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Little-known China hotel chain is analysts' hot pick

New York/Shanghai

HOTEL-chain operator Huazhu Group is less well-known than the likes of Marriott International and Hilton Worldwide Holdings among global travellers, but that is not stopping the US-listed Chinese company from becoming a darling of overseas investors.

China-focused Huazhu is the top performer among the world's 10 largest hotel stocks in the past year and is trading at nearly twice its global peers' valuation.

Some analysts say the premium is deserved, and may even widen due to rapid travel demand from China's middle class and Huazhu's focus on expanding its mid-range hotel portfolio.

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Even with one of the fastest-growing hotel markets globally, China is suffering from a shortage of mid-tier hotels, said a Bloomberg Intelligence report this year. The segment only makes up 6.8 per cent of the country's total supply.

Tian Hou, an analyst at TH Capital, said: "Huazhu still looks very cheap compared to those international hoteliers."

Her view was echoed by Angela Han Lee, an analyst at China Renaissance, who said that Huazhu is her top pick among Chinese hoteliers as its success in building its brand and expanding its network is driving long-term growth.

Formerly known as China Lodging Group when it was founded in Shanghai in 2007 as a budget hotel chain operator, Huazhu has overtaken InterContinental Hotels Group, Hyatt Hotels Corp, Shangri-La Asia and other major global chains to become the world's fourth-largest hotel group by market value.

The enterprise value of Huazhu, which had nearly 385,000 hotel rooms as of the end of March, is about 22 times earnings before interest, taxes, depreciation and amortisation, compared with about 13 times for the peer group, data compiled by Bloomberg showed.

Reflecting its strong earnings growth momentum, Huazhu's blended price-to-growth ratio stays at 1.1 times, below the 1.6 times for peers.

Its blended 12- and 24-month earnings per share growth is forecast to reach about 34 per cent, versus 20 per cent and 17 per cent respectively for peers.

A major risk to Huazhu and other China-focused hoteliers is a full-blown trade war between the US and China, analysts said.

The tensions could put pressure on room occupancy and rates for eight to nine months, especially affecting corporate travel, John Kidd, chief executive officer of Minnesota-based Radisson Hospitality, said in an interview with Bloomberg last month.

Analysts remain optimistic, at least for now. Despite a doubling of its share price over the past year - versus about 27 per cent for its peers - 12 out of 14 analysts tracked by Bloomberg have a "buy" rating on Huazhu.

Their average 12-month target price of US$47.08 is 17 per cent above its closing price last Thursday, according to data compiled by Bloomberg.

Huazhu's share price started to surge in 2016, when China's hotel industry began to shake off years of sales declines to generate sustainable revenue gains, said a Bloomberg Intelligence report in April.

The company generated average annual sales growth of 20 per cent in the last five years versus the global industry average of 3.6 per cent, Bloomberg data showed.

In May this year, the firm revised up its net revenue growth range for this year to 18-22 per cent from 16-19 per cent as its revenue per room for the first three months registered a ninth consecutive quarter of growth.

China Renaissance's Ms Han said: "It is understandable that high-growth China companies are trading at premium to their peers focusing on developed nations."

China lodging companies like Huazhu "are expanding fast with consistent margin improvement". BLOOMBERG