China Lodging:Beyond a strong Q3,we see secular growth in the long term -Buy

类别:公司研究 机构:德意志银行 研究员:Tallan Zhou,Karen Tang 日期:2017-12-01

Secular growth story intact, led by continuous "price" hike in the long term

    We reiterate our Buy and raise our TP slightly to USD 130. In addition tosecular growth, we believe China Lodging, as industry leader, will enjoy apremium on both RevPAR and growth over its competitors. Furthermore, webelieve its strategy, to strengthen its network of midscale hotels (favorable“mix up”), will further improve the blended RevPAR. We slightly cut our 2017Eprofit by 2% to factor in Crystal Orange. Although Crystal Orange contributedtop-line/RevPAR growth significantly, its margin may be lower than the originalChina Lodging business, on its higher portion of lease and owned hotels.

    3Q17EBITDA growth in-line, record-high growth, but it’s NOT the end of story

    China Lodging reported 3Q17EBITDA growth of 55% yoy today (or 38% yoyexcluding contribution from Crystal Orange). This is in line with the market andour expectation. The company further guided that although Oct RevPar growthslowed slightly for some one-off reasons, Nov RevPAR was as strong as Q3and they are confident that Dec RevPAR growth should also be healthy. Inaddition, we have seen management’s confidence on the high growthpotential of the mid-high scale hotel segment, as they guided an acceleratedpace in new store openings in 2018E. Management expects to open 650-700new stores (gross opening) in 2018E and 60-65% will be mid-high scale hotels.

    “3keys” in managing the long-term RevPAR growth

    We believe there is still potential for China Lodging to drive up its RevPAR inthe long term: a) although the reported occupancy rate has hit 90%+ high,c.10% is contributed by paid-by-hour hotels. Thus, the stay-over occupancyrate is c. 80%, meaning there is still potential for further improvement; b) ADRon a same hotel basis should continue to rise, as more hotels renovate andupgrade; and c) as it continues to enhance the expansion of midscale hotels,the favorable “mix up” is estimated to contribute at least 4% RevPAR growth.

    Valuation and risks

    We change our primary valuation to DCF (9.2% WACC and 3% TGR) fromEV/EBITDA, as we view DCF as a better valuation methodology to capture: 1)secular growth; 2) strong cash flow generation; and 3) the asset light businessmodel over the medium term. It is currently trading at 2018EV/EBITDA of 12x,higher than BTG’s 11x and Jinjiang’s 10x, for its industry leader status andhigher EBITDA growth. Risks: 1) lower tourism demand; 2) a stronger RMB,leading to more outbound travel; and 3) government policy changes.

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