摩根士丹利-中国-休闲与住宿业-中国酒店业之旅要点-2019.19.30-22页.pdf

Praveen.CDan.Xd.XAttractiveMORGAN STANLEY ASIA LIMITED+Praveen K ChoudharyEQUITY ANALYST+852 2848-5068Dan XuRESEARCH ASSOCIATE+852 2239-1227Hong Kong/China Leisure&LodgingAsia PacificIndustryViewHong Kong/China Leisure&LodgingHong Kong/China Leisure&Lodging|Asia Pacific Asia PacificTakeaways from Our Chinahotels TripWe saw no signs of recovery and expect RevPAR growth toremain negative in 3Q19.Investors are concerned aboutmidscale market competition,franchisee returns anddisruptions from soft franchising.We continue to prefer GHGover HTHT as a defensive play in the downcycle.Near-term RevPAR outlook:Hotel companies have not seen any signs ofrecovery in 3Q19 and RevPAR growth could continue to remain negative.HTHTmaintained its guidance of low single-digit decline for RevPAR growth in 2H19after falling 2.1%in 2Q19.Both BTG and GreenTree said 3Q QTD is trackingsimilarly to 2Q,with September negatively impacted by timing of the mid-Autumn festival this year.Is there oversupply in the midscale market?Seems unlikely.Midscale hotels arevaguely defined as having room rates of Rmb400-800/day in Tier 1 cities.Theseassets require good locations.Many independent hotels held or managed bySOEs or local authorities in prime locations are generating low returns and thuscan be converted to branded midscale hotels.Demand is also strong in two ways:1)Franchisees,when facing a land lease renewal,are forced to upgrade theirexisting hotel to midscale brand to command higher room rates to absorb higherrental costs;2)both business and leisure travellers are looking for more thanbasic amenities and designs,and branded midscale hotels(especially hotelspriced at the upper end),are still a small fraction of total stock.Soft franchising:China hotel market has seen more new entrants with a softerfranchise model and focusing on non-standardized hotel assets in lower tiercities/counties.However,the incumbents have yet to see the impact on the takerate or their ability to source new potential franchises.This is mainly due tolimited overlap in city exposure and different asset requirements(Exhibit 3).Home Inn(China Inn)and Jin Jiang(Chonpines)also started soft franchising afew years ago(HTHT started its Yisu platform in 1Q19)but these will not betheir strategic focus.Read Soft Franchising:Primer for details.Prefer GHG over HTHT:We find GHGs recurring income growth to be moreresilient than HTHTs due to high exposure of its Franchised&Managed(F&M)business.HTHT is seeing negative operating leverage in its Leased&Operated(L&O)business since its like-for-like RevPAR is declining by more than 1.5%YoY.GHGs earnings growth in 2H is accelerating,yet valuation at 7%FCFE yield and12x P/E on 2020E is significantly cheaper than HTHT(2.9%FCFE yield and 34x P/Eon 2020E excluding stakes in Accor).Exhibit 1:Whats changed:We raise GHGs PT by 3%toUS$16.5 to reflect incremental income from theacquisition of 60%stake in Argyle GroupRatingPTNewChgUpsideGreenTreeGHG.NOW16.5+3%+64%PT(LoC)Source:Company data,Morgan Stanley Research(E)estimatesMorgan Stanley does and seeks to do business withcompanies covered in Morgan Stanley Research.As aresult,investors should be aware that the firm may have aconflict of interest that could affect the objectivity ofMorgan Stanley Research.Investors should considerMorgan Stanley Research as only a single factor in makingtheir investment decision.For analyst certification and other important disclosures,refer to the Disclosure Section,located at the end of thisreport.+=Analysts employed by non-U.S.affiliates are not registered withFINRA,may not be associated persons of the member and may notbe subject to NASD/NYSE restrictions on communications with asubject company,public appearances and trading securities held bya research analyst account.1September 30,2019 06:29 PM GMT Other Key Discussion Topics(A)Franchisee loan:Still smallAll of the hotel groups we visited provide loans to existing franchisees.As of Jun-19,HTHT and GHG had loan amounts outstanding of Rmb190mn and Rmb90mn,respectively,based on our estimates(representing 7%and 11%of F2019E FCF to equity,respectively).Duration of a typical loan is three years with interest rate at a spread oncommercial loans(currently running at 8-9%per annual).Typically the LTV ratio is 50%-60%,or Rmb3mn,for a hotel with capex of Rmb6mn,for example.We do not thinkthere is any major risk for the hotel sector yet as hotel groups are selective whenproviding credit:(B)Sales channel:OTAs are still importantOnline Travel Agencies(OTAs)remain one of the crucial sales channels for hotels.Based on our discussions with companies,OTA contribution to unbranded hotels canreach as high as 50%in terms of room nights sold.OTA contribution declines for hotelgroups with strong membership programs(GreenTree and Huazhu only sold 5-15%ofthe room nights via OTAs).OTAs are also important for newly opened hotels as well asnewer brands in the ramp up stage.(C)Franchisees and background:Hotel investors leasing assets from SOEsMajority of the franchisees are not land owners but investors of hotel assets,especiallyin higher tiered cities.They sign a land lease of on average 10 years with land ownerswith step function increases in rent rates.Land owners are mostly SOE companies,localauthorities or private landlords.About 30-50%of the leases in the market are nowBorrower must be an existing hotel franchisee and can provide more than 12months of cash flow as credential.Existing hotels will be used as collateral.Franchisee loan is still not the norm,with each hotel group providing only 15-20loans a year while each of the top four hotel groups are opening 600-1,000 hotelsannually.Exhibit 2:Hotel groups sales channel by room nights sold as of 1H19OTAsDirect ChannelCRS systemCorporateWalk-inJin Jiang Domestic hotels*25%50%25%0%BTG20%56%14%10%Huazhu16%40%14%30%GreenTree6%30%51%13%*CRS system,Walk-ins and Corporate are included in the companys WeHotel systemSales channel split is estimated by each individual hotel group,the definition across companies might varySource:Company data,Morgan Stanley Research2signed between franchisee and secondary landlords who are subletting assets to othertenants.The hotel sector is also seeing more professional franchisees investing in two ormore hotels,sometimes with loans and special benefits supported by hotel brands.(D)New hotel supply:Mostly conversionsA majority(80%)of the newly opened branded hotels are conversions from existinghotel assets,especially for midscale and upper midscale brands.This is because there israrely new hotel-use buildings permitted in existing urban and prime location in highertier cities.Restrictions on land use changes from commercial office to hotels is also tightand difficult.New-builds can still be seen in newly developed areas and suburbandistricts but competition for these assets is intense which might bid up rent and henceaffect investment return for franchisees.Conversions are mainly unbranded independent hotels turning into branded hotels withcapex input(typically Rmb60k-80k/room for economy brands or Rmb100k-250k/roomfor midscale brands).Conversions by switching among brands under the top 4 hotelgroups are becoming less frequent.(E)Soft franchising examplesA traditional hotel franchising model collects Rmb3,000-5,000/room as an initialfranchisee fees,charges 4-5%monthly management fees,and typically sends a hotelmanager(payroll reimbursed by franchisee).In addition,a traditional model also chargesCRS reservation fees,which are 2-3%of hotel revenue.However,a soft franchisingmodel,as shown below,waives most of these above-mentioned costs.The businessmodel is scalable but brand recall and quality is not as powerful as the traditionalmodel.Exhibit 3:Basic soft franchise framework comparisonInitial feesNet take rateMin#of roomsMin CapExRmb/room%of revenue#Rmb/roomGHG(Shell)partially waived3%303,500HTHT(Yisu)nil4%301,000BTG(Soft franchise)*nil3%n.an.aJin Jiang(Soft franchise)*nil2-3%n.a3,000*Soft franchise hotels are not consolidated into listing companies#of hotels or P/LGross take rate of 2.0 includes OTA commissions and other value added services,we estimate effective take rate is still around 5%Source:Company data3 Stock IdeasWe prefer GHG over HTHT:GHG has underperformed HTHT by 5%and the S&P 500index by 28%in the last six months despite the company consistently delivering over20%revenue and core net income growth.The underperformance is mainly due toissues listed below,which we believe are well understood:However,we expect following near-term positive catalysts to drive outperformance:Low daily trading volume.Shorter operational track record.Limited disclosures on recent acquisitions,for which value accretion was not clearlyvisible.Slower-than-expected upgrade to mid-scale segment.Not many successful brands that have achieved scale,Post 2Q results,GHG raised its revenue growth guidance to 23-28%in 2019(from20-25%),while HTHT lowered its to 10-12%(from 15-17%).Exhibit 4shows that GHGs EBITDA growth has been accelerating in 2019 comparedto HTHT.It has also been more stable in both an upcycle(2018)and a downcycle(2019),while HTHTs EBITDA growth showed higher volatility.We expect a significant increase in room rate and occupancy in its L&O business asthe renovation of the five hotels is completed by the end of 2019.Earnings contribution from Argyle Group acquisitions will continue to add inorganicgrowth(as of Apr-19),while Urban Group is expected to be consolidated by yearend.4Exhibit 4:MS adjusted EBITDA growth YoY:GHG vs.HTHT43%39%18%40%9%12%5%7%22%13%20%18%16%17%23%34%0%5%10%15%20%25%30%35%40%45%50%1Q182Q183Q184Q181Q192Q193Q19E4Q19EGHGHTHTMS Adjusted EBITDA excludes FX,government subsidies,interest income and trading gains/losses;includes SBC.Core net income reflects the sameadjustment from adjusted EBITDA but includes net interest income and tax-related deductions.Source:Morgan Stanley Research(E)estimates5 Huazhu Group(HTHT.O,UW,PT US$28)We continue to remain cautious on HTHT in view of its rich valuation.For 3Q,thecompany guided for revenue growth of 9-11%(vs.14%in 1H19).The outlook for like-for-like RevPAR growth in 2H19 was maintained at negative single digit decline,and thecompany could see EBITDA margin decline as negative operating leverage continues toset in.New initiatives into upscale hotels cost Rmb200mn in pre-opening expenses in2019E.We think this cost will continue in 2020 when the rental expense shows up andL&O margin could suffer during the ramp-up stage.Other takeaways from our trip in Shanghai:Exhibit 5:HTHT:Key Estimates for 3Q19E and 2019E,Rmb mnRevenueMS Adjusted EBITDACore Net profit2019E11,3153,2321,583YoY12%8%6%3Q19E3,021986530YoY9%5%15%MS Adjusted EBITDA excludes FX,government subsidies,dividends,trading gains/losses;includes SBC.Core net income reflects the same adjustmentfrom adjusted EBITDA but includes interest and tax-related deductions.Source:Morgan Stanley Research(E)estimatesStong Pipeline:Pipeline stayed strong at 1,553 hotels(including 300 soft brands)asof Jun-19,+18%QoQ or+85%YoY despite like-for-like RevPAR decline.FranchisingHuazhus brand becomes more attractive as independent hotels struggle to keep upwith the occupancy in a weaker economic environment.Moving ahead with upscale strategy:The company believes it can find a franchisemodel for luxury full service hotels as most of the existing upscale hotels are notmaking good return to landlords.Higher-end hotels have more stringentrequirements on good assets in prime locations,and now is a good time to obtainthese assets at a less expensive valuations.However,HTHT admits the upscalemodel is still an experiment,and it will take one to two years to stabilize theoccupancy/ADR and only then can it start franchising.6 GreenTree Hospitality(GHG.N,OW,PT US$16.50)We maintain our preference for GHG over HTHT in view of its attractive valuation.GreenTree has 99%of its hotel rooms under its asset light franchise model(HTHT:80%)as of Jun-19.We estimate over 90%of EBITDA comes from the franchise business(HTHT:60%).Therefore GreenTree is a more defensive play in a weakening RevPARgrowth environment.Furthermore,with over US$130mn of net cash after two recentacquisitions,GHG can continue to add value-accretive brands and hotel companies.Thecompany began consolidating the Argyle group holdings(28 franchised hotels)in Apr-19,which will add 3-6%and 2-4%to annualized revenue and adjusted EBITDA,respectively.Other takeaways from our trip in Shanghai:Exhibit 6:GHG:Key estimates for 3Q19E and 2019E,in Rmb mnRevenueMS Adjusted EBITDACore Net profit2019E1,170636497YoY24%18%16%3Q19E322185146YoY25%23%20%MS Adjusted EBITDA excludes FX,government subsidies,interest income and trading gains/losses;includes SBC.Core net income reflects the sameadjustment from adjusted EBITDA but includes net interest income and tax-related deductions.Source:Morgan Stanley Research(E)estimatesGHG is the only player with positive RevPAR growth in 2Q19:The reasons whyGHGs like-for-like RevPAR growth was more resilient than peers in the past threequarters are mainly:1)GHGs room pricing was more steady during the upcycle in2017/18,hence ADR still has potential to increase while occupany fell less thanmarket;2)80%of the customers were business travelers and the company claimedthey are more sticky and less price sensitive to GHGs hotels.40%of the franchisees have more than one hotel under GHGs brands7 GreenTree Whats ChangedWe raise our previously estimated revenue for 2019,2020 and 2021 by 2%,4%and 4%,respectively,to factor in the consolidated Argyle operations.As a result,adjustedEBITDA for FY20/21E increases by 0-2%after considering the negative impact onoperating margin due to Argyle Groups lower operating scale.Adjusted EBITDA for2019E is lowered by 4%to account for initial SG&A costs consolidated.Earnings changes:Core Income changes as we adjusted net interest income as weestimate total cash spent on recent two transactions amounted to Rmb300mn.We alsomark-to-market the equity trading losses in 3Q19E while assuming zero for 4Q19E.Hence,our 2019 EPS and net income estimates are down by 4%.Our EPS estimate for2020 also fell slightly,by 1.8%,but less than 2019,since we expect Argyle groupmargins to improve YOY.We also mark-to-market our average FX assumption forUSDCNY from 6.80 in our previous model in June 2019 to 7.00 now,in line with ourforecasts for other hotel groups.Valuation:We maintain our base-case FCFE target yield of 5%on the average of 2019-20E,to account for the annualized earnings from the Argyle Group acquisition.We alsodeduce the minority interest at book cost as the company holds a 60%stake in ArgyleGroup.As a result,our price target increases by 3%to US$16.50.Exhibit 7:GHG:Earnings Estimate RevisionsNewOldChangeRmb mn2019E2020E2021E2019E2020E2021E2019E2020E2021ENet Revenue1,1701,3851,5771,1471,3321,5102.0%4.0%4.4%Adjusted EBITDA636796944663795924-4.1%0.1%2.2%Core net income497622752530638754-6.3%-2.4%-0.3%Net