Global leader in hospitality consulting China Hotel Market Sentiment Survey August 2014

Horwath HTL China Hotel Market Sentiment Survey

August 2014

INTRODUCTION CHINA V.S. GLOBAL SENTIMENT TRENDS

SHARE OF RESPONDENTS BY REGION

The Horwath HTL China Hotel Market Sentiment Survey, part of a global initiative, has been designed to provide the China hotel industry with a quick assessment of the future market outlook. The four-question survey focuses on the outlook for occupancy, average room rate and total revenue. In this mid-year survey, hoteliers have been asked to make comments on their expectations for the coming semester in comparison to the second half of 2013, as well as share comments on the impact that the global economic uncertainties continued to have on hotel room night demand. This report summarizes the outcome, gathered from responses across 25 provinces and municipalities. Of the 334 respondents, 42 percent of them came from East China (Shanghai, Zhejiang, Jiangsu, Anhui, Fujian and Shandong), 22 percent from North China (Beijing, Tianjin and Hebei), 18 percent from Mid-South China (Henan, Hubei, Jiangxi, Guangdong, Guangxi and Hainan), followed by Southwest China (Chongqing, Guizhou, Sichuan and Yunnan) at 10 percent, Northeast China (Liaoning and Jilin) at 4 percent, and Northwest China (Gansu, Ningxia, Qinghai and Shaanxi) at 4 percent.

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Horwath HTL China Hotel Market Sentiment Survey

SHARE OF RESPONDENTS BY STAR CLASSIFICATION

August 2014

In regards to the star classification of the participating properties, the majority of the contributions were from 5-star hotels (72 percent), followed by 4-star hotels at 20 percent. The 3-star and budget/economy sections only accounted for a small portion of respondents at 3 percent and 5 percent respectively. Following the same pattern over the last five years, the mid-year sentiment has turned negative after a more optimistic outlook at the start of the year, with sentiment this time declining to a negative score of 12, reflecting the anaemic economic growth in the country and the great impact on hospitality industry from the central government policy. This is the twelfth China survey by Horwath HTL, and we have analyzed previous sentiment scores in order to provide some context to the sentiment scores recorded .

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Horwath HTL China Hotel Market Sentiment Survey

SENTIMENT RANKINGS

SENTIMENT RANKINGS BY REGION

SCORE FEB 2012

JUL 2012

FEB 2013

JUL 2013

FEB 2014

AUG 2014

North

56

20

-6

-51

-19

-30

Northeast

11

-6

-24

-72

-33

-33

East

34

-2

7

-32

1

1

Mid-South

35

-20

-4

-24

-8

-15

Northwest

-5

-71

13

-15

-29

-17

Southwest

61

8

-7

-55

-6

-9

China Average

38

-3

-4

-38

-9

-12

FEB 2012

JUL 2012

FEB 2014

AUG 2014

Beijing

57

31

0

-45

-22

-26

Shanghai

30

4

15

-16

3

11

Shenzhen

51

8

17

-8

10

5

Chongqing

56

24

-5

-55

-19

34

Tianjin

59

-1

-32

-49

-22

-44

Sanya

-13

-49

-3

-7

-5

-12

BY KEY CITY

SCORE FEB 2013

JUL 2013

“More negative than the global hotel market sentiment (positive 9), general sentiment of the China hotel industry continued to be negative with a national average score of negative 12.” RANKING SCORE KEY Much Worse Worse Same Better Much Better

August 2014

-150.0 -75.0 0 75.0 150.0

As a way to measure and compare the results across regions and cities in China, we have created an index to formulate an overall average sentiment score from the forward looking questions. Points are assigned to each corresponding response and compounded accordingly. The index utilizes a scale of negative 150 to positive 150 in which a score of negative 150 denotes a sentiment of absolute pessimism; a zero score indicates unchanged expectations from the previous year whereas a positive 150 signifies a very optimistic outlook. The sentiment index or scores then allow trends to be observed over time. Coming to the second half of the year, the sentiments of hoteliers across most regions and some key cities in China have remained negative, affected by the slowing economic growth and the continued belt-tightening police. More negative than the global hotel market sentiment (positive 9), general sentiment of the China hotel industry continued to be negative with a national average score of negative 12. Being the only region that recorded a positive outlook, East China registered the highest score at 1, same as the last period’s. Supported by the Chongqing market, the Southwest’s sentiment kept a score above the national average at negative 9. North and Northeast lag behind, recording below negative 25, in which North recorded the biggest decline. Among the key cities across China, the top three cities that recorded the highest scores were Chongqing (34), Shanghai (11) and Shenzhen (5), while Beijing (-26) and Tianjin (-44) rounded the bottom two.

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Horwath HTL China Hotel Market Sentiment Survey

August 2014

FIRST HALF MARKET PERFORMANCE Question 1: Was the first half 2014 market performance better or worse than you expected at the start of the year? OCCUPANCY In response to expectations on market-wide occupancy performance, more than 40 percent of the hoteliers replied that occupancy in the first half of 2014 was better or much better than expected; some 24 percent felt that performance was in line with expectations; while about 30 percent and 6 percent felt that occupancy performance was worse and much worse respectively.

“Respondents showed that ARR fared worse than the other two performance gauges, at 56 percent, indicating that ARR had performed worse or much worse than expected.”

MARKET PERFORMANCE RANKING BY REGION

Avg

Occ

ARR

Rev

North

-31

-9

-49

-35

Northeast

-29

-25

-38

-25

East

1

14

-21

11

Mid-South

-10

10

-30

-11

Northwest

-27

-17

-40

-23

Southwest

-33

-16

-43

-39

China Average

-14

3

-33

-11

AVERAGE ROOM RATE Respondents showed that ARR fared worse than the other two performance gauges, with the main difference being more hoteliers with negative assessment, at 56 percent, indicating that ARR had performed worse or much worse than expected. About 26 percent of respondents voiced that ARR had remained the same. For the 18 percent of hoteliers holding positive assessment, only 2 percent responded that ARR in the first half was much better than expected. TOTAL REVENUE The sentiment of total revenue was more negative than occupancy index, with less than 33 percent of respondents replying total revenue was better or much better than expected. The majority of hoteliers expressed negative assessment, with 44 percent of hoteliers indicating total revenue was worse or much worse than expected. The remaining 23 percent of participants stated that total revenue performance in the first half of 2014 was consistent with their expectations at the start of the year.

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Horwath HTL China Hotel Market Sentiment Survey

MARKET PERFORMANCE RANKING BY CITY Beijing Shanghai Sanya Tianjin

Avg

Occ

ARR

Rev

-29

-1

-54

-32

17

33

-10

29

0

21

-21

0

-32

-21

-38

-38

Hangzhou

-6

0

-17

0

Qingdao

-6

6

-25

0

Guangzhou

23

75

-48

41

Chengdu

-68

-38

-75

-90

Shenzhen

25

25

17

33

Chongqing

-14

17

-42

-17

13

38

-28

28

Hefei

-18

11

-43

-21

Kunming

-38

-38

-38

-38

Xiamen

33

25

63

13

Wuxi

-13

0

-63

25

Xi’an

-8

25

-63

13

Suzhou

August 2014

INDEX SCORE The index was used to gauge the average responses of respondents with regards to their actual first half performance compared to their expectation at the beginning of the year. Almost all regions yielded negative result, while East China, being the only region registered the positive sentiment, recorded the highest score of positive 1. Amongst the top ten provinces and municipalities with the most respondents, Shanghai (17), Guangdong (8) and Jiangsu (5) were the only three with positive sentiment on average, signalling a better performance for the first half of the year than expected. Sichuan (-60), Tianjin (-32), Beijing (-29), and Zhejiang (-21) recorded the lowest scores. Comparing the key cities across China, Suzhou (33), Shenzhen (25) and Guangzhou (23) were the top three in the category, while Chengdu was last at negative 68. Hoteliers of 4-star properties recorded more positive score at an average of negative 7, higher than both 5-star and 3-star which were at negative 15 and negative 46 respectively.

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Horwath HTL China Hotel Market Sentiment Survey

August 2014

THE IMPACT OF FINANCIAL CRISIS Question 2: Have continued global economic uncertainties impacted hotel demand as much as you had expected? When asked if the continued global economic uncertainty had impacted hotel demand as much as they had expected, some 46 percent of responding hoteliers indicated that the impact of the global economic uncertainties was in line with their expectations. Approximately 24 percent of hoteliers responded that demand was still affected more or much more than expected, while about 30 percent of respondents felt the global economic uncertainty had impacted hotel demand less or much less than expected.

“A vast majority of 76 percent of responding hoteliers felt that the impact of global economic uncertainties was not worse than they expected.”

IMPACT OF FINANCIAL CRISIS Score North Northeast East

8 6 10

Mid-South

3

Northwest

6

Southwest

0

China Average

7

All regions in China, except Southwest China, registered positive assessment of the impact of the continued global economic uncertainty, with the national average score of positive 7, shielded by the continued domestic economic growth. Comparatively other factors, such as central government policy and new competitive supply additions, have had a bigger impact on some markets than the financial crisis. Cities in which hoteliers felt the impact of the crisis has not been as bad as expected include Hefei (32), Shenzhen (25) and Qingdao (19). Xi’an, registered at a sentiment score of negative 38. Other cities in which respondents believe the global economic uncertainty still continually has had worse impact than expected are Guangzhou (-7), Chengdu (-15), Hangzhou (-17) and Tianjin (-21). Comparing across different star-rating markets, respondents operating 5-star hotels felt the impact of global financial crisis was in line with their expectations, while hoteliers managing 4-star and 3-star and below hotels expressed more positive sentiments.

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Horwath HTL China Hotel Market Sentiment Survey

August 2014

SECOND HALF MARKET OUTLOOK Question 3: What are your expectations for the second half 2014 market performance compared to second half 2013? At least 31 percent of respondents stated that they expect performance in all three measures to perform worse or much worse in the second half of 2014 when compared to market performance in the second half of last year.

“Following the similar trend of the corresponding outlook in August 2013, 52 percent of hoteliers expect that ARR would perform worse or much worse than expected.”

SECOND HALF MARKET OUTLOOK BY REGION

Avg

Occ

ARR

Rev

North

-32

-25

-42

-30

Northeast

-31

-38

-25

-31

0

10

-15

5

East Mid-South

-18

5

-43

-18

Northwest

-17

-6

-35

-12

Southwest

-13

0

-30

-9

China Average

-14

-2

-29

-10

OCCUPANCY More than 31 percent of hoteliers across China expect that occupancy performance in the second half of 2014 be worse or much worse in comparison to occupancy performance in the second half of 2013, whereas about 35 percent expect that occupancy in the second half be better or much better than the same period of last year. Some 34 percent feel that occupancy will be in line with expectations. AVERAGE ROOM RATE Following the similar trend of the corresponding outlook in August 2013, respondents registered negative assessment of ARR performance in the second half of 2014. 52 percent of hoteliers expect that ARR would perform worse or much worse than expected. About 29 percent of respondents expect ARR performance will be the same. Only 19 percent of China hoteliers expect to see improved ARR performance for the second half of 2014 when compared to the same period in 2013. TOTAL REVENUE The sentiment of total revenue is more negative than occupancy expectation with about 39 percent of respondents indicating total revenue in the second half of this year will be worse or much worse than the same period of last year. About 30 percent of hoteliers expect that total revenue performance in the second half of 2014 be consistent with last year, while 31 percent expect total revenue to increase.

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Horwath HTL China Hotel Market Sentiment Survey

SECOND HALF MARKET OUTLOOK BY CITY Beijing Shanghai Sanya

Avg

Occ

ARR

Rev

-30

-24

-42

-25

7

8

0

11

-14

11

-38

-16

Tianjin

-45

-32

-54

-48

Hangzhou

-27

-12

-46

-23

2

19

-19

6

Qingdao

16

61

-41

27

Chengdu

-40

-23

-53

-45

Shenzhen

-3

8

-25

8

Guangzhou

Chongqing

28

42

0

42

Xiamen

13

38

-28

28

Hefei

-4

11

-11

-11

-29

-25

-38

-25

Kunming

46

50

38

50

Wuxi

-42

-25

-75

-25

Xi’an

-13

0

-38

0

Suzhou

August 2014

INDEX SCORE The index was used to gauge the average responses of respondents with regards to their expectation of second half performance this year compared to the corresponding outlook of the same period of last year. East China is the only region that expressed a neutral outlook while all other regions had negative outlook, especially for North (-32) and Northeast China (-31). Amongst the top ten provinces and municipalities with the most respondents, Shandong (9), Shanghai (7) and Guangdong (0) are the top three on the list, signalling a positive or neutral expectation for the second half of the year when compared to the same period of last year. Tianjin (-45), Sichuan (-44), and Beijing (-30) recorded the lowest scores. Comparing the key cities across China, Suzhou (46), Chongqing (28), Guangzhou (16), and Xiamen (13) are the top four in the category, while Tianjin is last at negative 45. On average, 3-star and below hotels’ managers indicated the most pessimistic outlook for the second half of 2014 when compared to the same period of 2013 with a sentiment of negative 63, while hoteliers managing 5-star properties recorded the highest score at negative 10.

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Horwath HTL China Hotel Market Sentiment Survey

August 2014

HOTEL PERFORMANCE EXPECATION Question 4: For your hotel, what are your expectations for second half 2014 performance compared to second half 2013? On average, hoteliers in China indicated negative expectation for their own hotel’s performance, scored at negative 10, in line with their expectations for the general market (-14).

“Close to 27 percent of respondents expect the decline in total revenue to be in excess of 5 percent in the second half of 2014 when compared to the same period in 2013.”

SECOND HALF HOTEL PERFORMANCE EXPECTATION BY REGION

Avg

Occ

ARR

Rev

North

-28

-15

-37

-32

Northeast

-35

-34

-34

-38

East

2

12

-11

6

Mid-South

-12

4

-24

-15

Northwest

-17

0

-38

-14

Southwest

-6

9

-22

-5

-10

2

-22

-9

China Average

OCCUPANCY Half of the hoteliers expect occupancy performance at their hotel in the second half of 2014 will increase compared to that in the same period of last year, within which 45 percent expect the increase to be within the range of 10 percent. 38 percent of respondents expect occupancy at their hotel will decline in the second half of 2014, compared to the same period in 2013, with about 29 percent expecting the decrease to be within 10 percent. AVERAGE ROOM RATE The sentiment of ARR was more negative than the other two performance indices. More than 58 percent of hoteliers expect a decrease in ARR in the second half of 2014, with close to 27 percent of respondents indicating a decrease by more than 5 percent. Another 28 percent still expect ARR increase, with 19 percent of these respondents expecting the increase to be within 5 percent. TOTAL REVENUE Following the similar trend of occupancy, more than 40 percent of hoteliers expect improved revenue performance in the second half of this year when compared to the same period of last year. About 46 percent of respondents expect revenue to decline, within which close to 27 percent of respondents expecting the decline to be in excess of 5 percent. The rest 14 percent of respondents believe total revenue will be in line with the second half of 2013.

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Horwath HTL China Hotel Market Sentiment Survey

SECOND HALF HOTEL PERFORMANCE EXPECTATION BY CITY Beijing Shanghai

Avg

Occ

ARR

Rev

-21

-5

-35

-23

15

22

5

17

Sanya

-9

16

-35

-8

Tianjin

-43

-35

-40

-54

Hangzhou

-9

0

-17

-9

Qingdao

-3

3

-13

0

7

27

-14

7

Chengdu

-46

-26

-56

-56

Shenzhen

13

21

0

17

Chongqing

40

67

4

50

Xiamen

-5

14

-28

0

Hefei

-21

-11

-27

-27

Kunming

-29

-44

-6

-38

Suzhou

19

25

6

25

Wuxi

15

50

-38

31

Xi’an

-4

25

-50

13

Guangzhou

August 2014

INDEX SCORE Except East China, all the other regions registered negative sentiment scores for total revenue, while East China remained the most positive outlook. 56 percent of hoteliers in East China believe occupancy performance will increase in the second half of 2014. Amongst the top ten provinces and municipalities with the most respondents, Sichuan (-45), Tianjin (-43), Fujian (-24) and Beijing (-21) are the bottom four on the list, signalling the pessimistic expectation for the second half of the year when compared to the same period of last year. Shandong (17) and Shanghai (15) record the highest scores. Of the key cities, Chongqing (40), Suzhou (19), Wuxi and Shanghai (both at 15) are the top four cities with the most positive performance expectation on average. The bottom three were Chengdu (-46), Tianjin (-43) and Kunming (-29). Respondents managing 5-star hotels recorded the highest average sentiment score at negative 7, indicating a less pessimistic expectation for their hotel performance for the second half of 2014 when compared to the same period of last year.

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Horwath HTL China Hotel Market Sentiment Survey

OTHER MARKET SENTIMENT REPORTS BY REGION ASEAN Europe South East Europe BY COUNTRY Brazil China Hungary Indonesia Ireland Italy Japan Norway Poland Switzerland BY CITY/DESTINATION Beijing Shanghai

August 2014

CONCLUSION Once again, the consciously domestic anaemic economic growth, the influx of new supply in some key cities and the central government’s restriction of government spending on meetings and banquets plague the performance levels across China. Although remaining negative, the sentiment score shows a positive improvement on both market and hotel performance expectation compared with the same period of last year. Overall, China recorded a slightly lower sentiment score of negative 12 in the second half of 2014, compared to a score of negative 9 in February 2014. On average, East China (1) is the only region registering the positive sentiment score. Performance in all three indicators in the first half of 2014 failed to meet hotel operator expectations, and hoteliers feel more disappointed with ARR levels than occupancy. With an economic slowdown and belttightening policy across the country, sentiment in the China hotel industry continues to be negative and the assessment is that performance levels will continue to be below expectations.

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Horwath HTL China Hotel Market Sentiment Survey

August 2014

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