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