Praveen.Choudhary@morganstanley.comDan.Xd.Xu@morganstanley.comAttractiveMORGANSTANLEYASIALIMITED+PraveenKChoudharyEQUITYANALYST+8522848-5068DanXuRESEARCHASSOCIATE+8522239-1227HongKong/ChinaLeisure&LodgingAsiaPacificIndustryViewHongKong/ChinaLeisure&LodgingHongKong/ChinaLeisure&Lodging||AsiaPacificAsiaPacificTakeawaysfromOurChinahotelsTripWesawnosignsofrecoveryandexpectRevPARgrowthtoremainnegativein3Q19.Investorsareconcernedaboutmidscalemarketcompetition,franchiseereturnsanddisruptionsfromsoftfranchising.WecontinuetopreferGHGoverHTHTasadefensiveplayinthedowncycle.Near-termRevPARoutlook:Hotelcompanieshavenotseenanysignsofrecoveryin3Q19andRevPARgrowthcouldcontinuetoremainnegative.HTHTmaintaineditsguidanceof"lowsingle-digitdecline"forRevPARgrowthin2H19afterfalling2.1%in2Q19.BothBTGandGreenTreesaid3QQTDistrackingsimilarlyto2Q,withSeptembernegativelyimpactedbytimingofthemid-Autumnfestivalthisyear.Isthereoversupplyinthemidscalemarket?Seemsunlikely.MidscalehotelsarevaguelydefinedashavingroomratesofRmb400-800/dayinTier1cities.Theseassetsrequiregoodlocations.ManyindependenthotelsheldormanagedbySOEsorlocalauthoritiesinprimelocationsaregeneratinglowreturnsandthuscanbeconvertedtobrandedmidscalehotels.Demandisalsostrongintwoways:1)Franchisees,whenfacingalandleaserenewal,areforcedtoupgradetheirexistinghoteltomidscalebrandtocommandhigherroomratestoabsorbhigherrentalcosts;2)bothbusinessandleisuretravellersarelookingformorethanbasicamenitiesanddesigns,andbrandedmidscalehotels(especiallyhotelspricedattheupperend),arestillasmallfractionoftotalstock.Softfranchising:Chinahotelmarkethasseenmorenewentrantswithasofterfranchisemodelandfocusingonnon-standardizedhotelassetsinlowertiercities/counties.However,theincumbentshaveyettoseetheimpactonthetakerateortheirabilitytosourcenewpotentialfranchises.Thisismainlyduetolimitedoverlapincityexposureanddifferentassetrequirements(Exhibit3).HomeInn("ChinaInn")andJinJiang("Chonpines")alsostartedsoftfranchisingafewyearsago(HTHTstartedits"Yisu"platformi...
