Investment highlights
Once again, it covered Jinjiang Hotels (600754) to outperform the industry. The target price was 26.50 yuan, corresponding to 20 times P/E in 2025. The reasons are as follows:
There are plenty of transformation and optimization initiatives, focusing on actual implementation results. 1) The company has become the largest hotel chain group in the country based on endogenous epitaxial extension. As of 1Q24, the number of hotels operating at home and abroad reached 12,595 (about 1.04 million rooms). 2) The company plans to develop leading key brands at the core; the overall proportion of mid-range and above hotels will increase from about 33% in 2018 to about 59% in 1Q24. We believe that an increase in the share of mid-range and above products is expected to drive continuous improvement in product strength and RevPAR performance. 3) The company sells fashion tours to implement an asset-light transformation strategy; adhering to the principle of “decentralizing power, strengthening the headquarters, and implementing the region”, it once again optimizes the organizational structure to help the territorial layout. 4) Focus on RevPAR performance: We estimate that the RevPAR for limited services in Jinjiang fell by more than 10% in April; RevPAR fell by about 1% in May. It is recommended to continue to pay attention to demand-side performance and marginal changes in RevPAR during the peak summer season.
Looking ahead, it is recommended to focus on the three major marginal improvement factors: direct management improvement, channel optimization, and overseas loss reduction.
1) Direct management transformation: The company continues to implement the direct store screening, shutdown and upgrading strategy. We estimate that the overall loss of direct-run stores in China was about 50 million yuan in '23. It is recommended to pay attention to the progress of subsequent direct store upgrades and profitability improvements. 2) Channel optimization: By the end of '23, the Jinjiang CRS channel accounted for about 32%, and the comprehensive rate was slightly over 3%. The company's 23-year performance conference mentioned that it was signing CRS supplementary agreements with old franchisees, improving the membership system, and enhancing membership stickiness. We believe that through the above measures, the company is expected to gradually increase the share and rate of CRS channels. 3) Overseas loss reduction: The total amount of overseas loans was about 1.43 billion euros by the end of '23. The company had completed an overseas capital increase of 300 million euros in June '24, and plans to complete some loan interest rate optimization in 2H24. Furthermore, the company is considering cooperating with domestic banks to reduce average loan interest rates. We recommend continuing to pay attention to the implementation timeline of measures related to reducing overseas interest expenses and the overall overseas loss reduction process.
What is our biggest difference from the market? We recommend focusing on the results of the company's new round of organizational structure transformation, the transformation and optimization of direct-run stores, CRS channel construction, and the implementation of measures such as reducing overseas interest expenses. If marginal improvements are made, we believe it is expected to bring some potential profit flexibility to the company.
Potential catalysts: Direct store operating performance exceeded expectations; CRS channel optimization progress exceeded expectations, etc.
Profit forecasting and valuation
We expect the company's 2024/25 EPS to be 1.17/1.35 yuan, respectively, and a CAGR of 20% (2023-25). The current stock price corresponds to 20/18x 2024/25e P/E for A shares and 8/7x 2024/25e P/E for B shares.
Referring to comparable company valuations, we gave A/B shares a target price of 26.50 yuan/1.45 US dollars (corresponding to 20 times A shares and 8 times 2025e P/E for B shares, respectively). A/B shares were all rated outperforming in the industry. Currently, the upward space for A/B shares is 11.7/10.3%, respectively.
risks
Consumption power and travel demand are under pressure, scale expansion is slower than expected, the results of various reforms are weaker than expected, supply is increasing or leading to increased competition.