Wyndham Hotels: Conversions And China Expansion In The Spotlight
Summary
- Brand conversions hold significant growth potential for WH, as the company's current portfolio is only 1% of the total number of independent, unbranded hotels globally.
- WH recently disclosed plans to open 20 new Microtel by Wyndham hotels in China by the end of next year, and its expansion plans in Asia deserve more attention.
- Wyndham Hotels & Resorts trades at consensus forward fiscal 2022 EV/EBITDA and P/E multiples of 15.2 times and 23.8 times, respectively.
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Elevator Pitch
I maintain a Neutral rating for Wyndham Hotels & Resorts (NYSE:WH).
My prior article for WH was published approximately five months ago, and the company's share price rose by +10% from $73.09 as of May 5, 2021 to $80.21 as of October 1, 2021 over this period.
Brand conversions accounted for roughly 70% of Wyndham Hotels & Resorts' room openings in the recent quarter, and they should continue to be a key driver of WH's future growth considering the large addressable market of unbranded independent hotels. Another growth driver for WH is geographic expansion, and China appears to be an area of focus for the company considering its plans for new hotels in the country.
Although I am positive on WH's future growth opportunities in terms of brand conversions and geographic expansion, these seem to have been factored into the company's share price and valuations. Wyndham Hotels & Resorts' shares are up by +35% and +58% year-to-date and in the past one year, respectively; and the stock is currently trading at the high end of its historical EV/EBITDA and P/E valuation ranges. As such, I view a Neutral rating for Wyndham Hotels & Resorts as more appropriate.
The Growth Opportunity Associated With Brand Conversions
In my prior May 6, 2021 article on Wyndham Hotels & Resorts, I stressed that WH's "key growth driver is conversions" and noted that "brand conversions made up more than 70% of Wyndham Hotels & Resorts' of total hotel openings in 1Q 2021." Wyndham Hotels & Resorts participated in the Jefferies (JEF) Consumer Conference in late-June 2021, and provided more insights the potential growth opportunities associated with brand conversions.
At the Jefferies Consumer Conference, WH quoted research from Bernstein which found that there are approximately 800,000 "unbranded independent hotels" globally. In contrast, Wyndham Hotels & Resorts boasts a portfolio of 9,000 hotels, and this is a mere 1% of the number of "unbranded independent hotels" worldwide. In its investor presentation slides, WH highlighted that the company has the leading "economy & mid-scale brands in the select-service space", and the majority of these "unbranded independent hotels" fall into these segments as well. In other words, the future growth prospects for Wyndham Hotels & Resorts in terms of expansion via brand conversions appear to be very attractive.
Wyndham Hotels & Resorts' recent quarterly results also validate the growth potential of brand conversions, and how that has accelerated post-pandemic. WH's brand conversions as a proportion of the company's total room openings worldwide in Q2 2021 was around 70%, which is significantly higher than the 50% ratio a year ago in Q2 2020. This should not be a surprise, as the challenging operating conditions during COVID-19 have led many small independent hotel owners to appreciate the value of operating under a strong brand and be more receptive to brand conversions.
Besides brand conversions, geographic expansion is another area of growth for Wyndham Hotels & Resorts, that I detail in the next section.
Expansion In China
Wyndham Hotels & Resorts revealed last month that it has plans for "20 new Microtel by Wyndham hotels by the end of 2022", which will be "located in key cities and emerging destinations across the country."
It is noteworthy that WH has significant exposure to international and Chinese markets. International markets outside the US (including China) accounted for 39% of Wyndham Hotels & Resorts' total rooms as of June 30, 2021, while Greater China specifically made up 19% of WH's total rooms as of end-Q2 2021.
Wyndham Hotels & Resorts' China portfolio has witnessed significant recovery in the second quarter of this year. WH's Q2 2021 China RevPAR (Revenue Per Available Room) was only -7% lower as compared to that for Q2 2019. This represented a significant improvement from the first quarter of 2021, where Wyndham Hotels & Resorts' China portfolio saw a -25% decline in RevPAR as compared to what it did two years ago in Q1 2019. Specifically, WH's China portfolio average daily rate in Q2 2021 was already +4% higher than that in Q2 2019, but this was offset by occupancies rates which still -10% below that of Q2 2019.
WH's good performance in China in the most recent quarter was attributable to the fact that approximately 70% of the company's brands in China are economy hotels located in drive-in locations which cater to demand for domestic travel. Wyndham Hotels & Resorts noted at the Jefferies Consumer Conference in June 2021 that the "May holiday travel was just huge for China and for the industry" and turned out to be "stronger than most analysts predicted."
Looking ahead, Wyndham Hotels & Resorts does seem to have significant growth ambitions in China and Asia. In the company's media release announcing the new Microtel by Wyndham hotels in China, Wyndham Hotels & Resorts highlighted that it aims to "build on the success of this expansion", and "introduce even more of Wyndham's 21 iconic and lifestyle brand" in "the Asia Pacific region."
COVID-19 is a global health crisis and has affected hotels worldwide almost equally. But when we eventually enter a post-pandemic environment where local or domestic events are the biggest risks for hotel operators, geographic diversification will be much more valued by investors. This is where Wyndham Hotels & Resorts' geographic expansion in Asia and China could be useful in diversifying the company's geographic revenue mix and lowering its risk profile in the future.
Valuation And Risk Factors
Wyndham Hotels & Resorts' forward P/E and EV/EBITDA valuations are lower than that of the company's peers, as per the peer valuation comparison table below. But this appears to be fair, as WH's forward revenue growth rates and Return on Assets or ROAs are also inferior to that of its peers.
Wyndham Hotels & Resorts' Peer Valuation Comparison
| Stock | Consensus Current Fiscal Year Normalized P/E | Consensus Forward One Fiscal Year Normalized P/E | Consensus Current Fiscal Year EV/EBITDA | Consensus Forward One Fiscal Year EV/EBITDA | Consensus Current Fiscal Year Revenue Growth | Consensus Forward One Fiscal Year Revenue Growth | Consensus Current Fiscal Year ROA | Consensus Forward One Fiscal Year ROA |
| Wyndham Hotels & Resorts | 30.3 | 23.8 | 17.6 | 15.2 | +17.9% | +16.0% | 7.7% | 11.4% |
| Hilton Worldwide Holdings (HLT) | 62.1 | 32.8 | 29.9 | 19.6 | +28.7% | +50.1% | 6.4% | 13.1% |
| Choice Hotels International (CHH) | 33.8 | 28.3 | 21.9 | 19.4 | +39.3% | +10.5% | 18.8% | 19.9% |
Source: S&P Capital IQ
Separately, Wyndham Hotels & Resorts is currently trading at the high end of its historical valuations. Based on S&P Capital's financial data, WH has traded in the 6.7-19.8 times forward P/E multiple range and in the 6.6-39.9 times forward EV/EBITDA multiple range historically.
I don't think WH's valuations now warrant a Bullish rating, despite a number of key positives which I highlighted earlier in this article. As such, I assign a Hold or Neutral rating to Wyndham Hotels & Resorts instead.
WH's key risks include a slower pace of brand conversions in the future, and unexpected challenges as a result of expanding & operating in foreign markets.
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