Beijing Hotel Companies Go for the Gold

S&P says select lodging companies are attractive investments as China's hotel market gears up for the Olympics

With 500 days to go until the opening ceremony, anticipation is building for the 2008 Summer Olympics in Beijing, which run from Aug. 8 to Aug. 24.

As with any event of such scale, attendees are going to need hotel rooms. Lots of hotel rooms. Beijing is expected to receive about 500,000 to 550,000 overseas visitors as it hosts the Summer Games, according to chinadaily.com. And that raises a question for investors: Are there attractive growth opportunities for hotel companies in China? Standard & Poor's Equity Research says yes.

This $40 billion event will increase China's expanding tourist traffic, and will likely improve its already hot market for hotels. China ranks fourth on the list of top destinations, and some believe it could surpass the U.S. to become the top destination over the next 10 years. China's growing middle-class population is also spending more on vacations within China.

Lots of Rooms in the Pipeline

Some major hotel companies stand to profit from this potential growth, in 2008 and beyond, says S&P.

"Business and tourist travel will likely benefit from China's growth, and it's not surprising that there are significant growth opportunities available for hotel companies there. The Olympics will likely contribute to this growth," says Tom Graves, co-head of U.S. consumer discretionary equity research for S&P.

China has the largest development pipeline for hotels in the world after the U.S. China's room count is 63% of all the rooms in the Asian pipeline, according to Lodging Econometrics. The pipeline for hotels to be built in Beijing is growing quickly. Shanghai also has a large pipeline, aimed to help accommodate visitors to its World Expo in 2010.

Eyeing the InterContinental

Today in China there are about 5,000 hotels with star ratings, holding about 701,700 available rooms. In comparison, the U.S. has about 50,000 hotels. This suggests to S&P that the market in China appears to have a lot of room for growth. How much? It's hard to say. By way of comparison, the U.S. hotel industry has annual revenues of about $90 billion.

S&P believes one good investment opportunity lies with InterContinental (IHG; recent price, $25). "InterContinental is among the three largest hotel companies in China," says S&P equity analyst William Mack. He points out that the company has more than 55 hotels in China, most of which are managed or franchised. InterContinental plans to have about 125 hotels by 2008; many will likely be Holiday Inns.

"The company is expanding its China brand presence—in terms of number of rooms—by about 20% a year," says Mack, with about 30 new contract signings in 2006. "It usually takes at least a year between contract signing to opening." Mack has a 4 STARS (buy) ranking on InterContinental.

Other Good Buys

Other hotel companies with a growing presence in China include Hilton Hotels (HLT; $36), Marriott International (MAR; $50), and Starwood Hotels & Resorts (HOT; $66). Each of those stocks is ranked 3 STARS (hold) by S&P.

Other U.S industry players making strides in China: Best Western, which will have around 25 hotels by the end of this year, and 4 STARS-ranked Wyndham (WYN; $34).