NEW YORK--(BUSINESS WIRE)--China represents a secular growth opportunity for US lodging C-corps, but near-term headwinds such as oversupply, government austerity, and the volatility of an emerging market are important credit considerations, according to Fitch Ratings. We maintain a favorable fundamental view of near-term US lodging supply and demand, but the industry is highly cyclical so the global macroeconomic environment is a key part of that outlook.
Excess supply growth continues to pressure China hotel fundamentals. Occupancy trends seemed to bottom in 2013, evidenced by positive monthly year-over-year growth from July through November, according to STR Global. However, the negative implications of oversupply reappeared when occupancy declined by 7.8% during January 2014. Aggressive pricing strategies were the primary reason for the decline in occupancy, although the industry faced a difficult year-over-year compare. Hotel managers pushed average daily rate to a slight 0.2% growth after ten consecutive months of declines.
Government austerity is exacerbating the oversupply of hotels. Fitch expects government demand to stabilize during 2014, but remain an overhang - particularly for the luxury, upper-upscale and full service segments. Positive comments during fourth quarter earnings calls suggest that strengthening corporate and leisure demand is offsetting the weakness in government demand. Further, volatility inherent in emerging markets due to external macroeconomic shocks remains a credit consideration, with the most recent examples being the devaluing of the Yuan and the instability in the Crimean peninsula. Longer term, Fitch generally views exposure to advanced emerging markets as a credit positive due to the benefits of diversification.
The China growth strategies of individual US C-corps' China are competitively rational, which should help alleviate the headwinds in this market. Marriott continues to target growth in the luxury and full service segments in the near-term. Starwood is focusing on secondary and tertiary cities, having already built a significant luxury and upper-upscale presence in most primary markets. Hyatt's objectives for growth aim below the full service level while Hilton targets the 3.5 star level and Wyndham is growing its select service offerings.
Growth in domestic travel and international travel to China has directly benefited C-corps who have expanded their rooms systems in the country. Longer term, Fitch expects the removal of the household registry system to redirect urbanization to select Tier 3 and Tier 4 cities. This should benefit C-corps such as Starwood, which is targeting growth in these areas. (For more information see Fitch's report: "View Point: APAC Corporates: Compendium of Topical Commentary.")
Fitch believes the growing Chinese middle class, more willing and able to travel internationally, is a compelling secular growth opportunity for the lodging C-corps. However, the C-corps need to further build brand awareness among the Chinese population and build loyalty in order to tap into this outbound market from China. Outbound travel from China to Asia has seen substantial growth, and Fitch expects outbound travel to the rest of the world to continue to have a meaningful long term impact on the C-corp's worldwide systems.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research:
View Point: APAC
Corporates - Compendium of Topical Commentary Published in November 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725355
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