Blue Skies Ahead for China Lodging Group, Analysts Say

China Lodging Group continues to record high revenue and profit numbers, thank to China's increasingly travel-hungry middle-class consumers.

Author: Ed Newton   

The ubiquitous Chinese hotel management company China Lodging Group (Nasdaq: HTHT) is profiting handily from the rapid expansion of the nation's middle class, with millions of citizens suddenly finding they have enough disposable income to travel on vacation or business. 

And these travelers, of course, need a place to stay. So, China Lodging's sprawling empire of owned and operated hotels, franchised facilities, and hotels that are "manachised" – that is, properties the company manages for other franchisees - are there to take advantage of this in more than 3,500 locations. 

The traveling public is getting the message. In its third quarter report, China Lodging reported a revenue increase of more than one-third year-over-year, to almost $357 million. Net income increased 60 percent to $70.7 million. 

The good numbers, explained chief financial officer Teo Nee Chuan, were "driven by an increase in occupancy by 4.2 percentage points," as well as an increase in the average daily rate (ADR) at the company's properties of more than 12 percent. 

China Lodging, like the hotel industry itself, is a shape-shifting entity and the company continues to take advantage of trends and opportunities. Founded in 2005 by entrepreneur Qi Ji, the company has sloughed off outdated or inferior properties, and acquired new ones, dipping its foot into the high-end market. 

With an upgrade in standards, there is also a corresponding rise in daily rates, said Chuan. The uptick in the average daily rate was a result of the "increasing mix of midscale and upgraded [properties among] the current hotels as well as strong domestic travel demand," he added.

A Dozen Years of Steady Growth

When Ji, now the company's executive chairman, started the company as the HanTing Hotel Group, it was a chain of economy hotels offering then-progressive services like internet access and "zero-second checkout."  The expansion-minded hotel group then went further, pursuing managerial travelers with its Ji Hotel line of three- and four-star hotels. It also started catering to backpackers and students in reasonably priced Hi Inns. 

In 2012, China Lodging bought the Starway chain of 120 hotels, culled a majority of them and began converting the rest to middle-level and high-end, uniquely designed lodgings. In 2015, the company opened its first upscale hotel, the Joya in Wuhan. 

Today, China Lodging operates 3,656 hotels with 372,464 rooms in 373 cities. Roughly one-quarter of them are traditional lease-and-ownership facilities, the rest are franchise and "manachise" models.

The Middle Class Market

The company clearly recognizes that it benefits from an exploding middle class that is eager to travel.

 A recent study by the consulting firm McKinsey & Co. said that by 2022, 550 million Chinese people will be considered middle class, unleashing a powerful force for consumer spending in the nation.

 China Lodging is looking to take advantage of this, having recently opened 167 hotels and closing 52 that did not fit into the new demographics.

 "By removing hotels of lower quality, the company is able to provide a more consistent customer experience, which will help enhance both the brands and future profitability," the report said.

 The overall strategy seems to be working. Companywide occupancy rate for the third quarter was 93.1 percent, compared with 88.9 percent in the equivalent period a year ago. There was also improved performance among all the company's brands "as driven by strong travel demand and increasing popularity of the company's brands," the report said.

Looking Beyond Borders

 Company officials say China Lodging's prosperity has prompted it to look beyond China's borders for investment opportunities. Responding to a question at China Lodging's third-quarter earnings call concerning the company's "very auspicious" RMB 888 million ($134 million) operating cash flow for the quarter, CEO Jenny Zhang said the company would reinvest most of the cash in "new opportunities."

 "We are considering not only expanding our business in China, we are also considering overseas opportunities," Zhang said.

In fact, just two weeks ago, Ji announced a new global expansion project during the company's annual conference in Shanghai. 

"China Lodging strives to become the next world-class hotel group by forming a complete global open ecosphere, featuring hotels, service apartment, shared office, and IT technology," Ji said. The company's shares jumped higher on the news.

In addition, China Lodging recently dropped a $10 million strategic investment on OYO, an Indian budget hotel startup. The partnership, described in a joint announcement as a means of exploring "knowledge and technology projects of mutual interest," though there was no specific business agreement.

 Nevertheless, OYO CEO Ritesh Agarwal said at the time: "Addressing consumers in India and China – two of the world's fastest-growing markets – through our combined strengths opens up a very large and significant growth opportunity."

 Needless to say, China Lodging has attracted the interest of investors in recent years. Its stock value has more than doubled this year, from about $50 per share at the start of the year to about $120 now. Today, China Lodging is a member of the elite IBD 50 List, Investor's Business Daily's list of leading growth stocks.

 The consensus of a group of analysts for Marketwatch this month gave the company a "buy" rating, with an average stock target price of $148.79. China Lodging shares closed up nearly 3 percent to $144.43 per share on Friday.