Sector financial performance:

This company, who is primarily luxury& upscale hotels owner and franchisor, the revenue of which comes mainly from operation of hotels owned and as well from percentage-of-revenue royalty fee of franchised hotels and management fees of managed hotels, has been grouped into owned& franchised-luxury& upscale sector in hotel industry.

It seems that it is consistent in terms of changes in demand for US hotels in this sector and in other sectors: companies in this sector have benefited from general increased demand in US market in the past several years. Data indicates that increase in RevPAR has been primarily attributable to increase in daily rate (increased by 1.2-4.6% annually) and, to lesser extent, to increase in occupancy rate (0.3-1%). However, the trend that the increase in both ADR slowed and increase in occupancy rate turned to be negative in 2016/17 can be obviously observed among the companies in this sector, which caused the increase in RevPAR to go down from average 4% to near 1% in 2016/17. And after entering 2018, demand rebounded as indicated by increasing occupancy rate and together with continuingly rising price pushed increase in revenue back up to 2015 level.

The demand in international market seems to be another story as it is in US market. For example, in Asian and pacific market the increase has been stably strong as seen by the strong increase in occupancy rate while daily rate went down between 2015 and 2017. In 2018, it seems that demand is going even stronger as indicated by increase in both occupancy and price.

Our data indicate that there are general improvements in companies’ gross margins (including marketing and reservation system fees and expenses but excluding marketing and reservation system and labor costs of managed hotels revenue and expenses) in the past several years primarily due to increasing revenue from franchised and managed hotels. For companies’ owned and leased hotels, it seems that margin has been flat. The typical gross margins are about 26-53% with average 40% varying with contribution from franchised hotels. Companies’ SG&A as percentage of sales of average has been kept between 12-14%.  The typical average operating margin is about 27% varying from 12%-41%. Due to increasing revenue the cash flow of companies increased by 10-38% straight in the past two years.

According to our analysis, the current companies’ enterprise price/EBI ratios range 29-32 with an interest/EBITDA ratio of 17%.

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Company performance:

It seems that, based on comparable data, the US hotels that this company operates have performed well in the past three years but the increase slowed down after entering 2017 as a result of slowing down demand and increasing supplies as indicated by decrease or slowing down increase in occupancy rate among different type of hotels. And the decrease in demand is particularly more obvious among those luxury hotels than upscale, which have higher ADR. Demand seems to be picking up in 2018 as indicated increasing occupancy, which together with continuing growth in price, help brought the revenue growth back around 3% in first half of 2018.

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

Comparable owned and leased hotels organic RevPAR increased 2.9% (4.1% for 2Q) primarily attributable to increase of 3.2% (3.5% for 2Q) in ADR (around 230) and increase of 0.7% (1% for 2Q) in occupancy rate (around 77%).

America managed and franchised hotels organic RevPAR increased 3.1-3.6% (2.6-4% for 2Q) primarily attributable to increase of 1.9% in ADR (around 140-206) and increase of 0.9-1.2% in occupancy rate (around 78%).

ASPAC managed and franchised hotels organic RevPAR increased 6% primarily attributable to increase of 1.3% in ADR( around 200)  and increase of 3% in occupancy rate ( around 70%).

The fiscal 2017 compared with 2016

Comparable owned and leased hotels RevPAR increased 1% primarily attributable to increase of 1.3% in ADR( around $229)  offset by decrease of 0.2% in occupancy rate ( around 77%).

America managed and franchised hotels RevPAR increased 2.4-2.9% primarily attributable to increase of 1.5-1.7% in ADR (around 137-204) and increase of 0.5-1.1% in occupancy rate (around 77%).

ASPAC managed and franchised hotels RevPAR increased 5.8% primarily attributable to decrease of 0.9% in ADR( around 200)  and increase of 4.3% in occupancy rate ( around 70%).

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

Comparable owned and leased hotels RevPAR decreased 0.2% primarily attributable to increase of 0.7% in ADR( around 225)  and decrease of 0.7% in occupancy rate ( around 78%).

America managed and franchised hotels RevPAR increased 2.1-2.4% primarily attributable to increase of 1.3-1.7% in ADR (around 140-200) and increase of 0.3-0.8% in occupancy rate (around 78%).

ASPAC managed and franchised hotels RevPAR increased 5% primarily attributable to decrease of 2.4% in ADR( around 200)  and increase of 5% in occupancy rate ( around 70%).

Fiscal 2016 compared with 2015

Comparable owned and leased hotels RevPAR increased 2.2% primarily attributable to increase of 1.4% in ADR( around 221)  and increase of 0.6% in occupancy rate ( around 77%).

America managed and franchised hotels RevPAR(organic) increased 2.8-5.4 primarily attributable to increase of 3.1-3.4% in ADR( around 130-200)  and increase of -0.2-1.4% in occupancy rate ( around 78%).

ASPAC managed and franchised hotels RevPAR(organic) increased 2.2% primarily attributable to decrease of 2.0% in ADR( around 200)  and increase of 2.9% in occupancy rate ( around 70%).

Fiscal 2015 compared with 2014

Comparable owned and leased hotels RevPAR (organic growth) increased 5.4% primarily attributable to increase of 4.6% in ADR (around 221)  and increase of 0.6% in occupancy rate ( around 77%).

America managed and franchised hotels RevPAR(organic) increased 6.6-7.7% primarily attributable to increase of 5.2-6% in ADR( around 140-200)  and increase of 0.9-1.2% in occupancy rate ( around 76%).

ASPAC managed and franchised hotels RevPAR (organic) increased 2.2% primarily attributable to decrease of 2% in ADR (around 210) and increase of 2.9% in occupancy rate ( around 70%).

Its gross margin (including direct operation expenses, rental, expenses and depreciation; excluding marketing and reservation system and labor costs of managed hotels revenue and expenses) went up by about 90 basis points to approximate 24% in 2017 from 2014. Its SG&A as percentage of sales has no changes and its operating margin went up to about 11% in 2017. Gross margin was improved to about 26% in 2018 probably due to dispositions of hotels and thus the operating margin (above 12% in 2018). The cash flow has been improved in the past three years.

Stock price

This stock currently has an enterprise price/EBI ratio of 29. We think that its stock is being relatively overvalued with its peers considering its relatively lower operating efficiency and profitability.