Hall of Shame

Consumer Discretionary

Huazhu Group Ltd (HTHT US; 1179 HK)

Year: 2020

Huazhu Group Limited is a China-based holding company. The Company is mainly engaged in the operation of develop leased and owned, manachised and franchised hotels. Under the lease and ownership model, the Company directly operates hotels located primarily on leased properties, as well as on owned properties. Under the manachise model, the Company manages manachised hotels through the on-site hotel managers the Company appoints and collects fees from franchisees. Under the franchise model, the Company collects fees from franchisees but do not appoint on-site hotel managers. The Company engages in the hotel operation business under the following brands, including HanTing Hotel, Ni Hao Hotel, JI Hotel, Crystal Orange Hotel, Joya Hotel and others.

The company listed on the NASDAQ as China Lodging Group Ltd in March 2010 and raised US$126.79M during its IPO.

June 11, 2018 China Lodging Group Limited announced its name change to Huazhu Group Limited.

January 16, 2019 GMT Research reviewed Huazhu, as one of the companies, in its report "THE OVERSEAS CHINESE: Top 30 US-listed Chinese companies".   It had two major concerns with Huazhu: 

  1. the risk that businesses are held off-balance sheet and hence costs and liabilities are possibly underreported; and
  2. excess capital raising, which has been used to buy non-core assets, although this has occurred relatively recently.

In addition, the size of its hotel portfolio held off-balance sheet meant new lease accounting rules would cause a huge increase in on-balance sheet debt when introduced in 2019. GMT rated Huazhu Group as high risk from an accounting perspective.

September 22, 2020 The Company listed on the Hong Kong Exchange raising HK$6.07B in a secondary listing.

September 22, 2020 Bonitas Research released a short report on the Company. In the report, Bonitas alleged that Huazhu concealed operating expenses and inflated profits by RMB2B (US$300M). Bonitas said that it's research had found:

  • Since 2017 Huazhu’s SEC reported profits were significantly better than two of its direct Chinese-listed competitors. Bonitas believed Huazhu fabricated its SEC-reported profitability which manifested as fake PP&E assets on its balance sheet.
  • Large discrepancies in Huazhu's Hotel portfolio. The numbers, reported by Huazhu, of self-operated, franchised and party related hotels were vastly different to the number uncovered in Bonitas' research.
  • Comparing SAIC registered data against SEC filings, Huazhu understated its SEC reported employee count by at least 3,594 (16%).
  • As of CYE’19, Huazhu reported net PP&E (ex. buildings) per room of RMB 54,502. However, 47 different credit reports for Huazhu’s hotel portfolio revealed Huazhu’s actual net PP&E (ex. buildings) per room was half that amount; a figure in-line with direct domestic Chinese competitors, in-line with one of Huazhu’s largest operating subsidiaries
  • Huazhu’s approved hotel construction contractor list included multiple undisclosed current Huazhu employees. Credit reports for two undisclosed related party contractors revealed significant revenues without profit or assets which suggested to Bonitas their possible use as a front to wash fake cash via construction costs.

Concluding, Bonitas expressed its belief that Huazhu generated significantly less profit and held significantly less PP&E assets than reported in both its SEC filings and HKEX Global Offering. Bonitas was short Huazhu because it believed that Huazhu’s actual financial performance justified a significantly lower stock price.

September 22, 2020 In an announcement, Huazhu responded that "the company believes that the report is unfounded, it contains many false, unsubstantiated statements and misleading conclusions about the company's business and operations."

September 25, 2020 The company announced the formation of a Special Committee. The Special Committee was comprised of three members, the chairman of the audit committee, the chief financial officer, and the secretary and general counsel of the Company. The Special Committee retainde Cleary Gottlieb Steen & Hamilton LLP as the Special Committee’s independent outside counsel.

September 28, 2020 Huazhu issued a clarifications announcement addressing the main five allegations in the Bonitas report.

September 29, 2020 Bonitas issued a response to Huazhu's clarification. It noted that Huazhu denied all of Bonitas's allegations without providing any substantive evidence to refute the facts presented in its' report. It added further evidence to back up its allegations and said it and remained short because it believed Huazhu generated significantly less profit and held significantly less PP&E assets than reported in both its SEC filings and HKEX Global Offering.

September 30, 2020 Huazhu responded saying that similar to the initial report published by Bonitas Research on September 22, the Company believed the additional report was without merit and that it contained numerous errors, unsubstantiated statements, and misleading conclusions regarding the Company’s business and operations. It also stated that given that it had already responded to Bonitas Research’s allegations twice, the Company may not respond to future allegations by Bonitas Research, unless required by the applicable laws or listing rules.


GMT Research: THE OVERSEAS CHINESE: Top 30 US-listed Chinese companies, 16 Jan 2019
Bonitas Research: Huazhu - Short, 21 Sep 2020
Huazhu: Announcement, 22 Sep 2020
Huazhu: Clarifications, 28 Sep 2020
Bonitas Research: Response to clarifications - remains short, 29 Sep 2020
Huazhu: Global Offering, 11 Sep 2020
Huazhu: Annual Report - YE Dec. 2019
Huazhu: Annual Report - YE Dec. 2018