• China operators stick with growth plan

China’s domestic operators, China Lodging and Home Inns, are continuing to plan expansion, despite concerns over the country’s economy.

China Lodging described 2014 as “an investment year” while both it and Home Inns said that they would be looking to growth in the economy segment.

At China Lodging, CFO Jenny Zhang said: “We not only are going to invest in the new leased hotels into this [Ji Hotel] brand, we are also going to invest into the marketing, and also human resources to build a major platform for the future growth.” She added that the group was also planning on accelerating growth in a few of its smaller brands.

Zhang said that the group was looking to expand through acquisition as well as organically, commenting: “We have been actively looking around for various M&A opportunities. In 2013 we completed a deal to buy a few hotels in the Jiujiang province which were a small chain. We continue to look for those type of opportunities if the valuation and asset quality are satisfactory.” She said the group remained “open minded” about bigger deals.

The company is continuing to pursue growth through the manachised model, forecasting the addition of 420 to 450 new hotels in 2014, with 50 to 60 leased hotels and 370 to 390 manachised hotels.  Among these new hotels, 80% will be economy hotels and 20% will be midscale hotels.

Of the current portfolio of 1,425 hotels, 40% were leased hotels, 59% were manachised hotels, and the remaining 1% were franchised Starway Hotels. For the fourth quarter last year, leased hotels revenue grew 25%, to CHY1.04bn (USD171.2m) and the manachised and franchised hotels revenue grew 44% year on year to CHY151.7m. Total revenue for period was CHY1.19bn, up 26.9% on the year and down 2.3% on the quarter. The drop was attributed to seasonality.

Looking forward, the company forecast net revenues in the range of CHY1.03bn to CHY1.05bn in the first quarter of 2014, representing a 19% to 21% year-over-year growth. Revenue growth for the full year was expected to be 20% to 23%.

In line with the growing trend for mobile bookings in the Asia-Pacific region, Zhang said that the company would continue to invest in the area. She said: “The mobile application has brought major change to consumer behaviour. It's a fast-growing trend in China. And no matter for hotel groups or for the OTA, we must embrace this big shift in the market.

“The app will continue to be our major channel going forward. And in terms of our competitiveness in this channel, we are going to provide our best price there.”

The CFO said that China Lodging had seen booking through the mobile app double in the fourth quarter.

There was a similar theme to Home Inns’ earnings call, where CEO David Sun described the group’s expansion strategy as focused on “franchised and managed hotels”. He added: “We see visible and ample growth opportunity in economy hotels sector in China.” At the end of the fourth quarter franchised and managed hotels represented 60% of its total hotels in operation and over 80% of the pipeline was franchised and managed contracts.

Revenues from leased and operated hotels for the fourth quarter was CHY1.4bn, a 7.4% increase year-on-year, with revenue from franchised and managed hotels of CHY208m, an increase of 29.4% on the year. Total revenue for the quarter was CHY1.61bn, up 9.8% on the year.

The company expects to open no less than 450 new hotels in 2013, including 70 to 90 leased and operated hotels and 350 to 380 franchise managed hotels. As with China Lodging, the company expects to acquire some existing chains. Huiping Yan, CFO, said: “In some cases, if the local chain operation is very prominent, it has a good local customer base and following, we would choose to co-brand. And in other cases, depending on the scale and the customer base and the local awareness, we may choose to completely do away with the existing brand.”

For the full year, the group forecast revenues in the range of CHY6.8bn to CHY7bn, representing a growth of 7% to 10.2% over 2013. Revpar for the year was expected to be “flattish and down based on the current view”.

Sun was cautious looking ahead, commenting: “We believe short-term challenges still remain. There are no clear signs of meaningful recovery in the macro conditions”.

 

HA Perspective [by Katherine Doggrell]: At both companies’ third-quarter results, enthusiasm was the order of the day, with chat from Home Inns in particular looking towards the international markets. This time around, it’s a lot more batten-down-the-hatches as China’s economy slows and the recent terrorist attack in which 29 people were knifed to death has investors spooked.

The global operators have turned their attention back to the more established markets, with many shifting their aspirations for China away from luxury brands and towards the mid-market. For China Lodging and Home Inns, the focus remains on economy, with the emphasis on asset-light and hoovering up smaller chains.

The terrorist attack raises questions for development in the country. Only this week the EU and US criticised the country’s human right record following the death of an activist. This has not so far deterred development. As one hotel executive told me recently, their company didn’t have a seat on the UN. As long as they did no harm themselves, the actions of government were no great concern, they said. China has many enemies, many from within and those wishing to operate within it would at least be well-placed to do their research.

Home Inns’ Sun said: “The recent events of public safety and security concerns cast further shadows on this segment.” The existing shadows being worries over the economy. In mid-March Goldman Sachs become the latest bank to downgrade its GDP growth forecast for China, describing the world's second largest economy as facing a "bumpy road ahead." The bank lowered its 2014 forecast to 7.3% from 7.6% and cut its 2015 outlook to 7.6% from 7.8%.

"Both trade and consumption – factors that we had expected to provide positive support to growth this year – disappointed in the first two months of 2014, relating to the anti-corruption efforts, which affected consumption, and the soft developed market recovery," economists led by Li Cui, managing director, China Macro Research at the bank wrote in a note.

The domestic operators are past their initial development frenzies and are now filling in the gaps in secondary and tertiary markets. The global operators should not yet rest easy – China’s hoteliers may yet seek safe haven in their back yards.
 

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