SHANGHAI—Despite worries of a softening national economy, China Lodging Group continues to grow its footprint of opened and under-development properties across the country.
In the second quarter of 2015, the company added 207 net hotels, a company record high for a single quarter, said CEO Jenny Zhang on an earnings call with analysts.
By the end of the quarter, the company had 2,384 hotels in operation, of which 26% were leased and 74% were manachised or franchised. The company’s pipeline at the end of the quarter stood at 740 hotels, with 19 leased and 721 manachised or franchised, all according to the company’s second-quarter financial statement.
At press time, China Lodging Group stock was up 2.6% year to date. By comparison, the Baird/STR Hotel Stock Index was down 8.9% year to date.
Brand growth
Brand clarification and rollouts are a big part of the company’s growth strategy, Zhang said.
“We are excited about the growth of our core brand HanTing,” she said. “The fast growth of our hotel network is attributable to the successful adoption of asset-light model as well as our new brand rollouts.”
The economy HanTing brand led the company’s quarterly property growth count, adding 98 hotels under the brand. This was followed by 42 net Hi Inn additions and 35 Elan Hotel additions.
Regarding the Hi Inn economy brand in particular, China Lodging executive chairman and founder Qi Ji said, “The number of manachised and franchised Hi Inn (hotels) has grown by more than nine times, and the pipeline grew by more than five times.”
The company also is putting focus on its midscale and upscale brands Ji Hotel, which added net 15 properties to the system in the quarter, and Starway Hotel, which added 17.
Still, the bulk of the company’s activity remains in the economy segment, prompting one analyst to ask, “Why aren’t hotel owners more interested in moving on to the midscale hotel format?”
Zhang attributed this dynamic to demand trends in China.
“I think the demand for economy hotels is still significantly higher than the demand for midscale hotels, mainly because of the general income level of the Chinese population. That’s No. 1,” she said. “So clearly for many years to come the total room supply of economy hotels will still be significantly higher than the midscale hotels.”
She also cited franchisee desire for a smaller investment in the property. And despite larger economic worries, she said, “most of our franchisees are still generating positive cash flow.”
Performance
Net revenue for the company was a highlight in the second quarter. That number increased 16.9% year over year to 1,457.8 million renminbi ($235.1 million) for the second quarter of 2015, exceeding the high end of the guidance.
As a result the company raised its net revenue growth guidance significantly for 2015, up to a growth range of 11.5% to 13.5%, from the previously announced range of 7.5% to 11.5%.
“We have seen positive changes in two things,” Zhang said. “One is that in Q1 we expected the same-hotel revenue per available room to decline by 5%. And it turns our Q2 and Q3 (were) slightly better than that, so that has moved our number up positively.”
She also cited the company’s strong franchised and manachised pipeline. “We expect more new hotels will be opened this year. And our fee income also is quite strong … so generally we have seen a couple of positive things to move our forecast upwards.”
The company posted average daily rate of 181 renminbi ($28.30) in the second quarter of 2015, up 0.6% over the second quarter of 2014. Occupancy was 85.8% in the second quarter of 2015, compared with 91.2% in the second quarter of 2014. The company attributes the year-over-year decrease to the soft Chinese macro-economy and a dilutive impact from newly opened hotels in lower-tier cities.
RevPAR was 156 renminbi ($24.39) in the second quarter of 2015, compared with 164 renminbi ($25.64) in the second quarter of 2014. The year-over-year decrease was a result of lower occupancy rate, according to the company.