Who Benefits From Lodging Growth In China?
Growth in the Chinese hotel market is shifting to mid-market properties from the high end, according to Jefferies' analyst Ian Rennardson.
A growing middle class will result in "emphasis switching away from the over-supplied top-end of the market to the middle market," as customers trade up and out of the budget and economy segments, Rennardson said.
Accor and Hilton, through franchise agreements with local players, have "by far" the largest number of Chinese projects planned for construction. Most of those are aimed at the middle market, Rennardson said.
That's likely to put pressure on InterContinental Hotels Group PLC (ADR) (NYSE: IHG), the only international operator with a currently significant mid-market presence in China.
Operating earnings from China will double at both Accor and Hilton to 4 percent and 2.5 percent of totals, respectively, according to Rennardson.
But Chinese profits will grow "only slightly," according to Rennardson, at InterContinental, Marriott and Starwood.
China, however, "will remain a relatively small contributor" to profits among the five hotel companies followed by Rennardson.
China accounted for an average 7 percent of capacity and 3.5 percent of operating profits at Rennardson's five hotel companies in 2014, he estimated.
The group on average will see capacity in China continue to increase at about 5 percent annually, with operating profit there contributing to 5.3 percent of the group's total by 2017.
With the U.S. hotel market mature and offering little structural growth, "we prefer non-U.S. exposure," with both Europe and emerging markets under-penetrated by branded and franchised hotels, Rennardson said.
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