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The Super-hot Chinese Sector

January 20, 2012 | About:
Profit Confidential

Profit Confidential

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With Chinese New Year’s coming up on Monday, I have been focusing on China. The country has rapidly become one of the top tourism markets in the world for both domestic and international travelers. The country has been steadily building its road, rail, and air infrastructure aimed at make traveling in the country much easier. China is predicted to see major growth in its domestic travel from now until 2013, according to research report, China Tourism Industry Forecast to 2012, by traveldailynews.com.

As income levels rise in this country, we are seeing a corresponding increase in domestic travel. The country’s domestic travel market could be worth approximately RMB 3.9 trillion or about US$590 billion by 2020, according to a report published by The Boston Consulting Group (Taking Off: Travel and Tourism in China and Beyond). The country will see strong growth in its inbound travel industry from 2011 to 2013 that will be driven by overseas investment and the influx of foreign companies, according to traveldailynews.com report China Tourism Industry Forecast to 2012. But, while higher-end hotels like the Hilton are desirable, the cost is often out of reach for the majority of domestic and foreign visitors. I like the budget end of the hotel side similar to the Days Inn, Super 8 Motels, Howard Johnston, and Holiday Inns in the United States.

China has a population of about 1.34 billion people; over four times the size of the United States. The size of the middle class is over 300 million and this is expected to grow exponentially. The World Bank estimates that, within five years, there will be 542 million middle-class consumers in China. I have heard estimates of up to 700 million! And as wages increase so will the spending on non-essential items such as travel and recreation.

The Chinese economy saw its GDP slowed to 9.1% in the third quarter, down from 9.5% in the second quarter and over 10% in 2010. The Chinese economy may be slowing, but the growth is still staggering given the muted growth in the United States and Europe.

The reality is that the Chinese consumer is continuing to spend money. In September, retail sales in China grew a staggering 17% versus a muted 1.1% in the U.S.

To handle the expected increase in travel, there is a push to build more hotels and motels across the vast country.

I like Chinese travel stocks, including China Lodging Group, Limited (HTHT), Home Inns & Hotels Management Inc. (HMIN), and 7 Days Group Holdings Limited (SVN). Note that these are not recommendations to buy; just an example of stocks to look at.

All three companies have above-average long-term share appreciation potential, but 7 Days Group is more interesting due to its better valuation versus the other two rivals.

7 Days Group is the third largest national economy hotel chain in China. The company offers limited services under the “7 Days Inn” brand, similar to budget hotels and motels in the U.S. In the third quarter of 2011, the company added 116 net hotels. As of September 30, 2011, 7 Days Group operated 838 hotels spread across 127 cities and 83,487 rooms. In addition, growth is expected to be strong, with 251 hotels in the pipeline.

7 Days Group may or may not have the greatest potential of the three stocks. Only time will tell, but what is for sure is that the travel sector in China is a key growth area.

I truly feel China continues to be the place to make money going forward, which you can read more on in China: On the Offensive Again.


Rating: 3.0/5 (9 votes)

Comments

Wang wei
Wang wei - 2 years ago


again,what about the price ?

show me the value, not the hot stock!
BEL-AIR
BEL-AIR - 2 years ago
What about the books, you cannot trust what is on the books with Chinese companies...

Plus you cannot trust the management of these companies...

Plus HMIN HAS A PE of 76.....

SVN has PE of 45....

HTHT has PE of 67.....

I never paid more than a PE of more than 8 for a company in my entire life.

You should post this info on some momentum or trading website, nothing to do with value investing.

I know of 3 Chinese hotel and tourism stocks that turned out to be frauds just in the last year alone, and went to zero or were halted and delisted, I would say these would be great to short if I were a trader.

I would never buy a company from China again, you cannot trust them.
Wang wei
Wang wei - 2 years ago
I am from China, I don't agree with what Bel-air has said about the frauds things of chinese companies,

some Chinese companies do cheat, but don't put the Cheat tag on all the companies.

the more investors like you have the negative attitudes or whatever bias, the more value I can find in thoese cheating companies, frankly speaking I don't care your attatude, because weather you like it or not, the Chinese companies are there and the true value will befound, if you seek wisely.

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