China"s Domestic Chains Accelerate Growth

　　Rapid growth for China’s domestic hotel chains continued in the third quarter and is expected to accelerate into 2012, but shifts in business models have brands approaching growth differently.

　　7 Days Group Holdings Limited

　　At Guangzhou-based 7 Days Group Holdings Limited, which opened a record 116 hotels in the third quarter bringing the total portfolio to 838, the company will shift its focus from franchised-and-managed hotels to leased-and-operated hotels.

　　“At the beginning of 2011, because there was a lot of excess cash in the market, we adopted a very aggressive strategy in opening managed hotels and have been quite successful so far,” 7 Days CEO Alex Nanyan Zheng said. “But the government’s credit-tightening policy means excess cash might be reduced next year, which in turn might create more activity to open more leased-and-operated hotels at a more reasonable price.”

　　However, the majority of 7 Days’ growth in 2012 will still come by way of managed hotels. The company expects to open 360 new hotels in 2012; 120 leased and operated and 240 managed.

　　“There’s a chance we might be able to do better than that 240 mark,” Zheng said.

　　The company, which recorded net revenue increases of 33.2% year-over-year in the third quarter, also will turn to small acquisitions as a new growth driver. In July, 7 Days reached an agreement to acquire 21 leased-and-operated hotels from Huatian Star, a state-owned company. The deal has not closed but 7 Days expects it to in the “near future” and has already taken over operations at the properties.

　　“Our target for hotel openings next year includes a small-scale acquisition we’re going to make,” Zheng said. “We have accumulated valuable experience with (the Huatian Star deal) and we think it will help us complete similar deals in the future.

　　“We believe moving forward smaller-scale acquisitions will be part of our strategy.”

　　Zheng admitted there is risk with ramping up a portfolio too rapidly. To ensure quality, the company has installed a quality assurance initiative called Q Plus.

　　Secondly, he said, not all franchisees understand the industry as well as they should.

　　“This industry only generates stable returns, not very aggressive returns. So some franchisees might have unrealistic expectations,” he said. “What we are doing now, when we first interact with franchisees we want to be more selective and manage franchisees’ expectations. We won’t work with franchisees with unrealistic expectations.”

　　China Lodging Group

　　China Lodging Group, which saw net revenues increase 23.8% year-over-year for the third quarter, expects to open 200 new hotels in 2011 and 240-260 in 2012. The 580-hotel chain will shift its growth model as well.

　　“In the past we focused more on leased-and-operated and now we’re more balanced,” said Matthew Zhang, CEO of China Lodging. “Because of the competition in the market there is less profitability for individual hotels and more pressure to join big company.”

　　Zhang doesn’t expect an economic slowdown to have an impact on demand from franchisees to join the brand in 2012.

　　“I don’t think the economy fluctuation will have an immediate impact on openings next year,” he said. “On the franchised front, our current pipeline is very strong. Our franchisees are people who have capital and are seeing investment opportunities. Even if the economy slows down it won’t impact growth.”

　　In opposition to its competitors in the market, Zhang doesn’t think there are many opportunities for mergers and acquisitions in the China hotel space. China Lodging will, however, explore purchasing small portfolios of three to five hotels.

　　“We regard these types of acquisitions as new hotel development,” he said.

　　Zhang said China Lodging in 2012 will continue a “balanced approach” to growth by way of both franchised-and-managed hotels and leased-and-operated hotels. The company will enter 20 new Chinese cities next year.

　　Home Inns & Hotels Management

　　Having officially closed on a deal to acquire 290 Motel 168 properties on 1 October, executives at Home Inns & Management are looking to leverage their operational experience to boost performance and the quality and the stunted budget brand.

　　The integration process will take 12 to 18 months, Shanghai-based Home Inns CEO David Sun during a third-quarter earnings call.

　　Near-term goals include:

　　• boosting portfolio-wide occupancy from 70% to 75%;

　　• completing an already-in-place system-wide maintenance refresh, for which Home Inns is committing an additional US$10 million to US$15 million; and

　　• establishing a stronger Motel 168 development team.

　　“We currently plan to have separate development teams working in the field because the market overlap is different from Home Inns … and also the property requirements is somewhat differing from Home Inns,” said Hulping Yan, the company’s CFO.

　　Home Inns, which is planning to open no less than 300 properties a year during the next few years for its existing Home Inns and Yitel brands, doesn’t expect to sign a new Motel 168 property until at least the second quarter of 2012, Hulping said. Between 25 to 30 Motel 168 properties could come on board by the end of 2012 and into early 2013, she said.

　　Future growth of Motel 168, as well as Home Inns other brands, likely will begin to shift toward the franchising model, Hulping said.

　　Within the next few years, the company will begin to distinguish Home Inns on its “home and warm feel,” within the budget segment, she said. Motel 168 will be differentiated by emphasizing its “trendy and fashionable” qualities.

　　Motel 168 will eventually garner an average daily rate 10-15% higher than Home Inns, Hulping said.

　　Revenue per available room in the quarter was RMB169 (US$27) in the third quarter of 2011, compared with RMB183 (U$29) in the same period in 2010 and RMB163 (US$26) in the previous quarter of 2011. The year-over-year RevPAR decrease was driven by a lower occupancy rate and a lower ADR, from RMB189 (US$30) to RMB180 (US$28) because of the absence of the price premium unique to the Shanghai World Expo that started 1 May 2010 and ended 31 October 2010.