TRAVEL – Jin Jiang Calls On Europe With Louvre Buy

Bottom line: Jin Jiang is emerging as China’s first global hotel brand, but its inexperience and focus on property ownership with its first major acquisition are likely to produce poor results for the campaign.

Jin Jiang checks into Europe

Domestic hotel stalwart Jin Jiang (Shanghai: 600754; HKEx: 2006) is quickly emerging as China’s hotel company to watch on the global stage, with word that it’s on the verge of a deal to buy Louvre Hotels Group, Europe’s second largest operator. The acquisition would be the biggest so far for Jin Jiang, which is China’s only hotel operator to make any serious moves outside its home market. Frankly speaking, I’m a bit surprised that state-owned Jin Jiang is leading this particular global expansion campaign, since I would have expected one of the country’s private hotel operators to be at the forefront of this initiative.

But all that said, Jin Jiang probably has access to more money and other necessary connections for such a global play than more dynamic private names like Home Inns (Nasdaq: HMIN) and China Lodging Group (Nasdaq: HTHT). I’ve never really been too impressed by Jin Jiang’s hotels or its management, which leads me to believe the company’s globalization campaign could produce a network of second-rate hotels that will have a hard time competing with the likes of industry leaders like Marriott (NYSE: MAR) and Accor (Paris: AC).

All that said, let’s dive into the news that cites unnamed sources saying that hotel investor Starwood Capital Group has selected Jin Jiang to buy Louvre’s parent in a deal valued at up to 1.2 billion euros ($1.5 billion). (English article; Chinese article) Louvre has 1,100 hotels in 47 countries, running the range from luxury to budget properties. Starwood Capital bought Louvre in 2005 for $3.5 billion, but has sold many of the company’s most valuable properties since then.

That means the portfolio of Louvre’s remaining hotels are probably mostly so-so properties in the middle to low-end range, which doesn’t look too exciting. What’s more, Louvre probably owns many of its properties, which is a less attractive business model than most major hotel companies like Marriott that typically manage and franchise properties for third-party owners.

That difference in business model is apparent in the huge difference in valuations between Louvre and some of its largest European rivals that operate more famous chains. France’s Accor, operator of the Sofitel and Ibis chains, and Britain’s Intercontinental (London: IHG), operator of Holiday Inn, both have current market values in the $9-$10 billion range — some 6 times bigger than the reported sale price for Louvre.

Reports on the deal say Jin Jiang currently operates 1,700 hotels in 11 countries. One of its biggest international moves so far came at the beginning of this year, when the company entered a major partnership to bring its hotels to Indonesia. (previous post) Jin Jiang also made headlines in 2012 when it formed a hotel management joint venture with US operator Thayer Lodging, showing it was serious about improving its hotel management abilities. (previous post)

I’ll be honest and say I haven’t stayed in a Jin Jiang hotel for a long time, mostly due to previous so-so experiences. But my occasional forays into their wide range of properties, including their original landmark hotel here in Shanghai, don’t ever leave me feeling too impressed. The fact that it’s a big state-run company certainly doesn’t help, since such firms are notoriously slow-moving and not very market driven.

At the end of the day, Jin Jiang looks like it’s picking up a big portfolio of mid-tier and low-end properties at a relatively bargain price, which is a typical acquisition strategy for many Chinese companies just starting to go abroad. On the one hand I do applaud Jin Jiang for its efforts to expand globally. But this particular purchase doesn’t look too exciting, and could result in headaches for Jin Jiang due to Louvre’s heavy emphasis on property ownership rather than more lucrative management contracts.

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