How Does The Unrest In Greater China Impact Hyatt's Stock?
Hyatt Hotels (NYSE:H) reported headwinds from Greater China in its second-quarter results, reflected by a 3% drop in occupancy and a 1.7% reduction in revenue per available room (RevPAR) in the region. With the demonstrations in Hong Kong expected to impact Hyatt’s business during the third quarter, Trefis analyzes key sources of Hyatt’s Revenues across geographies in an interactive dashboard along with the possible impact of Greater China headwinds on Hyatt’s Earnings for the year. Given that the company’s operations in the Asia-Pacific region contribute to a very small fraction of Hyatt’s stock, we don’t expect the short-term headwinds to have a notable impact on the share price.
A Quick Look at Hyatt’s Revenues
Hyatt Hotels’ reported $4.45 billion in Total Revenues for full-year 2018. The company generates its revenues from three sources: Owned & Leased Hotels, Management & Franchise Hotels, and Corporate & Other.
- Owned & Leased (O&L) Hotel Revenues: $1.85 billion in FY2018 (42% of Total Revenues). These represent revenues from hotel operations such as room rentals and food & beverage sales from properties that are owned or leased by Hyatt.
- Management & Franchise (M&F) Hotel Revenues: $2.45 billion in FY2018 (55% of Total Revenues). These represent fees from properties where Hyatt has a long-term management agreement or has franchised one of its brands. (Note: The figure includes costs incurred by Hyatt on behalf of owners of the properties such as payroll, marketing, loyalty program, etc.)
- Corporate & Other Revenues: $143 million in FY2018 (3% of Total Revenues). These represent revenues from co-branded credit cards, Exhale, and other corporate functions.
(Note: The revenues from the above-mentioned sources are different than reported on the Income Statement as the values are taken from the segment summary after considering intersegment eliminations)
The Asia-Pacific Region Has Negligible Share In Owned & Leased Hotel Portfolio
As a part of its asset-light growth strategy, Hyatt has been selling its Owned & Leased properties to expand its Management & Franchise business. The segment’s revenues have declined at a CAGR of 4% since 2015 to $1.85 billion in 2018.
- The share of O&L Rooms has fallen from 12.5% in 2015 to just 8% in 2018.
- The company plans to raise $2.9 billion from O&L asset sales by 2022, of which $1.4 billion has been raised and $1.5 billion is planned.
- Consistent with the capital strategy, we expect O&L revenues to decline consistently till 2022.
- In 2018, Americas, Europe & Middle East and the Asia Pacific regions had a contribution of nearly 86%, 11% and 3% of O&L’s room portfolio, respectively.
- With the overall O&L room portfolio to shrink further, we expect that the decline in occupancy levels in the Greater China region to have a minor impact on Hyatt’s O&L Hotel revenues.
The Impact Will Be Evident On Management & Franchise Revenues, But Will Barely Move The Needle on Hyatt’s Stock
Hyatt’s Management & Franchise revenues have grown at a CAGR of 3.6% since 2015 to $2.45 billion in 2018, offsetting declines from Owned & Leased properties.
- Notably, the share of M&F Rooms has increased from 87.5% in 2015 to 92% in 2018.
- Considering the three geographies, the rooms in the Asia Pacific region have grown at a CAGR of 14.4% since 2015 – the highest among all regions
- While the Asia Pacific region contributed 18% of M&F room portfolio, it contributes just 9% of Management & Franchise’s total EBITDA.
- Therefore, lower occupancy in the Greater China region for the third quarter will not meaningfully impact Hyatt’s full-year expectations.
Based on our forecast for Hyatt’s revenues (shows key revenue components) of $4.7 billion in 2019, we estimate a non-GAAP EPS of $1.70. This EPS figure coupled with a forward P/E multiple of 43, works out to a price estimate of $73 for Hyatt’s stock (shows cash and valuation analysis), which is in-line with the current market price.
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