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China Lodging Group, Limited (HTHT - Free Report) is cashing in on the growing Chinese middle class that wants to travel. This Zacks Rank #1 (Strong Buy) is expected to see revenue grow in the double digits in 2017.

China Lodging operates and franchises 3,541 hotels, or 359,530 rooms, in 369 cities in China. It's a mid-cap company with a market cap of $7.75 billion.

It focuses on economy and midscale hotel segments including brands such as Hi Inn, HanTing Hotel, Elan Hotel, JI Hotel, Starway Hotel, Joya HOtel, CitiGo Hotel, VUE Hotel, Crystal Orange Hotel, Orange Hotel Select, Orange Hotel and Manxin Hotel.

Its business includes leased and owned, manachised and franchised models. Manachised properties means the company manages it through the on-site hotel managers it appoints and collects fees from franchisees. Under the franchise model, the company provides support and training, including reservations, to the hotels and collects fees but does not appoint on-site management.

Like many franchise models, the company has a set company-wide standard across all hotels so customers know what to expect from the brand.

China Lodging also directly owns and leases some hotels, which it operates.

Revenue Jumped 20.1% in the Second Quarter

On Aug 17, China Lodging reported its second quarter result. As it's a foreign company, it is lightly covered by the Street. Zacks only has data from one covering analyst which only provides full year earnings estimates.

But revenue jumped 20.1% to $293.4 million, above its previously announced guidance without the acquisition of Crystal Orange, which closed on May 25.

In the second quarter, it opened 272 hotels, including 72 leased hotels and 200 manachised and franchised hotels. These newly-opened hotels included the 140 hotels (69 leased and 71 manachised and franchised hotels) from Crystal Orange Hotel. It also closed 6 leased and 61 manachised and franchised hotels during the quarter.

The occupancy rate for all hotels was 90.1% in the second quarter, up from 85.2% in the year ago quarter and up from 83.9% in the first quarter of this year.

The sequential gain was mainly due to seasonality but the year-over-year gains was the result of strong travel demand and increasing popularity of the company's brands.

RevPAR, or revenue per available room, rose 14% year-over-year due to both higher ADR and occupancy.

Loyalty Program Driving Growth

As of June 30, the loyalty program had 88 million members, who contributed about 76% of room nights sold in the second quarter.

87% of room nights were sold through the company's own channels. However, strong leisure travel demand as well as the expansion of the company's newly launched midscale brands were attracting increasing bookings from third party channels.

Midscale and upscale hotel rooms contribute 24% and 57% of the hotels in operation and in the pipeline. It feels confident it can feed into the growing demand at those price levels.

Raised Full Year Net Revenue Growth Guidance

For the third quarter, China Lodging expects net revenue to grow between 30% and 34% year-over-year.

For the full year, which includes Crystal Orange, net revenue growth is expected to range 23% to 26%, with Crystal Orange contributing about 7.2%. Excluding Crystal Orange, it would be growth of 13%-16%.

Previous guidance, excluding Crystal Orange, had called for 10%-13%.

Full Year Estimates Jump

The estimates are bullish for China Lodging as 2017 has jumped to $3.19 from $2.14 in just the last 60 days. That's earnings growth of 82.3% as the company made only $1.75 in 2016.

The analyst is equally as bullish on 2018 as the Zacks Consensus has risen to $4.77 from $2.68 in the last 2 months. That's earnings growth of 49.5%.

The financial impact from the acquisition of Crystal Orange is expected to be negligible in 2017 and will start to contribute to the bottom line in 2018.

Shares at New Multi-Year High

It's been quite a year for the shares as they've popped 107% on the belief that China's economy is turning around.



Shares are no longer cheap. They trade with a forward P/E of 33.

But for investors looking for a way to play China's growing travel industry, China Lodging is one they should keep on their short list.

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