China Lodging:Beyond a strong Q3,we see secular growth in the long term -Buy

    We use SOTP EV/EBITDA (12-month weighted average) as our primary
valuation.We separately calculate the EBITDA of Crystal Orange and the
original businessof China Lodging. We assign a 16x multiple to Crystal
Orange as it: 1) is midhigh-scale; and 2) carries a 20% premium to its
acquisition multiple of 13-14x.We assign a 14x multiple to the original
China Lodging business, which is theaverage of its peers’. Risks: 1)
lower tourism demand; 2) a stronger RMB, leadingto more outbound travel;
and 3) government policy changes.。

    We use SOTP based on EV/EBITDA (12-month weighted average) as
ourprimary valuation methodology. We separately calculate the EBIDTA
ofJinjiang’s Chinese and overseas selected hotel businesses. We assign a
12xmultiple to Hotel Louvre, which is in line with the high-end of
European peers.We assign a 14x multiple to Plateno (7 days) and the
original Jinjiang Chineseselected hotel business (in line with the
original China lodging business), whichis the average for its peers.
Risks: 1) lower tourism demand; 2) stronger RMB,leading to more outbound
travel; and 3) government policy changes.

    We reiterate our Buy and raise our TP slightly to USD 130. In
addition tosecular growth, we believe China Lodging, as industry leader,
will enjoy apremium on both RevPAR and growth over its competitors.
Furthermore, webelieve its strategy, to strengthen its network of
midscale hotels (favorable“mix up”), will further improve the blended
RevPAR. We slightly cut our 2017Eprofit by 2% to factor in Crystal
Orange. Although Crystal Orange contributedtop-line/RevPAR growth
significantly, its margin may be lower than the originalChina Lodging
business, on its higher portion of lease and owned hotels.

    2Q17net revenue of RMB1.99bn increased by 20.1% yoy fromRMB1.66bn in
2Q16, beating its original 2Q17guidance of a 10-12%growth range.。

    We have factored in the full-year contribution of newly-acquired
hotelsincluding Plateno (9-10M contribution in 2016) and Vienna
(half-yearcontribution in 2016). We mainly raise our Plateno EBITDA
estimate, by c.40%to reach c. RMB1.1bn (doubled from RMB0.6bn in 2016),
due to the full-yearcontribution and cost efficiencies. As a result, we
increase our earningsforecasts in 2017/2018 by 26%/29%.

    We believe there is still potential for China Lodging to drive up
its RevPAR inthe long term: a) although the reported occupancy rate has
hit 90%+ high,c.10% is contributed by paid-by-hour hotels. Thus, the
stay-over occupancyrate is c. 80%, meaning there is still potential for
further improvement; b) ADRon a same hotel basis should continue to
rise, as more hotels renovate andupgrade; and c) as it continues to
enhance the expansion of midscale hotels,the favorable “mix up” is
estimated to contribute at least 4% RevPAR growth.

    We raise our 2017and 2018earnings growth forecast。

Upgrading to Buy due to better industry outlook – 2017 is bottoming
out

    Valuation and risks

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