Why China Lodging Group is off to a good start in 2016


With China’s hotel market in a state of flux, the Q1 earnings report from China Lodging Group (which also operates under the name "HuaZhu") offered a peek into the changing landscape for both the group’s business and its new role as a partner to a global brand. 

Rapid Growth

In spite of China’s volatile economy, net revenues for the group rose 18.8 percent year-over-year to $223 million for the first quarter of 2016, exceeding the high end of the guidance. The group credited its year-over-year average daily rate increase of 2.5 percent to a "more favorable brand mix with an increased proportion of midscale and upscale hotels."

The number of rooms in operation grew by 34 percent from Q1 2015. During the first quarter of the year, including both organic growth and strategic alliance, China Lodging Group added 11 net leased (leased-and-operated) and owned hotels, 215 net “manachised” (managed and franchised) and franchised hotels. As of the end of the quarter, the company had 627 leased-and-owned hotels, 2,189 manachised hotels and 173 franchised hotels in operation in 356 cities. 

A Valuable Partnership

In late 2014, AccorHotels signed a strategic alliance with China Lodging Group to more than double the number of its hotels in the coveted Chinese market within five years. The partnership sought to open 350 to 400 GrandMercure, Novotel, Mercure, ibis and ibis Styles hotels in China, Taiwan and Mongolia.

The deal was completed during the first quarter of 2016, bringing more than 90 new hotels to China Lodging Group's platform. “The deal is transformational for Accor,” AccorHotels Global CDO Gaurav Bhushan said, calling China—along with the U.S.—“the largest and most important hospitality market globally.” HuaZhu opened 800 hotels in China last year alone, he added, and will continue to develop its own brands as well as Accor’s midscale properties.

The AccorHotels properties were a major percentage of the new hotels added to the group’s portfolio, China Lodging Group CEO Jenny Zhang said during the earnings call, emphasizing the value of the partnership. 

Looking Ahead

For the next quarter, the group suggested that net revenues could grow 12 percent to 15 percent. The group has a pipeline of 632 hotels, with 25 leased hotels and 607 manachised and franchised hotels. The economy HanTing brand makes up a good portion of this pipeline, with 271 hotels on the way. The midscale JI Hotel brand has 105 properties in the pipeline

The group will “strengthen and differentiate” its HanTing flagship brand in the economy sector. “We will [also] continue our fast expansion through both organic and M&A activities,” Zhang said. 

This development plan, especially the focus on the economy HanTing brand, is an important reflection of China's changing hotel demographic. Until the economy stabilizes, the economy and midscale segments are likely to be popular options for domestic travelers—and for investors.

Sources: NASDAQ, Seeking Alpha