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 percentage-of-revenue royalty fee of franchised hotels and as well from 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 in 2017 as indicated by the slowing down increase in ADR and the decrease in occupancy rate for its US hotels, probably a signal that supply catches up or demand shrinks or both.  And the decrease in demand or increase in supply seems less obvious among its hotels in Asia and pacific area as indicated by the strong increase in occupancy rate of hotels in that area. Occupancy was largely improved for those US hotels in first half of 2018 and, together with growth in price, brought per room revenue back to about 4% in 2018.

The first six months of fiscal 2018 compared with 2017

System-wide RevPAR increased 3.9% primarily attributable to increase of 1.8% in ADR (around 148) and increase of 1.6% in occupancy rate (around 76%).

Comparable owned and leased hotel RevPAR increased 5.1% (4.5% for 2Q) primarily attributable to increase in ADR and increase in occupancy rate.

Comparable managed hotels RevPAR increased 5.2% (5% for 2Q) primarily attributable to increase in ADR and increase in occupancy rate.

Comparable franchised hotels RevPAR increased 3.5% (3.4% for 2Q) primarily attributable to increase in ADR and increase in occupancy rate.

US system wide hotels RevPAR increased 3.2% primarily attributable to increase of 1.8% in ADR (around 149) and increase of 1% in occupancy rate (around 77%).

ASPAC system wide hotels RevPAR increased 9.1% primarily attributable to increase of 2% in ADR ( around 137)  and increase of 4.6% in occupancy rate ( around 72%).

The fiscal 2017 compared with 2016

System-wide RevPAR increased 2.5% primarily attributable to increase of 0.9% in ADR (around 145) and increase of 1.2% in occupancy rate (around 76%).

Comparable owned and leased hotel RevPAR increased 4.8% primarily attributable to increase of 3.2% in ADR (around 145) and increase of 1.2% in occupancy rate (around 77%).

Comparable managed hotels RevPAR increased 3.4% primarily attributable to increase of 2.4% in occupancy rate (around 77%) and increase of 1.6% in ADR.

Comparable franchised hotels RevPAR increased 2% primarily attributable to increase of 0.9% in ADR and increase of 0.8% occupancy.

US system wide hotels RevPAR increased 1.5% primarily attributable to increase of 1% in ADR (around 147) and increase of 0.4% in occupancy rate (around 76%).

ASPAC system wide hotels RevPAR increased 7.3% primarily attributable to increase of 0.1% in ADR ( around 140)  and increase of 5% in occupancy rate ( around 72%).

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

System-wide RevPAR increased 2.1% primarily attributable to increase of 0.8% in ADR (around 145) and increase of 1% in occupancy rate (around 77%).

Comparable owned and leased hotel RevPAR increased 5% primarily attributable to increase of 2.8% in ADR (around 145) and increase of 1.6% in occupancy rate (around 77%).

Comparable managed hotels RevPAR increased 3% primarily attributable to increase of 2.3% in occupancy rate (around 77%).

Comparable franchised hotels RevPAR increased 1.5% primarily attributable to increase in ADR.

US system wide hotels RevPAR increased 1% primarily attributable to increase of 1% in ADR (around 147) and occupancy rate was flat (around 78%).

ASPAC system wide hotels RevPAR increased 7% primarily attributable to decrease of 0.8% in ADR ( around 138)  and increase of 5.4% in occupancy rate ( around 72%).

Fiscal 2016 compared with 2015

System-wide RevPAR increased 1.8% primarily attributable to increase of 1.9% in ADR (around 145) and occupancy rate (around 75%) was flat.

Comparable US owned and leased hotel RevPAR increased 0.4% primarily attributable to increase of 2.1% in ADR (around 145) offset by decrease of 1.4% in occupancy rate (around 77%).

Comparable managed hotels RevPAR increased 1.7% primarily attributable to increase in ADR.

Comparable franchised hotels RevPAR increased 2.1% primarily attributable to increase in ADR.

US system-wide hotels RevPAR increased 1.8% primarily attributable to increase of 2% in ADR (around 143) and occupancy rate was flat (around 76%).

ASPAC system-wide hotels RevPAR increased 3.5% primarily attributable to decrease of 2.1% in ADR (around 145) and increase of 3.8% in occupancy rate (around 72%).

Fiscal 2015 compared with 2014

System-wide RevPAR increased 5.4% primarily attributable to increase of 3.6% in ADR (around 141) and increase of 1.3% in occupancy rate (around 75%).

Comparable US owned and leased hotel RevPAR increased 4.2%.

Comparable managed hotels RevPAR increased 6.3% primarily attributable to increase in ADR.

Comparable franchised hotels RevPAR increased 5.2% primarily attributable to increase in ADR.

US system-wide hotels RevPAR increased 5.2% primarily attributable to increase of 3.8% in ADR (around 140) and increase of 1% in occupancy rate (around 76%).

ASPAC system-wide hotels RevPAR increased 9.3% primarily attributable to increase of 1.3% in ADR (around 140) and increase of 5% in occupancy rate ( around 69%).

Before spinning off of resort and timeshare assets, 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 from approximate 32% of 2014 to 38% of 2016 probably due to the increase in revenue from management fees and franchising fees. Its SG&A as percentage of sales increased by about 160 basis points and its operating margin went up to about 30% in 2017. For assets after spinning off, its gross margin (about 53%, including direct operation expenses, rental, expenses and depreciation; excluding marketing and reservation system and labor costs of managed hotels revenue and expenses) was largely improved due to nature of assets. Operating margin was slightly improved in 2018 to about 41.5% due to revenue increase. Its cash flow has been gradually improving in the past several years for the current assets only.

Stock price

This stock currently has an enterprise price/EBI ratio of 33. We think that its stock is being relatively fairly valued with its peers considering.