Hyatt Build-Up Highlights Looming Hotel Glut In China

| About: Hyatt Hotels (H)

News that high-end hotel operator Hyatt (NYSE:H) is launching two more brands in China is drawing attention to the market's growing saturation, boding poorly for all operators as the nation's economy slows. Hyatt and most of the other big western brands don't disclose separate operating figures for China, but leading budget brands Home Inns (NASDAQ:HMIN) and China Lodging (NASDAQ:HTHT) act as good indicators for the market. And their latest quarterly results don't paint a very rosy picture for the industry in the year ahead.

All the big global brands have been adding hundreds of hotels in China over the last five years, seeking to capitalize on the nation's booming economy and increasingly mobile business and leisure travelers. But that growth has slowed sharply over the last year as the market becomes saturated, and China's slowing economy is making the problem worse. Some operators are accelerating their new hotel openings in a bid to offset slowing growth for individual properties, which is further exacerbating the problem.

Hyatt is a typical case in point, with the company announcing the launch of its Hyatt Place and Hyatt House brands in China (company announcement). The introduction means that six of Hyatt's nine brands are now represented in the country. Hyatt says it will open its first Chinese Hyatt Place in Shenzhen in May, marking the brand's first entry into Asia. It added that plans for 20 new hotels under the two brands are now in various stages of development, meaning we can probably expect to see them open within the next 12 months.

Hyatt was one of the later global players to come to China, and now has around 20 hotels in the country. That means this new expansion should double its hotel count, which broadly reflects the aggressive expansion of many operators in the market.

Home Inns and China Lodging, operator of the Hanting chain, painted a relatively bleak picture for the industry when they reported their latest quarterly and annual results earlier this month. Home Inns reported that its revenue per room, which combines occupancy rates with room prices, fell slightly in the fourth quarter and was also down slightly for the year. China Lodging reported similar trends.

But China Lodging was also quick to highlight its forecast for overall revenue growth of more than 20 percent in the current year. Since its revenue per property is likely to stagnate or even drop this year, nearly all of the new growth will come from new hotel openings. China Lodging said it plans to open up to 450 hotels this year, boosting its total hotel count by nearly a third (company announcement). Home Inns is also planning similar new openings.

All of those openings will only put further pressure on the market, meaning we're likely to see margins squeezed as hotel operators struggle with stagnating and even falling room prices and occupancy rates. The fact that China's economy is rapidly slowing will only make the problem worse, with many now predicting that GDP will fail to meet Beijing's target for 7.5 percent growth - down sharply from the rates of around 10 percent in previous years.

All of that makes me rather gloomy about the year ahead for hotel operators, both domestic and international. The global chains might feel slightly less effect, since many of them have more international travelers than their Chinese counterparts. But any way you look at it, the industry will come under growing pressure throughout the year, and I wouldn't be surprised to see some declines of up to 5 percent in both occupancy rates and room prices in the second half of the year.

Bottom line: Hyatt's aggressive China expansion reflects a broader industry where companies are trying to offset slowing growth by opening new properties, putting pressure on margins.