As the Chinese travel further afield international investment in hotels is a growing focus. Sally White reports

Spurned by local acquisition targets China’s largest OTA, Ctrip, has come up with a new growth strategy. Like its online peers in other sectors, notably Google, it obviously has no inhibitions about diversification into new industries. According to China Travel News, Ctrip is setting up a platform called Xieling Investment which will manage overseas hotel acquisition funds. Partners in this Shanghai free-trade zone based initiative are China’s Huiyu Asset Management and Singapore-based venture capital and private equity firm F&H Group.  

Overseas hotels are a currently a top favourite with China’s corporate investors as the country’s outbound tourist numbers soar. Last year the number reached 114 million, according to the China Tourism Academy. In the first half of this year 61.9 million holidayed abroad as visa restrictions for Chinese holidaymakers were eased in many countries, an increase of 16% on the same period in 2014. Ctrip claimed over 40% of the Chinese outbound market last year.

Ctrip and its partners hope to raise 2.5 billion yuan (US$403 million) in a first phase for the platform, according to China Travel News. It quotes a source “close to Ctrip” as saying that: “About 90% will be raised among Chinese institutional investors with the company picking up the rest. The investment focus will be on hotel projects in Europe, where many high quality properties are professionally managed but undervalued."

Dai Bin, head of the China Tourism Academy, is quoted as saying: "The outbound tourism market is part of the decision to set up the fund, but it is not the only reason. As an online travel agency, Ctrip intends to extend its brand through investing in overseas hotels."

Spending spree

Europe, with its economic recovery still underway, is seen as offering professionally managed, high-grade hotel assets at good value prices. However, the Chinese have been buying hotels all around the world over the last year, spending most heavily in the US. The $1.95 billion purchase of New York’s iconic Waldorf Astoria in February is the biggest purchase – so far. Chinese money is also going into building new hotels in destinations as far flung as Minsk, the Republic of Guinea and Milan.

The Chinese have been buying hotels all around the world over the last year, spending most heavily in the US

US investment bank Credit Suisse puts last year’s Chinese hotels spending spree at around $1 billion. With an eye to the rapidly filling pipeline it forecasts a total of at least $5 billion from China for 2015. This follows a relaxation of the outbound investment rules by the Ministry of Commerce and raising of the threshold.

In fact, everyone currently seems to want to invest internationally in hotels and 2015 is going to be a record year. Globally transactions totalled $42 billion in the first half of the year alone, according to property specialists JLL Hotels & Hospitality. Hotel finance numbers are looking good, with RevPAR projected to grow by 5-8% globally and many European countries having reached their occupancy ceilings.

With its international hotel coverage now at 670,000 (a 55% increase over the last year) Ctrip fully appreciates the opportunities. In conference calls on its Q2 earnings report earlier this month it pointed out that the company served as the largest base of business and high-end leisure travellers in China. Its outbound hotel reservation volume achieved triple-digit growth year-on-year, as did international air ticketing revenues. On some routes , it says, it sells over 40% of the business and first-class seats. 

Ctrip’s overtures to its rivals may not be meeting with success – Qunar said ‘No, thank you’ – but its Q2 figures show it growing at a blistering pace. It has plenty of money to spend on new ventures like the new foreign hotel investment platform with $3billion of cash and cash equivalents at end-June.

Revenues in Q2 rose by 47% year on year to $408 million (up 9% on Q1). Marketing and tough competition kept net income only slightly higher at around $23 million against $22 million year-on-year. But it is, it points out “still the most profitable travel company in China.”

Obviously Ctrip is not worried about any slow-down in Chinese holiday spending, despite the current economic crisis. Management’s guidance to investors for Q3 is that it “expects to continue the net revenue growth year-on-year at a rate of 45-50%”.

However, it would be too much to expect the shares to remain unscathed by the turmoil in local stock markets. The shares have fallen from a 2015 peak of $88 on the US NASDAQ market to just over $70, though they are still a lot higher than last December’s trough of $42.

Brokers’ analysts remain strongly positive on Ctrip. As Credit Suisse points out, outbound tourist volumes are currently only 3% of domestic tourism levels. Also highlighted by analysts are figures from iResearch showing that only 9% of Chinese tourist revenue currently comes from online booking.

However, even Ctrip fans concede that with very strong industry and stock market “headwinds” the shares’ path is likely to be subject to “high volatility”.