China economy brands continue rapid growth

China economy brands continue rapid growth

　　SHANGHAI—China Lodging Group has grown its three domestic economy brands at a rapid pace, and the company reported on its second quarter earnings call Monday that accelerated growth will continue throughout 2011 and into 2012.

　　“We continue to see tremendous growth in the limited service sector in China,” said Matthew Zhang, CEO.

　　During the second quarter of 2011, the company opened 43 net new hotels, including 22 leased and operated hotels and 21 net franchised and managed hotels. As of 30 June, China Lodging Group had 516 hotels in operation, consisting of 281 leased and operated hotels and 235 franchised and managed hotels.

　　As of 30 June, China Lodging Group had a total pipeline of 201 hotels under development. During 2012, the company hopes to open 240 to 250 new hotels. Interestingly, as a reflection of changing hotel operations in China, future growth will be a balanced mix of leased and franchised hotels, as the pipeline includes 90 leased and operated hotels and 111 franchised and managed hotels.

　　“We believe a fast-growing network of leased and operated hotels will lead to better profit margins in the future,” Zhang said. “Also, our multi-brand platform will capture different customers and lead to the highest profits in long run.”

　　Alongside rapid growth, China Lodging Group’s three economy chains—Hanting Seasons Hotel, Hanting Express and Hanting Hi Inn, experienced a 93% occupancy rate in the second quarter of 2011. This rate, however, was down from 98% in the second quarter of 2010, a decrease attributed to a large number of ramping-up hotels and the absence of a “one-time benefit” from the Shanghai Expo.

　　Revenue per available room guidance for the remainder of 2011 also decreased from 7%, given at the beginning of the year, to 2%, attributed to overall macroeconomic performance in Shanghai and an increased ramp-up period for converted hotels.

　　For detailed Q2 earnings results, read “China Lodging reports Q2 results.”

　　“Our growth prospect remains solid, driven by robust economic growth, a ramp-up of infrastructure in China and a ramp-up of the spending class,” Zhang said. “We are confident that growth in scale and profit will remain strong.”

　　China Lodging opened 43 hotels in the fourth quarter of 2010 and another 38 hotels in the first half of 2011. The company expects to open 30 leased and operated hotels in Q3 2011 and “more franchised toward the end of the year,” Zhang said. The company will open 40 to 50 more hotels in 2012 than this year, he said.

　　“We see a promising trend of hotel operation metrics,” Zhang said. “The biggest negative impact in the first quarter of 2011 is already behind us. We see very healthy macroeconomic industry growth. We are confident that looking forward that same hotel RevPAR will continue to increase.”

　　China Lodging Group first introduced the franchise model in 2009. Zhang explained the balanced growth objectives: “The main driver for growth is we can realize in the long run much more profit from leased and operated hotels, although more leased and operated, especially by way of conversion, will post pressure to the (profit and loss) lines. But we do look at hotels as long-term projects rather than one-year P&L statements.”

　　Zhang said continuing the leased and operated hotel model is necessary as China Lodging Group goes through innovation, such as introducing a new brand.

　　“We will have more opportunity to experiment and learn how to build a new brand with our own hotels,” he said. “It also gives us more leverage to maintain and improve the quality of brand.”

　　Growth in 2012 will be more geared toward lower-tier cities, he said.

　　“There is a tremendous opportunity in the second and third tier of cities because urbanization goes so quickly,” Zhang said. (Jason Q. Freed)