• Huazhu grabs Deutsche to move upmarket

Chinese hotel group Huazhu has agreed to buy German group Deutsche Hospitality, for EUR719m. The move will give fast-growing Huazhu a portfolio of upper end brands to grow in China, and adds a foothold in Europe, the Middle East and Africa.
The deal sees Nasdaq-listed Huazhu buy all the shares in Deutsche, which was controlled by the Egyptian Travco group. The acquisition will be funded by a combination of cash and a EUR440m bank loan.
Huazhu founder Qi Ji told analysts on a quarterly results presentation: “Our Company, will be a world-class global company only after it has reached sufficient scale and strength in geographic areas also outside China.” But the challenge was, he said, the time it takes to build luxury and upscale brands, “that’s why we chose to enrich our luxury and upscale brand portfolio through acquisition.”
Huazhu has seen substantial acceleration in its pace of growth, and is currently opening an average of more than five hotels a day, triple its pace of a year ago. As at the end of its most recent quarter, the portfolio stood at 5,151 hotels. The group is also busy growing its own upscale brands. Its first Joya property will open before the year end in Chengdu, with two more due in the spring, while a second Blossom Hill hotel will open shortly in Shanghai, joining one already trading in Beijing.
Deutsche, with 118 hotels, fits into the Huazhu portfolio providing just 4% of rooms, but 27% of revenues, and 9% of ebitda. “This is a deal size that is meaningful, but not too big for us as a first step of going international, said Huazhu CEO Jenny Zhang. The move adds brands Steigenberger, Jaz in the City, Maxx, IntercityHotel and Danish budget brand Zleep, which DH bought a controlling stake in, less than a year ago.
“The DH brands will have accelerated expansion by leveraging Huazhu’s current strong presence in China,” promised Zhang. “Secondly, Huazhu will successfully establish our initial footprint into Europe, Middle East and Africa. Thirdly, we envision Huazhu’s loyalty program and our direct sales capability will help DH to strengthen their competitiveness in their existing markets and also help the operation of their current hotels.”
Intercity, which already has a hotel in Qingdao, is expected to be the brand to be developed fastest in China, followed by Steigenberger. “We anticipate the growth will exceed Germany in the midterm probably,” said Qi Ji.
The addition to Huazhu’s portfolio comes as the group reported a softening Chinese market. Occupancy across the portfolio slipped to 88%, although average room rate, flattered by the movement of the portfolio gradually upmarket, was up 2.6%. Finance director Nee Chuan Teo reported an operating margin of 23%, but said this was 5% down year on year “mainly due to our investment in hotel development teams, upscale hotels and IT capabilities”.
“The focus of the next two years, we think right now it’s a kind of downturn, overall macro-wise, it is a challenging external environment,” warned Ji. But he said the DH acquisition would not deflect Huazhu’s growth plans: “China will still be the focus of our growth because the development potential, and the speed of China is unprecedented compared to other geographies in the world.”

HA Perspective [by Chris Bown]: Huazhu, previously known as China Lodging, has grown amazingly fast in the Chinese hotel market, and incredibly is still accelerating its pace, never mind acquisitions. Having set out its stall at the economy end of the market, the group started concentrating on growing its midscale and upscale brands over the last couple of years. And it’s not been afraid to dispose of those properties that didn’t hit the mark.
Clearly, the experience of starting out Joya and Blossom Hill, the group’s luxury brands, has taught the Huazhu team that a bolt-on would give it much better pace. And Deutsche looks to be a good fit, with a similar outlook on management contracts, or manachising as the Chinese like to call their version of hotel operating deals.
The deal also gives Huazhu a massive opportunity to market somewhere to stay overseas, to its millions of loyalty programme members. The Chinese are coming – and they’ll be staying in IntercityHotels or Steigenbergers.
The elephant in the room – and something no analyst asked about – is a fancy dress outfit being worn by Sebastian Bazin. A joint venture with Huazhu to grow Accor’s brands in China has led to more than 300 Ibis, Mercure and Novotel properties coming into the market to date. Will the arrival of the DH brands deflect from the Accor brands’ growth? That’s probably a risk Accor will be ready to take, bearing in mind the pace that the Huazhu team works at. Nobody else comes close.
And the person with probably the broadest smile, is Zleep’s Peter Haaber. Having set up the highly efficient Scandinavian economy brand, he was delighted to have DH buy in to the brand, taking a majority stake in January 2019. Less than a year later, Zleep’s upgraded growth plans will be turbocharged still further by the restless Huazhu folk.

Additional comment [by Andrew Sangster]: Huazhu is making its ambitions clear. The investor presentation at its third quarter results had a slide depicting how Marriott has grown from having 90% of its rooms as domestic US in 1990 to being 63% domestic US in 2019. Today, Huazhu stands at 96% domestic China. The clear implication being Huazhu sees itself as a rival to Marriott (and most likely won’t take 30 years to grow overseas).
The pace of openings at Huazhu has certainly quickened, with three times as many rooms opening in Q3 2019 compared to Q3 2018. Its pipeline of unopened hotels is now 34% the size of hotels in operation, having grown from just 17% in Q3 2017.
The loyalty scheme is growing at a CAGR of 46% to hit 139 million by the end of the latest quarter.
The big push initially was with economy hotels, started back in 2005 with HanTing. Then, in 2010, a second wave was started with the JI brand which today has 2,059 hotels with 400 planned to be opened in 2020.
The next wave is luxury and upscale. Exec chairman and founder Qi Ji said on the conference call that these segments require “richer stories and service qualities”. The acquisition of Steigenberger is meant to shorten any learning period.
At a 17.5 times EV / EBITDA multiple (EUR700m paid against forecast EBITDA of EUR40m for 209), Huazhu considers the price reasonable. Just as important as the brands is the acquisition of multi-national experience for the fourth wave of development, international.
Huazhu has just reached its 5,000 hotels milestone but it wants to reach 10,000 hotels in three to five years. That Deutsche Hospitality development experience is going to be in demand.

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