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China’s domestic chains undeterred by slow Q4
March 9 2012

Despite decreases in performance metrics in Q4, 7 Days Group Holdings Limited, China Lodging Group and Home Inns & Hotels Management will continue their aggressive plans for growth in 2012.

  • In 2011, 7 Days added 376 hotels, opening 106 of them during the fourth quarter. As of 31 December, the company had a total 944 hotels in operation, covering 141 cities throughout China.
  • CFO Jenny Zhang said China Lodging Group’s newest brands—HanTing Seasons and HanTing Hi Inn—will serve as “extra growth engines.”
  • The integration of Motel 168 will be a primary focus for Home Inns & Hotel Management during 2012.
By The HNN editorial staff

REPORT FROM CHINA—The focus on growth remained at the forefront for China’s domestic economy chains, and the companies plan to go full force in 2012 despite decreases in performance metrics in the fourth quarter.

7 Days Group Holdings Limited
7 Days Group Holdings Limited reported 2011 was a record year for the company’s growth, and CEO Alex Nanyan Zheng said he is confident the company will achieve its aggressive goals for expansion during 2012.

In 2011, 7 Days added 376 hotels, opening 106 of them during the fourth quarter. As of 31 December, the company had 944 hotels in operation, covering 141 cities throughout China.

“Regarding our outlook for 2012, we will continue to execute our rapid growth strategy,” Zheng said during the company’s earnings call Thursday.

7 Days is targeting 360 new hotels this year, which include 120 leased-and-operated properties and 240 managed properties. The managed hotel openings will be distributed evenly among the first half and second half of 2012, Zheng said.

During the fourth quarter, the company reported 82.8% occupancy, down from 83.9% in the fourth quarter of 2010. Average daily rate decreased 1.7% to 159.6 renminbi ($25.29) and revenue per available room decreased by 3% to 132.2 renminbi ($20.95).

When asked by an analyst if the rapid expansion in 2012 would negatively impact occupancy, Zheng said it will not. “Our overall mature hotel occupancy is growing very fast,” he said. 7 Days increased in size by 66% in 2011, and mature properties were not impacted, he said.

While market demand remains very strong, the company needs to focus more on bringing in corporate clients, Zheng said. “This is the area we are going to pay more attention to going forward, and that will bring additional demand in the future.”

Approximately 40% to 45% of the company’s customers are business travelers, and Zheng said he is looking to increase that percentage.

When asked about opportunities for growth in other chain-scale segments, Zheng said 7 Days will continue its single-brand strategy for the time being. However, “we’ve been trying to understand the customers’ demand in the broader midscale market. We like to look at this new segment from high-end down to low-end rather than as an expansion of the economy segment,” he said.

By looking at the market from the high-end rather than as an expansion of their economy hotels, it will be easier for 7 Days to change the image it established as an economy-brand operator, Zheng said. “It will be easier for us to establish a strong brand influence.”

China Lodging Group Limited
China Lodging Group Limited will continue in 2012 to grow its three brands—HanTing Seasons Hotel, HanTing Express Hotel and HanTing Hi Inn—and is setting lofty expectations for growth.

The Shanghai-based company opened 201 hotels in 2011, including 101 leased-and-operated hotels and 100 franchised-and-managed hotels, according to executives on the company’s fourth-quarter earnings call Wednesday. As of 31 December, China Lodging had 639 hotels in operation and expects to open 278 more in 2012.

“Our strategy is to continue to focus on the customer experience. We’re committed to creating a high-quality portfolio and will continue fast growth,” said CFO Jenny Zhang. “The goal is to exceed 2,000 hotels in five years and be in one of the top 10 global brands in 10 years.”

Zhang said China Lodging Group’s newest brands—HanTing Seasons and HanTing Hi Inn—will serve as “extra growth engines.” As of 31 December, China Lodging Group had 22 Seasons Hotels and 28 Hi Inns in operation. The Seasons brand now makes about 3% to 4% of China Lodging’s overall portfolio and executives said they hope to grow that to 10% to 15%. The Seasons brand will be “slightly upgraded” in order to differentiate it further from HanTing Express.

“We have seen a fairly positive demand for Seasons Hotels, so we’ve decided to speed up expansion of this brand,” Zhang said. “… We’ve introduced new Seasons Hotels in Shanghai and the feedback has been very positive.”

China Lodging is approaching the five-year mark and now covers 100 cities in China.

In 2011, “China’s domestic travel grew dramatically faster than (gross domestic product),” Zhang said. “Household income grew and travel expenditures are expected to grow, building demand for our hotels.”

Moving forward, China Lodging Group plans to open around 120 leased-and-operated hotels in 2012 and the remaining 158 or so will be franchised and managed.

“Going forward we will use leverage for future expansion,” Zhang said. “Currently the company has zero debt, but we’re in negotiations with Chinese banks to secure a credit line. We’re confident in our funding and that the next few years’ growth will be sustainable.”

RevPAR at China Lodging hotels was reported at 167 renminbi ($26.43) in the fourth quarter of 2011, down from 168 renminbi ($26.60) in the fourth quarter of 2010. Full-year 2011 RevPAR was reported at 165 renminbi ($26.12) compared to 183 renminbi ($28.97) in 2010. The decreases, executives said, are attributable to “the absence of one-time favorable impact from the Shanghai Expo.”

Home Inns & Hotels Management
The integration of Motel 168 will be a primary focus for Home Inns & Hotels Management during 2012.

Thus far, the integration has gone smoothly, Home Inns executives said. “We found no surprises post closing,” CEO David Sun said during a conference call with analysts Thursday.

Home Inns acquired economy hotel chain Motel 168 in May 2011 for $470 million. During the integration process, Home Inns’ work has included installing Home Inns’ loyalty program to Motel 168; renovation work; providing a new marketing platform for the brand; and improving Motel 168’s operating metrics, CFO Huiping Yan said.

Occupancy at Motel 168 was 66% during January and February 2011, Wu said. Home Inns’ goal is to boost that figure to approximately 75% by the end of the year. The brand’s RevPAR during that period was “still positive; still an increase,” Yan said, though ADR was below what Home Inns saw during the period.

Overall during the quarter, Motel 168 had occupancy of 73.5%; RevPAR of 113 renminbi ($17.91); and ADR of 154 renminbi ($24.41). Excluding Motel 168, Home Inns saw occupancy during the quarter of 88.4%; RevPAR of 173 renminbi ($27.42); and ADR of 153 renminbi ($24.25).

Motel 168, with 307 hotels open, has a total 198 hotels in its pipeline. Excluding Motel 168, Home Inns has 1,119 hotels in operation. This year, Home Inns intends to open between 330 hotels and 360 hotels.

Improving Motel 168’s operating metrics could prove challenging, though, as Home Inns executives noted a slowdown in the Chinese economy, particularly during the fourth quarter.

“We are seeing fairly stable performances … there is no decline, there is no continued deterioration; which provides a good level of confidence and a reasonable assessment,” Yan said. “As we get out of … leaving the Chinese New Year and the low season, we hope that things will improve.”

Home Inns’ pricing strategy for Motel 168 is to push for high occupancy levels first, and then follow with rate increases, Yan said.

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