REPORT FROM CHINA—The news of The Carlyle Group’s purchase of a 49% stake in Mandarin Hotel Holdings made industry headlines earlier this month, but what exactly was it about the Mandarin’s 25-hotel portfolio that lured in the global asset management company?
For one, it’s China’s burgeoning middle class, which is generating incredible hotel demand, said Eric Zhang, a managing director of Carlyle based in Hong Kong.
Rising disposable income is leading to a consumer trade-up from the lower-end hotel segment to mid-market hotels, Zhang said. “During 2007 to 2011, the mid-market hotel segment grew at 13% (compound annual growth rate), and the growth is expected to continue in the next three to five years,” he said.
And executives at Carlyle believe Mandarin Hotel Holdings Limited is in a great position to capitalize from the expected mid-market segment growth.
Mandarin operates 25 hotels, comprising approximately 3,200 rooms, in six cities within China, including Beijing, Tianjin, Dalian, Nanjing, Hangzhou and Ningbo. Six of the properties operate under the Crystal Orange Hotel name, which is a higher-end brand targeted toward business and leisure travelers. The remaining 19 are Orange Hotel properties, which the company classifies as a mid-end brand for budget-sensitive customers.
For both the Crystal Orange Hotel and Orange Hotel brands, Mandarin follows the lease-and-operate model. The brands lease the properties, typically for 10 to 15 years, convert, renovate and then operate them themselves, Zhang said.
Hai Wu, founder and CEO of Mandarin Hotel Holdings, said this is the process that works best for the company given the current economic state of the country. “We don’t own properties,” he said. “This model … effectively uses funds considering (the) rocketing property prices in China.”
Additionally, by not following a management model, Wu said the company is better able to control the product and service quality of its hotels.
Supporting expansion efforts
Zhang said Carlyle executives expect their support will give Mandarin the ability to accelerate the expansion of its network and further improve its brand, market penetration and customer satisfaction.
Despite industry concerns that an economic slowdown in China could negatively impact the rapidly growing hotel market, Carlyle and Mandarin plan to go full speed ahead with their efforts.
“We have confidence in Mandarin Hotel Holdings Limited’s management team and the continued growth of its hotel chain,” Zhang said, adding that most of the senior managers are familiar with the Mandarin’s vision as they have been with the company since its founding.
While the companies’ executives declined to go into specific details about the new properties, ground-up development seems to be an option, which would be a transition from Mandarin’s conversion model.
“Most hotels will be built in China’s tier-1 and developed tier-2 cities,” Zhang said.