JIN JIANG INT’L HOTELS(600754)COMMENTARY：ACQUIRING 65% OF WEHOTEL TO DRIVE FASTER MEMBERSHIP INTEGRATION

　　Core views:
　　Jin Jiang Int’l Hotels intends to acquire the 65% of shares of WeHotel held by Jin Jiang Asset Management (45%), Jin Jiang Capital (10%) and Tibet Hony Capital (10%) by way of transfer by agreement, for a total consideration of Rmb850.2mn, and the Company’s shareholding will increase to 75% after the acquisition. In this proposed acquisition, Jin Jiang Asset Management and Jin Jiang Capital made a performance compensation commitment: If the settlement date is no later than Dec 31, 2022, the audited attributable net profit (ANP) of the target company in 2022, 2023 and 2024 shall not be less than Rmb28.0635mn, Rmb40.207mn and Rmb57.9269mn, respectively, corresponding to deal valuation of 47x, 33x and 23x, respectively. This acquisition will likely help the Company further integrate the membership ecosystem, increase the proportion of direct sales channels and the revenue contribution of the central reservation system (CRS), reduce operating costs, and integrate the resources of multiple segments of Jin Jiang Int’l Group to improve member traffic and member stickiness, and solve the problem of related party transactions (RPT) of the Group. Under the short-term pandemic disruptions, the Company’s valuation has returned to a relatively moderate level. In the medium to long term, top hotel operators have accumulated stronger competitive advantages in recent years, and their post-pandemic development is worth anticipating.
　　Abstract:
　　Jin Jiang Int’l Hotels intends to acquire 65% equity interest in WeHotel. On Nov 24, 2022, Jin Jiang Int’l Hotels announced that it entered into an equity transfer agreement, pursuant to which it proposes to acquire the 65% equity in WeHotel held by Jin Jiang Asset Management (45%), Jin Jiang Capital (10%) and Tibet Hony Capital (10%) by way of transfer by agreement, for a total consideration of Rmb850.2mn, or Rmb588.6mn for Jin Jiang Asset Management and Rmb30.8mn for each of Jin Jiang Capital and Tibet Hony Capital. The funds were originally raised for the hotel renovation and upgrade project, accounting for 17.08% of the net proceeds raised via the non-public offering. After the completion of the proposed acquisition, the Company will hold 75% of the equity of WeHotel while Shanghai Lianyin Venture Capital holds 19% and Shanghai Guosheng Group Investment holds 6%. The transaction constitutes a related party transaction (RPT) but does not constitute a major asset restructuring. The proposal has been deliberated and approved by the board of directors and the board of supervisors, but still needs to be deliberated by the shareholders meeting.
　　Operation status of WeHotel: WeHotel was established on Feb 16, 2017. Its main businesses include providing next-generation digital technology, products, services and system solutions-such as central reservation system (CRS), check-in pass, or property management systems (PMS), enterprise key account management systems, settlement pass, one-click check-in-for the hotel segment of Jin Jiang, as well as a series of data specifications and information security defense systems such as data governance and “cloud, data, network and security” infrastructure for the group and various business segments. It also provides high-quality and effective corporate travel management technical services for more than 100,000 enterprises and groups through its self-developed corporate travel management platform. In 2020, 2021 and 1H22, the revenue of WeHotel was Rmb284mn, Rmb233mn and Rmb104mn, the attributable net profit (ANP) was Rmb-14.216mn, Rmb10.7473mn and Rmb7.9593mn, and the net profit margin was -5.0%, 4.6% and 7.7%, respectively.
　　The valuation of WeHotel under the equity method is Rmb1.308bn. As of Jun 30, 2022, WeHotel’s assets were Rmb1.561bn, the debt to asset ratio was 67.1%, the total book value of owner's equity was Rmb514mn, the equity method valuation was Rmb1.308bn (the mark-to-market valuation was Rmb1.275bn), implying an appreciation of 154.55%. Jin Jiang Asset Management and Jin Jiang Capital have made cash compensation commitments for the performance of the target company: if the settlement date is no later than Dec 31, 2022, the audited ANP in 2022, 2023 and 2024 shall not be less than Rmb28.0635mn, Rmb40.207mn and Rmb57.9269mn, respectively. If the actual cumulative ANP does not reach the promise (Rmb126,197,400) at the end of the performance commitment period, Jin Jiang Asset Management and Jin Jiang Capital will separately compensate the Company in cash, and the performance commitment compensation amount = (committed cumulative net profit - audited cumulative net profit as of the end of the performance commitment period) ÷ the promised cumulative net profit × the transaction price, and the total compensation amount shall not exceed their respective transaction considerations. According to the committed net profit, the deal corresponds to 47x/33x/23x 2022E/23E/24E PE, respectively.
　　Impact of the proposed deal:
　　Economies of scale help improve service quality, increase CRS charges and direct sales, boost revenue and reduce costs. In the future, Jin Jiang’s existing hotels can be placed on the WeHotel platform, and WeHotel will be responsible for the construction of Jin Jiang's membership ecosystem that helps unify the online entrance of Jin Jiang members as well as the membership point rules and the construction of the membership management system. Based on grassroots survey, historically the Vienna brands did not charge a CRS fee, and some brands under Botao only charged a fixed CRS fee of Rmb3~Rmb6 for a single room night. At present, the Vienna and Botao brands have begun to gradually harmonize the CRS fees, and the medium-term target rate is 5% of revenue. In addition to the increase in CRS rates, the acquisition of WeHotel will help Jin Jiang further increase the proportion of direct selling. According to the Company's earnings call, members contributed 64% of room nights in 1H22, and the online direct sales ratio was 53%, which still has room for further improvement compared to Huazhu and Atour. According to company announcements, in 2021, Huazhu and Atour members contributed 75% and 77.4% of room nights, respectively, and the direct sales ratio was 83% and 77.4%, respectively. The increase in the proportion of direct sales is conducive to reducing commission fees paid to online travel agency (OTA) platforms and selling & marketing (S&M) expenses. In 2021, Jin Jiang's S&M expense ratio was 7.8%, which still has room for further declines compared with Huazhu’s 5.0% and Atour's 5.8%.
　　Integrate the resources of Jin Jiang Int’l Group, expand the membership system and improve user stickiness. In addition to the “Luxury Classic Hotel Sub-Membership Program” and the “Preferred Hotel Sub-Membership Program” covering nearly 40 mid-scale and economy brands under Jin Jiang Int’l Hotels, the sub-membership programs of the tourism, transportation, gastronomy and other industries under Jin Jiang Int’l Group will be launched step by step, and the rights sharing and points exchange of Jin Jiang’s hotel memberships with various other memberships and overseas hotels through both online and offline channels will be gradually completed. The benefits of sub-membership of the group can bring differentiated benefits and experience to members and promote the circulation and mutual guidance of member traffic within the ecosystem. As of 3Q22, Jin Jiang has 182mn memberships, which has obvious advantages in the industry, and more diversified rights and interests can improve the stickiness of members and bring more repurchases. According to Atour’s prospectus, the repurchase rate of Atour members in 2021 was 52.8%, and the stickiness of Jin Jiang members is likely to further improve in the future.
　　Reduce RPTs and enhance the efficiency of the Company's capital operation. After the completion of this proposed transaction, WeHotel will be consolidated into the Company’s financial statements, and the above-mentioned RPTs and current payments will be offset within the scope of the consolidated statements, which will help reduce outstanding RPTs and payments disclosed in the Company’s consolidated statements.
　　Potential risks: Repeated Covid flare-ups at home and abroad; economic growth missing expectations; hotel management efficiency improvement below expectations; store openings slower than expected; overseas inflation and geopolitical conflicts exceeding expectations, etc.
　　Investment advice: Given exacerbated Covid flare-ups in China since Oct, hotel operators are likely to remain under pressure in the short term. Taking into account the existing revenue sharing arrangements between WeHotel and the Company before the proposed acquisition-the RPTs between the two in 2021 and 2H22 were Rmb133mn and Rmb56.1489mn, respectively, accounting for 56.8% and 54% of WeHotel's revenue in 2021 and 1H22, respectively-we maintain our 2022E/23E/24E EPS forecasts of Rmb0.06/ 1.73/2.24 for the Company, and the current price corresponds to 28x/22x 2023E/24E PE, without considering the dilution due to the global depositary receipt (GDR) offering. Under the short-term pandemic disruptions, the Company’s valuation has returned to a relatively moderate level. In the medium to long term, top hotel operators have accumulated stronger competitive advantages in recent years, and their post-pandemic development is worth anticipating. We are optimistic that after the acquisition of WeHotel, the Company’s front, middle and back office integration will further accelerate and the profit will increase. In the meantime, store openings of core brands will likely accelerate under organizational upgrading and brand repositioning, along with continued scale expansion assisted by global capital operation. In reference to the fact that comparable companies-such as Huazhu Group (01179.HK/HTHT.O) and BTG Hotels (600258.SH)-can generally achieve an average forward PE of 30x~40x in the up cycle of the industry, and considering that the Company is accelerating store openings in the upward cycle of business management and enjoys certain premiums as an industry leader, we value it at 37x 2023E PE and assign a target price of Rmb64. Reiterate the “BUY” rating.
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   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。