• China operators see opportunity in soft market

China Lodging and Home Inns & Hotels Management both used their first quarter results to reiterate their commitment to asset-light expansion, despite concerns over the softening Chinese economy.
Both companies claimed strong interest from franchisees, with China Lodging also viewing the weakened economy as an opportunity for growth in the leased market.
At China Lodging, CFO Jenny Zhang told analysts on the group’s earnings call: “There are a lot of properties which used to be four-star hotels, and now are ready for lease. As more of those properties come to the market, we’re finding plenty of opportunities.”
The company reiterated its full-year hotel opening target of 420 to 450 new hotels and its aim of seeing net revenues in the range of CHY1.21bn to CHY1.24bn in the second quarter, representing 17% to 20% year-on-year growth.
Zhang added: “We have already built a very strong pipeline, so we are confident that we will open those hotels. We don’t think the current opening target is too aggressive from the financial perspective. At the same time, we believe the economic softness has provided us a lot of consolidation opportunities for ourselves, as well as for our franchisees.”
Zhang acknowledged that the general softness of macro economy had meant a negative impact on the franchisee hotels’ profitability. However, she said that the company had not seen any “significant crash” in the business and described the environment as “still quite bearable” for franchisees.
The group is committed to the manachised sector, with 62% of its 1,530-hotel portfolio under the structure and 38% leased. The company has been pushing into the midscale sector, announcing that marketing of its midscale hotels had lead to a 14% increase in revpar at the sites during the period. “We are confident about the prospect of the midscale segment and we are willing to invest into it,” Zhang told analysts.
The company also announced increased investment in the economy sector, where it is renovating its Hanting brand. Founder, chairman & CEO Qi Ji said: “Among the different players in the economy hotel segment everyone has been working on an upgrade”. Ji said that, after a year of R&D on the rooms, the group would increase its investment to less than 10% in terms of capex, but a move which the CEO said would “provide a significantly better customer experience” which would allow ADR to be pushed higher.
At Home Inns & Hotels Management, CEO David Sun was equally buoyant on the subject of franchising, claiming “strong interest and demand from existing and new franchisees partners across all three of our brands”. As of the end of the quarter, franchised-and-managed hotels represented 61% of the group’s total hotels in operation, up from 56% from the same period a year ago and 60% as of the end of last year.
At the end of the quarter the group had a pipeline of 448 hotels, 95.5% of which were franchised and managed. The pace of opening had slowed for the company, with 63 franchised-and-managed hotels opening during the quarter, against 75 in the same period last year.
The group has maintained its target of opening no less than 450 new hotels for the full year, of which it expected to open 50 to 70 leased-and-operated hotels and 380 to 400 franchised-and-managed hotels. Revpar for the second quarter was expected to be “slightly down”, according to interim CFO May Wu, following a 2.2% drop in the first quarter. She added: “Hopefully the gradual improvement and stabilisation continues. We’re planning for perhaps a flat revpar in the later part of the year.”
Sun said that, in terms of acquisitions, the group had nothing in the pipeline, but that it would consider deals, commenting: “What we’re seeing now in the marketplace is, just as we’ve seen before, there are small chains that reach 20, 30, then feel the pressure … and are willing to sell”.
The group also announced plans to rebrand under the Home Inns flag, with Wu adding: “Home Inns umbrella is to instill the perception of value and trust and quality. This is not unlike any larger hotel chains such as Starwood, Marriot, Intercontinental, Accor. All of them have a collection of brands”.
Looking ahead to the rest of the year, Sun said that he had seen “some signs of rebound in market activities recently. However, we are not seeing any robust recovery at this moment”, adding that the group remained “positive and enthusiastic about the long-term opportunities in China’s travel and lodging industry. As such, we’re taking a cautious stand on leased-and-operated hotels unit growth, but are committed to our multi-brand development plan”.

HA Perspective [by Katherine Doggrell]: Time was, when you could throw up a high-end hotel in China and wait for The Party officials and doubloons to roll on in, pretty much. Now The Party is over, if not politically, then in terms of free meals and fancy beds. Add to this security concerns and a slowdown in growth and these are more trying times.
Now a little more finessing is required. As was commented on elsewhere in this issue, Starwood Hotels & Resorts has pulled down hard on its loyalty scheme lever and been rewarded. Here with the domestic players, who should be able to leverage their local knowledge, there has also been a loyalty scheme push. At China Lodging, the company grew membership by 79% between 2012 and 2013 (from what base is not clear) while at Home Inns the company saw membership up 38% on the year in the first quarter.
The companies have also been using technology as a differentiator, with China Lodging offering guests the chance to open some hotel rooms with their smartphones, plus the consumers’ dream – free wifi. Home Inns hailed its app, which accounted for 15.6% of total bookings in the first quarter.
It is no longer enough to have a hotel, the market has matured and the changing demographic – Party down, leisure up – is requiring a new level of sophistication. This is sophistication which the global operators already have, in the main, it now remains for them to be able to see out the current malaise in the hope of reaching the long-term gains which have become the chorus for any company reporting on its activities in China.

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