Bill Simpson wrote an analysis of China Lodging Group (HTHT) to TradingIPOs subscribers on March 23. In its debut Friday, March 26, the company priced 9 million American Depository Shares at $12.25 apiece, at the top of its expected range, raising $110.3 million. The company had hoped to price the initial public offering between $10.25 and $12.25.
The text of Mr. Simpson's original writeup follows:
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China Lodging Group plans on offering 9 million ADS at a range of $10.25-$12.25. Assuming over-allotments are exercised, the deal size will be 10.35 million shares. Goldman Sachs and Morgan Stanley are leading the deal, Oppenheimer co-managing. Post-ipo HTHT will have 60.25 million ADS equivalent shares outstanding for a market cap of $678 million on a pricing of $11.25. Ipo proceeds will be used to fund expansion.
*** Founder, Executive Chairman of the Board of Directors Qi Ji will own 46% of HTHT post-ipo. Qi Ji also co-founded Home Inns & Hotels Management (HMIN) and Ctrip.com International (CTRP) and served as CEO of each. Qi Ji currently sits on the Board of Directors of CTRP. CTRP and HMIN are two of the most successful China ipos of the past decade. In addition CTRP will be purchasing an 8% stake in HTHT on ipo at ipo pricing.
From the prospectus:
'We operate a leading economy hotel chain in China.'
HTHT commenced operations in 2005.
In '08 and '09 HTHT had the highest revenues generated per available room, or RevPAR, and the highest occupancy rate in China.
HTHT operates under the HanTing Express Hotel, HanTing Seasons Hotel and HanTing Hi Inn.
In 2009 approximately 68% of room nights were sold to members of HTHT's HanTing Club loyalty program.
HTHT utilizes a lease and operate model, directly operating the majority of their branded hotels. HTHT does franchise and manage hotels as well. As of 12/3109, HTHT had 173 leased-and-operated hotels and 63 franchised-and-managed hotels. In addition, as of the same date, HTHT had 21 leased-and-operated hotels and 123 franchised-and-managed hotels under development. HTHT currently operates in 39 cities with 28,360 total rooms.
2009 occupancy rate was strong at 94%. Average daily room rate was approximately $25 US with RevPAR at a shade over $23 per day.
Sector - We've seen two ipos this decade in this sector, HMIN and 7 Days Group Holdings (SVN). The lodging industry in China consists of upscale luxury hotels such as four and five star hotels and other accommodations such as one, two and three star hotels and guest houses. The industry grew from approximately 237,800 hotels in 2003 to approximately 315,900 hotels in 2008, and 20.1 million rooms in 2003 to 27.3 million rooms in 2008.
Seasonality - 1st quarter annually tends to be HTHT's lightest.
HTHT plans to add approximately 90 hotels in 2010, the majority of which will be franchised as opposed to leased and managed. This is key as HTHT's franchised hotels bring in less revenue per hotel than HTHT's leased and managed hotels.
$2.25 in net cash post-ipo.
HTHT moved into operational profitability in 2009.
97% of 2009 revenues were derived from leased and operated hotels.
2009 - $185 million in revenues, a 65% increase over 2008. Growth was driven by an increase in hotels and rooms as RevPAR and occupancy remained stable. Gross margins were 21%. Operating margins 6%. HTHT's tax rate is approximately 25%, putting net margins at approximately 4%. Earnings per share were $0.13. On a pricing of $11.25, HTHT would trade 86 X's 2009 earnings.
2010 - HTHT outgrew both SVN/HMIN in 2009 and that should continue in 2010 with the aggressive growth plan. Revenues however will not come close to the 65% increase in 2009, though, due to the mix of new hotels leaning towards franchised as well as the flat revenues the back half of 2009. I would plug in 30% revenue growth in 2011, for a total of $240 million. Gross margins should improve to 25%, operating margins 11%. Net margins after tax of 8.25%. Earnings per share of $0.33. On a pricing of $11.25, HTHT would trade 34 X's 2010 earnings.
Quick comparison with SVN and HMIN:
SVN - $320 million market cap. Trading 1 1/2 X's '10 revenues and 33 X's '10 estimates with a 28% revenue growth rate.
HMIN - $1.33 billion market cap. Trading 3 X's '10 revenues and trading 38 X's '10 estimates with a 23% '10 revenue growth rate.
HTHT - $678 million market cap on $11.25. Would trade 2.8 X's '10 revenues and 34 X's '10 earnings with a 30% revenue growth rate in '10.
Conclusion - All three of these (HMIN/HTHT/SVN) are sacrificing shorter term bottom line growth in a race to grow locations and rooms. The problem with this strategy is any appreciation for HTHT over pricing range makes them look awfully pricey when put beside nearly every other China stock across all sectors. That is a perceived valuation issue for this group currently as top line growth should be strong, but bottom line results continue to make the sector look pricey. This deal is a recommend in range for one big reason: HTHT's founder & CEO has also co-founded and was CEO of two very successful Chinese ipos this decade, CTRP and HMIN. Factor in that CTRP is purchasing a nice chunk of HTHT on ipo pricing and this is a deal that should work shorter term in range. Mid-term, all depends on what multiple the market wants to give this sector. This is a very competitive group and pricing power (or lack of) will come into play as the economy hotel market becomes better covered and saturated.
Recommend shorter term in range.