TRAVEL: Anbang Chases US Hotels, China Lodging Profits on Services

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Bottom line: Anbang Insurance is paying a big premium for US luxury hotels and may have to sell them for losses when China’s property market corrects, while China Lodging looks like a good bet due to growing profits from its focus on hotel franchising and management.

China Lodging posts big profit growth

A couple of hotel stories are in the headlines as we head into the new week, led by a surprise blockbuster deal that will see Chinese insurer Anbang buy US-based Strategic Hotels & Resorts for $6.5 billion. Meantime, one of China’s largest private hotel operators, China Lodging (Nasdaq: HTHT), has just reported its latest quarterly results that showed a big jump in profitability, as it mimics western peers by focusing on franchising and management services rather than self-developing properties.

These 2 stories both involve hotels but are also quite different, since Anbang’s move is squarely focused on overseas markets and its purchase represents an investment in property ownership. By comparison, China Lodging, owner of the budget Hanting hotel chain, is a domestic story of a company trying to move away from property ownership and into the higher end businesses of hotel management and franchising services.

Let’s begin with the Anbang story, since that involves some very large numbers and caught many people by surprise over the weekend. The reports say that Anbang is near a deal to buy Strategic Hotels & Resorts, owner of a portfolio of US luxury hotels, for $6.5 billion. (English article) Strategic’s owner, private equity firm Blackstone, just purchased the company back in December for about $6 billion, which includes $2 billion in debt.

Blackstone was planning to sell off Strategic’s various hotels individually, but changed its mind after it was approached by Anbang about buying the entire portfolio, the reports say. Blackstone purchased Strategic for a 13 percent premium last year, and now Anbang is paying another premium of about 8 percent. That means that Anbang is paying a premium of more than 20 percent from what Strategic was worth just a half a year ago.

Anbang is certainly no stranger to paying high prices for trophy hotel properties, having purchased the storied Waldorf Astoria in New York for nearly $2 billion last year. (previous post) My contacts tell me that Anbang is flush with cash from its extensive holdings of land and property in Beijing, where prices have skyrocketed in recent years.

But it does seem like the company is probably paying unjustifiably large premiums on its recent global buying binge, which is somewhat typical for this kind of Chinese buyer. The buying looks similar to Japan’s purchase of trophy US properties in the late 1980s. And like the Japanese, Anbang could be forced to sell the properties for a loss if China’s overheated real estate market hits the skids, which looks likely in the 2 years.

Shifting Business Model

Next there’s China Lodging, also known as Huazhu, which is quickly becoming my favorite domestic hotel operator following the pending privatization of rival Homeinns (Nasdaq: HMIN). The big story in China Lodging’s latest quarterly earnings is the sharp contrast between its revenue and profit growth. Revenue expanded at a modest 16 percent to 1.6 billion yuan ($246 million) for the quarter, while operating profits nearly tripled to 130.6 million yuan. (company announcement)

Shareholders applauded the results by bidding up China Lodging’s shares by nearly 10 percent, as they re-approached an all-time high reached briefly last December. The big story behind the big boost in profitability is China Lodging’s recent push into hotel management and franchising for other property owners. Such a strategy is now practiced by most of the world’s biggest operators like Marriott (NYSE: MAR) and Hilton (NYSE: HLT), and generally offers far better profit margins than traditional property ownership.

China Lodging says about 3 quarters of the hotels in its network are now properties that it manages and franchises for other property owners, and that ratio is likely to grow as it shifts its core business model. That should mean continued healthy profit growth for at least the next couple of years, even as revenue growth remains a bit slower in the 10-20 percent range due to stiff competition and in China’s maturing hotel market.

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