Key Takeaway
We think Accor and Hilton will benefit the most as the continuing rapid growth of the Chinese hotel market shifts from top-end hotels to the mid-market. We think IHG faces the biggest rise in competition and that Marriott and Starwood
will perform in-line with the market. China, however, will remain a relatively small contributor to group profits at c5% of EBIT, with other regions remaining a more important driver of near term financial and share performance.
China accounted for an estimated 7% of 2014 capacity and 3.5% of EBIT for the five companies in this report.
We expect annual capacity growth to continue at around the 5% level seen in recent years but with the emphasis switching away from the oversupplied top-end of the market to the middle market, as the rise of middle class incomes pulls them out the budget and economy segments. Based on flat assumed RevPAR, we expect China to account for 5.3% of group EBIT by 2017.
Room pipeline most important KPI. The rapid growth in Chinese capacity and austerity measures have inevitably put pressure on RevPAR in recent years, although most of the international players have managed to out-perform the overall market. We expect RevPAR growth to remain relatively subdued, meaning that the opening of new rooms will be the
biggest driver of profit growth. With c82,000 and c114,000 rooms respectively, Accor and Hilton, through franchise agreements with local players, have by far the largest Chinese pipelines, primarily focused on the mid-scale and upper mid-scale segments. This growth is likely to put pressure on IHG, the only international operator to currently have a significant mid-market presence. Marriott and Starwood have the smallest Chinese pipelines.
Accor and Hilton to grow profits the most. Financial disclosure is inconsistent across the companies, but we estimate that, from low bases, EBIT from China will double at Accor and Hilton by 2017 to 4% and 2.5% of total EBIT respectively. We expect IHG, Marriott and Starwood to grow Chinese profits only slightly.
Despite this rapid growth, China will remain a relatively small source of profits
with other regions being a more important driver of financial and share price performance. We continue to prefer non US exposure with self-help opportunities. The US is mature and stable, with little structural growth. US-focused companies, such as Marriott and IHG, are thus more dependent on the RevPAR cycle than the more geographically diverse Accor and
Starwood. In contrast, Europe and the Emerging Markets are under-penetrated in terms of both branded (<25% of total) and franchised hotels (<10% of total). Accor and Starwood are well placed to benefit from the structural changes in these markets as independent hotels convert to the branded, franchised model.
We see little upside risk to 2015 forecasts and valuations, and are becoming more worried about 2016. Our 2015/16 estimates, in line with consensus, are broadly based on RevPAR growth of 6% in the US and 3% in Europe. Our Buy rating on Accor is based on its geographic exposure, self-help opportunities and attractive valuation. Our Underperform recommendation on Marriott is based on large exposures to the cyclical US market, coupled with high valuations.