China Lodging: Cookie-Cutter Growth

04/26/2016 10:00 am EST

Focus: STOCKS

Timothy Lutts

Publisher, Cabot Heritage Corporation

I’ve been a fan of investing in China for more than a decade; the country’s economy is growing fast and you don’t need new business models to succeed there; the ones that have worked in the US for decades work just fine there, asserts Timothy Lutts, editor of Cabot Stock of the Month.

One of these models—and one of our favorites here at Cabot—is the cookie-cutter model. That name was coined by mutual fund legend Peter Lynch, who found great success investing in businesses that could grow by simply replicating existing successful retail outlets.

China Lodging Group (HTHT) has about 2,800 hotels—with nearly 280,000 rooms—in 352 Chinese cities, with accommodations offered in economy, midscale and upscale market niches.

The Chinese lodging market is still highly fragmented. While branded hotels account for some 70% of the US lodging market, in China only 20% of hotels are branded. That, of course, spells opportunity.

And the way that China Lodging Group is grabbing this opportunity is the fast way. They are not building many new hotels; instead they’re acquiring existing hotels and rebranding them. In this way, they take from the competition and add to their own.

The company added 768 hotels to its chain in 2015, and plans to open between 750 and 800 hotels in 2016, 80% of them in the economy tier and 20% in the midscale and upscale tiers.

Also contributing to the company’s rapid expansion strategy is an innovative "manachising" strategy, in which the company "manages and franchises" the hotel, while collecting revenue in franchise fees.

This is sometimes called an "asset light" strategy, as it doesn’t involve huge capital expenditures for new-build hotels.

Last but not least, one great assets of the company is founder Qi Ji, who is also the co-founder and former CEO of both Homenns Hotel Group (HMIN) and online travel stock Ctrip.com (CTRP).

Qi Ji’s experience in the industry—as well as the synergies between his businesses—is clearly an advantage.

Daily trading volume of HTHT averages just 237,000 shares. Buy at the market when it’s trading, or use limit orders. And don’t rush; take your time. In my view, the long-term prospects for lodging growth in China remain excellent.

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By Timothy Lutts, Editor of Cabot Stock of the Month

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