Not Financial Advice (“NFA”)
So since I’ve been on a mini hiatus from here. After correctly calling the DKNG/PTON/CRWD (Check post history) run-up & for those that got out early enough, some mini tendies on PM (if you held, I’m sorry, GTFO), I’ve been doing work behind the scenes & correctly called XPEV/NIO, CRSR, then TSLA. Proof below:
I still hold a majority of the above positions, though I’ve reduced some XPEV/CRSR primarily due to its run-up making the positions become too big. TSLA, even after my selldown is still a significant part of my portfolio.
With that said – here’s some good ol’ fundamental DD for you folks on my next play. Huazhu Hotels Group (NASDAQ: HTHT). This will be long, I’ll try to be short & succinct & below I’ve included a TL;DR; but maximum tendies will be gifted to those who learn 2 read.
I. 30,000 Feet Up – China’s 14th 5-Year Plan
My HTHT thesis aligns with what got me into XPEV at the $20s. Even if you don’t take my word for it, Google around – the foundation of the Chinese economy is based on Government policy. It isn’t like the US, where big money drives political processes in the shadows. In China, decisions about medium-term / long-term business begin in the political sphere. So, on October 29th, 2020, the Chinese Communist Party (“CCP”), wrapped up after meeting for 4 days on the high level themes of China’s 14th 5-Year Plan. The final details will be announced around March/April of 2021 (which drives my reasoning why XPEV/NIO & other related stocks should be held to after this date), at which the market will be able to apply more than estimates/qualitative assessments to beneficiaries of this plan. HTHT & XPEV/NIO fall under all 3 “Key Themes” of the Plan which are:
Theme #1: Domestic Dependency – New Energy – Electronic Vehicles & Related Supply Chain (Battery Tech & EV Charging Piles) –> XPEV / NIO
Theme #2: Domestic Demand / Theme #3: Digitization – Value-Added Products/Content –> HTHT
Other big picture drivers are ongoing Dollar weakness relative to the Yuan, China’s outperformance in handling COVID relative to the US & Europe, both of which I won’t discuss in great detail here but are easily researchable. These are all additional tailwinds for HTHT.
How successful has China been on implementing past “5-Year Plans”? Below is a nice infographic summarizing them. It’s almost safe to assume that 5-Year Plan targets are the floor cases of what China is striving to achieve:
What are the benefits to Chinese businesses that align themselves with Chinese government policy? Cheap capital & outsized governmental support. Put simply: It’s like having a JPoW picking certain industries every 5 years to unleash the money printer on + having Congress pass very biz friendly laws in tandem.
II. 10,000 Feet Up – China’s Only Trade Deficit – Service Sectors
Overall, China has an overall significant trade surplus over the US (+$3.5 Trillion), but a deficit in the following 5 sectors – Domestic Travel, Discretionary Consumption, Entertainment, Education & Drugs & Medical Devices.
My view is that China will be pushing to create surpluses in all of them, but the most realistic sectors are in Domestic Travel / Discretionary Consumption (HTHT + XPEV/NIO) & a bit on the Healthcare side, which I’m exploring at the moment (DD to come). I still think US-based entertainment (Hollywood, NBA, etc.) will not be replaced in our lifetimes so let’s focus on hotels.
Currently HTHT’s portfolio is split by # of rooms 49% vs. 51% of total in the Upper/Midscale vs. Economy segment. Below is a quick summary of their portfolio of brands:
While many of these brands may not be familiar to us autists here vs. the brands Marriott / Hilton / Hyatt have, you can bet that with the signing of largest trade agreement signed in history – the Free Trade Agreement & the quicker recovery from COVID in China, that these brands will be on flagship real estate assets across the world in the near future.
As an aside, Wall Street estimates that HTHT grows Room count by ~30% from year end 2020 to year end 2021, for an eventual mix weighted more towards the Upper/Midscale segment (56% vs. 44%, Upper/Midscale vs. Economy)
III. Ground Level – HTHT Business Strategy & Financials
So a very quick primer on how Hotels make money. There are 2 strategies – franchise / leased/operated. The Franchise strategy is higher margin, higher certainty of cash flows, is lower volatility, and captures some upside if business improves drastically. The leased/operated model is lower certainty of cash flows, higher volatility, and receives a bulk of outsized upside in the business. Overall, investors assign a much higher multiple to the franchise model. Taking a look at Marriott’s historical EV/EBITDA vs. Host Hotels (HST)’s will show you this clearly. (Marriott trades >20x, HST ~10-15x)
Basically, how all the current major hotel brands started, like Marriott, was by having a primarily leased/operated model then when their brands began gaining awareness, spun-off their leased/operated business (usually to a hotel REIT) & became a primarily franchise business. This has been the path of all of the major hotel chains in the past, & if you were an investor in Marriott then, you made out like a bandit today (15x gains through time period).
Currently, HTHT’s Revenue mix of franchise / leased/operated hotels is 31%/69% by Revenues. According to a survey by Frost & Sullivan in July 2020 on the Chinese consumer, HTHT’s brand, HanTing Hotel is the #1 economy hotel brand that is ‘top of mind’ for the Chinese consumer & HTHT’s midscale brand JI Hotel is #1 in the midscale segment. Brand momentum outside of the US has steadily been climbing for years which coincides with the Company’s recent shift in becoming ‘asset-lite’ or in autist speak, are going to pursue a primarily Franchise model.
With that said – Wall Street estimates HTHT’s franchised business is set to grow by >100% from ’20 to ’21, and the Revenue mix is set to go from 69% from Leased/Operated today to low 60%s by ’22E.
This will be driven by a quicker & already recovering economy in China + global expansion backed by government policy.
Here’s a snapshot on China’s hotel recovery vs. other major cities per STR (based on RevPAR – Google if you don’t know what this is – this is the main Hotel Revenue metric combining ADR & Occupancy):
Pay attention to growth from Aug ’20 to Oct ’20 – Beijing +51% vs. London -3% vs. Hong Kong +37%
Beijing +51% (from earlier) vs. NYC +2% vs. Tokyo +79% – Overall: Asia’s travel sector is recovering
In addition to the above RevPAR metrics, something else to note from the numbers. At Beijing’s $55.01 RevPAR, they are >50% recovered from the average RevPAR throughout 2019 vs. London where current RevPAR is still ~20% of what they accomplished in 2019. Though Tokyo had some massive growth, they are still only ~33% of 2019s RevPAR
Have you read this far yet? Lucky you – you get my exit strategy. $65/Share.
So they’re just going to be the Chinese Marriott – so what? What differentiates them like XPEV/NIO?
The Hotel industry hit the shittiest of shit recently, so all of them are coming off of ridiculously low bases. Even then, HTHT is expected to grow their EBITDA from ’20 to ’22E at a +209% CAGR vs. Marriott at +62%, and Hilton at +57%.
These estimates are extremely conservative in my view – downplaying HTHT getting the backing like NIO/XPEV to export its product overseas + the rapidly recovering Chinese economy relative to the US. Again, you will see their brands become flags in major cities in the coming years.
From a Valuation perspective, HTHT has had a decent run-up in the last month since the CCP unveiled the rough outline of their 5-Year plan, & they released preliminary 3Q’20 results (which show a much improved/improving outlook – significant recovery in mid/upscale brands) but it is still undervalued in my view relative to the major Hotel peers. This is evident in EV/EBITDA.
Even with the conservative case of 3x the growth embedded in estimates vs. Marriott, HTHT trades at EV/EBITDA of ~20x, vs. Hyatt at ~24x, Marriott at ~19x, & Hilton at ~19.5x. Historically, Marriott has traded at ~22x when expectations for growth were a lot lower than they are today.
I see HTHT getting to >22x EV/EBITDA very quickly or ~$70+ a Share, and this is on estimates that do not fully account for franchise expansion on CCP support.
TL;DR $55C+, 3/2021 & beyond
Source: Wall Street Research, Company Filings