Sector financial performance:

This company, who is primarily an upscale& midscale hotel owner, the revenue of which comes from owned hotels and franchising hotels, 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 are general 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) between 2015 and 2017. The typical gross margins are about 13-28% with average 20%. Companies’ SG&A as percentage of sales of average is 10-14%.  The typical operating margin is about 15% (between 4% and 20%) Due to increasing revenue the cash flow of companies increased by 18-30% straight in the past two years. Gross margin seems to continue to be improved in 2018 as revenue increased. However, under performed companies in this sector may have to increase spending on marketing to compete for the growing demand in US market and we may see decreasing cash flow from those companies.

According to our analysis, the current companies’ enterprise price/sales is about 3.2 with an interest/EBITDA ratio of 46%.

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Company performance:

It seems that, based on comparable data, the hotels that this company operates have not performed well in the past three years as indicated by continuing decreased occupancy rate. However, as daily rate increased it seems that it can still push its revenue to go up gradually. And occupancy rate seems to stop declining and may be going up in 2018.

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

Organic ownership revenue increased about 1% (3% for 2Q) (RevPAR higher) primarily from increase in occupancy rate (in ADR for 2Q).

The fiscal 2017 compared with 2016

Organic ownership revenue increased about 2% (RevPAR 1.6%) primarily from increase of 3.3% in daily rate offset by 1% decrease in occupancy rate.

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

Organic ownership revenue increased about 2% (RevPAR 1.6%) primarily from increase of 3.3% in daily rate offset by 1% decrease in occupancy rate.

Fiscal 2016 compared with 2015

Organic ownership revenue decreased about 2% primarily from decrease of 1.4% in occupancy rate offset by 1.2% increase in daily rate.

Fiscal 2015 compared with 2014

Organic ownership revenue increased about 10% primarily from increase of 5.1% in daily rate and increase of 3.4% in occupancy rate.

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 8% of 2014 to approximate 13% of 2017 due to increase in franchised fees and the closing of two less profitable hotels. However, because its SG&A as percentage of sales increased by about 400 basis points to about 10% its operating margin went up to about 1.2% in 2017. Due to increased spending in SG&A in 2018, its operating margin was down to -1%. Its cash flow decreased in the past two years as margin down.

Stock price

This stock currently has an enterprise price/sales ratio of 3.2. We think that its stock is being relatively overvalued with its peers with a concern about its low profitability while revenue seems to be going up.