HTHT: China Lodging Group, Limited
Sector financial performance:
This china-based company, who is primarily an upscale& midscale hotel owner, manager, and franchiser, the revenue of which comes from owned hotels, management fees, and franchising fees, has been grouped into owned hotel – upscale &midscale sector.
It seems that US hotels of companies in this sector have benefited from the increased demand in US market in the past several years as indicated by the changes in occupancy rate (a typical average growth rate is 45, -70, and 200 basis points in 2017, 2016, and 2015 respectively) from both company owned hotels and franchised hotels. Benefited from increase in demand and flat increase in supply of new hotels, companies have been able to continuously raise their room rate generally during the same period of time (1-3.7% annually) during the same period of time. It seems the demand has been continuously increasing in 2018 as indicated by improved occupancy rate and companies’ ability to raise price.
Performance of China hotels seems to be beat its peers in US market. The demand has kept very strong between 2015 and 2017 as indicated by the increase in occupancy rate and daily rate. The growth in demand in China market seems to be getting fast after entering 2017 as indicated by the increase of approximate 3-5% in occupancy rate. As a result of increased demand, the room rate started to rise in a fast pace while occupancy grew slowly.
Our data indicate that there is a significant increase 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. The typical gross margins rise up to 28% in 2017. With a less increase in companies’ SG&A as percentage of sales (around 8% currently), the typical operating margin reaches to 20%. Margins continued to get improved in 2018 as room rate increased.
According to our analysis, the current companies’ enterprise price/EBI ratio is 59 with an interest/EBITDA ratio of 7%.
It seems that, based comparable data, the hotels that this company operates and manages have experienced large growth in demand for its hotels in the past 1-2 years as indicated by picking up the same hotel occupancy rate (3.5% in 2017) when keeping mild increase in price and as well increase in same hotel daily rate (7-8% growth in 2018) without hurting occupancy rate.
The second quarter of fiscal 2018 compared with the same period of 2017
The same hotel RevPAR increased about 7.9% primarily from increase of 7.5% in daily rate and increase of about 0.3% in occupancy rate.
The first quarter of fiscal 2018 compared with the same period of 2017
The same hotel RevPAR increased about 6.5% primarily from increase of 6.1% in daily rate and increase of about 0.3% in occupancy rate.
The fiscal 2017 compared with 2016
The RevPAR (system wide) increased about 15% (same hotel 7.5% estimated) primarily from increase of 10% in daily rate and increase of about 3.5% in occupancy rate.
The third quarter of fiscal 2017 compared with the same period of 2016
The same hotel RevPAR increased about 9.5% primarily from increase of 4.5% in daily rate and increase of about 4.4% in occupancy rate.
The second quarter of fiscal 2017 compared with the same period of 2016
The same hotel RevPAR increased about 8.3% primarily from increase of 3% in daily rate and increase of about 4.5% in occupancy rate.
Fiscal 2016 compared with 2015
RevPAR increased about 2.6% (same hotel 1% estimated) primarily from increase of 3.3% in daily rate and increase in occupancy rate was flat.
Fiscal 2015 compared with 2014
RevPAR decreased about 3.4% primarily from decrease of 4% in occupancy rate and daily rate was flat.
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 18% of 2014 to 28% of 2017 as a result of increase in both daily rate and occupancy rate. Its SG&A as percentage of sales increased by about 100 basis points to about 8% its operating margin went up to 20% in 2017. As rooms rate continued to rise with flat occupancy rate, we have seen the continuously improved gross margin (29%) and operating margin (21%) in 2018 while fast expansion of rooms. Accompanying with growth in room rate, we have continuous increase in cash flow of this company in the past several years.
This stock currently has an enterprise price/EBI ratio of 59. We think that its stock is being slightly relatively undervalued with its peers in US market considering fast increase in revenue and improvement in margins with strong demand in China market.
For customized trading strategy of this stock