• China’s operators mature

China Lodging reported growth in the second quarter, driven by its midscale and upscale brands.

The news came as HNA Group made its structure less opaque, while Dalian Wanda added a third party to its asset sale.

China Lodging reported performance up across its estate, with revpar up 8.3% on the year for the second quarter, driven by occupancy and rate. Across the segments, midscale and luxury saw a 9.9% increase in revpar, with 7.7% for the economy hotels. The group has continued to expand, adding 205 hotels, net, during the period and reporting a pipeline of 612 sites, of which 582 were managed and franchised and the remainder leased.

The group’s agreement with AccorHotels has seen it add 33 hotels under the French group’s brands.

Earlier this year China Lodging launched three mid-market brands: CitiGo, an urban version of Manxin and HanTing Class. During the past three years, the company has increased room inventories in midscale and upscale segment from 11% in 2014 to 19% in the first quarter.

Jenny Zhang, China Lodging CEO, said that, were it to add a new brand, it would be to strengthen its position in the upscale and the luxury segment.

As China Lodging was continuing to grow in its domestic market, HNA Group revealed details of its ownership structure, with New York-based Hainan Cihang Charity Foundation owning 29.5% of the group, following the donation of a holding by businessman Guan Jun. The next-largest stake, of 22.75%, is also owned by a charity, Hainan Province Cihang Foundation, which is based in China.

Hainan Cihang Charity Foundation was formed in New York in December, while Hainan Province Cihang Foundation was formed in 2010. No details were given on the structure of the charities or who headed them.

HNA’s two chairmen, Chen Fang and Wang Jian, each hold 14.98% of the company, while CEO Adam Tan holds a 2.95% stake. Nine other directors hold a total of 14.63%, with the Hainan Airlines Holding Company owns 0.25%.

The group said that it expected all of the company to transfer to the Cihang Foundation over time “because all of the individual shareholders have pledged to donate all of their shares to the foundation upon death or resignation from the company”.

HNA said that there was “a great deal of interest in who we are and how we are structured” as the company expand rapidly, and that “although we are a private company with no obligation to disclose our ownership, we respect and appreciate the desire for transparency in this regard”. HNA said that it planned to update ownership details on “an annual basis” going forward.

HNA has come under pressure to reveal details of its structure as a series of deals have seen its profile raised across a number of industries, including hospitality, where it purchased a stake in Hilton, as well as Carlson Hotels, Rezidor Hotel Group and NH Hotel Group.

HNA’s clarification came as Dalian Wanda amended its transaction with Sunac China. Earlier this month the company had announced plans to sell a USD9.3bn package of hotels and theme parks to give full scope to its “business strength”.

Under the terms of the deal, Wanda was to transfer 91% of its equity interest in 13 Wanda Cultural Tourism City projects, plus 76 hotels. After the transfer of the hotels, the hotels’ existing management contracts will continue until expiration. Projects in planning will also continue to be developed.

Dalian Wanda has now added R&F Properties to the deal, which will now see Wanda Commercial Properties transfer 77 hotels, to R&F for CHY19.91bn (USD3bn) , as well as 91% of the equity of 13 cultural tourism projects in such cities as Xishuangbanna and Nanchang to Sunac for CHY43.84bn.

R&F has opened and built 24 premium hotels throughout the world and will operate over 100 hotels after acquiring the 77 properties. Wanda Group described the deal as “once-in-a-hundred-year opportunity to acquire the properties at such a low price”. The pair have an existing relationship through the development of shopping complexes/

Wang Jianlin, chairman, Wanda Group said that, compared with the initial agreement, “R&F is added as a trading party, but the object and total amount of the transaction are basically the same”.

No reason was given for the change in structure of the deal, but analysts pointed to the reduced debt requirements under the new agreement, with Sunac no longer required to raise the money to buy Wanda’s hotels, money which Wanda had planned to lend. Speculation has suggested that the authorities in China have warned banks over lending to Wanda, after its overseas buying spree, which has seen it expand into areas including cinema.

Jileen Loo, head of Asia Desk, International Capital Markets, CBRE Hotels EMEA, told us: “It has already been well published that the big four (Wanda, Anbang, HNA and Fosun) are now under scrutiny by Chinese regulators.

“Some have suggested that they seem to be going from opaque to transparent, however this is more likely through necessity than strategy. Just last week in a confusing state of affairs, Wanda altered its multi-billion-dollar deal to sell its hotel and theme parks by adding another company to the mix. “These changes were reported over a two-week period and from my experience even smaller, less complicated deals can take longer than two weeks to work out the fine print so who really knows what was agreed behind closed doors? I suspect this sudden need by Wanda to broadcast a significant disposal was due to pressure from the banks and as a way of demonstrating their way of ‘streamlining’ their business towards a more focussed and asset lighter approach.

“Looking at full year 2016 deals data the spend by Chinese investors on the hotels sector saw an increase of 28% from 2015 mainly driven by the USD6.5bn Strategic Hotels Portfolio deal which Anbang acquired from Blackstone. If we exclude the big portfolio transaction, total hotel investment by Chinese capital actually dropped by 31% and thought some deals were discussed, and single assets were acquired by (mainly private) Chinese investors there was no major portfolio acquisitions in Europe by State Owned Enterprise or institutional Chinese investors in 2016.”

HA Perspective [by Katherine Doggrell]: This year has seen a crackdown by Beijing on outbound investment, with rumours earlier this year suggesting that HNA might not be able to complete its investment in Hilton. That went through, but the group continues to struggle with Rezidor Hotel Group.

This is unlikely to slow deals down. Loo told us: “I don’t think Chinese investment has dried up for 2017. The Chinese outbound investment trend will continue but I expect the total investment turnover will be smaller than last year. We are expecting to see smaller deals as every deal over USD 1 billion need special approval from the government. The recent scrutiny on the big spenders and difficulties to get onshore guarantees for offshore loans will lengthen the process for Chinese outbound investment making them less attractive as buyers.”

Lauro Ferroni, global head of hotels & hospitality research, JLL, added: “In the first six moths of 2017 mainland China was the largest source of outbound investment. It hasn’t come to a grinding halt – a lot of it is business as usual, but there can be pressure from a senior level in the final stages of a deal. Typically we are looking at China with a longer-term perspective, given its position as the number two economy in the world.

“China continues to be the largest exporter of outbound hotel capital, and has quickly become a key source of international capital with an increasing investment allocation into the sector.

Looking forward, we may not see a repeat of recent big-ticket transactions due to tighter capital controls imposed by the government; however, hotels will definitely continue to attract a larger share of Chinese outbound investment due to their desire for higher yields and vertically integrated approach to travel and tourism.”

One party playing the politics in the entangled world of China’s hospitality groups is Accor, which has a strategic relationship with China Lodging, counts Jin Jiang as a (so far this year) obedient shareholder and recently saw board member Nicolas Sarkozy attend a party held by HNA Group in London, completing the set. In June HNA denied that it had held talks with Accor to discuss buying a stake and counter the threat of Jin Jiang, but relations are apparently still cordial.

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