Deutsche deal the ‘first step’ in Huazhu’s global plans
Deutsche deal the ‘first step’ in Huazhu’s global plans
14 NOVEMBER 2019 9:28 AM

Huazhu Group has had plans to grow its company on an international scale, and its pending acquisition of Deutsche Hospitality provides the company with an accelerated track toward achieving that goal.

SHANGHAI—Huazhu Group executive chairman and CEO Ji Qi believes the deal to purchase Deutsche Hospitality as the next stage in his company’s maturation.

But speaking during Huazhu’s third-quarter earnings call, he noted his company will have to be careful and thoughtful to avoid an unnecessary decline, comparing his company’s trajectory to a curve.

“My view is that when the curve begins pointing downward, you have to find a new function, a new power and a new direction (until) the curve takes off again,” he said.

Huazhu will achieve its goal after it has reached sufficient scale and strength both in and outside of China, he said. With a strong position in the midscale and economy segments, the CEO’s next goal is to capture the upscale and luxury segments.

The Deutsche deal gives the company a head start toward that goal compared to trying to build a presence in those segments from scratch, he said.

“Because these brands require richer stories and service qualities, that's why we choose to enrich our luxury and upscale brand portfolio through acquisition,” he said. “This will help to shorten our own learning period and we will benefit from new perspective of our employees in a newly acquired business.”

  • To read more coverage of Q3 2019 earnings calls, click here.

Acquiring Deutsche Hospitality
On 4 November, Huazhu announced its share-purchase agreement with Deutsche to acquire the company for €700 million ($770.9 million) in cash. The deal is still pending.

Deutsche Hospitality has five brands and 118 hotels in operation across 19 countries with another 36 hotels in the pipeline, executive vice chair-lady Jenny Zhang said. The company forecasts 2019 revenue of €490 million ($539.2 million) with an earnings before interest, taxes, depreciation and amortization of approximately €40 million ($44 million).

If Huazhu were to integrate Deutsche Hospitality today, the Frankfurt-based company would account for 4% of Huazhu’s rooms, 27% of its revenue and 9% of its EBIDTA, she said. The transaction value is about 7% of Huazhu’s market capitalization.

“This is a deal size that is meaningful, but not too big for us as a first step of going international,” she said.

The two company’s brand portfolios are “very complementary,” Zhang said. Deutsche Hospitality’s portfolio will account for 79% of Huazhu’s luxury and upscale portfolio, 3.1% of its midscale portfolio and 0.4% of its economy portfolio.

The deal will help Huazhu establish a foothold in Europe, the Middle East and Africa and marks a meaningful step in Huazhu’s efforts to create a global hotel network, she said.

“A global network has a natural synergy of channeling customers to their familiar brands and thus achieving an advantage in attracting customers all over the world,” she said.

Among the other synergies created by this deal, the Deutsche Hospitality brands will see accelerated expansion in China thanks to Huazhu’s strong presence in the country, she said. Huazhu’s loyalty program and direct sales capability will help Deutsche Hospitality brands strengthen their competitiveness in current and future markets, she added.

Huazhu’s technology will also help improve Deutsche Hospitality’s operations even further, particularly in back-office operational efficiency and customer interfaces, Zhang said.

Quarterly performance
Huazhu reached its first 5,000-hotel milestone, Ji said. Company officials intend to reach the 10,000-hotel milestone within the next three to five years.

The company experienced an acceleration of openings during the third quarter, Zhang said, and expects further growth of its pipeline. Among the net increase of 486 hotels in the quarter, 46% of those were from the company’s soft brands.

“We have a pipeline of 1,736 in hotels, equivalent to 34% of our hotels in operation,” she said. “This ratio has improved from 23% at Q3 last year. The strong growth is mainly attributed to franchise and manachised business, which was 97% of our total unopened pipeline.”

Technology is essential for Huazhu’s sustained growth, Zhang said. The company’s loyalty program reached 139 members by the end of the quarter, which is a 46% compound annual growth rate. Advanced bookings through online travel reservations contributed about 40% of the company’s total room bookings. More than 45 million people downloaded the company’s app, she said.

Digital booking and digital in-house functions have attracted more members to choose Huazhu’s online reservation channels, she said. The strong central reservation capability has significantly accelerated the ramp-up of new hotels and helps mature hotels to maintain a high occupancy.

Net revenue increased 10.4% year over year to $427 million, according to the company’s earnings report. The occupancy rate was 87.7%, a 3.1% year-over-year decrease attributed to China’s economic slowdown. Average daily rate increased by 2.6% year over year to 245 Chinese yuan ($34.88). As a result, revenue per available room decreased by 0.8% to 217 yuan ($30.90).

As of press time, Huazhu’s stock was trading at $36.67, a 28.1% increase. The Baird/STR Hotel Stock Index was up 11.4% for the same time period.

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