Sector financial performance:

This company, who is primarily upscale& midscale hotel franchisor ($120 ADR), the revenue of which comes from initial fee, percentage-of-revenue royalty fee and marketing/reservation fee, has been grouped into franchised hotel – upscale &midscale sector.

It seems that companies in this sector have benefited more from the increase in royalty fees (annual growth rate of 5-8%) than from initial fees between 2015 and 2017 due to the good performance of their franchised hotels in the past three years. Data indicates that increase in royalty revenue has been primarily attributable to increase in room rate (increased by 1.5-3.5% annually) and, to lesser extent, to increase in number of rooms (0.5-2%) and occupancy rate (0.5-1.5%). However, since the second half of 2017 the room/franchised hotels increased faster than before and caused faster increase in royalty revenue for companies with consistent growth in daily rate and occupancy.

Our data indicate, from a typical company, that there was a decrease in company’ gross margins (including marketing and reservation system fees and expenses) and thus in operating margins in before 2017. The typical gross margin is about 42% with a SG&A as percentage of sales of average 16%.  The typical operating margin is 27%. Due to increasing revenue the cash flow of companies increased by 5-9% straight between 2015 and 2017. As revenue jumped in 2018, which seems to be offsetting spending in marketing and reservation system, we see an improved gross margin (43.5%) and thus operating margin (27%) in 2018.  Cash flow of companies in this sector has been improving during the period of time.

According to our analysis, the current companies’ enterprise price/EBI ratio is 31 with an interest/EBITDA ratio of 15%.

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Company performance:

It seems that the franchised hotels of this company have performed well between 2015 and 2017 as indicated by continuing increased royalty revenues (5-8% annually) including increase in daily rate, occupancy rate, and rooms.  The growth seems to be accelerating since the second half of 2017, which generated a 10-14% growth in royalty revenue due to faster increase in daily rate and rooms (franchised hotels).

The first six months of fiscal 2018 compared with the same period of 2017

Franchising revenue increased about 14% (14% for 2Q) primarily from increase of 13% (13% for 2Q) in royalty fees and increase in procurement service revenue.

Increase in royalty fees come from about 3.1% (2.7% for 2Q) increase in RevPAR (up 2.5% daily rate and 0.4% occupancy rate) and 8.8% increase in number of rooms and increase in royalty rate (4.73% in 2018).

The fiscal 2017 compared with 2016

Franchising revenue increased about 10% primarily from increase of 8% in royalty fees and increase in initial franchising fees.

Increase in royalty fees come from about 2.5% increase in RevPAR (up 1.7% daily rate and 0.5% occupancy rate) and 2% increase in number of rooms.

The first nine months of fiscal 2017 compared with the same period of 2016

Franchising revenue increased about 10% primarily from increase of 8% in royalty fees and increase of 7% in initial franchising fees.

Increase in royalty fees come from about 2.6% increase in RevPAR (1.5% daily rate and 0.7% occupancy rate) and 2% increase in number of rooms.

Fiscal 2016 compared with 2015

Franchising revenue increased about 6% primarily from increase of 6% in royalty fees offset the decrease of 13% in initial franchising fees.

Increase in royalty fees come from about 4% increase in RevPAR (3% daily rate and 0.5% occupancy rate) and 1% increase in number of rooms.

Fiscal 2015 compared with 2014

Franchising revenue increased about 6% primarily from increase of 5% in royalty fees and the increase of 26% in initial franchising fees.

Increase in royalty fees come from about 6.5% increase in RevPAR (3.7% daily rate and 1.6% occupancy rate) and 0.4% increase in number of rooms.

Its gross margin (including marketing and reservation system expenses and depreciation) went down by about 170 basis points to approximate 42.5% in 2017 since 2014 due to faster increase in marketing and reservation spending than revenue. Its SG&A as percentage of sales is flat at about 16% and its operating margin is about 26% in 2017.  Benefiting from fast increase in revenue in 2018, gross margin was improved to about 43% and operating margin to 27%. Its cash flow has been growing by about 6-17% annually in the past three years.

Stock price

This stock currently has an enterprise price/EBI ratio of 30. We think that its stock is being relatively slightly overvalued with its peers.