Huazhu’s double vision

Deutsche Hospitality brand Intercity

Huazhu continued its shift up the chain scales, with midscale and upscale hotels accounting for 63% of its pipeline.

The company said that, having reached 5,000 hotels, it aimed to reach 10,000 hotels within the next three to five years.

The beginning of this year saw the completion of the group’s acquisition of Deutsche Hospitality for €700m, which founder Ji Qi said gave Huazhu “rich brand platforms in each segment up to the luxury and upper upscale segments”.

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Huazhu’s preliminary results for the year saw it report only 37% of the group’s pipeline in the economy segment. The company had a total of 5,618 hotels in operation, having added 467, net, in the last quarter.

The strong growth was attributed to the franchise and manachised business, which was 97% of the pipeline.

The group said that this year it expected to open approximately 1,700 hotels, an acceleration on last year, with 500 hotels under the company’s soft brands and not including the pipeline of Deutsche Hospitality.

For the quarter to the end of the year, the group saw 0.9% growth in ADR, with a three percentage point drop in occupancy and 2.7% fall in revpar. For the full year, ADR was up 3.6%, with occupancy down three percentage points and revpar up 0.1%.

The founder said: “With Huazhu's strong position in the midscale and economical segments, I'm now thinking how to capture the opportunity, as the next wave for the luxury and upscale segment. I think that either can take an even longer time for us to build a new luxury and upscale brand from the scratch.

“Because these brands require richer stories and service qualities, that's why we choose to enrich our luxury and upscale brand portfolio through acquisition. This will help to shorten our own learning period and we will benefit from new perspective of our employees in a newly-acquired business.

“Our recently announced acquisition of Deutsche Hospitality is a perfect service fit to our luxury and upscale brands.”

He added that, with 96% of its portfolio in China after the consolidation of the Deutsche Hospitality
acquisition “we still continue to have a mature presence in our home country going forward”.

CEO Min Zhang said that, taking Deutsche Hospitality today, it would account for 4% of Huazhu's rooms, 27% of Huazhu's revenues and a 9% of Huazhu's Ebitda. The transaction value was approximately 7% of Huazhu's market capital. She said: “This is a deal size that is meaningful, but not too big for us as a first step of going international.”

Deutsche Hospitality will account for 79% of Huazhu's room in luxury and upscale segment and 3.1% and 0.4% in midscale and economy segments respectively.

Zhang said: “This deal helps Huazhu to establish a geographic footprint in Europe, Middle East, and Africa. The geographic coverage of the two companies have no overlap. So, it's going to be a meaningful step for us to establish a global hotel network. A global network has a natural synergy of channeling customers to their familiar brands and thus achieving an advantage in attracting customers all over the world.”

The end of last year saw Accor sell a 5% stake in Huazhu for $451m. It will retain a 5.8% stake in the company and Accor chairman & CEO Sébastien Bazin will remain on the Huazhu board, while Huazhu continued to hold 5% of Accor and a seat on the French group’s board.

Insight: Huazhu ditched the name China Lodging and is moving on from its economy past with some vigour. It has retained its economy chum in Accor, with whom it signed a master franchisee agreement in 2014 for the Grand Mercure, Novotel, Mercure, Ibis and Ibis Styles brands.

No sign of ditching Accor, then, although there may be some uncomfortable faces at the festive gathering now that the two are competitors in Europe, and, oddly, not entirely in the economy sector.

We’re sure that they can work through it and it’s worth noting that Accor was thought to very much look to Huazhu as a way of staving off shareholder Jin Jiang, currently in repose but still viewed by some as a having the potential to gobble up the whole of the French group should it decide to re-enter the fray. Both Huazhu and Accor have a shared interest in keeping it at bay, given its existing position having taken the Radissons from HNA.

While all that plays out, we wait to see what Huazhu will pick up next, having spent, what, for it, wasn’t a terrible large chunk on Deutsche Hospitality. It doesn’t appear to have the appetite for the kind of bidding wars which lead to the purchase of, say, a Belmond - and it is unlikely that its government would enjoy such a display - but if you have a strong brand with a couple of hundred hotels, given them a call.

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