Where will China's hotel sector go post COVID?

China's hotel sector recovery has been uneven amid Covid resurgences. Post the pandemic, referencing the US lodging sector recovery, we think leading hotel groups in China with mainly limited service hotels may recover faster and are likely to benefit from consumption upgrades in lower-tier markets (65% of China's total population) where their penetration is increasing.

Affected by the epidemic, China's hotel sector recovery has been uneven. Referencing the US hotel sector, average daily rate (ADR) recovered faster than occupancy (OCC), and limited-service hotels (economy and midscale) recovered before full-service hotels (upscale). Post the pandemic, considering leisure and business travellers in China mainly opt for limited-service hotels (which account for 80% of hotels in China), we expect China's hotel sector RevPAR to recover to 80%/103%/104% of 2019 levels in 2022-24E.

A saturated hotel market and high rents in tier-1/2 cities amid the real estate boom have hurt hotel industry profitability. We expect China hotel groups to:

1. expand into lower tier cities: consumption power in lower-tier cities is similar to that of tier-1/2 cities 5-10 years ago, alongside consumption upgrades, and lower-tier cities have 61% of China's hotel rooms and relatively low brand penetration;
2. upscale market: hotel room contribution and brand penetration for upscale-and-above hotels in China is lower than in the US and is dominated by overseas brands. We expect China hotel groups to utilise overseas brands they acquired to gradually penetrate the upscale market and share the demand growth.