Atour: The Smart Way to Invest in China’s Hospitality Market

Introduction - Overview of the Hotel Service Industry in China

China's hotel service industry is on the cusp of a remarkable growth spurt, fueled by the country's soaring economy, rapid urbanization, and an unprecedented surge in domestic and foreign travel.

• Projected Market Value: $157.46 billion by 2032.
• Growth Rate: 8.23% Compound Annual Growth Rate (CAGR) from 2024 to 2032.

What's Driving this Growth?

• Economic Growth: China's economy continues to expand, boosting disposable incomes and travel budgets.
• Urbanization: As more Chinese citizens move to cities, they're seeking better travel experiences and accommodations.
• Increased Travel: Both domestic and foreign travel are on the rise, driving demand for hotels and travel services.

Overview of Atour Lifestyle Holdings Company

Atour's strategic focus on mid-to-upscale hotels enables the company to provide immersive local experiences, innovative design, and exceptional service. This distinctive approach has fostered a loyal customer base and positioned Atour for continued success in China's burgeoning hotel market.

As China's hotel service industry experiences rapid growth, Atour Lifestyle Holdings Company has established itself as a prominent force in the market. By delivering a unique blend of comfort, style, and local charm, Atour is redefining the hospitality landscape in China.

Business Model of Atour Lifestyle Holdings Company

Atour Lifestyle Holdings Limited utilizes an asset-light, franchise-oriented business model that enables rapid expansion and operational efficiency in China's hotel industry. Here are the key components:

• Manachised Model: Atour primarily operates through a "manachised" model, where franchisees handle capital expenditures and hotel leases while Atour provides management and training. This approach minimizes operational costs and maximizes revenue from franchise royalties.
• Diverse Brand Portfolio: The company offers various hotel brands, including Atour, Atour S, Atour X, and ZHOTEL, catering to different market segments and customer preferences.
• Retail Integration: Atour has expanded into retail by selling sleep-related products, generating significant revenue and enhancing the guest experience.
• Customer Loyalty Programs: The A-CARD loyalty program boasts over 63 million members, driving customer retention and engagement through various benefits.
• Digital Capabilities: Atour leverages technology for a seamless customer experience, allowing easy online bookings and efficient communication during stays.
• Focus on Experience: The company emphasizes delivering unique lifestyle experiences through thematic hotels and tailored offerings.

Key Competitors of Atour Lifestyle Holdings Company

• Huazhu Group (H World Group): A leading competitor with over 10,150 hotels, Huazhu operates a similar mechanized model and has been expanding rapidly, making it one of the largest players in the market.
• Jin Jiang International: With a vast portfolio exceeding 12,000 hotels, Jin Jiang is another major competitor that employs a mix of franchising and management strategies.
• GreenTree Hospitality Group: Focused on midscale accommodations, GreenTree operates around 3,000 hotels and utilizes a franchise-based model with mechanized elements.
• BTG Homeinns Hotels: Known for its budget offerings, BTG Homeinns has a significant presence with thousands of hotels primarily targeting domestic travelers.
• Plateno Group (7 Days Inn): Operating primarily in the budget segment, Plateno utilizes a mechanized approach to grow its network of over 3,000 hotels.

These companies dominate the domestic market, while international brands like InterContinental Hotels Group (IHG) and Shangri-La Hotels & Resorts lead the high-end segment.

Strategic Initiatives Powering Atour Lifestyle’s Growth Trajectory

• Expanded Hotel Network: 140 new hotels added in Q3 and 732 under development, increasing capacity and driving revenue growth.
• Upscale Brand Introduction: SAVHE Hotel launch in core business districts, enhancing occupancy and average daily rate (ADR).
• Retail Segment Growth: 107.7% year-over-year GMV growth in 'deep sleep' products, boosting revenue and net margins.
• Membership Base Expansion: Over 83 million members, increasing revenue potential through customer loyalty and repeated business.

Technical Analysis - Is it the right time to take this trade?

• The weekly chart indicates that after a long period of consolidation, the stock price has formed a Rounding Bottom Pattern and is likely to break through its strong resistance zone soon.
• A Pole & Flag pattern has formed on the daily chart, with the stock price targeting higher levels following a successful breakout.

Fundamental Analysis - How well is the company performing?

1. Revenue & Profit Analysis

A. Year-on-Year Growth Analysis

• FY23 sales reached $657.4 million, a remarkable 106% increase from $328 million in FY22.
• EBITDA surged to $142 million, up from $36 million in FY22.
• The EBITDA margin widened to 21.6% from 11.15% in the same period.

B. Quarter-on-Quarter Performance Analysis

• Q3 sales reached $270 million, a 9% increase from $247 million in Q2 and a 52% jump from $177 million in Q3 2023.
• Q3 EBITDA climbed to $72.6 million, up from $56.2 million in Q2.
• Q3 diluted EPS rose to $0.39 (LTM) from $0.30 (LTM) in Q2 2024.

2. Stock Valuation Analysis: Is the Stock Price Right?

A. P/E Ratio (Price-to-Earnings)

• This ratio compares the company's stock price to its earnings per share.
• The present P/E ratio is 18.9x, which is lower than the average P/E of 21.5x among its peers, indicating that the stock is fairly valued.

B. P/B Ratio (Price-to-Book)

• This ratio compares the company's stock price to its book value.
• The current P/B ratio is 2.2x, which is marginally above the peer average of 2.0x, yet it does not suggest that the stock is overvalued.

C. PEG Ratio (Price to Earnings to Growth)

• This ratio looks at the P/E ratio while also considering the company's expected earnings growth.
• With a PEG ratio of just 0.15, ATAT appears to be undervalued based on its anticipated earnings growth.

3. Cash Flow Analysis

• ATAT achieves remarkable growth in operational cash flow, rising 582% to $280 million in FY23 from $41 million in FY22.

4. Debt Analysis

• ATAT's debt-to-equity ratio stands at 0.67, signaling that debt is not a significant concern for the company.

Top Shareholder

• Mr. Haijun Wang, CEO of Atour Lifestyle Holdings, holds a significant 19.2% stake.
• Trip.com Group Limited holds approximately 13.6% stake.

Conclusion

Following a thorough analysis, we believe Atour presents a lucrative investment opportunity. With its appealing valuation, impressive financial track record, and strategic growth initiatives.

Atour is well-positioned to capitalize on the growing tourism sector. The company's commitment to delivering exceptional customer experiences further strengthens its potential for long-term growth and value creation for shareholders.