Bank Of America Upgrades China Lodging Group, Cites Medium And Long-Term Growth Potential

In a report published Friday, Bank of America analyst Billy Ng upgraded shares of

to Buy from Neutral with a price target raised to $31.50 from a previous $27.80 after the company's first quarter print confirms a "solid" medium and long-term growth potential. Ng noted that China Lodging's first quarter adjusted EBITDA of Rmb161 million represented a 36 percent year-over-year growth and exceeded his 33 percent estimate due to better than expected revenue and margins. In addition, revenue per available room (RevPAR) trends started to improve in March and April, creating a near-term opportunity. Looking towards the medium and long-term, Ng stated that China Lodging could experience growth as it is a key beneficiary from the "rapid" domestic tourism growth underway in China. In fact, the company has a 25 percent revenue exposure to Shanghai that should further benefit from the opening of

's theme park in 2016. Ng also stated that the company should show "solid" return on equity improvement over time due to an increasing mix from the asset-lite franchised and manachised models. The company's alliance with Accor should also drive growth and enhance its selection of brands for its customer base. Finally, China Lodging is not reliant on online travel agencies as 90 percent of its rooms were sold through its distribution channel. Bottom line, shares of China Lodging are higher by only 5 percent (excluding Friday's surge in share price) and have underperformed its domestic and Hong Kong listed tourism and hotel peers by 12 percent during the recent rally. As such, the large discount to its peers is "unjustifiable."