The current situation of the company
Shares of 600258.SH, another big hotel leader, fell more than 7 per cent on January 8, 2019. Speculation is partly due to lower-than-expected RevPAR growth in December 2018, raising concerns about RevPAR growth in the hotel industry as a whole.
In fact, the occupancy rate of Jinjiang's domestic limited service hotels (1H18 accounts for 70 per cent of total revenue) fell 2.8 per cent in November (down 1.6 per cent in October). We believe that the accelerated decline in occupancy is the main reason for the slowdown in RevPAR growth in November (RevPAR grew 5.7% year-on-year in November).
Comment
In the long run, we expect China's hotel industry to enter a business cycle. The supply of China's hotel industry has ended the period of high double-digit growth and is now close to zero growth. Under similar circumstances, the US hotel industry has achieved long-term RevPAR growth (RevPAR has grown at a compound annual rate of 3.1 per cent over the past 15 years, while hotel supply has grown at a compound annual rate of 1.1 per cent), providing room for the improvement of chain rates and the breeding of large companies.
In the short term, a slowdown in economic growth may put pressure on the company's operating performance and affect the upward space for share prices. Business demand is closely related to the macroeconomic environment. Economic downturn often affects the demand and growth of the industry. RevPAR growth in the hotel industry slowed to 2.5 per cent in the third quarter of 2018 (4.6 per cent in the second quarter of 2018), according to STR. Jinjiang's occupancy rate continued to decline in the fourth quarter of 2018 may also continue to put pressure on its RevPAR growth, affecting the upward space of the stock price. Although Jinjiang, as a leader in the hotel industry, already has a better brand membership system, coupled with the expansion of the mid-range hotel network, it can have a certain degree of defense and better RevPAR growth rate than the industry even in the industry downward cycle.
Valuation proposal
We maintain our profit forecast for 2019 and introduce a profit forecast of 782 million yuan for 2020. The current share price corresponds to 12.3 times 2019 earnings and 12.1 times 2020 earnings. We maintained our recommended rating but lowered our target price by 14% to HK $2.41 in the light of depressed market sentiment. Our target price is based on segment valuation and has 29.5% upside compared to the current stock price.
Risk
The macroeconomic environment is weak.