Deutsche Bank
Markets Research
Asia
China
Consumer
Hotels / Leisure /
Gaming
Industry
China Hotels
Date
30 November 2017
Industry Update
Secular growth kicking in
A secular growth sector
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Deutsche Bank AG/Hong Kong
Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should
be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should
consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST
CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. THE CONTENT MAY NOT BE DISTRIBUTED IN
THE PEOPLE’S REPUBLIC OF CHINA (“THE PRC”) (EXCEPT IN COMPLIANCE WITH THE APPLICABLE LAWS AND
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Tallan Zhou
Research Analyst
(+852 )2203 6464
tallan.zhou@db
Karen Tang
Research Analyst
(+852 )2203 6141
karen.tang@db
Top picks
China Lodging (HTHT.OQ),USD114.48 Buy
Jinjiang International Hotels
(2006.HK),HKD2.75
Buy
Jinjiang Hotels Development
(600754.SS),CNY31.00
Buy
BTG Hotels (600258.SS),CNY27.81 Buy
Source: Deutsche Bank
Companies Featured
China Lodging (HTHT.OQ),USD114.48 Buy
2016A 2017E 2018E
P/E (x) 21.0 38.7 27.1
EV/EBITDA (x) 8.7 16.7 11.8
Price/book (x) 4.5 7.8 6.0
Jinjiang International Hote
(2006.HK),HKD2.75
Buy
2016A 2017E 2018E
P/E (x) 37.3 26.1 23.1
EV/EBITDA (x) 13.2 10.0 9.7
Price/book (x) 1.0 1.3 1.3
Jinjiang Hotels Development
(600754.SS),CNY31.00
Buy
2016A 2017E 2018E
P/E (x) 82.9 27.3 25.2
EV/EBITDA (x) 20.9 9.0 9.3
Price/book (x) 2.2 2.2 2.1
BTG Hotels (600258.SS),CNY27.81 Buy
2016A 2017E 2018E
P/E (x) 42.6 33.9 25.2
EV/EBITDA (x) 9.8 13.7 11.0
Price/book (x) 1.9 3.1 2.7
Source: Deutsche Bank
We analyze the supply and demand of China’s limited service hotels (economy
hotels) and conclude that the sector will see secular growth (RevPAR growth of
6% CAGR) in the next five years. We believe the like-for-like hotel average daily
rate (ADR) for both economy and midscale hotels will continue to grow to meet
consumers’ trade-up demand. Meanwhile, on a blended basis, we believe the
short supply of midscale hotels will continue to increase its percentage of the
total, leading to a favorable mix change (40% of new hotel additions will be
mid- to high-scale hotels).
Hotels are a leveraged business, RevPAR is the key
Changes in operating cost per room (excluding rent) are manageable for
economy and midscale hotels; hence to maximize profit, the key is to increase
RevPAR. The two largest costs in operating economy hotels are: 1) staff cost
(already manageable at a staff-to-room ratio of 0.18-0.2), and 2) rent cost,
which is normally fixed for 15-20 years. We believe the two key drivers to
increasing RevPAR in the next five years are: 1) a higher percentage of
upgraded economy hotels and 2) a higher percentage of midscale hotels.
Economy segment has likely bottomed
We believe 2016 was the trough for economy hotels’ RevPAR as the high hotel
supply growth is likely to slow significantly in the next five years (6-7% CAGR
vs. 38% CAGR over 2006-16). We believe the sharp decline in economy hotel
additions, from 5k in 2015 to 2k in 2016, is a turnaround point for the sector as
1) loss-making franchisees leave the market; 2) property supply for hotels is
being tightened; and 3) both HomeInns and 7 Days have been delisted and
acquired by BTG and Jinjiang, respectively. We forecast a stable 2k new
economy hotel additions over the next five years, a 6-7% CAGR.
Midscale segment’s barriers to entry remain high
While the economy segment started in 2005, the mid-scale segment only
emerged in 2010. Given the government’s anti-corruption campaign, demand
for high-end hotels is shifting to midscale hotels, and alongside consumers
trading up, we believe midscale hotels’ RevPAR (8% CAGR) should be higher
than economy hotels’ (3% CAGR over 2018-2022E). The barriers to entry for
midscale hotels are much higher than for economy hotels, as: 1) initiation
investment for franchisee is 4-5x higher, 2) property criteria is more
complicated, and 3) brand/product designs are more demanding.
Valuation and risks
We initiate coverage of BTG with a Buy rating and TP of RMB35 (25% upside
potential). We also slightly lift China Lodging’s TP to USD130. We maintain
Buy on Jinjiang with TP unchanged. We change our primary valuation from
EV/EBTIDA to DCF as we view DCF as a better methodology to capture secular
growth over the medium term. We use EV/EBITDA as a check on the target
valuations. Risks include: 1) lower tourism demand; 2) stronger RMB leading to
more outbound travel; and 3) government policy changes.
Distributed on: 29/11/2017 21:36:30 GMT
0bed7b6cf11c
30 November 2017
Hotels / Leisure / Gaming
China Hotels
Page 2 Deutsche Bank AG/Hong Kong
Investment thesis
What has happened in the past five years
Hotels are probably one of the few consumer industries in China that have
seen prices continue to drop in the past five years (see Figures 9, 10 and 11)
despite rising consumer prices. The easiest explanation for this is to use a
supply and demand model. On the supply side, economy hotels recorded a
CAGR of 38% over 2010-2015 while on the demand side, travellers’ growth
was only in mid-teens.
The imbalanced supply and demand growth is one of the key fundamental
reasons why RevPAR has continued to decline in the past five years. However,
we believe 2016 is a turning point, because new economy hotel additions were
cut by half in 2016 while traveller growth was still robust at double-digit
growth. As a result, RevPAR like bottomed out in 2016 and so far in 2017, it
has maintained the growth momentum.
In this report, we look at factors contributing to the RevPAR drop in the past
years and analyse whether the recovered RevPAR growth is sustainable in the
next five years.
We highlight below key events that caused new economy hotel additions to
witness sharp declines in 2016.
aggressive expansion.
2010. The franchise contract is normally c. 8-10 years. Hence,
franchisees that failed to make profits exited the business
addition, they are expanding their midscale hotels. The upgraded
hotels are meeting consumers’ trade-up demand.
What will happen in the next five years
Three key messages
to register a 6% CAGR over 2018-2022E. (Based on 2% occupancy
rate improvement and 4% ADR increase). A breakdown would put
economy hotels’ RevPAR at a 3% CAGR and mid- to high-scale hotels’
RevPAR at an 8% CAGR during the same period.
expect more travellers to select midscale hotels. We expect demand to
record a 11-13% CAGR over 2018-2022E.
cost, based on our estimates, every dollar increase in ADR will flow
directly to profit.
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30 November 2017
Hotels / Leisure / Gaming
China Hotels
Deutsche Bank AG/Hong Kong Page 3
Incremental hotels over the next five years
We estimate there are more than 100k economy hotels in China, among which
only 26k are branded economy hotels. In terms of midscale hotels, we
estimate there are a total 15k, with chain branded midscale hotels estimated at
c. 1,600-1,800.
We estimate the number of midscale hotels will reach 40,000+ in the next five
years of which 35% will be chain branded ones (vs. the US’s chain percenta