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BTG Hotels Summary

Core Content

BTG Hotels (also known as Shoulu Hotel Group) is the third-largest hotel group in China, operating and managing 5,888 hotels with 193,000 rooms. It is a listing platform for the strategic hotel business of the Beijing SASAC-owned BTG Group. The company has shown strong determination to expand during the industry downturn, particularly through its "three-year ten thousand stores" strategy, which aims to accelerate its market penetration.

The hotel industry has experienced significant supply-side contraction due to the pandemic, with the total number of hotels declining by 17% in 2020 and 10% in 2021. This has led to a rise in market share for chain hotel groups, especially the top three. The recovery of the hotel industry post-pandemic is expected to drive a notable increase in profitability, particularly due to the high elasticity of average daily rate (ADR), which has already recovered to 90-100% of 2019 levels when occupancy (OCC) was only at 70-80% of pre-pandemic levels.

Main Points

• Market Position:

  • BTG Hotels is the third-largest hotel group in China, with 34 hotel brands covering all segments from economy to luxury.
  • It operates 5,888 hotels and 193,000 rooms, with a strong focus on chain hotel operations.
  • The company's market share in the hotel industry rose from 26% in 2019 to 35% in 2021, with the CR3 increasing significantly.

• Performance During the Pandemic:

  • In 2020, BTG Hotels' hotel operating income accounted for nearly 70% of total revenue, indicating strong profitability elasticity.
  • The company maintained a higher proportion of self-operated hotels (11.9%), which contributed to higher earnings resilience.

• Strategic Expansion:

  • The "three-year ten thousand stores" strategy was launched in 2020, aiming to expand into less developed areas.
  • In 2021, BTG Hotels opened 1,418 new hotels, representing a 56% year-over-year increase.
  • As of the end of 3Q22, the company had 2,046 reserve hotels, a 11% increase from the previous year.

• Profitability and Valuation:

  • The company is expected to have a significant improvement in profitability during the post-pandemic recovery.
  • Net profit is forecasted to be -2.97 billion RMB in 2022, 8.31 billion RMB in 2023, and 12.05 billion RMB in 2024.
  • The P/E ratio is expected to drop from 466.62 in 2021 to 31.26 in 2023 and 21.57 in 2024, indicating potential for valuation growth.

• Earnings and Net Profit Trends:

  • The net profit growth rate was -633% in 2022, but is expected to rise by 380% in 2023 and 45% in 2024.
  • The net margin is expected to improve from -5.6% in 2022 to 12.2% in 2023 and 14.8% in 2024.

Key Information

• Investment Thesis:

  • The company is expected to benefit significantly from the post-pandemic demand recovery, as its high ADR elasticity and strong brand portfolio position it well for performance growth.
  • It is recommended to "Buy" (Outperform) due to its strong fundamentals and expected recovery in the hotel market.

• Risk Factors:

  • Pandemic resurgence could impact demand and profitability.
  • Increased competition in the hotel industry may challenge the company's market share.
  • Lower-than-expected expansion of hotels could affect growth projections.

• Financial Highlights:

  • Revenue (RMB mn): 6,153 in 2021, 5,281 in 2022, 6,803 in 2023, and 8,113 in 2024.
  • Net Profit (RMB mn): 56 in 2021, -297 in 2022, 831 in 2023, and 1,205 in 2024.
  • P/E Ratio: 466.62 in 2021, 31.26 in 2023, and 21.57 in 2024.

• Operational Data:

  • The company has a strong presence in both self-operated and franchised hotels.
  • The number of franchised hotels has increased significantly, with the proportion of franchised hotels reaching 88% by the end of 3Q22.

• Future Outlook:

  • The company is expected to benefit from the recovery of the hotel industry and the increase in demand.
  • Continued expansion of its brand portfolio and focus on mid-to-high-end hotels are key growth drivers.
  • The company's financial health, with a P/B ratio of 2.42 and a market cap of 25,979.90 million RMB, supports its investment potential.

Strategic Initiatives

• Brand Expansion:

  • The company has expanded its brand portfolio through M&A, asset replacement, and independent & cooperative launches.
  • It now has 34 hotel brands, covering all hotel segments.

• Light Management Model:

  • The company primarily uses a light management model for expansion, which allows for faster market penetration and lower capital expenditure.
  • As of 3Q22, 88% of its hotels are operated under this model.

• Integration with Parent Company:

  • The company benefits from the support of the Beijing SASAC and its parent company, BTG Group.
  • The management team has a strong background in the hotel and tourism industries, with the original management of Home Inns retained after its privatization in 2016.

Conclusion

BTG Hotels is well-positioned to benefit from the post-pandemic recovery in the hotel industry, driven by its strong brand portfolio, strategic expansion, and high profitability elasticity. Despite a significant drop in net profit in 2022, the company is expected to recover strongly in the following years, with a projected increase in earnings and valuation. The investment thesis supports a "Buy" rating, highlighting the company's resilience and growth potential.