'Apple Effect' unlikely to hurt global brands' China pipelines

Rosewood Shanghai eyes 2024 opening; Kohn Pedersen Fox Architects appointed as designer.
China’s total construction pipeline continues to be led by Shanghai with 125 hotels and 24,403 rooms. Photo credit: Rosewood Hotels & Resorts

China’s total construction pipeline as of Q3 stood at 2,642 hotels and 569,690 rooms—up 9 percent by projects and 6 percent by rooms year-over-year, according to the latest report by Lodging Econometrics. 

Rooms in the construction pipeline are at an all-time high, with the pipeline 16 projects shy of the cyclical high of 2,658 projects set in Q4 2014. The news is decidedly positive for investors, especially coming a day after tech giant Apple blamed weakening growth and trade tensions in China for a reduced quarterly sales forecast.  

In the Pipeline

Because of growing tensions about tariffs and near-term concerns about the economy, there is a notable urgency for developers with hotels already in the pipeline to move toward construction at a faster pace. As such, there are 1,928 hotels with 402,529 rooms presently under construction; 344 hotels with 73,209 rooms scheduled to start construction in the next 12 months; and 370 hotels with 93,952 rooms in the early planning stage. 

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Through the third quarter, China opened 446 hotels with 78,091 rooms. The LE forecast for new hotel openings predicted another195 hotels with 27,054 rooms would open in Q4, bringing the anticipated new hotel openings to 641 hotels and 105,145 rooms by year's end 2018. 

In the years ahead, Lodging Econometrics expects 661 new hotel openings for 2019 and 604 in 2020. Both are distant from the cyclical peak of 1,684 new openings and 193,772 rooms recorded in 2014.

Top Destinations, Top Companies

Although the growth of China’s GDP has slowed in recent years, domestic tourism is still a driving force of China’s economy, which has been growing since 2013. Hotel demand is robust in tourism destinations and economically developed cities such as Beijing, Shanghai, Chengdu and Shenzhen, according to Lodging Econometrics. Hotels in the China pipeline average a very high 215 rooms as the projects in the upscale, upper-midscale and midscale segments are at cyclical peaks, LE added. 

China’s total construction pipeline continues to be led by Shanghai with 125 hotels and 24,403 rooms, and Guangzhou with 113 hotels and 26,897 rooms. Guangzhou set an all-time high for rooms in the third quarter. Chengdu follows with 98 hotels and 21,895 rooms; Suzhou with 82 hotels and 14,640 rooms; and Hangzhou with 78 hotels and 17,046 rooms.  

Franchise companies topping China’s construction pipeline are led by Hilton, which has reached a new, all-time high for the company, with 397 hotels and 88,689 rooms under development. Next is IHG with 305 hotels and 71,935 rooms, followed by Marriott International at 279 hotels with 77,087 rooms. 

Hampton by Hilton is the fastest-growing hotel brand in China, noted LE. This is a result of the 2014 exclusive partnership of Hilton with China’s Plateno Hotel Group to develop the brand in China. Since 2015, Hilton and Plateno Hotel Group have opened 47 Hamptons and have plans to continue rapid expansion across China with 194 of the 207 Hampton projects in the pipeline to be managed by Plateno. 

Hilton’s second-largest brand is DoubleTree with 66 hotels and 19,290 rooms. DoubleTree and Hampton make up 69 percent of Hilton’s total construction pipeline in China. 

IHG’s most prominent brands are Holiday Inn Express with 136 hotels and 25,628 rooms and Holiday Inn with 59 hotels and 15,961 rooms. Top brands for Marriott International are the full-service Marriott Hotels & Resorts with 65 hotels/20,064 rooms and Courtyard by Marriott with 32 hotels/8,363 rooms.

The Apple Effect

Following Apple's guidance-reduction announcement last night citing slowing sales in China, RW Baird gathered data on hotel brands' existing room counts and pipeline exposures to China in order to size up any potential demand/earnings impact.

"Exposure is relatively small, but China is likely to be a sentiment headwind," according to the report. "While the hotel brands have relatively low exposure to China (with Hilton appearing to have the lowest), we expect Apple's guidance-reduction yesterday to serve as another sentiment headwind for the brands despite the stocks already having underperformed in 2018 on fears of slowing macroeconomic growth; however, while the brands' current exposure is relatively low, China remains a meaningful portion of the brands' development pipelines, which could dampen their longer-term growth outlooks (although near-term, net unit growth is unlikely to be meaningfully impacted)."

While China growth has shown recent signs of slowing, Baird noted, hotel fundamentals are not likely to be affected by the ongoing trade war—or at least less affected than companies like Apple. "In our recent meetings with Hyatt, management noted that it has not experienced any share shifts or demand impact from anti-Western brand sentiment as a result of trade/tariff fallout; however, Hyatt noted that growth more broadly in China has slowed in recent months, which is consistent with Apple's guidance reduction and updated demand commentary last evening."

Global Companies' Market Share in China

Hyatt: 10 percent of existing room count; 30 percent of the pipeline; Greater China represented 11 percent of the company's 2017 global fee revenue.
IHG: 14 percent of existing room count and 29 percent of the pipeline.
Marriott: 18 percent of 2016 incentive fees (pro forma for Starwood), but likely much less of overall fees; 15 percent-20 percent of the development pipeline is in China.
Hilton: 4 percent of existing rooms and 24 percent of the pipeline.

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