Jinjiang Hotels Develop:Upgrading to Buy on a better outlook-worst seems over
Upgrading to Buy due to better industry outlook - 2017 is bottoming out
We upgrade Jinjiang Hotels to Buy, with a new TP of RMB37 (from RMB34).The upgrade is mainly due to: 1) Plateno and Vienna’s full year consolidation in2017, 2) reduced cost and expenses after acquisition, and 3) better outlookdriven by Chinese economy hotels’ recovery. We believe the company willstart to focus on internal consolidation of its current four hotel brands and thatit is likely to halt further expansion through acquisition.
Off to a good start: 1Q17 RevPAR growth and reduced cost and expenses
Jinjiang has reported 1Q17 RevPAR growth of 1.36%; however, if we factor inthe reform of business tax to VAT, the comparable RevPAR growth is 6.36%(i.e. 1.36%+5% of business tax rate, vs. China Lodging’s RevPAR yoy growthof 9.4%). In addition, Jinjiang cut its costs and expenses by c.RMB10m in1Q17. In the same period last year, there was expense incurred for theacquisition of Plateno and more financial cost. As domestic tourists reached4.4 billion (yoy growth of 10%) in 2016, we believe strong demand for budgetand mid-scale hotels will continue in 2017E.
Newly-acquired hotels likely to double EBITDA contribution in 2017
We have factored in the full-year contribution of newly-acquired hotelsincluding Plateno (9-10M contribution in 2016) and Vienna (half-yearcontribution in 2016). We mainly raise our Plateno EBITDA estimate, by c.40%to reach c. RMB1.1bn (doubled from RMB0.6bn in 2016), due to the full-yearcontribution and cost efficiencies. As a result, we increase our earningsforecasts in 2017/2018 by 26%/29%.
Valuation and risks
We use SOTP based on EV/EBITDA (12-month weighted average) as ourprimary valuation methodology. We separately calculate the EBIDTA ofJinjiang’s Chinese and overseas selected hotel businesses. We assign a 12xmultiple to Hotel Louvre, which is in line with the high-end of European peers.We assign a 14x multiple to Plateno (7 days) and the original Jinjiang Chineseselected hotel business (in line with the original China lodging business), whichis the average for its peers. Risks: 1) lower tourism demand; 2) stronger RMB,leading to more outbound travel; and 3) government policy changes.