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Apertor chinese lodging-industry_growth

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The report provides an overview and in-depth analysis of China's developing lodging industry.

The report provides an overview and in-depth analysis of China's developing lodging industry.


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  • 1. Apertor Research www.apertorhospitality.comFebruary 25, 2011 Gregg Carlson Advisor 702.506.0475 x540 gcarlson@apertorhospitality.comChinese Lodging Industry GrowthAn Unprecedented Opportunity ©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 2. 2 Chinese Lodging Industry Growth February 25, 2011Table of Contents 3 Introduction 4 Executive Summary 9 Recent China and Asian (ACPC) Industry Data Points and Select U.S. Company Comments 10 Recent China News Flow 11 Summary of the Chinese Economic and Development Story 18 Overview of the Chinese Lodging Market 35 China and ACPC (regional) Industry Data 39 China and ACPC Pipeline Data 44 Appendix A: Additional Recent Chinese Economic Headlines 46 Appendix B: Summary of Chinese Economic and Structural Issues 51 Appendix C: Recent Sentiment Regarding ACPC-Chinese Real Estate Market Conditions 53 Appendix D: Chinese Tier 1, 2 and 3 Cities 54 Appendix E: Smith Travel Asian Region Definitions 55 Bibliography 59 Disclosures and Terms of Use©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 3. Introduction 3 Chinese Lodging Industry Growth February 25, 2011Introduction This report is the product of an in-depth research project that addresses the growth and development of the lodging industry within China and to a lesser degree the Asia Pacific region. The work presented in this report is a combination of company, industry and economic analyses that address what we believe are the key issues tied to the ongoing development of the Chinese lodging industry. This report is independent and not sponsored by any of the companies or institutions mentioned herein. Over the past 20 years, China and the Asia Pacific region have experienced rapid development and significant economic growth. China is viewed today as an emerging world economic power that is expected to develop at what may be the highest rate of economic growth in the world over the next decade and beyond. At the current forecasted growth rate, China’s GDP may surpass the size of U.S. GDP as early as 2020.[1] With this growth, come challenges and a massive development story as millions of residents move from rural to urban areas and reach middle class status. Due to the size of the country’s population (approximately 1.3 billion), the magnitude of these and other shifts as drivers to the ongoing overall development story is unprecedented. The influences of many of the major themes within the Chinese development story are likely to have a significant impact not only on China but also the region and world as whole. Driven by the significant growth backdrop and positive structural tailwinds, multi-national companies in a variety of industries view China as a significant market and continue to invest in both the country and region. These and other large long-term development trends within China and the region are expected to continue to provide a positive, powerful backdrop for long-term industry growth for many industries including the lodging industry over the next decade. We have sourced relevant information for the topics covered here from companies, investment banks and consulting firms, which are participants in and/or focused on China and the Asia Pacific region. We have also sourced information from government databases within Asia, China and the U.S., relevant books written about the region, industry trade organizations and various news outlets, among other sources. We have also held discussions with institutional investors, industry analysts and industry executives that are active participants within the China and the Asia Pacific region. As the subject of China’s major social, political and economic trends vis-à-vis the lodging industry is quite large and complex, it would be easy to produce a voluminous report; instead we have summarized the key issues. As a result, this report serves as an entry point for further research into China’s lodging industry. We have provided a list of sources to allow for further reading and research on topics covered in this report. We have also provided a summary in Appendices A & B that focuses on current and forward looking economic and development issues.1 Per the “Dating Game, When will China overtake America?”, The Economist magazine, December 18, 2010.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 4. Executive Summary 4 Chinese Lodging Industry Growth February 25, 2011Executive Summary Despite some fear of an economic slowdown in 2011 (being engineered by the Chinese central government in an effort to control inflation), long-term growth forecasts over the next 5 to 15 years remain intact. The current size and pace of economic growth over the next decade means that Chinese GDP could surpass the size of U.S. GDP as early as 2020. This record-breaking pace of economic growth and overall development creates its own set of risks and issues. Within the overall Chinese emerging market development story, the lodging industry has grown at a significant pace, buoyed by the positive economic backdrop and other factors such as foreign travel and investment in the region, growth of the middle class and development of the domestic tourism industry. During 2010, the lodging industry in the Asia Pacific region and China recovered at a significantly stronger pace than the remainder of the world. Our analysis provides a snapshot of the growth of the lodging industry within China and to a lesser degree the Asia Pacific region (ACPC). The goal of this report is to provide an introduction and overview of the Chinese lodging industry and key companies that operate within the country and region as well as insight into some select current and essential issues. Key points and findings of this report are: „ Y/Y RevPAR growth in ACPC and China significantly surpassed y/y RevPAR growth in Europe and the U.S. in 2010. YTD y/y RevPAR growth as of October 2010 for the U.S., Europe, ACPC and China is 7%, 3%, 24% and 37%, respectively. The above world trend for ACPC and China RevPAR growth continues today. The 2010 recovery in ACPC and China RevPAR follows the 2009 downturn, which was triggered by the short term supply glut tied to the 2008 Olympic Games and 2008-2009 worldwide economic downturn. „ Recent company comments and pipeline announcements made by IHG, Marriott, Shangri-La, Starwood, Home Inns and 7 Days, among others, remain positive regarding forward prospects in both the Asia region and more so in China over the next several years. „ Recent Chinese news flow has been focused on inflation pressures, loan growth and central government tightening measures within the country. Some media reports suggest that China could face an economic slowdown. Despite these fears consensus GDP growth rates for the next few years remain in the 8% to 9% range, one of the strongest growth rates in the world. „ The Chinese economy has grown at a significant rate since the early 1990’s. Driven by significant economic stimulus, among other factors, growth persisted in 2008 and 2009 despite the world wide economic slowdown. „ The Chinese economy and lodging industry have benefitted from several significant long-term trends that continue today which include; − a massive rural to urban migration trend which drives a significant increase in the urban population; − ongoing growth of the middle class and overall per capita income levels that are expected to continue over the next decade;©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 5. Executive Summary 5 Chinese Lodging Industry Growth February 25, 2011 − changes in lifestyle and behavior that allow for more leisure time and consumer spending; − ongoing significant growth in small to medium enterprises (SME’S) as a driver of both overall economic growth and tourism; − and government effort to stimulate domestic tourism growth. „ Traffic count growth rates at Chinese gateway airports have continued to move towards the top of the worldwide rankings in recent years, providing further evidence of the growth of international travel into the country. Domestic travel has also grown at a significant rate in recent years. „ China’s lodging market is defined as follows: privately owned guesthouses & unrated hotels, 1–3 star hotels, branded economy hotels and 4 – 5 star rated hotels. In 2008, approximately 93% of the Chinese lodging market consisted of guesthouses and unrated hotels, suggesting that the market remains significantly underpenetrated by local and international brands compared to U.S. penetration statistics. „ The 1 – 3 star segment of the Chinese lodging industry (measured in hotels) expanded at a 5.6% compound average growth rate (CAGR) over the previous decade. The 4 – 5 star and branded economy segments expanded at 18% and 73% CAGR, respectively, over the same period as these segments took share from the unrated and 1 – 3 star hotel segments. „ Branded economy and 4 – 5 star industry hotel and room supply is expected to continue to grow at a significant pace resulting in market share losses by 1 – 3 star and unrated hotels through 2015 and beyond. „ The 4 – 5 star segment is dominated by brands of global companies such as Accor, IHG, Shangri-La, Starwood, Marriott and others. „ The branded economy segment which really only began significant operations in 2004 is now dominated by 5 companies, 4 of which are publicly listed.[2] „ Despite some fear of a short-term supply glut for branded economy hotels, the long- term growth story remains intact due to the low penetration rate and competitive advantages held by these firms. „ The three publicly listed, branded economy operators have expanded from approximately 26 hotels in 2004 to 1,800 as of December 31, 2010. Select industry analysts expect the rapid pace of growth to continue as the combined hotel footprint of these companies is expected to expand to approximately 5,700 hotels by 2015. „ Recently two of the three (Home Inns and 7 Days) U.S. listed, branded economy operators announced increases to their previously announced robust development pipelines.2 Three companies are listed in the U.S. (China Lodging Group, Home Inns and 7 Days). One company, Jin Jiang Hotels, is listed on the Hong Kong exchange.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 6. Executive Summary 6 Chinese Lodging Industry Growth February 25, 2011 „ The three U.S. listed, branded economy operators are expected to continue to increase their market share within the segment over the next several years. They are also expected to continue to rapidly increase their revenue and EBITDA between 2010 and 2012.[3] „ Over the next several years, revenue growth for Chinese focused operators is expected to significantly surpass overall worldwide revenue growth for the major global lodging companies. „ Publicly listed Asian and China focused hotel operators were recently valued at a premium to global companies due to the perceived superior forward looking growth prospects over the next several years. „ Our overall China supply model (for the combined star rated and branded economy segments) indicates the Chinese Lodging market (measured in hotels and rooms) tripled in size over the last decade growing at a 11% and 12% CAGR’s. „ The current ACPC and Chinese pipeline approaches the 2008 pipeline peak that preceded the Olympic Games. Based on recent data points, the Chinese pipeline continues to expand. „ During 2010, several major international operators (Accor, IHG, HOT, etc.) have expressed forward looking positive sentiment toward development within Asia and have announced significant development plans. HOT has focused 52% of its pipeline efforts on the ACPC region and has indicated this region represents the highest rate of pipeline growth for the company. „ Our survey of Chinese economic forecasts suggest the Chinese economic growth may slow some between 2010 and 2011 but remain at a premium to growth rates of virtually all major economies in the world for the next decade. „ Analysts, investors, economists and industry participants within the ACPC and Chinese lodging industry that we have spoken to as part of this research effort remain positive regarding current conditions and continue to maintain bullish views regarding long-term industry growth and overall Chinese economic growth.3 Select analyst estimates suggest revenue and EBITDA may increase approximately 40% to 80% between 2010 and 2012.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 7. Executive Summary 7 Chinese Lodging Industry Growth February 25, 2011Chinese Lodging Industry GrowthAn Unprecedented Opportunity Recent China and Asian Pacific (ACPC) lodging industry data points remain strong and support current robust forward growth expectations in the region. Over the course of 2010, China and Asia have become the key growth story for the worldwide lodging industry. At this juncture, the consensus view is that China and Asian markets are expected to continue to grow into 2011 and for the next decade. Faced with more limited growth prospects in the U.S. and attracted by significant opportunities in emerging markets, where supply continues to create demand, lodging companies with management and ownership opportunities in the region remain bullish regarding forward prospects. Driven by strong regional and global economic growth, massive rural to urban Chinese migration trends and a growing middle class, among other factors, the lodging industry in China has grown at a rapid pace in recent years and is expected to continue to do so between now and 2020. Today, the Chinese lodging market is comprised of two major market segments as follows: „ The upscale market that targets international business travelers. This market is primarily located in tier 1 cities (e.g. Beijing, Shanghai, etc.) and is dominated by global operators. „ Domestic market properties that target the growing middle class. This market is dominated by independent hotels and Chinese guesthouses, which includes 1 to 3 star hotels and a handful of rapidly growing budget operators that operate economy hotels in tier 1, 2 and 3 Chinese cities.[4] In this report, we provide an overview of the greater China lodging industry and our prognosis for expansion of the industry over the next several years. We also provide some insight into Asian regional lodging industry and economic trends. We view the Chinese lodging market as one of the most dynamic and significant forward- looking growth markets in the world. To understand future growth prospects of the market and market participants requires an understanding of China’s economic history and forward looking economic prospects as well as structural, political and other issues that are relevant to this dynamic growth story. Our research suggests that this large, complex story could literally result in several hundred pages of explanation. We have chosen to provide brief summaries of what we believe are the most relevant issues. Included in the report bibliography are references to research reports and other documents to allow our readers the option to dig deeper into particular aspects of this subject. This report is focused on China and should primarily be used as a starting point into the China lodging industry story and to a lesser degree the Asian region as a whole.4 See Appendix D for a description of Chinese tier 1, 2 and 3 cities.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 8. Executive Summary 8 Chinese Lodging Industry Growth February 25, 2011 Our analysis of the Chinese lodging industry is organized as follows: „ Recent China and Asian (ACPC) Industry Data Points and Select U.S. Company Comments „ Recent China News Flow „ Summary of the Chinese Economic and Development Story „ Overview of the Chinese Lodging Market „ China and ACPC (regional) Industry Data „ China and ACPC Pipeline Data „ Appendix A: Additional Recent Chinese Economic Headlines „ Appendix B: Summary of Chinese Economic and Structural Issues „ Appendix C: Recent Sentiment Regarding ACPC-Chinese Real Estate Market Conditions „ Appendix D: Chinese Tier 1, 2 and 3 Cities „ Appendix E: Smith Travel Asian Region Definitions©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 9. Recent China and Asian (ACPC) Industry Data Points and Select U.S. Company Comments 9 Chinese Lodging Industry Growth February 25, 2011Recent China and Asian (ACPC) Industry Data Points and Select U.S. Company Comments Recent RevPAR Data Points During 2010, y/y RevPAR metrics in the lodging industry within China and Asia have shown strong signs of recovery despite the mixed bag nature of results in Europe and more moderate signs of recovery in the U.S. as follows:Exhibit 1: Y/Y recent RevPAR growth in world markets y/y U.S. RevPAR growth y/y European RevPAR growth y/y ACPC RevPAR growth y/y China RevPAR growth 60% 50% 40% 30% 20% 10% 0% -10% 03/10 04/10 05/10 06/10 07/10 08/10 09/10 10/10Source: Smith Travel During 2009, Chinese and ACPC y/y RevPAR growth was negative due to the demand decline tied to the worldwide recession. Chinese 2009 y/y RevPAR growth was also negatively affected by supply and demand issues tied to the significant increase in supply that preceded the 2008 Beijing Olympic Games and post Olympic demand drop off. China and ACPC RevPAR began to recover in late 2009 and have led the worldwide recovery in the lodging industry during 2010. During 2010, the Chinese lodging market also benefitted from the Shanghai Expo that attracted approximately 70 million visitors between May and October. Recent Select U.S. Company Comments Regarding Asia Major operators’ results and pipeline outlook reflect current strong trends in China and ACPC as a whole as follows: Hyatt (H) Hyatt posted significant increases in international RevPAR (+17.3%) and franchise fee revenues (+14.8%) for 3Q10. Hyatt indicated that the increases were primarily attributed to the ACPC region.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 10. Recent China News Flow 10 Chinese Lodging Industry Growth February 25, 2011 Marriott (MAR) MAR recently forecasted robust growth in Asia and international operations as a whole. MAR ‘s forecast includes a total international and Asian fee CAGR of approximately 15%–22% between 2010 and 2013. MAR also indicated that one-half of company room growth will occur in international markets between 2011 and 2013 with ACPC growth at 19%. MAR and the International Travel and Tourism Council forecasted a 2009 to 2019 ACPC and China travel spend growth CAGR of 9.6% and 15%, respectively, the highest international market growth rate. At 2010, the MAR ACPC region consists of 47k rooms, a number that is expected to grow to 74k by 2013. Within MAR’s ACPC region, the majority of pipeline development will occur in China, India and Singapore at CAGR’s of 15%, 14% and 12%, respectively.[5] Starwood (HOT) On October 25, 2010, HOT announced that China had become the company’s second largest hotel market behind the U.S. with 60+ hotels and 86 new hotels in the pipeline. During 2011, one in every three new HOT hotels will open in China, including flagships for eight of its nine brands. HOT indicated that demand continues to outpace supply in China. This is a long runway for growth when you consider China has 171 cities with populations of more than one million, most of which do not have a major internationally branded hotel. HOT estimates that by 2015, China will have 100 million outbound travelers, the largest number of potential visitors in the world. Put into perspective, this number is larger than the number of people who visit France, the number one international tourist destination in the world.[6] The company currently generates 58% of its EBITDA in international markets and has committed 87% of its pipeline to international development.Recent China News Flow Recent China news flow has been focused on inflation and the central government’s effort to address the issues via tightening measures. As a result of the 2008 worldwide recession and resulting slowdown of exports, the Chinese government instituted a significant round of economic stimulus. The concern today is that this stimulus, among other factors, has created a property bubble and significant inflation pressure. The Chinese continue to take steps to rein in inflation. Concern has emerged that Chinese tightening efforts could cause a significant economic slowdown during 2011. We expect these issues to remain in the headlines.5 Per Marriott Analyst Day presentation on 10/27/10.6 Per HOT press releases and Investor Day presentation on 12/8/10. Per various media reports between 2007 and 2009 between 74 to 82 million tourists per annum visited France. We view HOT’s outbound tourism comment as an overall indicator regarding the development of the Chinese tourism industry.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 11. Summary of the Chinese Economic and Development Story 11 Chinese Lodging Industry Growth February 25, 2011 Despite the possibility of a 2011 China economic slowdown, the current consensus view is that significant ongoing economic growth will continue in China through at least 2020. This long- term economic growth profile is expected to support growth in the tourism industry within the country and the region.[7]Summary of the Chinese Economic and Development Story The Chinese lodging industry is rapidly growing due to the strong growth in the Chinese economy and dynamic development trends. China’s double digit GDP growth has been the fastest in the world of any major economy over the past 20 years. In Exhibit 2, we present China’s GDP growth between 1990 and 2010 and also include a forecast to 2015.Exhibit 2: Real China GDP growth 15% 10% 5% 0% 1990 1991 1992 1993 1995 1996 1998 1999 2000 2001 2002 2003 2005 2006 2008 2009 1994 1997 2004 2007 2010E 2011E 2012E 2013E 2014E 2015ESource: IMF 2010 database China’s economic growth trend is expected to continue to surpass the growth rate of any other major world economy over the next 5 to 15 years. Chinese GDP forecasts call for absolute Chinese GDP to surpass the U.S. sometime after 2020. The case for long-term Chinese economic growth remains in place. At the same time, near-term risks of a 2011 Chinese economic slowdown have grown due to China’s tightening measures that have been triggered by a spike in inflation. For 2011, economic concerns exist regarding a property bubble and bad bank debt issues that were triggered by the massive 2008 stimulus put into the Chinese economy in response to the export slowdown caused by the worldwide financial crisis. Current consensus Chinese economic forecasts for 2011 call for some level of economic slowdown from the recent high growth rate. Despite the slowdown, growth rate forecasts remain significant and far surpass those of any other major economy in the world. Chinese 2011 economic issues emerged as a key headline around7 In 2010, the World Travel & Tourism Council is forecasting that Chinese real travel and tourism consumption will grow at one of the highest growth rates for all major countries at a real 10.4% CAGR between 2010 and 2020. Between 2005 and 2010. Chinese real travel and tourism consumption was 9.5%, 10.2%, 5.8%, 5.1%, 4.6% and 6.4%, respectively. For additional information see, “2010 Travel and Tourism Economic Impact Report – China,” World Travel & Tourism Council.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 12. Summary of the Chinese Economic and Development Story 12 Chinese Lodging Industry Growth February 25, 2011 the world during the fall of 2010. In response to these issues, the Shanghai and Hong Kong stock markets dropped in late 2010. Stock prices of companies with significant exposure to China’s tourism industry also dropped between early November and late December 2010.[8] We would not be surprised to see ongoing stock volatility in the Chinese equity markets and China related tourism stocks. Lodging Industry growth has also been driven by the massive rural to urban migration trend, growth of the middle class, changes in lifestyle and efforts by the central government to rebalance the economy towards increased consumer spending, growth of small to medium enterprises (SME’s) and specific targeted efforts to support domestic tourism growth. The industry has also benefitted from foreign investment and world trade. These trends, which have benefitted the lodging industry, are expected to continue over the next decade. We have highlighted several as follows: Rural to Urban Migration Trend A rural to urban migration trend has occurred within China in recent years. Despite the trend, the urban population as a percentage of total population remains well below developed nations (such as the U.S.) as recently as 2008. See Exhibit 3 below: Exhibit 3: China and U.S. rural and urban populations U.S. China amount † % of total amount % of total Rural 58 19.0% 721 54.3% Urban 248 81.0% 607 45.7% Total 306 100.0% 1,328 100.0% Source: McKinsey and Company † amount in millions Over the next 15 years, the massive rural to urban migration trend is expected to continue. The scale of this migration trend is expected to be immense.[9] Highlights of this trend are as follows: „ 350 million people will be added to China’s urban population by 2025 – an amount greater than the population of the U.S. „ 1 billion people will live in Chinese cities by 2030. „ As many as 231 cities will have at least 1 million residents (Europe, for example, has 35 today).8 See stock prices for HMIN, HTHT, SVN, LVS and WYNN.9 See Jonathan Woetzel, Janamitra Devan, Luke Jordan, Stefano Negri, Diana Farrell, “Preparing for China’s Urban Billion”, McKinsey Global Institute, March 2008.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 13. Summary of the Chinese Economic and Development Story 13 Chinese Lodging Industry Growth February 25, 2011 „ Between now and 2025 to 2030: − 5 billion square meters of road will be paved; − 170 mass transit systems could be built; − 40 billion square meters of floor space in 5 million buildings could be built; − 50K skyscrapers will be built, an amount equal to 10 New York cities; − GDP will grow 5x by 2025; and − the urban economy will drive 90% of GDP. „ China’s goal is to grow per capita GDP four-fold by 2020. „ The urban population will grow to 1 billion between 2025 and 2030. „ Mega and mid size cities will grow at rapid rates between now and 2025. „ By 2025, six new mega cities with populations > than 10 million will emerge. Eight mega cities will exist that include: Beijing and Shanghai (present day mega cities), Tianjin, Shenzhen, Wuhan, Chongqing, Chengdu and Guangzhou. The scale of this trend will continue to create issues and pose risks to China. Mckinsey points out that demands placed on land, energy supply, water, the environment and social services will be significant. This massive development effort is positive for long-term lodging industry development. The existing penetration rate of hotel rooms in China is extremely low compared to the U.S. The massive urbanization trend and increasing penetration trend from the current low base is expected to continue to drive growth of the Chinese lodging industry. As a result, domestic and international hotel developers have significant development plans within China over the next several years. Growth of Disposable Income and the Chinese Middle Class Between 2003 and 2008, the number of households with annual disposable incomes over U.S. $5,000 in China increased from 33.8 million in 2003 to 134.1 million in 2008 (a 31.7% CAGR). By 2020, this number is expected to be 341.4 million, representing a CAGR of 8.1%. Domestic tourism is expected to expand at a significant growth rate as a result of growing disposable income. China’s domestic tourism spending grew from RMB 344.2 billion in 2003 to RMB 875.0 billion in 2008 (a CAGR of 20.5%) while international inbound travel grew at a 11.7% CAGR between 2001 to 2008.[10] Exhibit 4 includes disposable income and tourism expenditure data as follows:10 Per China Lodging Group 2010 registration statement and investor presentation. The term RMB is the abbreviation for Renminbi, which is the official currency of China.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 14. Summary of the Chinese Economic and Development Story 14 Chinese Lodging Industry Growth February 25, 2011Exhibit 4: Growth in disposable income and tourism expenditures Household growth by annual disposable income Domestic tourism expenditures growth (RMB in billions) above U.S. $15,000 between U.S. $5,000 to $15,000 1,400 200 1,500 1,273 1,157 160 40 1,200 1,006 33 875 28 777 23 25 900 120 623 16 600 471 529 80 12 136 148 344 9 111 117 125 40 7 86 300 6 56 69 28 43 0 0 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012E 2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012ESource: China Lodging Group 2010 investor presentation Over the next 20 years, a large middle class will emerge in China with enormous spending power. Significant growth will occur across various personal consumption categories. Over the next 20 years the growth of higher paying jobs in urban areas will continue to create a larger middle class.[11] This trend along with the government’s effort to rebalance the economy toward consumer spending will drive a significant amount of recreational spending. At a 9.5% CAGR, the Chinese recreation spending category is forecasted to grow at one of the highest spending category growth rates between now and 2025. Total discretionary spending is also expected to take a larger share of the Chinese consumer’s wallet over this time period. Between now and 2015 urban upper middle class households are expected to increase from 12% to 60% of the total urban population, and at the same time, the urban poor are expected to decline from 40% to 10%. In regard to tourism, in late 2009 the government declared tourism as a key industry to develop and has announced plans to significantly increase the market share of budget hotels over the next several years. Changes in Lifestyle Between 2000 and 2007, car ownership per 100 households increased from .5 to 6.1, representing an eleven-fold increase. Car ownership provides more independence and facilitates domestic travel. Other examples of significant lifestyle changes that are benefitting the travel industry include the rising number of employers that are providing paid leave benefits, and the younger generation demonstrating a higher interest in leisure travel compared to older generations.[12]11 See Diana Farrell, Eric Beinhocker, Ulrich Gersch, Ezra Greenberg, Elizabeth Stephenson, Jonathan Ablett, Mingyn Guan, Janamitra Devan,“From ‘Made in China’ to ‘Sold in China’: “The rise of the Chinese urban consumer,” McKinsey Global Institute, November 2006.12 Per China Lodging Group 2010 registration statement.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 15. Summary of the Chinese Economic and Development Story 15 Chinese Lodging Industry Growth February 25, 2011 Growth of Small to Medium Enterprises (SME’s) Ongoing growth of SME’s is viewed as a positive driver of the Chinese lodging industry. The number of SME’s is expected to continue to grow as the economy continues to expand and evolve. In 2003, 24m SME’s existed in China. By 2008, the number grew to 37m and is expected to grow to 60m by 2012.[13] We have viewed estimates that suggest SME’s are the most important driver of job creation and economic growth in China contributing 60% to GDP in 2009.Exhibit 5: Growth in Chinese SME’s 70 60 60 44 47 50 40 36 37 40 32 28 28 30 24 20 10 0 2003 2004 2005 2006 2007 2008 2009E 2010E 2011E 2012ESource: China Lodging Group registration statement Growth in SME’s has benefitted the domestic hotel market and is expected to continue. According to the China Economy Hotel Survey in 2008, 42% of economy hotel guests were individual business travelers, many of which were associated with SME’s. [14] Continued Growth in International Arrivals Driven by World Trade and Affluent International Travelers The Chinese economy has been dependent on and has benefitted from foreign direct investment by multinational corporations and exports.[15] China has also emerged as an international tourism destination evidenced by in-bound international travel that has grown at a rapid pace between 2000 and 2009.[16] These trends are expected to continue, driven by expected ongoing strong international direct investment trends and multinational expansion over the next several years. These robust trends are evidenced by traffic volume at Chinese gateway airports such as Beijing, Hong Kong and Shanghai that have experienced some of the strongest passenger count growth rates in the world in recent years (see Exhibit 7 for additional information,) which in turn has benefitted 4 and 5 star international hotels operated by global brands.13 Per China Lodging Group 2010 investor presentation. SME’s are forecasted to grow at a 27% CAGR between 2003 to 2012.14 The economy segment is the fastest growing segment of both the domestic and overall Chinese lodging industry. See China Lodging Group 2010 registration statement and investor presentation.15 For an extensive overview of these issues, see Jonathan Anderson, “How to Think About China, UBS, January 2006.16 Per the UNWTO World Tourism Barometer at June 2010, Chinese inbound tourism receipts and traffic grew at 9.4% and 5% CAGR’s between 2000 and 2009. As of April 2010 in-bound tourism receipts and traffic grew y/y by 14.7% and 9.6%., respectively.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 16. Summary of the Chinese Economic and Development Story 16 Chinese Lodging Industry Growth February 25, 2011 Chinese Air Traffic In Exhibit 6, we present Beijing and Hong Kong air traffic data as a proxy for international travel in and out of China. The chart includes present traffic counts for Beijing and Hong Kong that have consistently increased in recent years due to the robust economic growth in the country and region, among other factors.Exhibit 6: Beijing and Hong Kong airport passenger counts (amounts in millions) Beijing Hong Kong 80 70 60 50 40 30 20 10 0 2004 2005 2006 2007 2008 2009 2010Source: Airport Council International In Exhibit 7, we present rankings of passenger count data into the world top 30 airports for Beijing and Hong Kong. Between 2004 and 2010, Beijing and Hong Kong have led the world in y/y passenger growth and moved up the overall top 30 international airport world rankings for total passenger deplanements. During 2009, Guangzhou appeared in the rankings and led all other airports in terms of y/y passenger growth. In 2010, Shanghai ranks #1 in terms of y/y passenger growth owing to the Shanghai Expo. As of August 2010 on a ytd basis, Beijing, Guangzhou, Hong Kong and Shanghai were all near the top of the world rankings for y/y passenger growth according to ACI. [17].17 ACI is known as Airport Council International, an international trade association of airports. ACI compiles passenger and freight traffic data and provides monthly and annual traffic count ranking for the top 30 airports worldwide.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 17. Summary of the Chinese Economic and Development Story 17 Chinese Lodging Industry Growth February 25, 2011Exhibit 7: World ranking of Chinese international airport traffic counts Beijing Hong Kong Passenger Passenger Comments Comments Year Count Count world world y/y gth y/y gth rank rank08 /10 ytd 2 13.4% # 2 ranked worldwide growth rate 11 10.6% near top of worldwide growth rate rankings 2009 3 16.9% top ranked worldwide growth rate 13 -4.8% near top of worldwide growth rate rankings 2008 8 4.4% near top ranked worldwide growth rate 12 1.7% near top of worldwide growth rate rankings 2007 9 10.1% top 5 worldwide growth rate 14 7.3% near top of worldwide growth rate rankings 2006 9 18.7% top ranked worldwide growth rate 14 8.9% near top of worldwide growth rate rankings 2005 15 17.5% top ranked worldwide growth rate 16 9.7% near top of worldwide growth rate rankings 2004 20 43.0% top ranked worldwide growth rate 17 35.0% near top of worldwide growth rate rankingsNote: During 2009 Guangzhou appeared in the top 30 airport passenger count ranking at 23 and also ranked near the top in terms of y/y passenger growth rates. On a YTD basis as of August 2010, Shanghai ranked #1 in terms of y/y passenger growth at 29.1% and 21st in terms of total passenger counts. Data sourced from Airport Council International (ACI). ACI is the trade association to the worlds top international airports.Source: Airport Council International Chinese domestic air traffic has significantly increased as well, as the total number of domestic air passengers increased from 110.5 million to 176.8 million between 2004 and 2008, a 12.5% CAGR.[18] China’s Targeted Effort to Drive Further Domestic Tourism Growth Domestic tourism volume and spending has significantly grown between 2004 and 2008.[19] The Chinese government has earmarked tourism as a key industry for development within the national economy and has announced key initiatives to promote ongoing tourism growth within the country.[20] The government has also made specific expenditures in the tourism industry to drive growth. The World Travel and Tourism Council (WTTC) estimates that annual government tourism expenditures grew from 87.5b RMB in 2004 to 158.6b RMB in 2008, a 16% CAGR.[21] Post the 2008 Beijing Olympic Games, the government announced spending plans of approximately $1.5b RMB for railways, highways and other infrastructure designed to benefit/facilitate tourism in specific regions.[22]18 Per China Lodging Group 2010 registration statement.19 Per the China Lodging Group 2010 registration statement, Chinese domestic trips and total spending on domestic travel increased at 11.6% and 16.7% CAGR’s between 2004 and 2008, while the overnight visitor count increased at a 9.4% CAGR between 2004 and 2007.20 Per JP Morgan China Hotel and Lodging industry report, “Riding the Upcoming China Travel Boom,” November 2010.21 Per the 2010 China Lodging Group registration statement.22 Per the 2010 China Lodging Group registration statement.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 18. Overview of the Chinese Lodging Market 18 Chinese Lodging Industry Growth February 25, 2011Overview of the Chinese Lodging Market China’s lodging market is comprised of two major subsets as follows: „ Upscale properties that target upscale domestic and foreign travelers plus international business travelers. The majority of these properties are located in gateway cities (e.g. Beijing, Shanghai, etc.), with some located in tier 2 cities and are typically 4 and 5 star hotels operated by global companies; „ Domestic market properties that target the growing middle class. This market is dominated by independent hotels and Chinese guesthouses, including 1 to 3 star hotels and a handful of rapidly growing budget operators that operate economy hotels in tier 1, 2 and 3 Chinese cities.[23] The overall share of specific Chinese lodging industry subsets in 2008 was as follows:Exhibit 8: 2008 Market share of Chinese lodging industry 1.5% 1.9% 3.9% branded economy 4 to 5 star 28.2% 1 to 3 star 64.5% Other hotels Other accomodationsSource: Morgan Stanley and Apertor Research estimates The overall lodging market has grown rapidly in China between 2003 and 2008 as the hotel and room count has moved from 237.8k hotels/20.1m rooms to 315.9k hotels/27.3m rooms (5.8% and 6.3% CAGR).[24] Branded economy, 1 – 3 star rated, 4 – 5 star rated and total branded economy plus star rated hotels and rooms have increased rapidly between 2001 and 2010 as follows: Branded economy CAGR hotels/rooms 72.5% / 71.1% 1 – 3 star rated CAGR hotels/rooms 5.6% / 5.4% 4 – 5 star rated CAGR hotels/rooms 18.9% / 17.3% Branded economy plus star rated CAGR hotels /rooms 10.7% / 12.2%23 See Appendix D for a description of Chinese tier 1, 2 and 3 cities.24 Per China Lodging Group 2010 registration statement. These amounts include star rated hotels, branded economy hotels, guest houses and other unrated hotels. The growth rate of the star rated and branded economy segment is significantly higher than the overall growth rate as these segments have further penetrated the market and taken market share from guesthouses and unrated hotels.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 19. Overview of the Chinese Lodging Market 19 Chinese Lodging Industry Growth February 25, 2011 In Exhibit 9, we present the number of branded economy plus star rated hotels and rooms between 2001 and 2010 and also include forecasts for 2011 and 2012.Exhibit 9: Total economy and star rated hotels (left axis) and rooms (right axis) hotels rooms 25,000 3,500,000 3,000,000 20,000 2,500,000 15,000 2,000,000 10,000 1,500,000 1,000,000 5,000 500,000 - - 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012ESource: Public news sources, analyst and Apertor estimates The Chinese hotel market (ex guesthouses) is expected to continue to grow over the next 10 to 15 years to 4x the current size, 2x the size of the current U.S. market and be equal in size (measured in rooms) to the U.S. market sometime between 2020 and 2025.[25] On a per capita basis, the number of rooms, lodging spend per capita and room revenue as percentage of real GDP remains 45%, 75% and 20%, respectively, below the U.S.[26] Luxury/upper upscale/upscale segments and economy segments are expected to continue to grow at a rapid pace while midscale segments are expected to grow as well. The industry remains fragmented as only 15% to 20% of all hotels in the market have brand affiliation vs. 70% in the U.S.[27] Domestic low end hotels and guesthouses currently dominate the market, which provides an opportunity for global operators with international brands and economy brands to expand via market share gains. The brand proposition in China centers around prestige tied to international brands, standardized room-product offerings, consistent quality (safety & cleanliness) and loyalty programs, etc. The overall market penetration rate of branded economy and 4 & 5 star hotels (1.5% and 1.9%) into the Chinese hotel market remains low despite the rapid growth of these two segments. For the branded economy segment on a population penetration basis, currently .52 rooms exist per 1k urban residents compared to 8.9 in the U.S.[28] Although the ultimate penetration rate is unknown, a double or triple of the current penetration rate implies a 19% to 32% room count CAGR in this segment between 2008 and 2012. Market penetration and market growth driven by the major trends of ongoing robust economic growth, growing middle class, domestic consumption growth and rural to urban trends, among other factors, create the backdrop of a multi-year growth story for both international and domestic economy brands.25 Per IHG 2010 analyst day presentation.26 Per IHG 2010 analyst day presentation and United Nations World Travel Organization.27 Per IHG 2010 analyst day presentation.28 Per China Lodging Group 2010 investor presentation.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 20. Overview of the Chinese Lodging Market 20 Chinese Lodging Industry Growth February 25, 2011 International Operators – Brands Segment Select high quality international operators with a brand presence in the Chinese market include Accor, Hilton, Hyatt, Intercontinental Hotel Group, Marriott, Shangri-La, Starwood and Wyndham. Given the bullish outlook for Chinese economic growth and development over the next decade, many of these companies maintain significant development pipelines that are focused on China. The companies continue to focus on 4 and 5 star hotel development opportunities in primary cities such as Beijing and Shanghai, but have also evolved their pipeline strategies to incorporate tier 2 and tier 3 cities as part of the “go west” and cluster trends.[29] The “go west” trend to central provinces is expected to be significant as many of the fastest growing Chinese cities over the next decade are expected to be located here.[30] The cluster trend refers to the current urban development trend where multiple smaller cities are expected to grow into major urban metropolises over the 10 to 15 years. In Exhibit 10, we present 4 and 5 star Chinese lodging supply between 2001 and 2012.Exhibit 10: 4 & 5 star supply hotels rooms 3,500 900,000 3,000 800,000 700,000 2,500 600,000 2,000 500,000 1,500 400,000 300,000 1,000 200,000 500 100,000 - - 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012ESource: Public news sources, analyst and Apertor Research estimates Most of the international brands pursue management contract opportunities in the market. Ownership was previously dominated by fragmented SOE’s with government supplied funding sources.[31] Major SOE’s and significant real estate developers are now more prevalent with internal SOE funding sources comprised of public equity issuance. In 2005, SOE’s owned 58% of all hotels in the market. The number has now moved down to 35% and expected to reach 20% sometime after 2015.[32] In the future, Chinese hotel ownership is likely to include institutional investors and REIT’s. Successful international operators in China have strong connections with the government, SOE’s and partnerships with local leading developers. The current system and pipeline plans within the market include a cross section of international brands. We have provided an outline of pipeline size and brand information for the most significant players in the market, Accor, IHG and Starwood.29 Company 4 and 5 star brands target upscale Chinese travelers, international tourists and business travelers.30 For additional information see ”CHAMPS, China’s fastest growing cities,” Economist Intelligence Unit, 2010.31 SOE’s, known as state owned enterprises are owned and controlled by the central government. For further explanation of SOE’s, see “How to Think About China,” by Jonathan Anderson, UBS, January 2006.32 As of 2010, Chinese hotel ownership is comprised of SOE and private local & foreign funding sources (35% and 65%, respectively).©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 21. Overview of the Chinese Lodging Market 21 Chinese Lodging Industry Growth February 25, 2011 Accor[33] The company operates 93 hotels and approximately 25K rooms in China as of 2010. The company’s current Chinese pipeline includes another 108 hotels. The company has doubled its footprint in China since 2003 to 93 hotels and would like to re-double its footprint by 2015 to approximately 200 hotels. In 2009, Chinese rooms were 5% of the total worldwide room base (owned, franchised, managed and leased). The Chinese room composition is expected to move to 7% of system wide totals by 2015. Accor remains focused on tier 1 and 2 cities and has a current footprint and development pipeline that covers the economy, midscale, upscale and luxury segments. Current Chinese footprint and development pipeline details are presented in Exhibit 11 as follows: Exhibit 11: Accor’s Chinese hotels and development pipeline Current Chinese development Brand Segment Future Chinese hotels Chinese Hotels pipeline IBIS economy 39 66 105 Novatel mid-scale 12 7 19 Mercure mid-scale 14 15 29 Pullman upscale 6 14 20 Sofitel luxury 22 6 28 Total   93 108 201 Intercontinental Hotels Group (IHG)[34] The company’s total worldwide system was 4,476 hotels and 651k rooms as of June 2010. The company currently operates 137 hotels and approximately 47k rooms in China as of 2010 (approximately 3.3% & 7.2% of total worldwide hotels & rooms). The company’s current Chinese pipeline includes another 149 hotels/49.5k rooms. Based on IHG, Chinese and total worldwide pipeline, Chinese hotels and rooms will make up 7.6% and 11.4% of the company’s worldwide hotel and room base. IHG’s Chinese room base and development pipeline is located in tier 1 – 3 cities and includes properties throughout the chain scale. Exhibit 12 includes IHG’s current Chinese hotels and development pipeline as follows:33 Per Accor 2010 investor presentation.34 Per IHG November 2010 investor presentation.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 22. Overview of the Chinese Lodging Market 22 Chinese Lodging Industry Growth February 25, 2011 Exhibit 12: IHG’s Chinese properties and development pipeline Current Chinese Chinese development Brand Segment Future Chinese hotels Hotels pipeline Holiday Inn Express mid-scale 30 27 57 Holiday Inn mid-scale 52 39 91 Hotel Indigo upscale 0 4 4 Crown Plaza upscale 37 59 96 Intercontinental luxury 18 20 38 Total 137 149 286 Shangri-La Asia[35] At December 31, 2009, the company owned 47 hotels, held one operating lease and managed 17 hotels located in Asia. Approximately one-half of the hotels are located in mainland China with the remainder located in Hong Kong (3), Malaysia, the Philippines and Singapore, among other countries. Company primary brands include Portman, Shangri-La, and Traders. For the six months ending June 30, 2010, forty-four percent of total company revenue was generated in China ($318.5m of the company-wide total $722.9m). At December 31, 2009, the company indicated that it planned on developing approximately 35 hotels (1/2 owned and 1/2 managed) over the next 3 to 4 years. At June 30, 2010 the company had 11 specific projects identified in its pipeline with 7 hotels located in mainland China. Starwood (HOT)[36] The company currently operates 62 hotels in China as of 2010. The company’s current China pipeline includes an additional 82 hotels. HOT defines greater China as China, Hong Kong, Macau and Taiwan. Approximately one-half of the company’s worldwide pipeline is dedicated to China. HOT’s 62 hotels are four/five star hotels in key Chinese markets. HOT’s expansion includes secondary Chinese markets, which we believe are tier 2 and 3 markets. HOT’s existing properties and pipeline encompass a range of HOT brands including Sheraton, Westin and W, among others. HOT’s worldwide pipeline is currently 28% of the company’s current room base, which implies that the Chinese pipeline is nearly 14% of the overall company room base.[37] For additional information regarding international brand activity in China, see company filings and presentations for Accor, Hyatt, IHG, Marriott, Shangri-La, HOT and Wyndam.[38]35 Per company 2009 annual report and 6/20/2010 interim financial statements.36 Per HOT December 2010 investor presentation.37 Per HOT December 2010 investor presentation.38 Although we have not addressed in detail here, Shangri-La currently controls 98 existing and pipelined luxury hotels primarily located in Asia. Of the total company hotel portfolio, 49 hotels (current and pipeline) are located in China (44 in China, 3 in Hong Kong and 2 in Macau).©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 23. Overview of the Chinese Lodging Market 23 Chinese Lodging Industry Growth February 25, 2011 The Domestic Lodging Market – Growth of the Economy Brands Measured by the number of hotels, the domestic hotel market is the largest in China at approximately 97% of the total Chinese market. The domestic lodging market remains highly fragmented and consists of independently and privately owned 1 to 3 star hotels, unrated hotels, guesthouses and the small but fast growing economy branded sub segment, which is dominated by four public operators. As of 2008, 1 – 3 star hotels and branded economy hotel chains comprise approximately 5.4% of the entire Chinese lodging market, accounting for a small percentage of the industry. In Exhibit 13 we present historical data and estimates for the total number of 1–3 star hotels and rooms. Between 2001 and 2010, the 1 – 3 star hotels and rooms grew at a CAGR of 5.6% and 5.4%. Between 2010 and 2012, the number of hotels in this segment is expected to grow at a 6% CAGR. This segment is expected to continue to grow through 2015 despite an overall forecasted market share loss to the branded economy segment.Exhibit 13: 1–3 Star hotels in China hotels rooms 14,000 1,400,000 12,000 1,200,000 10,000 1,000,000 8,000 800,000 6,000 600,000 4,000 400,000 2,000 200,000 - - 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012ESource: Public news sources, analyst and Apertor estimates The branded economy chain segment has grown at an extraordinary pace since 2003. Home Inns (HMIN) is the current dominate player in the market; more recently, a handful of other operators have rapidly increased in size. Per the 2010 China Lodging Group, Limited (HTHT) registration statement, there were 2,805 and 312.9k branded economy hotels and rooms in the market as of 2008, which comprised approximately 1.5% of the entire lodging market (comprised of branded economy and star rated hotels plus unrated hotels and guesthouses) and approximately 17.6% of the combined branded economy and star rated market.[39] The economy chain hotel segment has continued to grow since 2004, with approximately 4.8k hotels and 600k rooms now in existence as of 2010. The majority of the domestic market that the branded economy competes against is currently comprised of 1 to 3 star & unrated hotels and private guesthouses with no dominate player existing. Most owners own one to two units. Our understanding is that many of the private guesthouses remain unprofitable. In 1997, the Chinese branded economy hotel chain segment began and since 2004 expansion within the segment has been driven by several factors including robust overall economic growth,39 For additional information see the China Lodging Group 2010 registration statement and company presentation.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 24. Overview of the Chinese Lodging Market 24 Chinese Lodging Industry Growth February 25, 2011 growth of the middle class and SME’s and a standardized-superior product, among other factors. Since 2004, the domestic branded economy chain segment in China has essentially been one of the fastest growing segments in the worldwide lodging industry at a 70% multi-year CAGR in room growth. In Exhibit 14, we present historic and forecasted hotel and room data for Chinese branded economy hotel segment.Exhibit 14: Branded economy hotel segment hotels rooms 8,000 1,000,000 7,000 900,000 6,000 800,000 700,000 5,000 600,000 4,000 500,000 3,000 400,000 2,000 300,000 200,000 1,000 100,000 - - 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012ESource: Company reports, public news sources and analyst reports, Apertor Research The rapid growth of the branded economy segment has created some fear of a short term supply glut. Despite short term fear regarding supply issues, the long-term trend of this segment remains positive due to expected additional market share gains connected to the existing low penetration rate and multi-year growth of the entire Chinese tourism-lodging market.[40] Public company operators and various industry analysts have forecasted significant ongoing industry growth to 2015 and beyond.[41] Population and urbanization forecasts we have viewed for China in 2015 suggest the market penetration rate for branded economy hotel rooms will remain below that of the U.S. despite the significant industry growth forecasts we have viewed. The current customer base is comprised of approximately 60% business, 20% leisure and 15% to 20% in other traveler categories. The market is dominated by seven major hotel chains with the top five operators controlling approximately 50% of the market as follows:40 The recent China Lodging Group registration statement indicated that the Chinese branded economy penetration rate is .52 per 1,000 urban resident compared to 3.0 in the U.S. They also pointed out that the urban population will continue to significantly expand over the next several years which is a positive driver for this segment.41 Goldman Sachs recently forecasted an industry segment size of 13,000 hotels by 2015 (from the current size of 5,000 as of 2010) representing a 21% CAGR. They also suggested that this segment plus 1 & 2 star rated hotels will resemble the structure of the U.S. budget lodging industry, based on a forecasted 49% share of the overall Chinese lodging market, an amount that is equivalent to the U.S. market in 2008. Goldman’s longer term forecast assumes growth will continue to 2020, a point in time where the industry reaches a level comparable to U.S. per capita penetration rate.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 25. Overview of the Chinese Lodging Market 25 Chinese Lodging Industry Growth February 25, 2011Exhibit 15: Top five branded economy hotel chain operators Company Recent 2010 room Recent 2010 Select company comment’s (stock symbol) count (thousands) market share HMIN is the largest economy chain operator in China. Home Inns (HMIN) 79 16.5% Company began operations in 2002 & went public in the U.S. in 2006. Company began operations in 1997 and is listed on the Jin Jiang (2006:HK) 48 10.0% HK stock exchange. 7 Days (SVN) 40 8.4% Shares listed in the U.S. Motel 168 37 7.7% China Lodging (HTHT ) 36 7.5% Shares listed in the U.S. Top 5 subtotal 240 50.2% Green Tree 25 5.2% Super 8 17 3.6% Others 196 41.0% Economy chain total 478 100.0% Of the seven companies including the three U.S. publicly listed companies, HMIN, SVN and HTHT plus Jin Jiang (listed on the Hong Kong stock exchange), five currently dominate the economy market segment. We estimate that the three U.S. listed operators currently control approximately 35% of the supply in the economy segment (measured by hotel rooms) at 2010 and will control approximately 42% of the economy segment by 2012 and may eventually control as much as 45% of the market by 2015. The business model of the economy chain operators is as follows: „ Most hotels are leased with existing facilities being converted to budget hotels. „ Lease terms tend to be in the 10 to 15 year range. „ Major operators have built earnings via new openings vs. rate increases. „ The industry is rapidly expanding as major operators undertake varying expansion strategies. HMIN, for example, looks for first mover advantage to lock in locations in tier 2 and 3 cities, while 7 Days uses a cluster strategy in key regions to build brand awareness. „ Industry occupancy remains high (80%+) due to low penetration rate. Occupancy is expected to remain high through 2012. At some point in the next few years, occupancy is expected to trend down to 60%–70% as markets are more fully penetrated. On a comparative basis, 1 – 3 star and 4 – 5 star occupancy has been approximately 60% in recent years. „ An increase in rent costs is a risk as rent is the largest operating expense of the industry. The risk is mitigated to some degree by long-term property leases. Recent cost to sales was 32%, 35% and 37% for the U.S. listed public operators 7 Days, HMIN and HTHT, respectively, during 2009.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 26. Overview of the Chinese Lodging Market 26 Chinese Lodging Industry Growth February 25, 2011 „ Rent costs in Shanghai (the number one city for economy chain hotels) have substantially increased between 1998 and 2009. „ Industry franchise model is evolving as a way to mitigate rent increase risks. In these transactions, property owners tend to be the franchises. „ Recent customer surveys we have viewed suggest that Chinese customers tend to favor branded economy hotels over available alternatives. Economy rooms in the top 15 cities as of mid 2010 are as follows: Exhibit 16: Economy rooms in the top 15 cities as of mid 2010 Rank City Rooms (thousands) 1 Shanghai 72 2 Beijing 49 3 Shenzhen 19 4 Hangzhou 18 5 Guanghou 17 6 Nanjing 16 7 Wuhan 15 8 Tianjian 14 9 Suzhou 13 10 Chenghu 11 11 Zhenghou 10 12 Xian 10 13 Shanyang 9 14 Jian 8 15 Changho 7 Source: JP Morgan Significant growth in the industry occurred in 2004 and has continued as the companies have rapidly expanded. Rapid growth is expected to continue for most operators. Three of the most significant players in the market are the U.S. publicly listed operators, Home Inns, 7 Days and China Lodging Group. These three companies are expected to continue to take market share in the economy brand sector. The priority of the three operators is to continue to expand as rapidly as possible to exploit a first mover advantage, which allows for taking advantage of pent-up demand and build-out of a network and brand. Specific comments regarding the big three U.S. listed operators are as follows:©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 27. Overview of the Chinese Lodging Market 27 Chinese Lodging Industry Growth February 25, 2011 Home Inns (HMIN) With a wide geographical profile, HMIN is the largest economy chain hotel operator in China. HMIN began significant operations in 2003 and has created a first mover advantage within the market through its organic growth driven expansion from 2002. The company currently has the largest number of stabilized hotels due to its length of operation. This has resulted in new inventory being less dilutive (due to pre-opening expenses and typical property ramp-up period) to their overall results. The company’s overall expansion has created economies of scale, while its expansion to tier 2 and 3 cities has placed the company in a position to tap into the long-term growth potential in these cities over the next decade. HMIN’s strategy of pursuing tier 2 and tier 3 city development growth is expected to benefit from the governments ongoing investment in transportation infrastructure in these cities. Development in tier 2 & 3 cities also allows for comparatively lower investment costs on a per room basis and that drives a yield return per room return on higher than similar investment in tier 1 cities. Tier 2 and 3 cities are also less competitive than tier 1 cities due to lower overall budget chain industry penetration.[42] HMIN was listed in the U.S. during 2007 and as of third quarter, 2010 operated 728 hotels (404 & 324 leased & managed) and has developed a significant level of brand recognition. HMIN’s margins are higher than competitors due to economies of scale. The company is the leading economy brand operator with a 16.5% share of the economy market and wide geographic reach. The company has developed a track record for execution by successfully managing its rapid expansion by primarily utilizing a leased property strategy. The company has the ability to further expand using a less risky same-city expansion approach as a significant number of cities where only one Home Inn hotel is located. Net revenue and EBITDA are expected to increase 62% and 65% between 2010 and 2013. Earnings growth is less than its peers due to it’s significantly larger than peer asset base. At the same time, the company’s acquisition efforts benefit from its track record and level of accumulated brand equity-credibility. HMIN is looking to enter the up-market portion of the economy brand segment with a new brand. Major equity holders in the company are Fidelity, CTRIP.com and Poly Victory. Risks to the company strategy include ongoing rising real estate prices that would make it more difficult to find locations at attractive terms and a slowing growth rate tied to continual growing size of the company. 7 Days Group (SVN) SVN began operations in 2005 and was listed in the U.S. in late 2009. The company is expected to rapidly expand between 2010 and 2013 utilizing a franchising led approach. Franchising opportunities are expected to be abundant for the foreseeable future. Net revenue and EBITDA are expected to increase 125% and 160% between 2010 and 2013. ROE is expected to significantly increase between 2010 and 2013. SVN is the 2nd largest branded economy operator in terms of hotels and 3rd in terms of rooms. The company has grown from 5 hotels in 2 cities in 2005 to 461 in 75 cities as of third42 The top 3 cities (tier 1 cities) in China currently account for approximately 40% of all economy hotel supply in China.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 28. Overview of the Chinese Lodging Market 28 Chinese Lodging Industry Growth February 25, 2011 quarter, 2010. Ongoing growth will continue to increase confidence in the company’s ability to execute and also allow the company to scale. SVN uses a clustered development strategy, which has allowed the company to build brand awareness in cities where its hotels are located. The company’s expansion strategy is to reduce cap-ex and the risk of entering new markets by utilizing management contracts with local partners before a longer term lease commitment is made. The company targets younger customers and has developed the largest membership base of the big three operators. Company has invested in IT and loyalty systems that allow members to control their own itineraries via online bookings, which has created customer loyalty and improved margins. Most bookings are made online. The company has the balance sheet capacity to expand at about a 100 leased unit pace. China Lodging Group (HTHT) HTHT began operations in 2005 and was listed in the U.S. during 2010. The company has a short track record as it opened its first hotel in 2005 and expanded to 67 by 2007. The company is the 5th largest economy chain as measured in the number of hotels and is ranked second in terms of revenue. The company operates 368 hotels (200 leased and 168 managed) as of third quarter, 2010. The company focuses on the high end of the economy sector in China and charges premium rates compared to its peers. The company’s strategy is to target higher end customers in key cities and operates at an approximate 90% occupancy rate. The company’s major brand is known as Haunting, but offers several other brands at various price points. The company’s key operating cities are Beijing (52) and Shanghai (63) where 33% of its portfolio is located. The company was the prime beneficiary of the 2010 Shangahi Expo. The company founder was also the founder of the largest online travel service provider in China (CTRIP with 37m members) and also originally founder HMIN. The HTHT management team is viewed as strong. Company historical expansion has been driven by the leased led approach. Looking forward into 2011 to 2013, growth in franchised/managed hotels will outpace growth in leased hotels. By 2013, the mix of leased vs. franchised/managed hotels will be approximately 50%. Revenue and EBITDA are expected to increase 140% and 160% between 2010 and 2013. Cash remains in the company balance sheet from the U.S. IPO in 2010. The company is expected to grow at a faster rate (measured in hotels openings) than its public company peers during 2011 and 2012. The rapid growth may hurt company earnings relative to peers over the next two years due to pre-opening costs and the ramp-up period tied to new openings. The company went EBITDA positive during fourth quarter, 2008 and earnings positive during second quarter, 2009. Like its peers, growth of the company will allow the business to scale, which will drive margin growth. For the industry as a whole, higher rental rates are a risk in the future tied to inflation in the Chinese overall property market. The economy chain sector industry is currently in a new location volume phase with a focus on securing locations in key cities, which allows individual operators©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 29. Overview of the Chinese Lodging Market 29 Chinese Lodging Industry Growth February 25, 2011 to scale. Valuation of the three U.S. publicly listed companies is significantly influenced by future opening volume. In Exhibit 17, we present comparative data for the three U.S. publicly operators as follows:Exhibit 17: Comparative financial data for Home Inns, 7 Days and China Lodging Home Inns 7 Days China Lodging (RMB in millions) 2010 2011 2012 2010 2011 2012 2010 2011 2012 Net revenue 3,042 3,597 4,310 1,517 2,078 2,622 1,739 2,288 3,174 y/y 22% 18% 20% 31% 37% 26% 38% 32% 39% EBITDA 866 956 1,210 361 527 691 460 539 840 y/y 60% 10% 27% 64% 46% 31% 124% 17% 56% Major expenses % of net revenue rent & utilities 30% 32% 31% 38% 37% 35% 37% 39% 38% labor 17% 17% 18% 15% 16% 16% 14% 14% 14% EBITDA margin 28% 27% 28% 24% 25% 26% 27% 24% 27% Net profit margin 14% 12% 14% 9% 11% 11% 15% 12% 14% ROE 17% 14% 17% 10% 15% 17% 17% 9% 15% Cash to equity % 33% 34% 40% 25% 16% 16% 48% 32% 22%Source: Select analyst estimates©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 30. Overview of the Chinese Lodging Market 30 Chinese Lodging Industry Growth February 25, 2011 In Exhibit 18, we present select historical and forward looking operating data for the three major U.S. listed operators as follows:Exhibit 18: Select operating data for HMIN, SVN and HTHT (RMB in millions) 2007 2008 2009 2010E 2011E 2012E Home Inns (HMIN) Hotels (1) 266 471 616 817 1,045 1,272 leased 195 326 390 457 550 637 managed 71 145 226 360 495 635 Rooms 32,726 55,631 71,671 93,621 119,121 144,621 y/y growth 70.0% 28.8% 30.6% 27.2% 21.4% leased 24,336 39,188 46,496 53,576 64,076 74,576 managed 8,390 16,443 25,175 40,045 55,045 70,045 cities covered (2) 66 94 120 134 occupancy % 91% 85% 92% 94% 93% 93% y/y RevPAR -10% 1% 10% -4% 4% revenue (m RMB)(1) 949 1,760 2,442 3,042 3,597 4,310 revenue growth 71% 85% 39% 25% 18% 20%(1) Total hotels increased from 24 to 266 between 2004 and 2007. Total revenue increased from 96 (RMB) to 949 (RMB) between 2004 and 2007.(2) Tier 1, 2 and 3 presence during 2010 was approximately 24%, 40% and 36%. HMIN has indicated that 180 cities exist that are suitable for expansion. 7 Days (SVN) Hotels 106 223 337 537 760 970 leased 103 206 236 314 406 501 managed 3 17 101 223 354 469 Rooms 11,399 22,352 32,836 53,893 78,393 100,393 y/y growth 96.1% 46.9% 64.1% 45.5% 28.1% leased 11,057 20,697 23,764 32,486 40,986 49,986 managed 342 1655 9072 21407 37407 50407 (2) cities covered 20 33 54 75 200 (1) occupancy % 88.0% 88.1% 88.3% 89.5% 89.1% 89.6% y/y RevPAR 1.0% 0.0% 3.0% -1.0% 2.0% revenue (m RMB) 252 721 1,141 1,517 2,078 2,622 revenue growth 358% 186% 58% 33% 37% 26%(1) The company has forecasted their city coverage to reach 200 between 2012 and 2013.(2) Tier 1, 2 and 3 city presence during 2010 was approximately 37%, 44% and 19%. China Lodging Group (HTHT) Hotels 67 167 236 425 625 850 leased 62 145 173 229 330 440 managed 5 22 63 196 296 400 Rooms 8,089 21,033 28,360 48,250 68,250 93,250 y/y growth 160.0% 34.8% 70.1% 41.5% 36.6% leased 7,583 18,414 21,658 27,438 37,438 48,438 managed 506 2,619 6,702 20,812 30,812 44,812 cities covered (1) 23 35 39 55 occupancy % 85.0% 87.0% 94.0% 94.0% 92.0% 93.0% y/y RevPAR 1.0% 4.0% 11.0% -5.0% 3.0% revenue (m RMB) 235 764 1,260 1,739 2,288 3,174 revenue growth 225% 65% 38% 32% 39%(1) Tier 1, 2 and 3 city presence during 2010 was approximately 37%, 38% and 25%.Source: Company filings, consensus estimates and select analyst estimates©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 31. Overview of the Chinese Lodging Market 31 Chinese Lodging Industry Growth February 25, 2011 Overall China Lodging Market Summary In Exhibit 19, we present worldwide company revenue growth rates and forecasted revenues for various major lodging companies that operate in China. Revenues for the Chinese branded economy hotel operator segment have grown at a substantially higher rate than other operators included in this comparison. We also note that the revenue base for the Chinese branded economy operators is significantly smaller than most other operators due to the current early stage of industry development for this segment within China.Exhibit 19: Lodging industry revenue growth for select companies Revenue growth (1) Revenue Company Region-description 2006 2007 2008 2009 2010E 2011E 2011E (2) 7 Days China economy NA 360.0% 185.0% 58.3% 31.4% 34.8% 307 China Lodging China economy NA NA 225.1% 64.9% 38.4% 33.0% 351 Home Inns China economy 105.9% 71.3% 85.5% 38.8% 22.3% 19.5% 540 Accor Global economy 1.4% -6.1% 2.9% 3.2% NA NA 7,065 Choice Hotels Global economy 14.2% 14.1% 4.2% -12.0% 4.8% 5.9% 626 Mandarin Oriental Hong Kong-Asia-luxury 4.3% 18.5% 0.9% -17.5% NA NA 838 Shangri-La China-Asia-luxury 19.1% 21.5% 11.0% -9.1% NA NA 1,230 Intercontinental Europe-global 13.5% 4.8% 2.5% -18.9% 4.0% 4.4% 1,670 Hyatt U.S.-global NA NA 2.6% -13.2% 5.6% 6.3% 3,740 Marriott U.S.-global 7.8% 8.3% -0.9% -15.3% 6.8% 7.6% 12,530 Starwood U.S.-global -0.3% 2.7% -4.1% -17.3% 6.4% 7.3% 5,430 Orient Express U.S.-global 13.8% 20.7% -4.8% -17.1% 28.3% 3.4% 605 Wyndham U.S.-global 10.7% 13.5% -1.8% -12.4% 2.6% 6.5% 4,100NA = Not Applicable, Not Available or Not Sourced(1) 2010 and 2011 estimates are based on average consensus revenue estimates as of January 10, 2011.(2) Amounts listed are in millions and U.S. dollars except for Accor revenues which are reported in euros. Accor revenues adjusted to dollars would be approximately $9.8B.Source: Company filings and consensus estimates In Exhibit 20, we present a forward valuation comparison for Asian, Europe and U.S. based lodging companies based on recent EV/EBITDA relationships. The table indicates that Asian operators currently trade at higher forward 2010 to 2012 valuations than European or U.S. based operators owing to significantly higher EBITDA growth rates tied to robust development pipelines in the region. Forward industry multiples have expanded since late 2008 to early 2009 recession troughs. Prior to the onset of the U.S. recession, U.S. operator forward multiples were 12x to 14x between 2003 to 2007 before bottoming at roughly 8x during the fall of 2008. During the second half of 2009 through 2010, U.S. multiples have expanded due to the industry recovery that has occurred. Current forward U.S. multiples are 13X to 14x 2010 and 2011 EBITDA.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 32. Overview of the Chinese Lodging Market 32 Chinese Lodging Industry Growth February 25, 2011 A similar pattern has occurred for the Asian operator Home Inn as the company forward EV/ EBITDA multiple has expanded since bottoming during late 2008 to early 2009.[43] During 2007, Home Inns’ forward EV/EBITDA multiple ranged between 10x to 14x before bottoming at approximately 2x during late 2008 to early 2009. The company valuation has since expanded over the balance of 2009 through 2010 owing to the industry recovery in the region, expansion of the company’s development pipeline and growing track record of executing its business model. Asian and global operators have made significant pipeline bets on China tied to the long-term positive industry view connected with forecasted, ongoing, rapid economic and tourism industry growth. Assuming long-term industry development does in fact persist in China over the next decade, 2012 EV/EBITDA multiples for China focused operators look potentially cheap relative to European and U.S. multiples based on forecasted forward comparable growth rates.[44]Exhibit 20: Lodging industry valuation comparison Primary region 10 - 12 EV/EBITDA Company of operation EBITDA CAGR 2010 2011 2012 China Lodging China 28% 17.7 16.6 10.7 Home Inns China 19% 13.8 12.0 8.5 7 Days China 38% 19.5 13.3 9.6 28% 17.0 14.0 9.6 Shangri-La Asia Asia - China 23% 20.0 15.6 13.3 Mandarin Oriental Asia-China 30% 18.7 14.1 11.1 26% 19.4 14.9 12.2 Accor Europe-global 15% 9.5 8.1 6.6 IHG Europe-global 8% 11.5 10.4 9.8 11% 10.5 9.3 8.2 Choice U.S.-global 9% 14.3 12.5 11.1 Hyatt U.S.-global 20% 14.8 13.4 10.4 Marriott U.S.-global 16% 15.6 13.1 10.8 Starwood U.S.-global 16% 15.9 15.7 13.4 Wyndham U.S.-global 10% 9.5 8.2 6.8 14% 14.0 12.6 10.5Source: Select analyst estimates43 7 Days and China Lodging Group were listed in the U.S. during late 2009 and 2010, respectively. As a result, U.S. public valuation multiple estimates are not available for these companies during late 2008 to early 2009, a period of significant valuation compression for U.S. publicly listed lodging companies.44 Select analyst estimates we have viewed suggest that the overall industry will grow supply at an approximate 12% + CAGR over the next several years implying the overall industry room count could double between 2010 and 2015/16. This amount of growth rate duration does not appear to be currently reflected in 2012 multiples.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 33. Overview of the Chinese Lodging Market 33 Chinese Lodging Industry Growth February 25, 2011 In Exhibit 21, we present our overall China supply model for branded economy and star rated hotels:Exhibit 21: China lodging supply model for branded economy and star rated hotels HOTELS 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E Economy HMIN, SVN & HTHT 5 10 26 78 184 439 861 1,189 1,779 2,430 3,092 other economy 36 45 77 140 444 774 1,259 1,944 2,568 3,100 3,600 4,200 Total economy 36 50 87 166 522 958 1,698 2,805 3,757 4,879 6,030 7,292 4 + 5 star 570 810 925 1,213 1,427 1,671 1,947 2,253 2,389 2,546 2,744 3,096 1 + 3 star 6,788 8,070 8,826 9,675 10,401 11,080 11,393 10,904 10,457 11,083 11,748 12,513 Total 7,394 8,930 9,838 11,054 12,350 13,709 15,038 15,962 16,603 18,508 20,522 22,901 Y/Y growth Economy HMIN, SVN & HTHT 100.0% 160.0% 200.0% 135.9% 138.6% 96.1% 38.1% 49.6% 36.6% 27.2% other economy 25.0% 71.1% 81.8% 217.1% 74.3% 62.7% 54.4% 32.1% 20.7% 16.1% 16.7% Total economy 38.9% 74.0% 90.8% 214.5% 83.5% 77.2% 65.2% 33.9% 29.9% 23.6% 20.9% 4 + 5 star 42.1% 14.2% 31.1% 17.6% 17.1% 16.5% 15.7% 6.0% 6.6% 7.8% 12.8% 1 + 3 star 18.9% 9.4% 9.6% 7.5% 6.5% 2.8% -4.3% -4.1% 6.0% 6.0% 6.5% Total 20.8% 10.2% 12.4% 11.7% 11.0% 9.7% 6.1% 4.0% 11.5% 10.9% 11.6% Market share Economy HMIN, SVN & HTHT 0.0% 0.1% 0.1% 0.2% 0.6% 1.3% 2.9% 5.4% 7.2% 9.6% 11.8% 13.5% other economy 0.5% 0.5% 0.8% 1.3% 3.6% 5.6% 8.4% 12.2% 15.5% 16.7% 17.5% 18.3% Total economy 0.5% 0.6% 0.9% 1.5% 4.2% 7.0% 11.3% 17.6% 22.6% 26.4% 29.4% 31.8% 4 + 5 star 7.7% 9.1% 9.4% 11.0% 11.6% 12.2% 12.9% 14.1% 14.4% 13.8% 13.4% 13.5% 1 + 3 star 91.8% 90.4% 89.7% 87.5% 84.2% 80.8% 75.8% 68.3% 63.0% 59.9% 57.2% 54.6% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% ROOMS 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010E 2011E 2012E Economy HMIN, SVN & HTHT 0 550 1,131 2,991 9,335 21,979 52,214 99,016 132,867 195,764 265,764 338,264 other economy 4,741 5,498 9,161 16,208 47,519 76,838 136,574 213,884 317,133 400,800 483,913 558,768 Total economy 4,741 6,048 10,292 19,199 56,854 98,817 188,788 312,900 450,000 596,564 749,677 897,032 4 + 5 star 160,000 205,000 245,000 330,000 379,000 420,000 474,237 526,400 585,000 671,000 679,000 770,000 1 + 3 star 656,260 692,206 747,804 907,851 969,500 1,040,000 1,099,547 1,065,009 1,032,000 1,052,000 1,165,000 1,248,000 Total 821,001 903,254 1,003,096 1,257,050 1,405,354 1,558,817 1,762,572 1,904,309 2,067,000 2,319,564 2,593,677 2,915,032 Y/Y growth Economy HMIN, SVN & HTHT 105.6% 164.5% 212.1% 135.4% 137.6% 89.6% 34.2% 47.3% 35.8% 27.3% other economy 16.0% 66.6% 76.9% 193.2% 61.7% 77.7% 56.6% 48.3% 26.4% 20.7% 15.5% Total economy 27.6% 70.2% 86.5% 196.1% 73.8% 91.0% 65.7% 43.8% 32.6% 25.7% 19.7% 4 + 5 star 28.1% 19.5% 34.7% 14.8% 10.8% 12.9% 11.0% 11.1% 14.7% 1.2% 13.4% 1 + 3 star 5.5% 8.0% 21.4% 6.8% 7.3% 5.7% -3.1% -3.1% 1.9% 10.7% 7.1% Total 10.0% 11.1% 25.3% 11.8% 10.9% 13.1% 8.0% 8.5% 12.2% 11.8% 12.4% Market share Economy HMIN, SVN & HTHT 0.0% 0.1% 0.1% 0.2% 0.7% 1.4% 3.0% 5.2% 6.4% 8.4% 10.2% 11.6% other economy 0.6% 0.6% 0.9% 1.3% 3.4% 4.9% 7.7% 11.2% 15.3% 17.3% 18.7% 19.2% Total economy 0.6% 0.7% 1.0% 1.5% 4.0% 6.3% 10.7% 16.4% 21.8% 25.7% 28.9% 30.8% 4 + 5 star 19.5% 22.7% 24.4% 26.3% 27.0% 26.9% 26.9% 27.6% 28.3% 28.9% 26.2% 26.4% 1 + 3 star 79.9% 76.6% 74.5% 72.2% 69.0% 66.7% 62.4% 55.9% 49.9% 45.4% 44.9% 42.8% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%Notes: 1) Approximately 93% of the market is unrated as of 2008 based on the total number of hotels (314k) at 12/31/08 per Euromonitor International. 2) For a more extensive model of the Chinese lodging market see Kwok, Justin, Anthony Wu and Sean Chan, China: Hotels - Poised for growth: initiate 7 Days and Home Inns, Goldman Sachs, November 2010.Source: Company filings, public new sources, select analyst estimates and Apertor estimates©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 34. Overview of the Chinese Lodging Market 34 Chinese Lodging Industry Growth February 25, 2011 Key Points in this Analysis are: „ Between 2001 and 2010, the economy, 1 – 3 star and 4–5 star hotels have grown at 72.5%, 5.6% and 18.1% CAGR’s, respectively. Between 2001 and 2010, on a combined basis, total economy and star rated hotels have grown at a 10.8% CAGR. Between 2010 and 2012, on a combined basis, we have modeled an 11.3% CAGR and expect the growth rate to remain in the low double-digit range until mid decade. „ Between 2001 and 2010, the economy, 1 – 3 star and 4 – 5 star room counts have grown at 71.1%, 5.4% and 17.3% CAGR’s, respectively. Between 2001 and 2010, on a combined basis, total economy and star rated rooms have grown at a 12.2% CAGR. Between 2010 and 2012, on a combined basis, we have modeled a 12.1% CAGR and expect the growth rate to remain in the low double-digit range until mid decade. „ The strong growth rate of hotels and room supply is expected to continue through 2012 and beyond for potentially several years due to the overall growth rate of the overall economy and low penetration rate. „ The growth rate of the economy sector is expected to continue to surpass other sectors, which will shift the overall industry market share mix between now and 2012 and beyond. „ The growth rate of the three U.S. listed economy operators has surpassed the overall growth rate of the economy sector and is expected to continue. „ Between 2001 and 2012, the three U.S. listed economy operators and economy sector overall market share of hotels will move from zero to 13.5% and 31.8% and will continue to increase to at least 2015 due to the above industry average growth rate. „ Between 2001 and 2012, the 4 – 5 star sector market share of hotels will increase from 7.7% to approximately 13.5% and will remain roughly unchanged until 2015. „ Between 2001 and 2012, the 1 – 3 star sector market share of hotels will decrease from 91.8% to approximately 54.6% and will remain relatively unchanged until 2015. „ On a rooms basis, the patterns are similar in that a market share shift between the economy and 1 – 3 star segments is expected to continue between 2010 to 2012 and beyond.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 35. China and ACPC (regional) Industry Data 35 Chinese Lodging Industry Growth February 25, 2011China and ACPC (regional) Industry Data During 2010, Asia Pacific-China have led the worldwide lodging industry RevPAR recovery. In Asia, the 2010 RevPAR recovery has been driven by significant y/y increases in both occupancy and ADR. In Europe and North America, the recovery has been comparatively smaller and driven by more modest y/y improvement in occupancy. In Exhibit 22, we present occupancy, ADR and RevPAR data for major global regions on a y/y ytd basis through October 2010.Exhibit 22: Occupancy, ADR and RevPAR data for Asia & other worldwide regions YTD at October Occupancy % ADR RevPAR y/y 2010 & 2009 2010 2009 2010 2009 2010 2009 OCC ADR RevPAR Asia Pacific 65.9% 59.7% 130.46 117.23 85.97 69.99 10.4% 11.3% 22.8% Central & South Asia 60.4% 54.8% 156.33 150.99 94.42 82.74 10.2% 3.5% 14.1% Northeastern Asia 64.6% 57.0% 124.03 114.21 80.12 65.10 13.3% 8.6% 23.1% Southeastern Asia 65.3% 60.0% 122.75 107.02 80.16 64.21 8.8% 14.7% 24.8% Australia & Oceania 73.2% 69.0% 146.98 125.21 107.59 86.39 6.1% 17.4% 24.5% North America 59.3% 56.3% 99.35 99.22 58.91 55.86 5.3% 0.1% 5.5% Europe 64.9% 61.5% 130.64 132.66 84.79 81.59 5.5% -1.5% 3.9% South America 64.6% 58.9% 119.92 109.61 77.47 64.56 9.7% 9.4% 20.0% Middle East 61.3% 61.1% 152.48 148.03 93.47 90.45 0.3% 3.0% 3.3%Source: Smith TravelExhibit 23: YTD y/y 10/2010 Asia Pacific occupancy, ADR and RevPAR Asia Pacific Central & South Asia Northeastern Asia Southeastern Asia Australia & Oceania30% 30% 30%25% 25% 25%20% 20% 20%15% 15% 15%10% 10% 10% 5% 5% 5% 0% 0% 0% Occupancy ADR RevPARSource Smith Travel [45] During 2010, GDP growth in ACPC and more specifically, China has been stronger than other regions of the world. This growth has provided the backdrop for the robust lodging industry recovery in the region. Forward prospects for the lodging industry in the region remain strong.45 See Appendix E for Smith Travel region definitions.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 36. China and ACPC (regional) Industry Data 36 Chinese Lodging Industry Growth February 25, 2011 Some Historical Prospective Regarding Chinese & Regional 2010 Results The stellar 2010 recovery follows 2009 results in the region that were negative as the region suffered along with the rest of the world during the global financial crisis. In 2009, the Chinese lodging industry faced an extremely difficult year despite strong overall China GDP growth. Substantial negative y/y occupancy and ADR results were driven by excess supply that was added in several markets prior to the August 2008 Olympic games, difficult y/y comparisons and the effect of the global financial crisis on major significant gateway markets (e.g. Beijing and Shanghai) that are dependent on and exposed to international travel and economic conditions. As a result, strong 2010 China results were also driven by easy comparisons. It is also important to note that RevPAR has yet to recover to peak 2007 levels. At the same time, we must point out that the y/y 2010 to comparison for China is stronger than virtually all other regions in the world that are now also benefitting from easy comparisons. Due to a challenging year in 2009, confidence for a strong recovery at the beginning of 2010 was weak. Confidence in an ongoing industry recovery in China increased throughout 2010 as strong y/y RevPAR data point comparisons emerged. The forward looking consensus tied to October data points for China and ACPC as a whole is that an industry recovery is firmly underway in the region. A Drill Down Into Chinese RevPAR Data In Exhibit 24, we present 2010 and 2009 RevPAR data for individual hotel markets within major Chinese cities that are tracked by Smith Travel.Exhibit 24: Y/Y occupancy, ADR and RevPAR data for select Chinese cities y/y 2009 vs. 2008 y/y 1Q10 vs. 1Q09 y/y 2Q10 vs. 2Q09 City Occupancy ADR RevPAR Occupancy ADR RevPAR Occupancy ADR RevPAR Chengdu 24.0% -9.7% 12.0% 31.5% -2.6% 28.1% 20.0% 6.0% 27.0% Chongqing 11.0% -1.3% 9.2% 3.4% 8.5% 12.3% 0.0% 24.0% 24.0% Guangzhou -4.0% 6.0% 2.0% 32.7% -8.4% 24.3% 18.0% 17.0% 38.0% Hangzhou -1.6% 1.9% 0.3% 5.2% 15.2% 21.1% 11.0% 8.0% 20.0% Hainan -3.0% -0.3% -3.4% 20.0% 31.0% 57.0% 13.0% 20.0% 35.0% Xian 2.3% -6.0% -3.8% 8.9% 14.8% 25.0% 15.0% 13.0% 30.0% Shenzhen -5.2% -8.5% -13.2% 20.0% 7.2% 28.2% 21.0% 17.0% 42.0% Dialian -9.2% -5.5% -14.0% 25.1% 10.0% 40.0% 24.0% 7.0% 33.0% Suzhou 5.4% -19.0% -14.0% 0.6% 20.0% 21.0% 20.0% 6.0% 27.0% Qingdao -9.2% -13.1% -21.1% 21.9% -11.7% 7.7% 25.0% 7.0% 34.0% Shanghai -6.7% -23.0% -28.4% 22.1% -2.8% 18.6% 54.0% 23.0% 77.0% Taijin -20.0% -19.0% -35.0% 38.0% -10.0% 22.1% 12.0% 5.0% 18.0% Beijing -6.9% -39.0% -43.0% 30.0% -3.9% 24.0% 33.0% 4.0% 39.0%Source: Horwath International and Smith Travel©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 37. China and ACPC (regional) Industry Data 37 Chinese Lodging Industry Growth February 25, 2011 Exhibit 24 shows that following a challenging 2009, individual markets have sequentially improved over the course of 2010. Outlined below are additional comments on results and conditions in individual cities through second quarter, 2010:[46] Beijing – with a relatively stable supply base, the strong recovery in demand drove occupancy levels during 2010 as occupancy moved to 65% during 2Q10 from 50% during 2Q09. Chengdu – the city is viewed as a gateway city to western China. Despite an increase in supply in the market, occupancy, ADR and RevPAR significantly increased during the first half of 2010. Chongqing – the market experienced roughly flat occupancy growth during 2010 due to supply increases but experienced strong ADR over the same period. Dalian – the market experienced a strong recovery in occupancy and ADR during the first half of 2010. Despite the y/y recovery, occupancy remained below 50% in the first half of 2010. Guangzhou – experienced strong growth in occupancy and ADR during the first half of 2010, despite the addition of several luxury properties in the market. Hainan – during 2010, the market experienced significant growth in occupancy, ADR and RevPAR. Hangzhou – during 2010, the market experienced positive increases in occupancy, ADR and RevPAR despite record double digit increases in supply due to the Shanghai Expo and other factors. Shanghai – the market experienced exceptional occupancy, ADR and RevPAR growth during 2010 despite a 15% supply increase due to the Shanghai Expo that drove a significant increase in visitation. Shenzhen – during 2010, the market experienced strong increases in occupancy and ADR despite new supply in the market. Suzhou – the market also benefitted from the Shanghai Expo due to its proximity to Shanghai, posting positive gains in occupancy and ADR during 2010 despite a significant increase in supply. Tianjin – during 2010, the market experienced a slower pace of recovery due to recent supply additions and a high speed train that reduced the need for overnight stays. Qingdao – the market experienced a strong recovery in occupancy during the first half of 2010. This was expected to continue into third quarter, 2010. Xi’an – the market experienced positive y/y growth in occupancy, ADR and RevPAR due to the growth of business meeting demand in the city. Subsequent to second quarter, 2010, RevPAR results have remained strong in both ACPC and China on a y/y basis as follows:46 See Horwath International, “HTL Newsletter China, Edition 2 and 3, 2010.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 38. China and ACPC (regional) Industry Data 38 Chinese Lodging Industry Growth February 25, 2011 Exhibit 25: Recent ACPC-China y/y RevPAR results August 2010 October 2010 Beijing 31.0% 31.9% Shanghai 61.0% 86.0% Hong Kong 38.0% 39.5% ACPC 16.5% 24.5% Australia 6.0% China 34.3% Singapore 25.6% Source: Smith Travel and various news reports Based on the latest results, ACPC and China continue to be the global industry recovery leader compared to other regions. While the overall recovery in the region has been strong, there is a wide range of recovery in specific countries and cities within ACPC and China due to unique characteristics of individual markets. An example of over the top results in 2010 is Shanghai, which has experienced a stellar RevPAR growth due to the World Expo, a major event that drew an estimated 70 million visitors. In 2010, results in both Beijing and Shanghai (primary cities, point of entry and major Chinese lodging markets) were driven by occupancy and a low 2009 comparison base. Longer term performance in these two markets is expected to remain robust tempered by intermediate term pressures tied to a significant number of rooms under construction (8k in Beijing and 21K in Shanghai) that must eventually be absorbed. Hong Kong is also experiencing a strong recovery with y/y RevPAR up 39.5% during October 2010. The strong performance is tied to the growing regional economy and the city’s role as a link between China and the developed world. Looking into individual Chinese markets in 2011 suggests that y/y RevPAR results may be somewhat muted than 2010 due to difficult comps. For ACPC as a whole at October 31, 2010, the recovery continues to be strong as the healthy demand for lodging continues to be driven by the robust economic conditions. Additional Color on Recent Market Conditions in China Despite booming economic conditions, y/y RevPAR performance within China in 3, 4 and 5 star property categories was negative between 2005 and 2009 due to headwinds caused by the significant supply increase in front of the 2008 Olympic Games. Strong demand in China between 2005 and 2009 could not overcome this supply increase and that hurt occupancy performance. In 2009 for example, Chinese occupancy moved below 60% in most markets due to supply issues and the global financial crisis. Between 2007 and 2009, primary Chinese markets recorded the biggest declines within the country. Beijing and Shanghai for example, suffered sharp declines in RevPAR growth due to significant increases in supply and exposure to the global economic crisis. Although we have not presented the data here, we have viewed data that shows varying RevPAR and GOP performance between star ratings (1 – 5) and city tiers (1 – 3) in recent years. Historical©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 39. China and ACPC Pipeline Data 39 Chinese Lodging Industry Growth February 25, 2011 data points out some of the nuances of operating in China as the “the devil is in the details.” The bottom line is that companies and investors will need to do a significant amount of homework regarding individual development, management and investment decisions. This document is designed to provide an overview of some the major issues tied to the Chinese lodging market and likely does not address many issues tied to specific transactions, investments, development and management, to name a few.China and ACPC Pipeline Data Current ACPC Pipeline Summary Pipeline growth in ACPC and more specifically China has bounced back since the fourth quarter, 2008 low that was driven by the world-wide economic downturn and post second quarter 2008 Chinese Olympic Games build-up. The bulk of the pipeline is comprised of China and India based rooms (55% and 20% respectively, of the ACPC pipeline total at 2Q10). Owing to an exceptionally strong 2010 economic growth within in Asia as a whole, and more specifically within China and India, the overall ACPC lodging pipeline has continued to grow and has now neared the peak reached in second quarter, 2008 in front of the 2008 Chinese Olympic Games. The Chinese pipeline has grown in response to the government’s move to drive lending in the real estate sector in response to the 2008 to 2009 global economic downturn. China and India pipelines are now the second and third largest in the world behind the U.S. Per the Smith Travel database, at second quarter, 2010, the existing supply of ACPC hotels and rooms stood at 16,273 and 2,212,500 respectively.[47] We estimate that approximately 713,000 and 90,000 rooms were located within China and India, respectively. In Exhibit 26, we provide the chain scale breakdown of the region and note that 61% of the supply is not affiliated with a major brand or management group. For the twelve months ended June 2010, approximately 60k (81% affiliated with a major brand or management group) rooms opened, which increased the existing room base by approximately 3%.47 These amounts differ from the market estimates we have compiled and we have not attempted to reconcile the differences, which may be driven by database differences or other factors. We have presented these numbers to provide additional information on the market and a more nuanced view.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 40. China and ACPC Pipeline Data 40 Chinese Lodging Industry Growth February 25, 2011 Exhibit 26: Current ACPC supply at May 2010 6% Luxury 9% Upper Upscale 11% Upscale 61% 9% Midscale Economy 4% Unaffiliated Source: Smith Travel At second quarter, 2010 the ACPC pipeline consists of 253,815 rooms (in construction, final planning and planning stages) and 1,004 hotels, where 82% are affiliated with a major brand or management group. In addition to the pipeline amount, another 62,500 rooms are in the pre- planning stage. Total planned and pre-planned rooms amount to approximately 316k rooms (approximately 14.3% of the existing room base). Of 316k total, approximately 55% of the rooms are under construction. See Exhibits 27 and 27a below for additional details.Exhibit 27: Pipeline at May 2010 Exhibit 27a: Pipeline in stages Luxury 18% 18% Upper Upscale Construction 4% 20% Upscale Final Planning 11% Midscale 12% Planning 25% 55% Economy Pre-Planning 13% 24% UnaffiliatedSource: Smith Travel Source: Smith Travel Exhibit 28 shows that on an individual country basis, approximately 55% and 20% of the pipeline is located in China and India as follows:Exhibit 28: Pipeline by country 2% 3% 7% China Phillipines 2% India Australia 4% 2% Thailand Malaysia 5% Indonesia Other 55% 20% VietnamSource: Smith Travel As a result of the pipeline activity, China’s room supply is expected to increase significantly over the next 4 to 5 years. Based on this increase, China will have the most rooms coming online of any©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 41. China and ACPC Pipeline Data 41 Chinese Lodging Industry Growth February 25, 2011 country until 2012 and beyond. For ACPC as a whole, the total supply increase is expected to be roughly 14% over the next 4 to 5 years. Exhibit 29: Projected ACPC room openings 100,000 86,000 78,400 82,650 69,250 75,000 50,000 25,000 - 2010 2011 2012 2013 Source: Smith Travel At September 2010, the ACPC pipeline continued to expand in terms of rooms, hotels and more specifically projects in China and India. In Exhibit 30, below we present the Smith Travel total monthly supply and pipeline data for ACPC between June 2009 and September 2010, which shows that the room base and pipeline has steadily increased.Exhibit 30: ACPC pipeline and existing supply ACPC Pipeline ACPC existing Supply 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 - 6/09 7/09† 8/09† 9/09 10/09 11/09 12/09 1/10 2/10† 3/10 4/10 5/10 6/10 7/10† 8/10 9/10Source: Smith Travel and Apertor Research estimates† The chart includes estimates for months where data was not available. On a percentage basis, the change in the ACPC room base, pipeline and total room base plus pipeline between June 2009 and September 2010 is 41.7%, 14.2% and 38.5 %, respectively. For China, we estimate that the room base increased approximately 28% between May 2009 and September 2010.[48] Global lodging companies continue to focus on China as an attractive market looking forward. At second quarter, 2010, global lodging company projects represent approximately 38% of the48 While not presented in the chart, the ACPC pipeline of rooms and hotels continued to increase during October 2010 to 265k and 1,084, respectively.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 42. China and ACPC Pipeline Data 42 Chinese Lodging Industry Growth February 25, 2011 rooms in the pipeline focused mostly on the Luxury, Upper Upscale and Upscale brands.[49] Local companies are also significant participants in the market through existing properties and pipeline efforts and are mostly focused on smaller sized economy projects. As a result of pipeline activity, a significant amount of new hotels will come online during 2011 and 2012. China Pipeline Detail In Exhibit 31, we drill down into the China pipeline by breaking out China data from the total ACPC pipeline to show that China has been a significant influence on the total Asia pipeline during the post 2008 Olympic Games build-up that peaked during second quarter, 2008 owing to the rapid economic growth in China. Exhibit 31 shows that post the 2008 Olympic build-up, the pipeline bottomed during first quarter, 2009 and has rebounded through second quarter, 2010.[50]Exhibit 31: ACPC rooms pipeline ex China & China pipeline ACPC ex China China 550 500 450 400 350 300 250 200 150 100 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10Source: Lodging Econometrics In Exhibit 32, we drill further into the China pipeline to show that a significant amount of China’s pipeline has consisted of projects under construction. At second quarter, 2010 this trend continued, which suggests that there will be a significant number of new hotel openings in the future. China will have the most rooms in the world coming online for the foreseeable future. Pipeline growth in China stands in contrast to the current declining pipeline trends in many other developed regions of the world.49 Per Lodging Econometrics ACPC pipeline analysis as of 2Q10.50 In Exhibits 26 and 27, we present pipeline data sourced from Lodging Econometrics. Amounts in these charts vary from amounts included in Smith Travel data. We have not attempted to reconcile the two data sets. Differences between the data sets may be caused by a large number of factors that affect comparability. We have presented both sets of data to provide insight into recent pipeline activity within both ACPC and China.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 43. China and ACPC Pipeline Data 43 Chinese Lodging Industry Growth February 25, 2011Exhibit 32: China hotel planning, starts and construction China starts & planning China pipeline construction 1,300 1,100 900 700 500 300 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10Source: Lodging Econometrics©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 44. Appendix A: Additional Recent Chinese Economic Headlines 44 Chinese Lodging Industry Growth February 25, 2011Appendix A: Additional Recent Chinese Economic Headlines Recent Chinese economic forecasts by Fitch Ratings and Oxford economics include 9% GDP growth between 2011 to 2013. Recently reported Chinese GDP growth for 2007 and 2008 was approximately 15% and 11%, respectively. In a recent Chinese economic analysis, Fitch Ratings put forth their view that continued robust Chinese economic growth is integral to support the fragile and uneven recovery in the world economy given the anemic recovery profile in the U.S. and other mature developed economies. Over the course of 2010, a steady stream of news headlines have put forth the potential for a turn in China’s economic policy cycle regarding monetary policy. During the fall of 2010, the Chinese government implemented various tightening steps in an effort to control inflation. The Wall Street Journal (WSJ) recently reported that China made its “prudent” monetary policy shift official. This headline essentially formalizes the governments change in policy from driving all-out economic growth toward combating inflation. The change in policy is part of a transition that has taken place over a period of several months. While the U.S. and Europe continue to focus on economic growth issues, China has increasingly focused on containing inflation and asset- price bubbles. The WSJ reports that, as part of this process, China has phased out some of the supportive policies that prevailed during the global financial crisis and its aftermath. Economists expect China to impose a target for lower total lending by banks next year as concern has grown over the social impact of inflation triggered higher prices. News headlines have continued to emerge regarding shadow lending in China that has hampered the government’s effort to control overall economic growth and rein in inflation. Fitch Ratings recently estimated that Chinese banks have blown past lending limits that regulators set for 2010. In 2010, total lending is largely unchanged from 2009 when Chinese banks led a massive expansion of credit, roughly doubling loan volume from the previous year, as part of a significant stimulus program designed to keep the economy growing during the financial crisis. On December 2, 2010 Fitch summarized the issue as follows: “Heightened concern in recent weeks about rising inflation in China appears to have taken many market participants by surprise. One reason may be the widespread misconception that the acceleration in lending in 2009 was a short-lived anomaly and that monetary conditions have begun to normalize in 2010. Talk of a substantial slowdown in credit growth in China is premature, albeit understandable given the visible drop in official figures on net new loans. Nevertheless, while headline data may point to a slowdown, actual credit flows in China remain as high as in 2009: lending has not moderated, it has merely found other channels.” Recent discussion with Asian based industry analysts and institutional investors suggests that belief in continued Chinese economic growth remains intact. At the same time, inflation pressures remain a concern. We believe the inflation-policy tightening issue will remain an issue. We also understand that the world will watch closely how well China can smoothly slow loan growth in order to slow economic growth as part of its effort to rein in inflation. Although the forward looking strong Chinese economic growth consensus remains in place, there are some©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 45. Appendix A: Additional Recent Chinese Economic Headlines 45 Chinese Lodging Industry Growth February 25, 2011 concerns regarding economic risks tied to inflation, further tightening and eventual rebalancing among other factors. Fitch recently released a “macro credit” research report that addresses the implications of a Chinese economic slowdown. Fitch points out that their analysis is hypothetical as they have stuck to their overall Chinese economic growth forecast. In the report titled, “The Impact of a China Slowdown on Global Credit Quality,” Fitch makes the following general points regarding a material slowdown in the Chinese economy: „ A material slowdown in the Chinese economy is considered unlikely in the near-term. „ Their “what-if” analysis reflects the potential negative impact on China and the global economy. „ If a slowdown were to occur it is most likely to stem from a combination of a property crash and a banking crisis. The report points out that a slowdown in China also would likely have a significantly negative impact on the travel, leisure and gaming industries within China. A China slowdown would also negatively impact overall economic growth within the ACPC region, Europe, Latin America and the U.S.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 46. Appendix B: Summary of Chinese Economic and Structural Issues 46 Chinese Lodging Industry Growth February 25, 2011Appendix B: Summary of Chinese Economic and Structural Issues We surveyed a large volume and variety of China and global economic research to develop a view of current Chinese and Asia Pacific economic issues and possible forward looking multi- year economic growth rates as of the fall-winter of 2010. We specifically surveyed research authored by the China economic research teams within investment banks including CLSA, HSBC, Morgan Stanley, Merrill Lynch and UBS. We also surveyed other sources of Asia, ACPC and China economic research authored by the Economist magazine, Fitch Ratings, the IMF, the OECD, Oxford Economics and the Peterson Institute. Based on our informal survey, listed below are the key issues for China. We have also included a description of other select issues that we believe are relevant to the Chinese and Asia Pacific growth story looking forward: Key 2011 Themes and Issues „ 2010 was a near perfect year for the Chinese economy as overall growth was strong without significant inflation pressures. The 2010 real GDP is expected to be 10% driven by investment and trade growth. The 2011 Chinese GDP is expected to be 8%–9% driven by Chinese consumer spending that is expected to increase in 2011 as an offset to small trade and investment declines. „ During 2010, consumption and infrastructure investment have become been bigger drivers of the economy. „ 2011 is expected to be a year of reflation as the effect of 2009 Chinese monetary expansion is expected to provide a tailwind for inflation as the headwind from weak external demand decreases. „ Inflation and monetary tightening have become issues and key recent news headlines. The Chinese have recently announced a shift in their monetary policy—moving from a loose to tight monetary policy stance. Addressing inflation will be a key priority for China in 2011. Chinese CPI will be a key economic measure in the economy and a metric that is closely followed by the government and economists. Currently, there is excess liquidity in the economy. China economic observers indicate that this issue is being addressed by the government. „ Some concern has developed regarding inflation risks that could trigger a 2011 bust owing to pegged Chinese currency issues and policy mistakes made by the central government. „ Overall GDP is expected to slow some in 2011 from extraordinary high levels achieved in recent years. Near perfect economic conditions for China in 2010 have probably run their course. At the same time, GDP levels are expected to remain robust between 2011 to 2015 and beyond. „ China is expected to continue to work to rebalance its economy to drive more internal consumption over the next several years. „ The Chinese may allow the Renminbi to appreciate some against the U.S. dollar in order to contain inflationary pressures stemming from commodity driven inflation.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 47. Appendix B: Summary of Chinese Economic and Structural Issues 47 Chinese Lodging Industry Growth February 25, 2011 Other Specific 2011 Economic Issues „ The robust Hong Kong property market is likely to remain an economic issue. The Chinese government has taken steps to thwart speculation and reduce market volatility of property prices. Mortgage lending has been tightened and a tax has been levied on residential property transactions in an effort to dampen property speculation activity. Hong Kong market observers debate the severity of these measures as some believe they are more aggressive than expected. „ The Chinese government has taken steps to improve housing affordability for low income households, which could reduce precautionary consumer saving that would in turn boost consumption growth. Rebalancing the Chinese economy towards consumer spending and away from infrastructure investment will continue to be an issue looking forward into 2011. „ Food price inflation has been a recent issue in China. In October 2010, Chinese headline CPI jumped due to food inflation. In China, food inflation tied to loose monetary policy appears to have occurred and has become both an economic and political issue. Food inflation is likely to remain an issue into 2011. „ Ongoing labor market improvement is expected to continue to support improvement in private consumption. Select China economic forecasters believe that a drop in property prices will not significantly derail consumption. Long-Term and Structural Chinese Economic Issues Morgan Stanley (MS) published an overview of the Chinese economy through 2020. This research provides an in-depth view of longer term economic, social and mega trends that are tied to the forward looking long-term Chinese growth story. Highlights of the analysis are as follows: „ After several years of high growth, economic growth is expected to decelerate between 2010 and 2011. While growth is likely to decelerate, GDP is expected to see average gains of 8% per year until 2020. Consumption, service sector spending and income are all expected to rise relative to GDP as the economy rebalances. „ The labor supply is expected to remain abundant through 2020. „ Consumption is expected to be a key driver of economic growth. MS expects Chinese consumption to reach two-thirds of the U.S. level and account for about 12% of the world total by 2020. „ MS points out that based on world economic history, economies tend to decelerate after reaching a certain level of development. Based on this history, the authors point out that the law of gravity also applies to China as economic growth is set to slow. The authors point out how the deceleration is likely to pan out based on experiences of Japan and Korea which have similar characteristics to China and are part of the overall “Asian economic miracle” that has taken place. China appears to be at a similar inflection point as Japan and Korea were 40 and 20 years ago. The researchers point out that while the Chinese and Japan & Korea situations are not identical, beyond the ultra-high growth to slower strong growth inflection point, inflation tends to accelerate.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 48. Appendix B: Summary of Chinese Economic and Structural Issues 48 Chinese Lodging Industry Growth February 25, 2011 „ The researchers point out that beyond the high growth inflection point, the Japanese and Korean economies underwent significant transformations as consumption to GDP, service sector-GDP and labor income GDP all rose rapidly, while there were no clear trends in net exports. „ The key takeaways are that, GDP growth deceleration will be inevitable and inflation will be higher; consumption and service sector growth will outpace overall economic growth and labor will take a bigger share of national income. At an 8% growth rate, the Chinese economy will be three times its current size. „ MS points out that both the Japanese and Korean economies were hit with serious crisis after their economies crossed the inflection point, which suggests that future development for the Chinese economy will not likely be accident free. They point out that possible risks to the Chinese economy include a prolonged energy crisis or financial crisis in view of China’s rising dependency on crude oil and its present day relatively inflexible currency exchange rate, which could make vulnerable to sudden reversal of capital inflows. The bottom line is that the Chinese economy has become a significant force in the worldwide economy relative to other advanced economies as Chinese GDP and world trade continue to comprise a bigger share of global GDP, a trend that is expected to continue. Hypothetical Slowdown Scenario Analysis Fitch Ratings and Oxford Economics published an analysis of the implications of a hypothetical material Chinese slowdown for the world economy and the APAC region. They point out that their 2010 to 2011 9 – 10% GDP growth forecasts remain intact and indicate that concerns have been expressed as to China’s ability to sustain its high current growth rate. Their hypothetical “stress” forecast assumes Chinese GDP growth slows to 5% in 2011. Their central thesis is that this growth rate would have a negative impact on both ACPC and global economic growth. They make the following specific points: „ Australia, Hong Kong, Korea, Singapore and Taiwan would be particularly negatively impacted by a slowdown in overall Chinese economic growth. Other regions including the U.S. and EU would be less directly affected although the negative attitude generated by a China slowdown would impact investment and consumption in these countries as well. Emerging Asia GDP would fall from their base case estimate of 7.3% to 4.7%. „ Commodities, steel, energy and Chinese manufacturing sector would be most affected by such a slowdown. „ Fitch-Oxford identified other potential impacts including a 20% drop in worldwide commodity prices, a widening of emerging market credit spreads, a drop of 15% in Chinese property prices and a significant drop in the Chinese stock market. „ Chinese subsidiaries of global multinational companies in sectors such as travel, restaurants, casinos and consumer products would be negatively affected.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 49. Appendix B: Summary of Chinese Economic and Structural Issues 49 Chinese Lodging Industry Growth February 25, 2011 „ Fitch-Oxford believes that continued robust growth in China is integral to support the fragile and uneven recovery in the world economy given the continued anemic growth profile of the U.S. and EU. „ Industries located in ACPC economies would be affected in a significant way. Examples include Australian commodity producers, Korean and Taiwanese technology companies and the shipping sector as a whole. ACPC banks would also be affected. „ The ACPC region would likely be affected most heavily through trade flows. Hong Kong, Taiwan, Singapore, Korea and Malaysia would be the most vulnerable in terms of exports as 58% of Chinese imports come from within Asia. Although China’s role as Asia’s assembly shop has declined —it remains material. Lower demand in the European, Latin America and North American economies triggered by a slowdown in the Chinese economy would have a negative feedback loop on ACPC exporters. Fitch-Oxford point out that a slowdown in their hypothetical scenario would originate in China and ripple outward as opposed to a global shock that originates in another part of the world. Fitch-Oxford hold the view that if a China slowdown scenario were to occur it would most likely would be tied to a property market correction triggered by the Chinese monetary tightening catalyst, poor quality of lending issues by state run enterprises and banking system asset quality.©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 50. Appendix B: Summary of Chinese Economic and Structural Issues 50 Chinese Lodging Industry Growth February 25, 2011 Outlined below is a summary of select Chinese and ACPC economic forecasts:Exhibit 33: Chinese and ACPC economic forecast summary 2013 to 2005 2006 2007 2008 2009 2010E 2011E 2012E (1) 2020E (1) China Real GDP 11.3% 12.7% 14.2% 9.6% 9.1% Morgan Stanley 10.2% 9.0% 8.0% 8.0% Merrill Lynch 10.3% 8.5% 8.5% HSBC 10.0% 8.9% IMF 10.5% 9.6% Scotia Bank 10.0% 9.0% Conference Board 10.0% 9.6% 8.0% CLSA 10.0% 8.5% Fitch 9.7% 8.6% 8.7% Oxford Economics 10.1% 9.2% 9.1% Peterson Institute 10.0% 9.0% CPI 1.8% 1.5% 4.8% 5.9% -0.7% Morgan Stanley 3.2% 4.5% HSBC 2.9% 2.5% Scotia Bank 3.0% 2.5% CLSA NA 4.5% Exports (y/y change) 28.4% 27.2% 25.7% 17.2% Morgan Stanley -15.9% 29.5% 15.0% HSBC -17.9% 23.0% 18.0% ACPC Real GDP Conference Board 2.1% 6.0% 5.2% 5.1% Peterson Institute 2.7% 5.0% 5.5%(1) 2012E – 2020E include available estimates.Source: Recent estimates from the firms listed©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 51. Appendix C: Recent Sentiment Regarding ACPC-Chinese Real Estate Market Conditions 51 Chinese Lodging Industry Growth February 25, 2011Appendix C: Recent Sentiment Regarding ACPC-Chinese Real Estate Market Conditions In December 2010, Price Waterhouse Coopers (PWC) and the Urban Land Institute (ULI) published their “Emerging Trends in Asia Pacific Real Estate” survey for 2011. PWC-ULI surveyed 280 participants in the ACPC real estate market to develop a consensus outlook regarding ACPC real estate investment and development trends. The report states that improving economic conditions across the region brought an end to declining real estate prices and rents in most ACPC countries in 2010. PWC-ULI indicate that price action has been positive across the region and red hot in China. Survey participants expressed optimism regarding market prospects in the region but remain wary of the impact of any U.S. or European economic reversal that could stop the recovery. Economies in the region that continue to be viewed as high growth include China, India, and Vietnam. According to the survey, the top regional markets in 2011 include Mumbai, Shanghai and Singapore. China continues to be viewed as one of the world’s few remaining growth engines. Survey results suggest that post the 2008 economic crisis, Asia is back as the region has experienced a strong recovery. The survey indicates that the outlook is more opaque than before due to the level of optimism that has emerged, which could be unrealistic. At the same time, survey respondents expect growth to continue due to the large volume of Chinese and Indian development opportunities. Expectations for the Chinese real estate market remain robust owing to China’s rapidly growing economy. The survey pointed to various real estate investment opportunities in China, but also pointed out significant challenges that go with investment there due to difficult regulations and low cap rates among other factors. Survey respondents expressed some concern regarding inflation and bad bank debt that is tied to the recent massive amount of lending in China. Despite the concern, the belief is that any debt problems which emerge can be “kicked down the road.” Compared to problems associated with weak economic conditions in Japan and the U.S., China’s inflation issue is currently a better problem to have. Survey respondents believe Asia will continue to show more growth than the rest of the world. Most economic forecasts for 2011 call for stronger growth in Asia than the rest of the world. The belief is that overall economic growth and expansion of the middle class in the region will continue to boost real estate markets and development. Capital has continued to flow into the Asian real estate market from both local and international sources. The survey lists the 2011 top ten Asian city prospects as follows:©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 52. Appendix C: Recent Sentiment Regarding ACPC-Chinese Real Estate Market Conditions 52 Chinese Lodging Industry Growth February 25, 2011 Exhibit 34: 2011 top ten Asian prospects Rank 2011 Rank 2010 City 1 5 Singapore 2 1 Shanghai 3 8 Mumbai 4 2 Hong Kong 5 10 New Delhi 6 3 Beijing 7 6 Sydney 8 12 Guangzhou 9 9 Melbourne 10 14 Bangalore Source: Price Waterhouse Coopers & Urban Land Institute Finally, GDP historic and prospective growth rates within the region are as follows: Exhibit 35: GDP historic and prospective growth rates Real GDP Growth Rate (%) 2008 2009 2010E 2011E 2012E Singapore 1.78% -1.28% 15.00% 4.55% 4.37% China 9.60% 9.10% 10.46% 9.59% 9.54% India 6.40% 5.68% 9.67% 8.37% 7.98% Taiwan 0.73% -1.91% 9.32% 4.41% 4.69% Thailand 2.46% -2.25% 7.52% 4.40% 4.25% Philippines 3.69% 1.06% 7.04% 4.46% 4.50% Malaysia 4.71% -1.71% 6.72% 5.30% 5.20% Vietnam 6.31% 5.32% 6.47% 6.82% 7.04% South Korea 2.30% 0.20% 6.06% 4.88% 4.21% Hong Kong 2.16% -2.76% 6.04% 4.69% 4.32% Indonesia 6.01% 4.55% 6.00% 6.20% 6.50% Australia 2.24% 1.25% 3.00% 3.47% 3.48% New Zealand -0.15% -1.59% 3.00% 3.16% 3.05% Japan -1.20% -5.23% 2.82% 1.50% 2.04% Source: Price Waterhouse Coopers & Urban Land Institute©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 53. Appendix D: Chinese Tier 1, 2 and 3 Cities 53 Chinese Lodging Industry Growth February 25, 2011Appendix D: Chinese Tier 1, 2 and 3 Cities Tier 1 cities Beijing Guangzhou Shanghai Shenzen Tier 1 cities include the four largest cities in terms of population, income and GDP Tier 2 cities Chengdu Chongqing Foshan Hangzhou Tier 2 cities with large populations & Jinan Nanjing Shantou Shenyang income plus significant impact on GDP Tiajin Wuhan Xian Tier 2 cities Changzhou Dongquan Changchun Changsha Tier 2 cities with wealthy consumers Ningbo Suzhou Dalian Fuzhou and small markets (left box) Tiazhou Wenzhou Giuyang Harbin Wuxi Xiamen Huaian Kunming Tier 2 cities with relatively low income Zhuhai Zongshan Putian Qingdao and large populations (right box) Shijazhuang Taiyuan Tangshan Yantai Zhengzhou Zibo Tier 3 cities Baotou Daqing Huizhou Huzhou Tier 3 cities with growing markets Jiin Lanzhou Linyi Nanchang and populations > than 1 million (136 Urumchi Xiangfan Xuzhou Zaozhuang cities) Tier 3 cities Baoding Bengbu Boshan Dongying Tier 3 small cities with populations Hengyang Huldao Jiaxing Jinjua < than 1 million (484 cities) Jinzhou Lanfang Liuzhou Nantong Pingdingshan Quanzhou Quzhou Shaoquan Shaoxing Xianyang Xinixang Yueyang Zhenqiang Zhoushan Zhzuhou •••Source: McKinsey Global Institute (From ‘Made in China’ to ‘Sold in China’: The rise of the Chinese urban consumer, November 2006©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 54. Appendix E: Smith Travel Asian Region Definitions 54 Chinese Lodging Industry Growth February 25, 2011Appendix E: Smith Travel Asian Region Definitions Central & South Asia Australia & Oceania Northeastern Asia Southeastern Asia Bangladesh Australia China Brunei Bhutan New Zealand Japan Cambodia India Various Southwest Pacific Islands North Korea East Timor Maldives South Korea Indonesia Nepal Mongolia Laos Pakistan Taiwan Malaysia Sri Lanka Myanmar Phillipines Singapore Thailand VietnamSource: Smith Travel©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 55. Bibliography 55 Chinese Lodging Industry Growth February 25, 2011Bibliography 2010 and 2011 consensus analyst estimates for 7 Days, Accor, China Lodging Group, Choice Hotels, Home Inns, Hyatt, Intercontinental Hotel Group, Mandarin Oriental, Marriott, Orient Express, Shangri-La, Starwood and Wyndham Anderson, Jonathan, How to Spot a Housing Bubble, UBS Asian Economic Perspectives, February 2010 Anderson, Jonathan, How to Think About China, UBS Asian Economic Perspectives, January 2006 Asia Pacific Real Estate Trends Report, Lodging Econometrics, 2008, 2009 and 2010 Atsmon, Yuval, Jennifer Ding, Vinay Dixit, Ian St Maurice and Claudia Suessmuth-Dycherhoff, THE COMING OF AGE, China’s new class of wealthy consumers, McKinsey & Company, 2009 CBRE Hotels Newsletter Greater China, December 2008, June 2009, 1Q10, June 2010 CBRE RESEARCH, ASIA, Hotel Operators in China: New Opportunities in a More Sophisticated Marketplace, CBRE hotels, April 2009 CBRE RICHARD ELLIS, Asia Marketview Q1 2009, 2009 Chanos, James, A Walk on the (Asian) Wild Side, Kynikos Associates, Grant’s Fall Investment Conference, October 2010 Chen, Xi, The Influence of FDI on China’s Tourism Industry, Auckland University of Technology, 2010 China Lodging Group, Limited Investor Presentation, November 2010 China Lodging Group, public filings and 2010 registration statement, 2010 China Makes Monetary Policy Shift Official, The Wall Street Journal, December 2010 China Market Outlook, Horwath HTL, Quarter 1 2009 Edition and Editions 1, 2 & 3, 2010, Horwath HTL, 2009 & 2010 Cogman, David and Thomas Luedi, Growth and Stability in China: An interview with UBS’s chief Asia economist, McKinsey & Company, 2008 Company securities filings and presentations for 7 Days, Accor, China Lodging Group, Choice Hotels, Home Inns, Hyatt, Intercontinental Hotels Group, Jinjiang, Marriott, Mandarin Oriental, Orient Express, Shangri-La, Starwood and Wyndham CRS Issue Brief for Congress, China’s Economic Conditions, January 2006 Deloitte, Asia Pacific economic outlook: China, Japan, India, Philippines, June 2010 Deloitte, Hospitality Vision - Asia Pacific Performance Review – Mixed Fortunes, Fall 2009 Deloitte, Hotel Performance Update, 2010©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 56. Bibliography 56 Chinese Lodging Industry Growth February 25, 2011 Deloitte, Survival of the Fittest The Challenges and Promise of China’s Budget Hotel Industry, 2009 Dixit, Vinay, Max Magni, Ian St-Maurice, Claudia Suessmuth-Dyckerhoff and Hsinhsin Tsai, 2008 Annual Chinese Consumer Survey, McKinsey & Company, 2008 Economic reports re: China economic growth by Merril Lynch, Scotia Bank, Conference Board, CLSA and the Peterson Institute Economist Intelligence Unit, 2010: Asia’s overly liquid Tiger Year, May 2010 Economist Intelligence Unit, CHAMPS China’s fastest-growing cities, 2010 Emerging Trends in Asia Pacific Real Estate - survey for 2011, Price Waterhouse Coopers and Urban land Institute, December 2010 Farrell, Diana, Eric Beinhocker, Ulrich Gersch, Ezra Greenberg, Elizabeth Stephenson, Jonathan Ablett, Mingyu Guan and Janamitra Devan, From ‘Made in China’: The rise of the Chinese urban consumer, McKinsey & Company, November 2006 Farrell, Diana, Ulrich A. Gersch and Elizabeth A. Stephenson, The Value of China’s emerging middle class, The McKinsey Quarterly, 2006 Fong, Kenneth, Benjamin Lo, Sylvia Chan and Joseph Greff, Hotels & Lodging – Riding the upcoming China travel boom; initiating coverage of China budget hotels, J.P. Morgan, November 2010 Freitag, Jan D. VP, Global Lodging Overview, STR Global, 2009 Global Hotel Performance Outlook – Back on Track – Asia leading the Way, STR Global, Summer 2010 Global Hotel Review – October 2010, STR Global, November 2010 He, Lin, Praveen K. Choudhary and Ying Guo, China Leisure & Lodging – Initiation of coverage: Leveraging China Travel Growth, Morgan Stanley Research Asia/Pacific, May 2010 Holz, Carsten A., China’s Economic Growth 1978-2025: What We Know Today about China’s Economic Growth Tomorrow, Social Science Division, Hong Kong University of Science & Technology, November 2005 Hongbin, Qu and Sun Junwel, China Economic Insight – the three big misconceptions, HSBC, May 2010 Hongbin, Qu and Sun Junwel, China Economic Spotlight – The start of a new rate cycle?, HSBC, October 2010 Hongbin, Qu, China economic forecast, HSBC, November 2010 Hotel Pipeline and Development Trends, STR, 2009 ITB World Travel Trends Report 2010/2011, ITB Berlin, December 2010©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 57. Bibliography 57 Chinese Lodging Industry Growth February 25, 2011 Kent, Steve, Eli Hackel, Oliver Neal, Nick Edelman and Justin Kwok, Stars are aligned for Global Hotel Outperformance, Goldman Sachs, January 2011 Kwok, Justin, Anthony Wu and Sean Chan, China: Hotels – Poised for growth: initiate 7 Days and Home Inns, Goldman Sachs, November 2010 Lane, Kevin P. and Ian St-Maurice, The Chinese consumer: To spend or to save?, The McKinsey Quarterly, 2006 Morrison, Wayne M. and Marc Labonte, China’s Currency; an Analysis of the Economic Issues, Congressional Research Services, October 2010 Morrison, Wayne M., China’s Economic Conditions, December 2009 Morrison, Wayne M., China-U.S. Trade Issues, Congressional Research Service, June 2010 Neumann, Frederic, Song-yi Kim and Anuja Kar, What can Asia do about Bubbles?, HSBC, October 2010 Neumann, Frederic, The Anatomy of Bubbles – touched up and improved, HSBC, October 2010 No Pause Yet, The Wall Street Journal, December 2010 Qiao, Helen, Will China Grow Old Before Getting Rich?, Goldman Sachs, February 2006 Shadow Lending Hampers Beijing, The Wall Street Journal, December 2010 Stephen Roach on the Next Asia: Opportunities and Challenges for a New Globalization, Stephen S. Roach, 2009 Stringer, Tony, John Hatton, Robert Grossman, Rain Newton-Smith and Scott Livermore, The Impact of a China Slowdown on Global Credit Quality, Fitch ratings and Oxford Economics, November 2010 The China Opportunity, Intercontinental Hotel Group, 2010 Top 30 airport traffic rankings, Airport Council International, 2010 Tung, Chen-yuan, Amy T. Mah and Guo-chen Wang, China Economic Forecast Report, China Economic Databases, Center for China Studies, National Chengchui University, March 2010 UNWTO World Tourism Barometer, UN World Tourism Organization, June 2010 Wang, Qing and Steven Zhang, Chinese Economy through 2020: A Golden Age for Consumption, Morgan Stanley Research Asia/Pacific, November 2010 Wang, Qing and Yuande Zhu, China Economics – China Macro Risk Radar, Morgan Stanley Research Asia/Pacific, October 2010 Wang, Qing, Steven Zhang and Ernest Ho, China Economics – 2011: A Year of Reflation, Morgan Stanley Research Asia/Pacific, November 2010©2011 Apertor Hospitality, LLC. All Rights Reserved.
  • 58. Bibliography 58 Chinese Lodging Industry Growth February 25, 2011 Woetzel, Jonathan, A guide to doing business in China, The McKinsey Quarterly, 2004 Woetzel, Jonathan, Janamitra Devan, Richard Dobbs, Adam Eichner, Stefano Negri and Micah Rowald, If you’ve got it, spend it: Unleashing the Chinese consumer, McKinsey Global Institute, August 2009 Woetzel, Jonathan, Janamrita Devan, Luke Jordan, Stefano Negri and, Diana Farrell, Preparing for China’s Urban Billion, McKinsey Global Institute, March 2008 World Economic Outlook, IMF, July 2010 World Travel & Tourism Council, China Hong Kong SAR and China Macau SAR- The Impact of Travel & Tourism on Jobs and the Economy, 2006 World Travel & Tourism Council, China Travel & Tourism Economic Impact 2010, 2010 Woronka, Chris and Tim Wengerd, Company alert – Home Inns – Hikes ’11 unit growth outlook; key positive catalyst for ‘ 12, Deutsche Bank, January 2011 Woronka, Chris and Tim Wengerd, Home Inns – Growth remains Impressive; raising price target to $55, Deutsche Bank, August 2010 Woronka, Chris and Tim Wengerd, Home Inns – Growth still underappreciated, Deutsche Bank, December 2009 Yam, Denise, New Property measures to Dampen Speculation, but not Prices, Morgan Stanley, November 2010©2011 Apertor Hospitality, LLC. All Rights Reserved.
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