Chinese hotel operator markets $300 million IPO

The operator of Shanghai's Peace Hotel hopes to copy Home Inns' phenomenal run on Nasdaq.
A well-known name and a dizzying performance by one of its US-listed rivals are expected to be two of the key points attracting investors to the initial public offering of ChinaÆs largest hotel operator, Jinjiang International Hotels Development, which started pre-marketing yesterday.

The state-owned enterprise, which runs budget inns as well as landmark hotels like The Peace Hotel in Shanghai, will be the first pure Chinese hotel operator to list in Hong Kong. However, the IPO comes on the heels of an extremely well-received listing of Chinese budget hotel operator Home Inns & Hotels Management on Nasdaq last month, which served as a clear indication of the strong appetite for this type of stock and the lack of investment alternatives for those who want to play the sector.

Home InnsÆ IPO, which was arranged by Credit Suisse and Merrill Lynch, was priced above the $10 to $12 price range at $13.80 and since its trading debut on October 26 the stock has soared another 145% to about $33.90 mid-session Monday. This has left the company trading at a 2007 PE multiple of more than 100 times, making it virtually impossible to use as a comparison.

Home Inns ôhas given the whole hospitality sector a boostö, notes one observer.

Not surprisingly, Jinjiang too has attracted a lot of attention and when the company began marketing its $300 million deal yesterday together with joint bookrunners BNP Paribas and UBS, it had already agreed to set aside about $70 million for strategic and cornerstone investors.

In hindsight, the need for such investors to anchor the deal is unlikely to be needed in the current strong market environment û indeed they are bound to cause a bit of a headache when it comes to the allocation of the offering as they will leave a limited amount of shares for other buyers. However, the company started talking to these guys earlier in the year when the demand situation was entirely different and couldnÆt very well back off when conditions improved, says a well-placed source.

According to the source, Jinjiang will sell about $30 million worth of shares to the Starwood group, which operates a number of international hotel chains such as the Sheraton, St Regis and Westin. StarwoodÆs investment should be useful from a business point of view as it will be accompanied by strategic cooperation between the two hotel groups.

However, Jinjiang will also sell $20 million worth of stock to each of BOC Investment Group and Bank of East Asia chairman David Li, who will be investing through his own personal trust. The guaranteed allocation to these two will have a less obvious impact on JinjiangÆs future business, but is likely to instil confidence among other potential investors û especially at the retail level û and will help stabilise the stock in the aftermarket as these anchor investors cannot sell their shares for six months.

The danger is that if the retail portion of the offering turns out to be more than 100 times covered, which has been the rule on most of the recent IPOs in Hong Kong, and is increased from 10% to 50%, Jinjiang will have only about $90 million left for institutional investors other than the three already signed up.

The company is looking to sell 1.1 billion new shares, or 25% of its existing share capital, ahead of a December 15 listing on Hong KongÆs main board. In case of strong demand in the secondary market, there is also a 15% overallotment option. The deal will have the usual 90-10 split between institutional and retail investors.

The price range wonÆt be set until the formal roadshow kicks off next Monday (November 27), but according to one source, the company is likely to be offered at a discount of at least 30% to its net asset value, which stands at about Rmb15 billion ($1.9 billion) on a pre-money basis. That would also be significantly cheaper than Shangri-La Hotels, which trades at a 5% premium to NAV and is considered one of the closest comparables because of its good presence in China.

The final price is expected to be determined on December 8.

Jinjiang is probably best known to international investors for its landmark four and five star hotels. Aside from The Peace Hotel, which is prominently situated on the Bund and has been a Shanghai icon since it was first opened as the Cathay Hotel in 1929, these include the International Hotel and Golden Gate Hotel, which are also located in the heart of Shanghai.

The company was also the first to set up a chain of budget hotels in China and its Jinjiang Inns brand is very well known in the local market.

JinjiangÆs three star budget hotels business is similar in scale to that of Home Inns, but while the latter typically leases its hotels, Jinjiang has ownership of most of its properties. In cases where it does operate hotels on a franchise basis, the contracts are for at least 15 years, while privately owned Home Inns is willing to accept hotel operations on a much shorter basis, sometimes only a few years.

Jinjiang also owns a number of hotels that donÆt rank as top tier and arenÆt that profitable, but which are in key locations. According to sources, it may sell some of these as part of a plan to focus more on management contracts than on ownership of second-tier hotels and to boost its return on equity from about 20% at present. The income from such sales will also help replace the revenue lost in connection with a planned renovation of the Peace Hotel that will start in March next year.

The company currently owns about 263 hotels in 73 cities with more than 51,000 rooms, which makes it the largest hotel operator in Asia. By comparison, Shangri-La has about 20,000 rooms around the region and Home Inns has 9,700 spread across China.

The renovation of the Peace Hotel is part of the groupÆs preparation for the 2008 Olympics and the 2010 World Expo in Shanghai and while closing its flagship hotel for at least nine months will obviously have a negative impact on 2007 earnings, it is expected to pave the way for rapid profit growth from 2008 onwards. The growth is expected to be driven both by higher room rates and improved occupancy, people close to the company say.

In 2005, the company posted revenues of Rmb2.8 billion ($356 million) and a net profit of Rmb313 million ($40 million).

ôGoing forward, the core business in the form of the landmark three to five star hotels will provide solid earnings, while the budget inns serve as a good platform for growth,ö says one source, noting the rapid increase of domestic travelling within China as a key driver.

The government will hold 75% of the company before the exercise of the greenshoe.
¬ Haymarket Media Limited. All rights reserved.
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