Business context and reporting period
This is China Lodging Group, Limited’s annual Form 20-F for the fiscal year ended December 31, 2011, prepared under U.S. GAAP. It is not a standalone 2011 fourth-quarter filing; the filing provides selected fourth-quarter operating indicators but does not present a clear standalone Q4 income statement.
The company operated limited-service hotel brands in China through leased-and-operated and franchised-and-managed models. At year-end it had 639 hotels in operation (344 leased-and-operated and 295 franchised-and-managed) and 278 hotels under development.
Financial and operating performance
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Total revenue | RMB2,385.6 million | RMB1,838.4 million |
| Net revenue, after business taxes | RMB2,249.6 million | RMB1,738.5 million |
| Operating income | RMB107.1 million; 4.8% of net revenue | RMB256.3 million; 14.7% |
| Net income attributable to China Lodging | RMB114.8 million; 5.1% of net revenue | RMB215.8 million; 12.4% |
| Basic / diluted earnings per share | RMB0.47 / RMB0.47 | RMB1.05 / RMB0.92 |
| Operating cash flow | RMB458.7 million | RMB469.1 million |
| Cash and cash equivalents at year-end | RMB781.6 million | RMB1,060.1 million |
| Capital expenditures | RMB919.5 million | RMB568.6 million |
| Long-term debt at year-end | None | None |
Unless otherwise noted, financial amounts are RMB. Net revenue grew 29.4%, while operating costs and expenses rose 44.5%. Net cash used in investing activities was RMB734.6 million, and cash decreased RMB278.5 million during the year.
- Leased-and-operated hotel revenue rose 27.2% to RMB2,172.9 million; franchised-and-managed revenue rose 62.8% to RMB212.6 million. The franchise model contributed 8.9% of total revenue.
- Company-wide RevPAR declined to RMB165 from RMB183; average daily rate declined to RMB180 from RMB197, and occupancy eased to 92% from 93%.
- Reported hotel income was RMB546.3 million, down from RMB558.3 million. Non-GAAP EBITDA was RMB377.4 million versus RMB447.2 million; adjusted EBITDA from operating hotels was RMB577.2 million versus RMB571.6 million.
- Year-end total assets were RMB3,525.0 million and total liabilities RMB1,269.1 million. Current assets of RMB1,173.8 million compared with current liabilities of RMB793.3 million.
Material changes versus the prior comparable period
- Net income attributable to the company fell 46.8%, and operating income fell 58.2%, despite higher revenue. Management attributed the pressure principally to the end of the 2010 Shanghai Expo’s demand benefit, lower RevPAR, a larger share of ramping-up hotels, and higher pre-opening costs.
- Pre-opening expenses increased to RMB184.3 million from RMB111.2 million; as a share of net revenue they rose to 8.2% from 6.4%. Hotel operating costs increased to RMB1,703.3 million from RMB1,180.2 million.
- Hotel expansion continued rapidly: operating hotels increased from 438 to 639, and available room-nights rose from 13.7 million to 21.5 million. Franchised-and-managed hotels increased from 195 to 295.
- Operating cash flow was modestly lower, while investment outflows increased with expansion. Cash declined from RMB1,060.1 million to RMB781.6 million.
For Q4 2011, total portfolio RevPAR was RMB167, compared with RMB168 in Q4 2010. Same-hotel RevPAR increased 5% year over year in Q4, after declines in the first three quarters of 2011.
Outlook, management commentary, risks and unusual items
- Management expected operating cash flow and existing cash to cover working-capital needs for the foreseeable future. It expected to fund expansion from cash and operations; no quantified revenue or earnings guidance was provided.
- The company had 93 leased-and-operated and 185 franchised-and-managed hotels under development. It estimated approximately RMB942.4 million of capital expenditures for recently completed improvements and the 93 leased-and-operated hotels in development.
- Future costs and returns are exposed to fixed leases, hotel ramp-up periods, competition, labor and input-cost inflation, seasonality, and economic or travel disruptions. The filing notes that the first quarter is typically weaker and the fourth quarter can also have lower RevPAR than the second and third quarters.
- Property and regulatory matters are significant: lessors for 86 leased properties had not provided ownership and/or land-use certificates, and lessors for approximately half of executed leases had not obtained required government approvals. Three additional leased hotels had been identified as likely subject to demolition for zoning reasons. One leased hotel was demolished in 2011; the company recorded a RMB2.4 million property write-off and a RMB0.1 million net gain after reimbursement.
- Contractual obligations included RMB10.13 billion of future operating lease payments and RMB110.5 million of purchase commitments at year-end. These lease obligations are substantial relative to reported cash and should be considered alongside the asset-light franchise expansion strategy.
- No outstanding loans existed at December 31, 2011. In March 2012, the company entered into a credit facility of up to RMB500 million for hotel renovations; it had not drawn on the facility as of April 12, 2012.
- The company reported effective disclosure controls and internal control over financial reporting as of year-end; Deloitte issued unqualified opinions on the financial statements and internal controls. The filing also cautions that its China-based auditor was not subject to PCAOB inspections at that time.
Important facts for investors to verify
- Whether RevPAR, same-hotel performance, and room rates stabilized after the loss of the Expo comparison and amid continued hotel openings.
- Whether new hotels ramp up on schedule and whether pre-opening costs and capital spending remain manageable.
- The legal status of leased properties, required approvals and registrations, and potential costs or disruption from the three identified demolitions.
- Cash generation and liquidity after capital expenditures, including the funding plan for the RMB942.4 million expansion estimate and the RMB10.13 billion lease commitment schedule.
- The sustainability of reported profit, including the impact of tax holidays, deferred-tax-asset assumptions, foreign-exchange gains, and non-GAAP EBITDA adjustments.
- Restrictions on moving cash from PRC subsidiaries to the holding company: approximately RMB1,818.5 million was reported unavailable for distribution as dividends, loans, or advances at year-end.