The Chinese hospitality industry is booming as Western chains
expand their presence and domestic hoteliers are growing so fast
they can't find enough staff in a nation of 1.3 billion people. But
have the stocks gotten ahead of themselves?
[caption id="attachment_58789" align="alignright" width="300"
caption="The Beijing International Hotel's neon sign reflected on
the street below. (Credit: David Singleton)"]
Between them, global tourists and domestic travelers spend about
$330 million a month in Chinese hotels and occupancies are running
at a comfortable 80% to 90%, depending on the chain.
And the number of rooms available is growing at a rate of 5% a
quarter just to meet demand.
The three biggest domestic operators -- 7 Days (
), China Lodging (
) and Home Inns & Hotels (
) -- are on track to open a staggering 1,000 new hotels between
them this year.
That's a spectacular expansion curve and a good demonstration of
the core investment proposition of emerging markets: fast growth at
a good price generates shareholder value.
Unfortunately, it looks like everyone else in the market has had
a similar idea where HTHT and HMIN are concerned.
HMIN, the biggest of the trio with nearly 1,200 hotels already
open throughout China, currently trades at a trailing P/E of 60.
That's more than a little speculative, but traders have piled in
here for the growth, not the profits -- on a forward basis, the
current price of roughly $24 a share equates to maybe 15 times
expected 2013 earnings.
But the next five years of aggressive expansion look baked into
HMIN already. Divide the P/E numbers by expected growth through
2017, and HMIN seems expensive at a PEG ratio of 1.29.
At barely half the size, HTHT has more room to grow, but the
shares look even richer at a PEG of 2.43. Remember, the higher the
price earnings growth ratio, the more overvalued a stock is on a
growth basis, with "fair value" at 1.
But SVN, which is currently in between the two better-known
Chinese hotel stocks, looks a lot more interesting. Granted,
trailing P/E is still up at 30, but when you add growth forecasts
to the equation, these shares actually look cheap at a PEG of
The secret? SVN's expansion plans are the most aggressive of the
trio, so while it may be smaller than HMIN now, the gap between
them should narrow appreciably in the next few months.
Naturally, all these growth ratios represent analyst consensus.
Reality will almost certainly be very different -- which is why
some analysts are more cautious and some traders are more
Beijing firms like T.H. Capital, for example, point out that
while occupancy rates in China aren't bad, rooms aren't in tight
enough supply to justify aggressive build-out of new hotels,
especially in areas of the country where not many tourists go.
In any event, if you're hungry for growth and like the hotel
story, SVN is probably your best bet. And if you want cheap
valuations in the here and now, skip the sector entirely -- or as a
last resort, check out Starwood (
), which currently operates 100 hotels in China and is looking to
grow its presence there 15% by the end of the year.
Even after its recent 27% run to the upside, HOT is only trading
at a P/E of 20. Growth isn't there, given the company's base in
mature Western hospitality markets, but on a pure value basis, it's
the best game in town.