Hotels Snubbed Amid China Rally on Expansion Plans

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Hotel In Shanghai
A worker cleans the railing on one of the floors of a hotel in Shanghai, China. Photographer: Tomohiro Ohsumi/Bloomberg

As world-beating rallies in Shanghai and Hong Kong spill over to Chinese stocks traded in New York, shares of hotel operators Homeinns Hotel Group and China Lodging Group Ltd. are getting left behind.

While much of the market is soaring amid speculation the government will manage to shore up a slumping economy, investors are concerned it may be too late for hotel operators that overestimated growth in travel and aggressively expanded. Homeinns and smaller rival China Lodging have fallen at least 16 percent this year, as U.S.-traded Chinese stocks jumped 15 percent and the Shanghai Composite Index surged 25 percent.

“The hotel business model is affected by the current economic situation; if the economy slows down, it makes hotel expansion more expensive, and that weighs on the bottom line,” Jun Zhang, head of China Research at Rosenblatt Securities Inc. in San Francisco, said by phone. “And in the current climate, if they expand, then those hotels will not be profitable.”

Shanghai-based China Lodging boosted its hotel count by 40 percent last year to 1,995, while Homeinns increased its network by 20 percent to 2,609, according to the companies’ 2014 earnings statements. The expansion incurred a “significant” amount of rental costs for China Lodging, driving up fourth-quarter operating costs by 20 percent from a year earlier, the company said in the statement.

Lower occupancy rates have dragged on revenue growth as the economy expands at the slowest pace in 24 years. Homeinns forecasts sales will grow this year at half the pace of 2014, while China Lodging projects revenue will rise just 10 percent, down from 19 percent last year.

Weaker Economy

Homeinns spokesman Ethan Ruan and China Lodging spokeswoman Ida Yu didn’t respond to e-mailed requests seeking comment about how the hotels are being affected by the slowing economy or their expansion plans amid declining occupancy rates.

Homeinns, also based in Shanghai, reported a 4.4 percentage-point drop in its fourth-quarter occupancy rate, while China Lodging’s fell by 3.5 percentage points. That compares with a nationwide decline of 0.8 percentage point, according to data from London-based research firm STR Global.

The decline is due in part to the weaker economy, China Lodging said in a release last month. Homeinns also attributed it to the economic slowdown.

“If you look at the current market situation in China, we’re not seeing significant improvement in the near term,” Homeinns Chief Executive Officer David Sun said during a March 11 earnings call. “We are quite prudent, very cautious with our development plans in 2015.”

Qunar, Ctrip

The stock slumps stand in contrast to online trip-booking agencies including Qunar Cayman Islands Ltd., which has rallied 57 percent this year, more than any other company on the Bloomberg China-US Equity Index. Rival Ctrip.com International Ltd. has gained 39 percent.

“Web-based service providers are still growing fast amidst the waves of people of going online,” said Tian X. Hou, the founder of Beijing-based research firm T.H. Capital LLC.

The number of Chinese Internet users has grown to 649 million, greater than the population of any other nation except India, and could exceed 850 million by 2015, government data show.

Ctrip, China’s biggest Internet travel website, said in its 2014 earnings statement that accommodation reservation volume climbed 63 percent while sales grew 45 percent last year. Qunar, which runs an online travel search platform, said revenue from hotel reservations rose 79 percent in 2014, as a 98 percent increase in booking volume more than offset a 9.7 percent drop in prices.

‘Long Game’

Despite the market downturn, the expansion makes sense because of the long-term potential in China’s travel sector, according to Alistair Way at Standard Life Investments Ltd.

“They’re all playing the long game -- investing in advance of customer demand,” Way said by e-mail on March 31. Domestic travel and tourism spending is expected to double to about $1.6 trillion by 2025, according to data compiled by the World Travel and Tourism Council. China’s ratio of population to hotel rooms is 12 times that of the U.S., according to Bloomberg Intelligence data.

Brick-and-mortar hotel operators traded in mainland China haven’t been immune to the country’s economic slowdown either. Shanghai Jinjiang International Hotels Development Co., which operated 968 economy hotels at the end of 2014, has climbed just 8.9 percent this year, versus 25 percent for the city’s benchmark gauge.

“China’s hotel operators have been overbuilding,” Gabriel Wallach, founder of North Grove Capital LLC in Boston, said by phone Friday. “It puts pressure on the occupancy rate and revenue per room.”

(Corrects China’s ratio of population to hotel rooms in 15th paragraph.)
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