Discount hotel chain China Lodging Group Ltd is emblematic of China's blistering growth, but it could be hurt if the government takes steps to prevent the world's third-largest economy from overheating. China Lodging, which hopes to raise about $100 million in an initial public offering next week, has grown rapidly by renting budget rooms under three different brands for an average of 174 yuan ($25.49) a night.
The number of rooms the company had to rent increased 160 percent in 2008 and another 35 percent in 2009. At the end of December China Lodging had 28,360 rooms for rent, mostly in big cities in the heavily industrialised eastern part of the country.
Its occupancy rate in 2009 was 94 percent, up from the mid- to high 80s the previous two years. China's hotel industry has grown rapidly as foreign tourist and business travel has increased and Chinese citizens are travelling more within the country as incomes grow.
Chinese citizens are willing to spend on hotels during pleasure trips but budget hotels are the choice for businesses aiming to keep costs down. China is taking moves to cool its explosive real estate sector and hotels are rumoured to be next.
On Thursday, the Chinese government said it would require some large state-owned enterprises whose core business is not in the property sector to withdraw from the business, in a move to try and cool the red-hot sector. Media reports said the government could next target the hotel industry that has assets worth hundreds of billions of yuan, given the huge number of players in the market.
China Lodging has not been immune to the financial meltdown. The company's hotels in Wuxi, Suzhou and Ningbo have seen a decline in business due to the global financial crisis because they rely heavily on international trade, the company said in its prospectus. A late November IPO by Chinese discount hotel chain 7 Days Group Holdings Ltd could also give investors pause.
The shares rose 13.6 percent in their debut but are now trading 6.7 percent below their IPO price. 7 Days Group had 28,266 rooms for rent as of September 30. Sweet said China Lodging's price - it plans to sell 9 million American Depository Shares for between $10.25 and $12.25 each - may need to be cut.
If the IPO prices at the midpoint of the expected range China Lodging will have a price-to-book value of 2.6 compared with 7 Days Group's 8.5 and Home Inns & Hotels Management Inc's 3.9, according to IPOdesktop.com President Francis Gaskins. Gaskins expects the China Lodging IPO to do well.
The company said it does not hold land use rights or own any of the hotel properties it operates. As of December 31 lessors failed to provide documentation for 46 properties. It also holds several leases without the permission of the property owners or government authorities, it said.
Such non-compliance issues may not be unusual among companies operating in China. 7 Days Group made similar statements in its prospectus. Goldman Sachs and Morgan Stanley are leading the underwriters. China Lodging founder and Executive Chairman Qi Ji was co-founder of online travel services provider Ctrip.com and Chinese economy hotelier Home Inns, both of which are publicly traded on Nasdaq. China Lodging is expected to price on Thursday. Other IPOs expected next week are telecom equipment maker Calix Networks Inc, First Interstate BancSystem Inc, crude oil and drybulk shipper Alma Maritime Ltd and chipmaker MaxLinear Inc.