Photographer: David Paul Morris/Bloomberg

Lone China Hotel Stock Seeing Gains Ducks Extravagance Purge

  • Only China Lodging Group has gained among peers this year
  • Cuts to expense accounts hurt hotels in regional cities

President Xi Jinping’s crackdown on fancy feasts and penthouse suites has decimated China’s hospitality industry, with a notable exception.

China Lodging Group Ltd. is the only Chinese hotelier to have gained in 2016. The Shanghai-based hotel operator has risen 23 percent to $38.43 so far this year, making it the fifth-strongest performer within the Bloomberg-China Index, which tracks Chinese stocks traded in the U.S.

After taking leadership of the Communist Party at the end of 2012, Xi banned official extravagance as part of an effort to stamp out widespread corruption. Lavish spending on anything from showy cars to luxury hotel rooms was out, with far-reaching consequences to caterers, entertainment and lodging businesses not to mention alcohol giant Remy Cointreau SA. Intensifying that effect has been slowing economic growth, which hovered at a seven-year low in the first half of 2016.

Over the past three years, China Lodging has posted annualized total returns of almost 29 percent. That’s outpaced competitors including Jinling Hotel Corp. and Huatian Hotel Group Co., and slightly trails the 30.6 percent annualized returns posted by Shanghai Jin Jiang International Hotels Co. While China Lodging’s share price has risen 23 percent this year, Shanghai Jin Jiang has dipped more than 20 percent in Hong Kong.

China Lodging’s strong presence in major cities such as Shanghai and Beijing helped it adapt to the new consumption climate while competitors, more reliant on the party’s largess in far-flung provinces, got slammed. In inland cities like Xian, a glut of new supply, an economic slowdown and slashed expense accounts have taken a sizable bite out of profit margins.

“China Lodging’s presence in primary markets in China has certainly helped to fuel revenue per available room growth,” Margaret Huang, an analyst from Bloomberg Intelligence, said in an e-mail, referring to an industry metric for gauging sales.

With more than 12 percent of its hotels in Shanghai, the company’s revenues will get a boost from a surge in tourists flocking to the newly opened Shanghai Disneyland, said Tian Hou, an analyst from TH Data Capital. Fifteen million visitors are expected to pass through the theme park’s turnstiles every year.

The hotelier’s earnings have grown annually since 2011 as robust demand for accommodation in Beijing and Shanghai made up for the shortfall in regional business. Industry revenues per available room in the two cities have risen at least two percent over the last 12 months, data from Smith Travel Research shows.

China Lodging’s focus on less expensive rooms has also helped it weather the anti-extravagance campaign. At the end of March 2016, about 85 percent of rooms in operation were at what the company describes as its “economy hotels.”

That’s not to say that China Lodging Group didn’t take a hit. It also expanded into smaller cities such as Dalian during the heady days of credit-fueled economic growth following the 2008 financial crisis. When the industry’s fortunes soured after the crackdown on graft, its hotel occupancy rates fell nine percent for three years to 85 percent in 2015. Nonetheless the company’s operating margins held strong, rising from 6.7 percent in 2013 to 8.6 percent in 2015.

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