addition, due to the German government’s effective measures and the employees’ great efforts, as of the end of June, 2020, 79% of hotels under Deutsche Hospitality have resumed operations.

 

The Group obtained waiver from certain financial covenants for its bank loans covenants under which the original financial covenants will not be applicable until the six-month period ending June 30, 2021. The Group issued convertible senior notes in May 2020 with gross proceeds of US$500 million, and also had unutilized credit facilities of approximately RMB5,300 as of June 30, 2020 to support its operations. The Group regularly monitor its current and expected liquidity requirements to ensure that it maintain sufficient cash balances to meet its liquidity requirements in the short and long term. Based on Group cash flow projections from operating activities, existing cash and cash equivalents, current assets, convertible senior notes issued in May 2020 and available bank facilities, the management believes there is no substantial doubt about the Group’s ability to continue as a going concern.

 

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, 2019, and March 31, 2020, the Group consolidated eight entities under VIE model, and the assets and liabilities of the consolidated VIEs are immaterial to the Group’s consolidated financial statements.

 

The Group evaluates its business activities and arrangements with the entities that operate the manachised and franchised hotels and the funds that it serves as general partner or fund manager to identify potential variable interest entities. Generally, these entities that operate the manachised and franchised hotels qualify for the business scope exception, therefore consolidation is not appropriate under the variable interest entity consolidation guidance. For the disclosure of significant non-consolidated variable interest entities, see Note 7 Investments.

 

F-8


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

2.              SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued

 

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 and intangible assets, valuation allowance of deferred tax assets, purchase price allocation, impairment of goodwill, fair value measurement and impairment of investments, share-based compensation, obligations related to the pension plans, estimates involved in the accounting for its customer loyalty program, contingent liabilities and incremental borrowing rate used to measure lease liabilities.

 

Investments

 

Investments represent equity-method investments, equity investments with readily determinable fair values, equity investments without readily determinable fair values and available-for-sale debt securities.

 

The Group accounts for equity investment in entities with significant influence under equity-method accounting. Under this method, the Group’s pro rata share of income (loss) from investment is recognized in the consolidated statements of comprehensive income. Dividends received reduce the carrying amount of the investment. When the Group’s share of loss in an equity-method investee equals or exceeds its carrying value of the investment in that entity, the Group continues to report its share of equity method losses in the statements of comprehensive income to the extent of and as an adjustment to the carrying amount of its other investments in 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. Impairment losses are recognized in other expense when a decline in value is deemed to be other-than- temporary.

 

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 unrealized gains and losses from fair value changes recognized in net income in the consolidated statements of comprehensive income.

 

F-9


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

2.              SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued

 

Investments - continued

 

Investments in equity securities without readily determinable fair values are measured at cost minus impairment adjusted by observable price changes in orderly transactions for the identical or a similar investment of the same issuer. These investments are measured at fair value on a nonrecurring basis when there are events or changes in circumstances that may have a significant adverse effect. An impairment loss is recognized in the consolidated statements of comprehensive income equal to the amount by which the carrying value exceeds the fair value of the investment.

 

Debt securities that the company has no 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. Available-for-sale debt securities are reported at fair value, with unrealized gains and losses (other than impairment losses) recognized in accumulated other comprehensive income or loss. Realized gains and losses on debt securities are recognized in the net income in the consolidated statements of comprehensive income. Before the adoption of Accounting Standards Update (“ASU “) 2016-13 the amount of the total impairment related to the credit loss was recognized in the income statement and the amount related to all other factors is recognized in other comprehensive income, net of applicable taxes, and the impairment losses recognized in the income statement cannot be reversed for any future recoveries. After the adoption of ASC 326 on January 1, 2020, 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 exceeds fair value.

 

Considering the continuing deteriorating business performance of two of the equity method investments due to the impact from COVID-19, the Group recorded an impairment of RMB92 for the three months ended March 31, 2020. No other impairment was recorded during the three months ended March 31, 2019

 

Accounts receivable, loan receivables and other financial assets

 

Accounts receivable, net

 

Accounts receivable mainly consist of franchise fee receivables, amounts due from corporate customers, travel agents, hotel guests and credit card receivables, which are recognized and carried at the original invoice or accrued amount less an allowance for credit losses. Before the year 2020, the Group established an allowance for doubtful accounts primarily based on the aging of the receivables and factors surrounding the credit risk of specific customers. The Group recognized RMB2 (unaudited) bad debt in the three months ended March 31, 2019. After the adoption of ASU 2016-13 Financial instruments- credit losses on January 1, 2020, the accounts receivable balance reflects invoiced and accrued revenue and is presented net of an allowance for credit losses. The Group establishes current expected credit losses (“CECL”) for pools of assets with similar risk characteristics by evaluating historical levels of credit losses, current economic conditions that may affect a customer’s ability to pay, and creditworthiness of significant customers. 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. The Group mainly focuses on historical collection experience and considering on aging or specific customer circumstance.

 

F-10


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

2.              SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued

 

Accounts receivable, loan receivables and other financial assets - continued

 

Loan receivables, net

 

The Group primarily entered into entrusted loan agreements with certain franchisees with the typical terms to be two to three years and annual interest rates ranging from 8.0% to8.5%, and with other un-related third-parties with the annual interest rates ranging from6% to 15%. Loan receivables are measured at amortized cost with interest accrued based on the contract rate. The Group classified loan receivables as long-term or short-term investments according to their contractual maturity or expected holding time. The Group evaluates the credit risk associated with the loans, and estimates the cash flow expected to be collected over the life of loans on an individual basis based on the Group’s past experiences, the borrowers’ financial position, their financial performance and their ability to continue to generate sufficient cash flows. A credit allowance will be established for the loans unable to collect. As a result of the assessment, the Group recorded a valuation allowance of nil, nil, RMB4 and nil (unaudited) in the years ended December 31, 2017, 2018 and 2019, and the three months ended March 31, 2019 respectively. Before the year 2020, the Group evaluates the credit risk associated with the loans, and estimates the cash flow expected to be collected over the life of loans on an individual basis on the group’s past experience, the borrowers’ financial position, their financial performance and their ability to continue to generate sufficient cash flows. A valuation allowance will be established for the loans unable to collect. After the adoption of ASU 2016-13, the Group estimates the CECL 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. As a result of the assessment, the Group recorded a credit allowance of RMB2 for three months ended March 31, 2020.

 

Additionally, the Group records an allowance on other forms of financial assets, including other current assets, other assets and amounts due from related parties with the similar approach of accounts receivable, which are immaterial to the consolidated financial statements.

 

The table below shows a summary of allowance for credit losses for the three months ended March 31, 2020.

 

Allowance for Credit Losses

 

 

 

March 31, 2020

 

Balance as of December 31, 2019

 

26

 

Adoption of CECL

 

7

 

Adjusted balance as of January 1, 2020

 

33

 

Write-offs

 

(1

)

Recoveries 

 

0

 

Provision for losses

 

13

 

Balance as of the end of period

 

45

 

 

F-11


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

2.              SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued

 

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

Shorter of the lease term or their estimated useful lives

Buildings

20-40 years

Furniture, fixtures and equipment

1-20 years

Motor vehicles

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 manachised agreements and favorable leases acquired in business combinations before the adoption of ASC Topic 842, Leases (“ASC 842”) and purchased software. Intangible assets acquired through business combinations are recognized as assets separate from goodwill if they satisfy either the “contractual-legal” or “separability” criterion. Intangible assets, including brand name, master brand agreement, non-compete agreements, franchise agreements, favorable lease agreements and other intangible assets acquired from business combination are recognized and measured at fair value upon acquisition.

 

The favorable lease agreements and unfavorable lease agreements in which the Group acts as a lessee were reclassified to operating lease right-of-use assets on January 1, 2019, upon adoption of ASC 842, Leases, which are amortized combining with operating lease right-of-use assets over remaining operating lease terms. The favorable lease agreements in which the Group acts as a lessor were accounted as intangible assets as before, which are amortized over remaining operating lease terms.

 

Non-compete agreements and franchise agreements are amortized over the expected useful life and remaining franchise contract terms respectively. Purchased software is stated at cost less accumulated amortization.

 

F-12


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

2.              SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued

 

Intangible assets, net - continued

 

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 agreements

 

remaining contract terms from 10 to 20 years

Non-compete agreements

 

2 - 10 years based on specified non-compete period

Favorable lease agreements acquired before the adoption of ASC 842

 

remaining lease terms from one to 20 years

Purchased software

 

3 - 10 years based on the estimated usage period

Unfavourable lease agreements

 

remaining lease terms from 3 to 13 years

Other intangible assets including trademark, licenses and other rights

 

2 - 15 years based on the contractual term, the length of license agreements and the effective terms of other legal rights

 

Brand names acquired by legacy Huazhu 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. Master brand agreement, acquired in Accor acquisition, granted the Group certain franchise rights with initial term of 70 years, and can be renewed without substantial obstacles. As a result, the useful life is determined to be indefinite. 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. The Group measures the impairment by comparing the fair value of brand name and master brand agreement with its carrying amount. If the carrying amount of brand name and master brand agreement exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess. The Group measures the fair value of the brand name under the relief-from-royalty method, the master brand agreement under the multi-period excess earnings method. The determination of the fair value requires management to make significant estimates and assumptions related to forecasts of future revenues, operating margin, royalty saving rate and discount rates to estimate the net present value of future cash flows. Management performs its annual brand name and master brand agreement impairment test on November 30. No impairment indicator raised to conduct impairment testing in March 31, 2019.

 

Due to the COVID-19 outbreak worldwide, the Group suffered an operating loss for the first quarter of 2020. As the situation is not totally under controlling and future impacts of the COVID-19 pandemic are highly uncertain, the Group performed impairment testing regarding all the indefinite life intangible assets as of March 31, 2020. There is no impairment loss recognized for intangible assets as a result of the impairment test as of March 31, 2020. However, the extent, magnitude and duration of COVID-19 pandemic may change the assumptions and estimates used in the indefinite life intangible assets valuation, which could result in future impairment charges.

 

On March 31, 2020, the estimated fair value of the intangible assets with indefinite useful lives exceeded its carrying value by approximately RMB3,634. A 5% increase in the discount rate or decrease in forecast of future revenues or operating margin or royalty saving rate could reduce the fair value of indefinite life intangible assets below its carrying value, which could result in future impairment charges of up to RMB229, nil, nil and RMB155, respectively.

 

F-13


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

2.              SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued

 

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, which are amortized on a straight-line basis over the remaining term of the land certificates, between 30 to 50 years. Amortization expense of land use rights for the three months ended March 31, 2019 and 2020 amounted to RMB2 (unaudited) and RMB2, respectively.

 

Impairment of long-lived assets

 

The Group evaluates its long-lived 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 property and equipment exceed the future undiscounted net cash flows and recognized an impairment loss of nil (unaudited) for the three months ended March 31, 2019.

 

As a result of the current economic environment due to COVID-19, the Group performed procedures to assess the recoverability of the net book value of property and equipment, operating lease right-of-use assets, and definite-lived intangible assets and recognized RMB10 impairment loss related to operating lease right-of-use assets for three months ended March 31, 2020.

 

Fair value of the property and equipment 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 represents the excess of the cost of an acquisition over the fair value of the identifiable assets less liabilities acquired.

 

F-14


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

2.              SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued

 

Goodwill - continued

 

Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. Before the adoption of ASU No. 2017-04, Intangibles-Goodwill and Other, the Group performed a two-step goodwill impairment test. The first step compares the fair values of each reporting unit to its carrying amount, including goodwill. A reporting unit is identified as an operating segment or one level below an operating segment (also known as a component) for which discrete financial information is available and is regularly reviewed by segment manager. Before the acquisition of Deutsche Hospitality, all the acquired business has been migrated to the Group’s business, and the Group’s management regularly reviews operation data including industrial metrics of revenue per available room, occupancy rate, and number of hotels by scale/brand, rather than discrete financial information for the purpose of performance evaluation and resource allocation at brand level. The Group concluded that it had only one reporting unit, and therefore the goodwill impairment testing was performed on consolidation level. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not considered to be impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of goodwill to the carrying value of a reporting unit’s goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. The Group adopted ASU No. 2017-04, Intangibles-Goodwill and Other on January 1, 2020, which requires a one-step impairment test in which an entity 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 since the segment manager regularly reviews discrete financial information for legacy Huazhu and legacy DH separately. 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 general and administrative expenses.

 

Fair value of the equity value was determined by the Group based on the income approach using 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.

 

Management performs its annual goodwill impairment test on November 30. The Group had not recognized any goodwill impairment for the three months period ended March 31, 2019, as no impairment indicator raised to conduct impairment testing. Given the impact the COVID-19 pandemic is having on hospitality industry, the Group concluded that indicators of impairment existed at March 31, 2020. The Group updated previous assumptions based on the current economic environment which is subject to inherent risk and uncertainty due to the stay-in-place measures enacted as a result of the COVID-19 pandemic, consumer confidence levels, and the ongoing impact of the COVID-19 pandemic on the hospitality industry. Based on the analysis, the Group concluded that the goodwill is not impaired at March 31, 2020. On March 31, 2020, the estimated fair value of legacy Huazhu reporting unit substantially exceeded its carrying value. For the goodwill of legacy DH, the estimated fair value of the reporting unit exceeded its carrying value by approximately RMB79. A 5% decline in the underlying discounted cash flow or increase in the discount rate could have resulted in goodwill impairment charges of approximately RMB218 and RMB337, respectively.

 

F-15


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

2.              SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued

 

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.

 

Leased and owned hotel revenues

 

Leased and owned hotel revenues are primarily derived from the rental of rooms, food and beverage sales 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

 

The manachised and franchised agreement contains the following promised services:

 

· Intellectual Property (“IP”) license grant the right to access the Group’s hotel system IP, including brand names.

 

· Pre-opening services include providing services (e.g., install IT information system and provide access to purchase platform, help to obtain operational qualification, and help to recruit and train employees) to the franchisees to assist in preparing for the hotel opening.

 

· System maintenance services include providing standardization hotel property management system (PMS), central reservation system (CRS) and other internet related services.

 

· Hotel management services include providing day-to-day management services of the hotels for the franchisees.

 

The promises to provide pre-opening services and system maintenance services are not distinct performance obligation because they are attendant to the license of IP. Therefore, the promises to provide pre-opening services and system maintenance services are combined with the license of IP to form a single performance obligation. Hotel management services forms a single distinct performance obligation.

 

Manachised and franchised hotel revenues are derived from franchise agreements where the franchisees are primarily required to pay (i) an initial one-time franchise fee, and (ii) continuing franchise fees, which mainly consist of (a) 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 franchise fee, is typically fixed and collected upfront and recognized as revenue over the term of the franchise contract. The Group does not consider this advance consideration to include a significant financing component, since it is used to protect the Group from the franchisees failing to adequately complete some or all of its obligations under the contract.

 

On-going management and franchise service fees are generally calculated as a certain percentage of the room revenues of the franchised hotel. Generally, management and franchise service fees are due and payable on a monthly basis as services are provided and revenue is recognized over time as services are rendered.

 

F-16


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

2.              SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued

 

Revenue recognition - continued

 

Central reservation system usage fees, other system maintenance and support fees are typically billed and collected monthly along with base management and franchise fees, and revenue is generally recognized as services are provided.

 

Reimbursements for hotel manager fees, which cover the manachised hotel managers’ payroll, social welfare benefits and certain other out-of-pocket expenses that the Group incurs on behalf of the manachised hotels. The reimbursements are recognized over time within revenues for the reimbursement of costs incurred on behalf of manachised hotels.

 

Above policies are only applicable to legacy Huazhu. For manachised hotels under Deutsche Hospitality, the franchisees have historically been required to pay Deutsche Hospitality 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. For franchised hotels under Deutsche Hospitality, the franchisees have historically been required to pay Deutsche Hospitality a license fee, a franchise fee and a central service fee. The manachised and franchised hotel revenues of Deutsche Hospitality are recognized over time as services are rendered. The Group is gradually conforming the terms of Deutsche Hospitality’s franchise and management agreements to those of hotels under legacy Huazhu.

 

Since the COVID-19 outbreak in January 2020, the Group has offered one-time reduction on continuing franchise fees of approximately RMB70 for the three months ended March 31, 2020 to help franchisees meet their short-term working capital needs. There is no change to the scope of services or other terms of the agreements. Previously recognized revenue on the original contract was not adjusted.

 

Other Revenues

 

Other revenues are derived from activities other than the operation of hotel businesses, which mainly include revenues from Hua Zhu mall and the provision of IT products and services to hotels. Revenues from Hua Zhu mall are commissions charged from suppliers for goods sold through the platform and are recognized upon delivery of goods to end customers when its suppliers’ obligation is fulfilled. Revenues from IT products are recognized when goods are delivered and revenues from IT services are recognized when services are rendered.

 

Loyalty Program

 

Under the loyalty program the Group administers, members earn loyalty points that 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.

 

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 recognize 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.

 

F-17


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

2.              SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued

 

Loyalty Program - continued

 

For manachised and franchised hotels, the portion of revenue deferred by manachised and franchised hotels are collected by the Group which will be refunded upon redemption of points at manachised and franchised hotels. The estimated breakage for points earned in manachised and franchised hotels are recognized as manachised and franchised revenue for each period. The Group estimates breakage based on the Group’s historical experience and expectations of future member behavior and will true up the estimated breakage at end of each period.

 

Above policies are only applicable to legacy Huazhu. The loyalty program initiated by Deutsche Hospitality has the same rights, nature and redeemable approaches as legacy Huazhu, therefore the accounting treatment is the same. As of March 31, 2020, the contract liabilities related to Deutsche Hospitality were immaterial and the loyalty program of Deutsche Hospitality was in the progress of being migrated to that of legacy Huazhu.

 

Membership fees from the Group’s customer loyalty program are all from legacy Huazhu, which are earned and recognized on a straight-line basis over the expected membership duration of the different membership levels and also applicable to legacy Huazhu only. Such duration is estimated based on the Group’s and management’s experience and is adjusted on a periodic basis to reflect changes in membership retention. The membership duration is estimated to be two to five years which reflects the expected membership retention. Revenues recognized from membership fees were RMB54 (unaudited) and RMB57 for the three months ended March 31, 2019 and 2020, 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.

 

Contract Balances

 

The Group’s payments from customers are based on the billing terms established in contracts. Customer billings are classified as accounts receivable when the Group’s right to consideration is unconditional. If the right to consideration is conditional on future performance under the contract, the balance is classified as a contract asset. Payments received in advance of performance under the contract are classified as current or non-current contract liabilities on the Group’s consolidated balance sheets and are recognized as revenue as the Group performs under the contract.

 

Value-Added Taxes and surcharges

 

The accommodation services of the Group in PRC and Germany are subject to 6% and 19% of Value-Added Taxes, respectively.

 

The Group is subject to education surtax and urban maintenance and construction tax, on the services provided in the PRC.

 

F-18


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

2.              SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued

 

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 RMB13 (unaudited) and RMB36 for the three months ended March 31, 2019 and 2020, respectively.

 

Government grants

 

Government grants represent cash received by the Group in the PRC from local governments as incentives for investing in certain local districts, and are typically granted based on the amount of investments the Group made as well as income generated by the Group in such districts. Such subsidies allow the Group full discretion to utilize the funds and are used by the Group for general corporate purposes. The local governments have final discretion as to whether the Group has met all criteria to be entitled to the subsidies. Normally, the Group does not receive written confirmation from local governments indicating the approval of the cash subsidy before cash is received, and therefore cash subsidies are recognized when received and when all the conditions for their receipts have been satisfied. Government grants recognized were RMB6 (unaudited) and RMB22 for the three months ended March 31, 2019 and 2020, respectively, which were recorded as other operating income.

 

Leases

 

As a lessee

 

Before January 1, 2019, the Group adopted the ASC 840, Leases and each lease is classified at the inception date as either a capital lease or an operating lease. All of the Group’s leases were classified under ASC 840 as operating leases while there are both capital lease and operating lease under legacy DH. The Group’s reporting for periods prior to January 1, 2019 continued to be reported in accordance with ASC 840 Leases. The Group elected the practical expedients under ASU 2016-02 which includes the use of hindsight in determining the lease term and the practical expedient package to not reassess whether any expired or existing contracts are or contain leases, to not reassess the classification of any expired or existing leases, and to not reassess initial direct costs for any existing leases.

 

In evaluating whether an agreement constitute a lease upon adoption of the new lease accounting standard ASC 842, the Group reviews the contractual terms to determine which party obtains both the economic benefits and control of the assets at the inception of the contract. The Group categorizes leases with contractual terms longer than twelve months as either operating or finance lease at the commencement date of a lease.

 

F-19


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

2.              SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued

 

Leases - continued

 

As a lessee - continued

 

The Group recognizes a lease liability for future fixed lease 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 and an operating lease right-of-use (“ROU”) asset representing the right to use the underlying asset for the lease term. Lease liabilities are recognized at commencement date based on the present value of fixed lease 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 using the rate implicit in the lease, if available, or the Group’s incremental borrowing rate. As its leases do not provide an implicit borrowing rate, the Group uses an incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments at the commencement date. Upon adoption of ASU 2016-02, the Group elected to use the remaining lease term as of January 1, 2019 in the estimation of the applicable discount rate for leases that were in place at adoption. For the initial measurement of the lease liabilities for leases commencing after January 1, 2019, the Group uses the discount rate as of the commencement date of the lease, incorporating the entire lease term. Current maturities of operating lease liabilities and finance lease liabilities are classified as operating lease liabilities, current and finance lease liabilities, current, respectively, in the Group’s consolidated balance sheets. Long-term portions of operating lease liabilities and finance lease liabilities are classified as operating lease liabilities, non-current and finance lease liabilities, non-current, respectively, in the Group’s consolidated balance sheets. 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 non-lease 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, plant, and equipment at the ASC 842 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”). 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-20


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

2.              SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued

 

Leases - continued

 

As a lessee - continued

 

The ROU assets are measured at the amount of the lease liabilities with adjustments, if applicable, for lease prepayments made prior to or at lease commencement, initial direct costs incurred by the Group, deferred rent and lease incentives, and any off-market terms (that is, favorable or unfavorable terms) present in the lease when the Group acquired leases in a business combination in which the acquiree acts as a lessee. The Group evaluates the carrying value of ROU assets if there are indicators of impairment and reviews the recoverability of the related asset group. The Group excludes the lease obligation from the carrying value of the asset group. Accordingly, the lease payments (both principal and interest) don’t reduce the undiscounted expected future cash flows used to test the asset group for recoverability. If the carrying value of the asset group determined to not be recoverable and is in excess of the estimated fair value, the Group records an impairment loss in the consolidated statement of comprehensive income. Noncash lease expense are used as the noncash add-back for the amortization of the operating ROU assets to the operating section of the consolidated statements of cash flow.

 

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 income statement on the contract termination.

 

As a result of the COVID-19 pandemic, some of the hotels of the Group are experiencing significantly reduced consumer traffic. In this case, the Group, as the lessee is entitled to have the lease concession after the negotiation with lessors, and it recognizes a negative lease expense of RMB38 for the three months ended March 31, 2020 under the relief as the Group elects not to account for the concession as a lease modification and by using the variable lease expense approach.

 

Sublease

 

The Group subleases property which are not suitable to operate hotels to third parties under operating leases. In accordance with the provisions of ASC 842, since the Group has not been relieved as the primary obligor of the head lease, the Group cannot net the sublease income against its lease payment to calculate the lease liabilities and ROU assets. The Group’s practice has been, and will continue to, straight-line the sub-lease income over the term of the sublease, which is consistent with the accounting treatment under ASC 840.

 

F-21


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

2.              SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued

 

Concentration of credit risk

 

Financial instruments that potentially expose the Group to concentration of credit risk consist primarily of cash and cash equivalents, restricted cash, short-term and long-term investments, loan receivables, amount due from related parties, other current assets, other assets and accounts receivable. All of the Group’s cash and cash equivalents and restricted cash are held with financial institutions that Group’s management believes to be high credit quality. In addition, the Group’s investment policy limits its exposure to concentrations of credit risk and the Group’s short-term and long-term investments consist of equity investments in listing and private companies. The Group’s loan receivables are lent to entities with high credit quality. The Group conducts credit evaluations on its group and agency customers and generally does not require collateral or other security from such customers. The Group periodically evaluates the creditworthiness of the existing customers in determining an allowance for accounts receivable, loan receivable and financial assets, including other current assets, other assets and amounts due from related parties based on the expectation of future economic conditions, historical collection experience and a loss-rate approach.

 

Fair value

 

The Group defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

 

The established fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of inputs may be used to measure fair value include:

 

F-22


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

2.              SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued

 

Fair value - continued

 

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.

 

When available, the Group uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not available, the Group measures fair value using valuation techniques that use, when possible, current market-based or independently sourced market parameters, such as interest rates. The Group’s financial instruments include cash and cash equivalent, restricted cash, loan receivables current and non-current portion, receivables, payables, short-term debts, long-term debts. The carrying amounts of these 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 rate approximates market interest rate, and market interest rates have not fluctuated significantly since the commencement of loan contracts signed. The carrying amounts of convertible senior notes were RMB3,290 and RMB3,348 and the corresponding fair value estimated based on quoted market price were RMB3,711 and RMB3,229, as of December 31, 2019 and March 31,2020, respectively. The fair value of pension plan assets is discussed in Note 18.

 

As of December 31, 2019 and March 31, 2020, information about inputs into the fair value measurements of the Group’s assets and liabilities that are measured at fair value on a recurring basis in periods subsequent to their initial recognition is as follows:

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

As of
December 31,

 

Description

 

Fair Value

 

Quoted Prices in Active
Markets for Identical
Assets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

2019

 

Equity securities with readily determinable fair value

 

2,908

 

2,908

 

 

 

 

 

2019

 

Available-for-sale debt securities

 

220

 

 

 

220

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

As of
March 31,

 

Description

 

Fair Value

 

Quoted Prices in Active
Markets for Identical
Assets
(Level 1)

 

Significant Other
Observable Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

2020

 

Equity securities with readily determinable fair value

 

1,539

 

1,539

 

 

 

 

 

2020

 

Available-for-sale debt securities

 

220

 

 

 

220

 

 

 

 

F-23


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

2.              SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued

 

Fair value - continued

 

The following table presents the Group’s assets measured at fair value on a non-recurring basis for the three months ended March 31, 2019 (unaudited) and 2020:

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

Three Months Ended
March 31,

 

Description

 

Fair Value for
Three Months Ended
March 31

 

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total
Loss for
the Year

 

2019

 

Property and equipment

 

 

 

 

 

 

 

 

2019

 

Long-term investment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

 

 

Three Months Ended
March 31,

 

Description

 

Fair Value for
Three Months Ended
March 31

 

Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)

 

Significant
Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total
Loss for
the Year

 

2020

 

Operating right-of-use Assets

 

23

 

 

 

 

 

23

 

10

 

2020

 

Long-term investment

 

 

 

 

 

 

 

92

 

 

As a result of reduced expectations of future cash flows from certain leased hotels, the Group determined that the hotels property and equipment with a carrying amount of RMBnil (unaudited) and nil was not fully recoverable and consequently recorded an impairment charge of RMBnil (unaudited) and nil for the three months ended March 31, 2019 and 2020, respectively. The Group also determined that the operating lease right-of-use assets amount with a carrying amount of RMB33 was not fully recoverable and consequently recorded an impairment charge of RMB10 for the three months ended March 31, 2020.

 

Fair value of the property and equipment and right-of-use assets impairment testing 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. As a result, the Group has determined that the majority of the inputs used to value its long-lived assets held and used and its reporting units are unobservable inputs that fall within Level 3 of the fair value hierarchy. The revenue growth rate and the discount rate were the significant unobservable input used in the fair value measurement, which are 4% and 20%, respectively, for the year ended December 31, 2019 and March 31, 2020, respectively.

 

As a result of the impairment assessment, the Group determined that the long-term investment amount with a carrying amount of nil (unaudited) and RMB92 was impaired as a result of the impairment assessment for the three months ended March 31, 2019 and 2020, respectively.

 

F-24


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

2.              SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued

 

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. The share-based compensation expenses have been categorized as either hotel operating costs, general and administrative expenses or selling and marketing expenses, depending on the job functions of the grantees. For the three months ended March 31, 2019 and 2020, the Group recognized share-based compensation expenses of RMB26 (unaudited) and RMB29 respectively, which was classified as follows:

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2020

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Hotel operating costs

 

8

 

10

 

Selling and marketing expenses

 

1

 

1

 

General and administrative expenses

 

17

 

18

 

Total

 

26

 

29

 

 

Earnings (Losses) per share

 

Basic earnings(loss) 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).

 

The loaned shares under the ADS lending agreement are excluded from both the basic and diluted earnings (losses) per share calculation unless default of the ADS lending arrangement occurs which the Group considered the possibility is remote.

 

Segment and geography information

 

The Group identifies a business as an operating segment if: i) it engages in business activities from which it may earn revenues and incur expenses; ii) its operating results are regularly reviewed by the Chief Operating Decision Maker (“CODM”) to make decisions about resources to be allocated to the segment and assess its performance; and iii) it has available discrete financial information. The Group’s chief operating decision maker has been identified as the chief executive officer. Before the acquisition of DH completed on January 2, 2020, CODM regularly reviews the operation data, such as industrial metrics of revenue per available room, occupancy rate, and number of hotels by scale/brand, to assess the performance and allocate the resources at brand level. All the acquired business including Accor, Crystal Orange and Blossom hotel management has been migrated to the Group’s business, and the Group operated and managed its business as a single operating and reporting segment. After the acquisition of DH, CODM regularly reviews the operating data and EBITDA, which is defined as earnings before interest income, interest expense, income tax expense (benefit) and depreciation and amortization, a non-GAAP financial measure for legacy Huazhu and legacy DH separately to evaluate their performance. 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.

 

F-25


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

2.              SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued

 

Segment and geography information - continued

 

The following table provides a summary of the Group’s operating segment results for the three months ended March 31, 2020. There is no reconciliation items and the total amounts are consistent with the consolidation amounts.

 

 

 

Legacy Huazhu

 

Legacy DH

 

Total

 

 

 

 

 

 

 

 

 

Net revenues

 

1,288

 

725

 

2,013

 

Operating costs and expenses

 

2,081

 

877

 

2,958

 

Other operating (expenses) income, net

 

62

 

26

 

88

 

Interest income

 

29

 

0

 

29

 

Interest expense

 

110

 

27

 

137

 

Other income (expenses), net

 

(104

)

2

 

(102

)

Unrealized gains (losses) from fair value changes of equity securities

 

(1,003

)

 

(1,003

)

Foreign exchange gain (loss)

 

(58

)

0

 

(58

)

Loss before income tax

 

(1,977

)

(151

)

(2,128

)

Income tax expense (benefit)

 

5

 

(35

)

(30

)

Income (loss) from equity method investments

 

(54

)

(6

)

(60

)

Net loss attributable to noncontrolling interest

 

(23

)

 

(23

)

Net loss attributable to Huazhu Group Limited

 

(2,013

)

(122

)

(2,135

)

Income tax expense (benefit)

 

5

 

(35

)

(30

)

Interest income

 

29

 

0

 

29

 

Interest expense

 

110

 

27

 

137

 

Depreciation and amortization

 

264

 

57

 

321

 

EBITDA (Non-GAAP)

 

(1,663

)

(73

)

(1,736

)

 

The following table presents total assets and liabilities for operating segments, reconciled to consolidated amounts:

 

 

 

Legacy Huazhu

 

Legacy DH

 

Total

 

 

 

 

 

 

 

 

 

Total assets

 

40,579

 

19,099

 

59,678

 

Total liabilities

 

41,949

 

12,453

 

54,402

 

 

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

 

1,284

 

Germany

 

511

 

All other

 

218

 

Total

 

2,013

 

 

Property and equipment, net, intangible assets, net, right-of-use assets, land use rights, net and goodwill:

 

China

 

30,815

 

Germany

 

15,992

 

All other

 

2,413

 

Total

 

49,220

 

 

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 three months ended March 31, 2020.

 

F-26


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

2.              SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued

 

Treasury shares

 

Treasury shares represent shares repurchased by the Company that are no longer outstanding and are held by the Company. Treasury shares are accounted for under the cost method. As of December 31, 2019 and March 31, 2020, under the repurchase plan, the Company had repurchased an aggregate of 3,096,764 ordinary shares on the open market for total cash consideration of RMB107. The repurchased shares were presented as “treasury shares” in shareholders’ equity on the Group’s consolidated balance sheets.

 

Recently Issued Accounting Pronouncements

 

Adopted Accounting Standards

 

In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities with certain practical expedients available on the balance sheet and disclosing key information about leasing arrangements. Subsequent to ASU 2016-02, the FASB issued related ASUs, including ASU No. 2018-11(“ASU 2018-11”), Leases (Topic 842): Targeted Improvements, which provides for another transition method in addition to the modified retrospective approach required by ASU 2016-02. This option allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative adjustment to the opening balance of retained earnings in the period of adoption rather than retrospectively adjusting prior periods and the package of practical expedients, which allowed the Group to (1) not reassess whether existing contracts contain leases, (2) carry forward the existing lease classification, and (3) not reassess initial direct costs associated with existing leases. Upon adoption of Topic 842, the Group elected to use the remaining lease term as of January 1, 2019 in estimation of the applicable discount rate for leases that were in place at adoption. By applying ASU 2016-02 at the adoption date, as opposed to at the beginning of the earliest period presented, the reporting for periods prior to January 1, 2019 continued to be reported in accordance with Leases ASC 840.

 

As a result of adoption, the Group recognized operating ROU assets of RMB18,940 and related lease liabilities of RMB19,438 for operating leases. The Group reclassified from assets and liabilities RMB498 net to operating ROU assets. The adoption of ASU 2016-02 did not materially affect the consolidated statements of income or consolidated statements of cash flows and had no impact on the debt covenant compliance under the current agreements.

 

The impact on the Group’s consolidated balance sheet upon adoption of ASU 2016-02 was as follows:

 

 

 

December 31, 2018

 

January 1, 2019

 

 

 

As Reported

 

Effect of Adoption ASU 2016-02

 

As Adjusted

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid rent

 

955

 

(955

)

 

Intangible assets, net

 

1,834

 

(181

)

1,653

 

Operating lease right-of-use assets

 

 

18,940

 

18,940

 

Total assets

 

2,789

 

17,804

 

20,593

 

 

 

 

 

 

 

 

 

Accrued expenses and other current liabilities

 

1,607

 

(126

)

1,481

 

Deferred rent

 

1,507

 

(1,507

)

 

Other long-term liabilities

 

453

 

(1

)

452

 

Operating lease liabilities, current

 

 

2,733

 

2,733

 

Operating lease liabilities, non-current

 

 

16,705

 

16,705

 

Total liabilities

 

3,567

 

17,804

 

21,371

 

 

F-27


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

2.              SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued

 

Adopted Accounting Standards - continued

 

Further in April 2020, the FASB released a Q&A which allows lessees and lessors to make an election to either apply the lease modification guidance or the variable rents guidance under ASC 840 and ASC 842 for lease concessions related to COVID-19 as long as the total cash flows as a result of the concession are substantially the same or less than those in the contract before the concession. A preparer can make this election without the need to determine whether a force majeure clause exists in the lease. The Group has elected to account for the lease concessions as variable lease expenses and recognized RMB38 negative lease expense under the relief for the three months ended March 31, 2020. The Group expects to record additional negative lease expense in future periods as the negotiation with lessors is still in process.

 

In June 2016, the FASB released ASU No.2016-13 (“ASU 2016-13”), Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU, along with subsequent ASUs issued to clarify certain provisions of ASU 2016-13, provide more useful information about expected credit losses to financial statement users and changes how entities will measure credit losses on financial instruments and timing of when such losses should be recognized. The standards are to be applied using a modified retrospective approach and are effective for interim periods and fiscal years beginning after December 15, 2019, with early adoption permitted. The Group adopted the guidance on January 1, 2020, as required, using the modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align the Group’s current processes for establishing an allowance for credit losses with the new guidance. Upon adoption, the Group recorded an adjustment of RMB7 to opening retained earnings related to the credit allowance for accounts receivable, other receivables and loan receivables. ASU 2016-13 did not materially affect Group’s consolidated financial statements.

 

In January 2017, the FASB issued ASU No.2017-04, Intangibles-Goodwill and Other, which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. As a result, under the ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, the ASU clarifies the requirements for excluding and allocating foreign currency translation adjustments to reporting units in connection with an entity’s testing of reporting units for goodwill impairment. The ASU also clarifies that an entity should consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. For public business entities, the ASU is effective prospectively for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Group adopted this ASU on January 1, 2020 and the adoption does not have a significant impact on the Group’s consolidated financial statements.

 

In August 2018, the FASB released ASU No. 2018-13 (“ASU 2018-13”), Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 modifies the disclosure requirements on fair value measurements. The provisions of ASU 2018-13 are to be applied using a prospective or retrospective approach, depending on the amendment, and are effective for interim periods and fiscal years beginning after December 15, 2019, with early adoption permitted. The Group adopted this ASU on January 1, 2020 and the adoption of this ASU does not have a significant impact on the Group’s consolidated financial statements.

 

In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. The new standard changes how entities evaluate decision-making fees under the variable interest entity guidance. The new standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance. The standard should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption. The Group adopted this ASU on January 1, 2020 and the adoption of this ASU does not have a significant impact on the Group’s consolidated financial statements.

 

F-28


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

2.              SUMMARY OF PRINCIPAL ACCOUNTING POLICIES - continued

 

Accounting Standards Not Yet Adopted

 

In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20). The amendment modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The revised guidance is effective for financial statements issued for fiscal years beginning after December 15, 2020, with early adoption permitted. The revised guidance will not have a material impact on the Group’s consolidated financial statements.

 

In December 2019, the FASB has issued ASU No. 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes. The guidance issued in this update simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for deferred tax liabilities for outside basis differences. This ASU also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted, and is not expected to have a material impact on the Group’s consolidated financial statements.

 

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions that the Company can elect to adopt, subject to meeting certain criteria, regarding contract modifications, hedging relationships, and other transactions that reference the London interbank offered rate for deposits of US dollars (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The relief provided in ASU 2020-04 is applicable to all entities, but is only available through December 31, 2022. The Group is still assessing the impact of adopting ASU 2020-04.

 

Translation into United States Dollars

 

The consolidated 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 = RMB7.0808, on March 31, 2020, 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 March 31, 2020, or at any other rate.

 

3.              ACQUISITIONS

 

On January 2, 2020, the Group completed the 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 net revenue and net loss of the acquiree included in the consolidated statements of comprehensive income for the three months ended March 31, 2020 were RMB725 and RMB122, respectively.

 

F-29


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

3.              ACQUISITIONS - continued

 

The following table summarizes unaudited pro forma results of operation for the three month ended March 31, 2019 and 2020 assuming that the acquisition occurred as of January 1, 2019. The pro forma results have been prepared for comparative purpose only based on management’s best estimate and do not purport to be indicative of the results of operations which actually would have resulted had the acquisition occurred as of January 1, 2019.

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2020

 

 

 

 

 

 

 

Pro forma net revenue

 

3,280

 

2,013

 

Pro forma net income (loss)

 

73

 

(2,158

)

 

The Group incurred transaction cost of RMB70 for the acquisition, which was expensed in 2019. These expenses are non-recurring in nature, and were eliminated from the calculation of pro forma net income above.

 

The following is a summary of the fair values of the assets acquired and liabilities assumed:

 

 

 

2020

 

Amortization Period

 

 

 

 

 

 

 

Current assets

 

785

 

 

 

Property and equipment, net

 

586

 

2-25 years

 

Operating lease right-of-use assets

 

8,616

 

The lease terms

 

Finance lease right-of-use assets

 

1,794

 

Shorter of estimated useful lives of the assets and the lease terms

 

Franchise agreements

 

270

 

Remaining contract terms

 

Brand name

 

3,873

 

Indefinite life

 

Non-compete agreement

 

10

 

2 years

 

Goodwill

 

2,682

 

 

 

Deferred tax assets

 

170

 

 

 

Other non-current assets

 

280

 

 

 

Operating lease liabilities, current

 

(296

)

 

 

Finance lease liabilities, current

 

(21

)

 

 

Other current liabilities

 

(784

)

 

 

Operating lease liabilities, non-current

 

(8,553

)

 

 

Finance lease liabilities, non-current

 

(2,166

)

 

 

Other non-current liabilities

 

(330

)

 

 

Deferred tax liabilities

 

(1,292

)

 

 

Total

 

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. None of the Goodwill is expected to be deductible for tax purposes.

 

F-30


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

4.             REVENUE FROM CONTRACTS WITH CUSTOMERS

 

Disaggregated Revenues

 

The following tables present the Group’s revenues disaggregated by the nature of the product or service:

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

2020

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Room revenues

 

1,560

 

1,058

 

Food and beverage revenues

 

82

 

205

 

Others

 

64

 

253

 

Leased and owned hotels revenue

 

1,706

 

1,516

 

Initial one-time franchise fee

 

21

 

23

 

On-going management and service fees

 

244

 

111

 

Central reservation system usage fees, other system maintenance and support fees

 

169

 

111

 

Reimbursements for hotel manager fees

 

128

 

144

 

Other fees

 

101

 

76

 

Manachised and franchised hotels revenue

 

663

 

465

 

Other revenues

 

18

 

32

 

Total revenues

 

2,387

 

2,013

 

 

Contract Balances

 

The Group’s contract assets are insignificant at December 31, 2019 and March 31, 2020.

 

 

 

As of December 31,

 

As of March 31,

 

 

 

2019

 

2020

 

 

 

 

 

 

 

Current contract liabilities

 

1,179

 

1,230

 

Long-term contract liabilities

 

559

 

546

 

Total contract liabilities

 

1,738

 

1,776

 

 

The contract liabilities balances above which are classified as deferred revenue on the consolidated balance sheet, as of December 31, 2019, and March 31, 2020 were comprised of the following:

 

 

 

As of December 31,

 

As of March 31,

 

 

 

2019

 

2020

 

 

 

 

 

 

 

Initial fees received from franchisees owners

 

869

 

862

 

Cash received for membership fees and not recognized as revenue

 

400

 

369

 

Advances received from customers

 

412

 

489

 

Deferred revenue related to the loyalty program

 

57

 

56

 

Total

 

1,738

 

1,776

 

 

The Group classifies initial fees received from franchisees into current liabilities when the hotel has not yet opened. Initial fees received from franchisees for pre-opening hotels are RMB448 and RMB435 as of December 31, 2019, and March 31, 2020, respectively. Once the hotel opens, initial one-time franchise fee will be recognized as revenue over the term of the franchise contract and the initial fees received from franchisees that has not been recognized as revenue will be reclassified into current contract liabilities and long-term contract liabilities respectively.

 

The Group recognized revenues that were previously deferred as contract liabilities of RMB105 (unaudited) and RMB334 for the three months ended March 31, 2019 and 2020, respectively.

 

F-31


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

4.              REVENUE FROM CONTRACTS WITH CUSTOMERS - continued

 

Revenue Allocated to Remaining Performance Obligations

 

Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods.

 

As of March 31, 2020, the Group had RMB56 of deferred revenues related to unsatisfied performance obligations under HUAZHU Rewards that will be recognized as revenues when the points are redeemed, which the Group estimates will occur over the next two years. The Group had RMB862 of deferred revenues related to initial fees received from franchisees owners are expected to be recognized as revenues over the remaining contract periods over generally one to ten years. Additionally, the Group had RMB369 of deferred revenues related to membership fees that are expected to be recognized as revenues over the remaining membership life, which is estimated to be one to five years. The Group also had RMB489 of deferred revenues related to advances received from customers, which are expected to be recognized as revenues in future periods over the terms of the related contracts.

 

The Group did not estimate revenues expected to be recognized related to our unsatisfied performance for the following:

 

·                  Revenues related to on-going management and franchise service fees, as they are considered sales-based royalty fees.

 

·                  Revenues related to central reservation system usage fees, other system maintenance and support fees, and reimbursement for hotel manager fee, as the related revenues from the satisfaction of these performance obligations is recognized when the Group is entitled to invoice the amount.

 

5.             PROPERTY AND EQUIPMENT, NET

 

Property and equipment, net consist of the following:

 

 

 

As of December 31,

 

As of March 31,

 

 

 

2019

 

2020

 

 

 

 

 

 

 

Cost:

 

 

 

 

 

Buildings

 

247

 

247

 

Leasehold improvements

 

8,414

 

8,822

 

Furniture, fixtures and equipment

 

1,270

 

1,816

 

Motor vehicles

 

1

 

1

 

 

 

9,932

 

10,886

 

Less: Accumulated depreciation

 

(4,918

)

(5,146

)

 

 

5,014

 

5,740

 

Construction in progress

 

840

 

731

 

Property and equipment, net

 

5,854

 

6,471

 

 

Depreciation expense was RMB225 (unaudited) and RMB293 for the three months ended March 31, 2019 and 2020, respectively.

 

The Group occasionally demolishes certain leased hotels due to local government zoning requirements, which typically results in receiving compensation from the government.

 

F-32


 

HUAZHU GROUP LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019

(RMB in millions, except share and per share data, unless otherwise stated)

 

6.             INTANGIBLE ASSETS, NET

 

Intangible assets, net consist of the following:

 

 

 

As of December 31,

 

As of March 31,

 

 

 

2019

 

2020

 

 

 

 

 

 

 

Intangible assets with indefinite life:

 

 

 

 

 

Brand name (Note 3)

 

1,340

 

5,212

 

Master brand agreement

 

192

 

192

 

Intangible assets with definite life:

 

 

 

 

 

Franchise agreements

 

95

 

365

 

Favorable lease agreements

 

13