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‘Manchise’ model takes hold in China
August 10 2012

Executives from some of China’s largest hotel companies reported progress in their strategic shifts away from leased and operated hotels toward the managed and franchised model.

  • Several major hotel companies in China are shifting their portfolios away from lease and operated hotels to the managed and franchised model.
  • Executives said the managed model removes much of the risk associated with lease agreement and increases operating margins.
  • “The managed hotel model is the key to the company’s further rapid growth,” said Yuezhou Lin, of 7 Days.

REPORT FROM CHINA—The great “manchised” revolution continued to unfold during the second quarter within some of China’s largest hotel companies.

Home Inns & Hotels Management, 7 Days Group Holdings Limited and China Lodging Group Limited on Friday China Standard Time each reported significant strides toward overhauling their economy-skewed portfolios away from the leased-and-operated model toward franchise agreements and management contracts during earnings calls with analysts.

“The managed hotel model is the key to the company’s further rapid growth,” said Yuezhou Lin, CEO of 7 Days, which in June formalized the shift toward managed hotels.

Given the government-led economic slowdown in China, executives said the managed model removes much of the risk associated with lease agreements, increases operating margins and ultimately provides a stronger, more consistent experience to guests.

7 Days added 88 hotels during the quarter, 70 of which were managed. The company’s portfolio as of 30 June comprised 1,132 properties, consisting of 697 managed hotels.

Home Inns opened 103 new hotels during the quarter, including 71 franchised-and-managed operations. The company had 1,580 hotels in its portfolio as of 30 June, of which 847 were franchised and managed.

China Lodging added 43 new “manchised” hotels and 35 new leased hotels during the quarter. The company had 365 managed-and-franchised properties in its portfolio as of 30 June. The recent acquisition of Starway added an additional 110 franchised hotels to China Lodging Group’s portfolio, which numbered 863 properties at the end of the quarter.

Executives provided a number of other updates during each company’s respective earnings call.

Home Inns & Hotels Management
“The company was able to achieve
solid overall performance with double-digit organic revenue growth,” said Home Inns CEO David Sun.

The company took a slight hit in its performance metrics, mainly because of a softening overall economy and the absorption of Motel 168, which came into the system with lower average daily rate and occupancy.

Home Inns reported occupancy rate of 89.2% during the quarter, compared to occupancy of 94% during the same quarter last year. Revenue per available room was 149 renminbis ($23) for the second quarter of 2012, compared with 163 renminbis ($26) in the same period of 2011 and 132 renminbis ($21) in the first quarter of 2012.

“We believe the market condition will remain challenging but generally stable at least through the end of 2012,” Sun said. “We are reasonably confident in our ability to successfully navigate through and deliver stable performance.”

Home Inns has completed phase 1 of the Motel 168 implementation, which consisted of integrating the group’s sales and marketing, best practices, membership program and “know how.” The second phase will be more results-oriented, with a focus on maintaining existing ADR levels while driving more demand.

“We are putting all the efforts into really showing and seeing the improvements in the second phase. With that, the occupancy rate for Motel 168 is still targeted to be at 80% on a full-year basis and perhaps even more for 2013,” said CFO Huiping Yan.

7 Days Group Holdings Limited
The name of the game is “growth” for 7 Days these days.

“We continue to execute our rapid growth strategy in the second quarter with the addition of 88 hotels to our network during the period,” CEO Yuezhou said, speaking through a translator.

Company executives aim to open 80 leased-and-operated hotels and 320 managed hotels by year end. 7 Days had 226 hotels in the pipeline as of 30 June.

Lease-and-operated hotels will continue to focus on first tier and second tier cities, which allow for a shorter ramp-up period and better operating performance.

The expansion strategy for managed operations will be broader and more geographically diverse. The company is discussing how to better tailor their offerings to enter fourth tier and fifth tier cities as well. “In those cities, there’s still tremendous demand,” Lin said.

Like Home Inns, 7 Days experienced a slowdown in overall hotel performance.

For the second quarter 2012, occupancy rates for leased-and-operated hotels, managed  hotels and all hotels were 86.8%, 83% and 84.6%, respectively, compared to 91.1%, 83.8% and 87.5%, respectively, in the second quarter 2011. The year-over-year decrease in occupancy rates was mainly because of the higher number of new hotels in operation compared to the prior year period.

RevPAR for leased-and-operated hotels was 145.1 renminbis ($22.81) in the second quarter 2012, compared to 152.4 renminbis ($24) in the same period in 2011. RevPAR for managed hotels for the period was 130.9 renminbis ($20.58) in the second quarter 2012, compared to 129.7 renminbis ($20.39) for the same period in 2011. 

China Lodging Group Limited
China Lodging made steady progress in the implementation of its multibrand strategy, executives said.

With China Lodging’s investment in Starway Hotels during the second quarter, the company now has two brands, Seasons and Starway, to further penetrate the midscale segment, while it continues its aggressive growth plan with its two economy brands, Hanting Express and Hi Inn, said CEO Qi Ji.

As domestic Chinese travel is expected to grow during the next several years, China Lodging sees tremendous opportunity to develop properties, Qi said. “We expect to have 2,500 hotels by the year of 2016 and 5,000 hotels by the year of 2021.”

The company had 863 hotels in operation in 131 cities as of 30 June.

For the short term, however, the company’s focus is on evolving the more than 100 Starway properties to operate effectively under the China Lodging umbrella, said Jenny Zhang, the company’s CFO.

“We are going to introduce major changes,” Zhang said. “First, we need to strengthen the midscale hotel chain image of Starway, therefore, we will clear out about 30 hotels that are low quality.”

China Lodging also intends to change Starway’s franchise business model to “manchised,” which is already under way, she said.

“We believe the model shift will offer our customers a more reliable service,” Qi said.

As for second-quarter performance, which does not include results from Starway properties, the company reported 97% occupancy, an increase from the 93% reported the same quarter last year; an ADR of 181 renminbis ($28), which remained approximately flat from the 182 renminbis ($82) reported in the second quarter of 2011; and RevPAR rose from 170 renminbis ($26) in the second quarter of 2011 to 176 renminbis ($27) this last quarter.

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