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Huazhu Hotel Light Asset TransformationAcquire Deutsche Hospitality

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Business Overview
Huazhu Hotels Groups is a hotel management company headquartered in Shanghai, China. It was previously known as China Lodging Group Limited. The company was founded by Qi Ji 季琦 who founded Trip.com and Home Inn – both giant companies in the travel industry.

With economy hotels as a solid base, Huazhu uses midscale and upscale hotels to increase value, and this business model has been quite successful: Huazhu managed to be ranked as the number one management company by the US magazine HOTELS. The P/E ratio of Huazhu is 39.18x – even at its lowest point compared to the past twelve months, and still one of the highest in the lodging industry.

The lodging group’s shift from leased and operated hotels to ‘manachised’(franchised-and-managed) is known as an asset-light strategy that passes over part of the operating risks to franchisees, and further increases business flexibility and scale. An asset-light strategy combined with increasing midscale customers formed Huazhu’s strategy for transformation after 2017: Huazhu has increased the percentages of both midscale hotels and manachised hotels in recent years.

COVID 19 benchmark and analysis
With Deutsche Hospitality (a German hotel company that Huazhu acquired in 2019), Huazhu 2020 Q1 revenue smashed more than 32% compared to last year, since the hotel sector missed the upside of the market cycle of hot traveling season like Chinese Spring Festival. However, such performance is still better than Jing Jiang, with more than a 34% decrease in revenue.

Qi Ji has written in an internal letter that he believes in China, the prevention and control towards the domestic epidemic will become normalized, meaning a strong V shape recovery curve for hotels will not likely happen. The hotel industry will show a relatively slow recovery trend, and the recovery process will also lengthen.

For now, Huazhu is recovering at a faster pace compared to its peers, reporting an opening rate of 100% and an occupancy rate of 70%. The management team said the hardest time had already passed, and it was looking to bring occupancy back to more than 85% and RevPAR back to last year’s level.

Huazhu experienced a countercyclical expansion despite the impact of COVID-19. It increased more than 290 manachised companies with low costs. This further helps the firm to lay out a long-term plan when everyone felt the pressure.

EO expects more consolidation in the hotel market after the pandemic as smaller hotels will get crushed out. In addition, Huazhu’s countercyclical expansion has shown signs since 2017, with RevPAR growth of midscale and upscale going down to -4.7% in 4Q19 as the overall hotel market is challenged. Huazhu constantly increased the hotel list it has to compete with other giant companies while maintaining a constant profit growth before 2020.

It is still worth noting that the ADR of Huazhu and the overall hotel market are low at this time. The traveling volume during May holiday only recovered to 50% of last year, even with the restrictions lifted. With unforeseeable near term post-COVID development, it will be hard to give a certain forecast of the future ADR of the industry.

Oversea expansion and new innovations
Aggressive international expansion since 2019, but yet to realize the synergies
Huazhu started aggressive overseas hotel expansion in response to the saturating domestic hotel market and increasing foreign travels in China. Qi Ji also said since 2010 that he wanted to build the world’s best hotel group in his lifetime.

In 2019, Huazhu opened its first overseas leased-and-operated hotel in Singapore. Immediately after, it acquired Deutsche Hospitality, the largest hotel group in Germany, with more than 118 hotels under 5 brands in 19 countries across Europe and the Middle East.

However, this acquisition comes with potential risks. First, uncertainties surrounding travelling restrictions during COVID can be harmful to DH. Also, the slower economic growth in Europe is hampering DH’s growth and resulting in less RevPAR compared to Huazhu China.

In Asia, Huazhu plans to enter the Japanese market in 2020 to capitalize on increasing Chinese tourists in Japan. So far, it has partnered with Valuable Capital to set up a $100 million fund for its hotel acquisitions in Japan.

Gradual innovation in long-term apartments
It is common for hotel companies to expnd management ability to take in long-term apartments, and Huazhu is no exception. Its investments in both CJIA and China Young Professional Apartment (CYPA) show its increasing appetite for new verticals.

Huazhu’s logic behind this investment is its solid belief of increasing demand for long-term rental apartments, especially among young white-collars in first-tier cities. The traditional rental market gives them many pain points, such as low qualities and bad services, and the long-term apartments are meant to solve these problems.

On the risk side, competition is heated in this space – several large players are already in the field. The ability to penetrate lower-tier cities also could be a challenge waiting for Huazhu. Finally, the services and products will be the critical factors that support the platform’s sustainable development over the years.

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