China Lodging Group, parent company of the HanTing economy hotel brands, is expected to raise $90-110 million in its Nasdaq IPO this week.
This IPO, scheduled for Friday 26 March, also highlights Ctrip's latest move to extend its dominance in China distribution through strategic investments.
HanTing operates 236 hotels, 28,360 rooms across 36 cities in China, and claims to be the leader in RevPAR and occupancy rate among China economy hotel chains.
Ctrip's significant investment in China Lodging Group
Leveraging its market share, cash war chest, and insider relationships, Ctrip is making strategic investments in hotel chains to secure access to inventory and potentially even integrate IT and some operations with their partners.
On March 12, Ctrip announced that it will purchase shares equivalent to 8% of the company at the IPO price (see Tnooz, JLM Pacific Epoch) and also 15% of another hotel chain, BTG-Jianguo Hotels & Resorts. At the expected IPO price, Ctrip’s investment will cost them $48-58 million. China Lodging Group will appoint Ctrip co-founder and CEO Min Fan as a Board Director.
For China Lodging Group, 8% to Ctrip represents a significant stake—all other public investors are expected to account for only another 15% of the company. While some of Ctrip's shares are newly issued, most of the shares are being sold by China Lodging Group's venture investors: Chengwei, CDH Ventures, IDG VC, Northern Light, and Pinpoint Capital.
After the sale to Ctrip and IPO, VCs will represent only 15.6% of the company.
China Lodging Group investment just the latest in a series of strategic moves by Ctrip to dominate hotel distribution
This move is just the latest in Ctrip’s grand strategy to strengthen their already powerful position in hotel distribution.
In 2009, Ctrip also made a similar move with Home Inns (NASDAQ: HMIN), another leading player in the economy hotel segment in China. CTrip invested $50 million to boost its ownership stake in Home Inns by 9.52% to a total of 18.25%.
Home Inns, as of the end of 2009, had 616 hotels and 71,456 rooms, covering 120 cities in China. Ctrip also sits on the Board of Home Inn.
Since 2008, Ctrip experimentedwith its own branded hotel distribution services, under the Starway Alliance brand. But with only 60 hotels in 22 cities, this effort seems small relative to their latest strategic investments in Home Inns and China Lodging Group.
After seeing Ctrip’s Jane Jie Sun speak at a Goldman Sach’s Internet conference, Tom Botts of Hudson Crossing wrote a perceptive post highlighting the true nature of the Home Inn investment:
"[Jane Sun] said the investment has allowed Ctrip to gain access to deeper inventory and that Ctrip and Home Inns are in the early stages of connecting their systems to allow electronic distribution. She also mentioned that she saw this reservations connectivity and inventory management as a catalyst for other domestics chains - as Home Inns goes, so goes the industry."
By investing in China Lodging Group, Home Inns, Jianguo Hotels, and more hotel chains in the future, Ctrip will also be able to drive deeper systems integration between the Customer Reservation Systems (CRS) of partner hotel chains and Ctrip’s online and offline points-of-sale.
Tom puts it into a US perspective: What if Expedia Group invested in Wyndham and InterContinental, gained an inventory and price advantage, and integrated with their CRS?
Using downstream customer market power to gain upstream supplier advantages
Ctrip is already the dominant online travel agency with an estimated 53%+ market share of the online travel market (source: iResearch.com.cn, 2009 Q2).
This insures that economy hotel chains, who seek to develop their own distribution channels, will be locked into a love-hate relationship with Ctrip as they all jockey for direct-to-consumer distribution power.
In many ways, Ctrip and the “branded economy hotels” like Home Inns, China Lodging Group (HanTing), 7 Days Inns, Green Tree Inn, and Motel 168, are in the same business of using technology and service to revolutionize hotel distribution.
In China, the economy hotel segment at an earlier stage of development than online travel distribution
In China, the branded economy hotel segment is actually at an earlier stage of development than online travel distribution--a significant difference from the United States and other developed markets.
The China Lodging Group S-1 filing highlights the nascent stage of the economy hotel segment in China. According to Euromonitor International, the lodging industry in China had 315,893 hotels and 27.34 million hotel rooms as of end of December 2008.
However, the “branded economy hotel” segment only represented a small segment of the total base of hotels: 2,805 hotels and 312K hotel rooms as of year end 2008.
The differentiators between “branded” economy hotels and other cheap hotels are:
- consistent, predictable service and brand standards.
- direct-to-consumer online booking and call-center based reservations.
- brand-wide loyalty programs.
All three of these aspects are also a source of Ctrip’s strength as a hotel distribution company.
Deals powered by Ctrip's close relationships
In the case of Home Inns and China Lodging Group, Ctrip enjoys an especially cozy relationship with the two companies.
Home Inn was co-founded by Neil Nanpeng Shen, who also co-founded Ctrip and sits on the Board of both companies.
China Lodging Group was founded by Qi Ji, who co-founded Home Inns and also Ctrip, and sits on the Board of both China Lodging Group and Ctrip.
Home Inn co-chairman Yunxin Mei serves on the board of Home Inn and is also vice-chairman and president of BTG (Beijing Tourism Group), a state-owned enterprise focused on tourism. BTG’s hotel subsidiary BTG-Jianguo Hotel & Resorts also received an investment from Ctrip.
The real test of Ctrip’s strategy will come when they try to secure similar deals with other hotel operators without as close a relationship as Home Inns, BTG-Jianguo, and China Lodging Group. It appears they intend to do so.
As of March 2010, Ctrip has leveraged its access to capital markets to raise over $200 million to pursue additional future acquisitions in “related businesses.”
The China Lodging Group offering will be for 9 million shares of American Depository Shares (ADS) representing 36 million ordinary shares and priced between $10.25 and $12.25 per ADS. Immediately after the offering, there will be 235,618,079 shares outstanding.
Ctrip 8% ownership will represent 18,849,446 ordinary shares, a sizable amount compared to the 36 million share public float of the company.
Could China Lodging Group, BTS-Jianguo, and Home Inns be the beginning of the tipping point that would force encourage the rest of economy hotel chains to partner more closely with Ctrip?
Will more hotel suppliers be receptive to Ctrip's warm embrace? Or will they fear Ctrip's growing market power in hotel distribution in China?
NB: VentureSprout associate Kai Liu contributed to this article.
NB: Home Inns photo courtesy China Daily.