Deutsche Bank Markets Research

Asia Industry Date 30 November 2017 Consumer China Hotels / Leisure / Industry Update

Gaming

Tallan Zhou Karen Tang Research Analyst Research Analyst Secular growth kicking in (+852 ) 2203 6464 (+852 ) 2203 6141 [email protected] [email protected]

A secular growth sector Top picks We analyze the supply and demand of China’s limited service hotels (economy China Lodging (HTHT.OQ),USD114.48 Buy hotels) and conclude that the sector will see secular growth (RevPAR growth of Hotels Buy 6% CAGR) in the next five years. We believe the like-for-like average daily (2006.HK),HKD2.75 rate (ADR) for both economy and midscale hotels will continue to grow to meet Jinjiang Hotels Development Buy consumers’ trade-up demand. Meanwhile, on a blended basis, we believe the (600754.SS),CNY31.00 short supply of midscale hotels will continue to increase its percentage of the BTG Hotels (600258.SS),CNY27.81 Buy total, leading to a favorable mix change (40% of new hotel additions will be Source: Deutsche Bank mid- to high-scale hotels). Companies Featured Hotels are a leveraged business, RevPAR is the key Changes in operating cost per room (excluding rent) are manageable for China Lodging (HTHT.OQ),USD114.48 Buy economy and midscale hotels; hence to maximize profit, the key is to increase 2016A 2017E 2018E RevPAR. The two largest costs in operating economy hotels are: 1) staff cost P/E (x) 21.0 38.7 27.1 (already manageable at a staff-to-room ratio of 0.18-0.2), and 2) rent cost, EV/EBITDA (x) 8.7 16.7 11.8 Price/book (x) 4.5 7.8 6.0 which is normally fixed for 15-20 years. We believe the two key drivers to increasing RevPAR in the next five years are: 1) a higher percentage of Jinjiang International Hote Buy upgraded economy hotels and 2) a higher percentage of midscale hotels. (2006.HK),HKD2.75 Economy segment has likely bottomed 2016A 2017E 2018E We believe 2016 was the trough for economy hotels’ RevPAR as the high hotel P/E (x) 37.3 26.1 23.1 supply growth is likely to slow significantly in the next five years (6-7% CAGR EV/EBITDA (x) 13.2 10.0 9.7 Price/book (x) 1.0 1.3 1.3 vs. 38% CAGR over 2006-16). We believe the sharp decline in economy hotel additions, from 5k in 2015 to 2k in 2016, is a turnaround point for the sector as Jinjiang Hotels Development Buy 1) loss-making franchisees leave the market; 2) property supply for hotels is (600754.SS),CNY31.00 being tightened; and 3) both HomeInns and 7 Days have been delisted and 2016A 2017E 2018E acquired by BTG and Jinjiang, respectively. We forecast a stable 2k new P/E (x) 82.9 27.3 25.2 economy hotel additions over the next five years, a 6-7% CAGR. EV/EBITDA (x) 20.9 9.0 9.3 Price/book (x) 2.2 2.2 2.1 Midscale segment’s barriers to entry remain high While the economy segment started in 2005, the mid-scale segment only BTG Hotels (600258.SS),CNY27.81 Buy emerged in 2010. Given the government’s anti-corruption campaign, demand 2016A 2017E 2018E for high-end hotels is shifting to midscale hotels, and alongside consumers P/E (x) 42.6 33.9 25.2 trading up, we believe midscale hotels’ RevPAR (8% CAGR) should be higher EV/EBITDA (x) 9.8 13.7 11.0 Price/book (x) 1.9 3.1 2.7 than economy hotels’ (3% CAGR over 2018-2022E). The barriers to entry for Source: Deutsche Bank midscale hotels are much higher than for economy hotels, as: 1) initiation investment for franchisee is 4-5x higher, 2) property criteria is more complicated, and 3) brand/product designs are more demanding. Valuation and risks We initiate coverage of BTG with a Buy rating and TP of RMB35 (25% upside potential). We also slightly lift China Lodging’s TP to USD130. We maintain Buy on Jinjiang with TP unchanged. We change our primary valuation from EV/EBTIDA to DCF as we view DCF as a better methodology to capture secular growth over the medium term. We use EV/EBITDA as a check on the target valuations. Risks include: 1) lower demand; 2) stronger RMB leading to more outbound ; and 3) government policy changes.

______Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivityDistributed of on:this 29/11/2017 report. Investors 21:36:30 should GMT consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. THE CONTENT MAY NOT BE DISTRIBUTED IN THE PEOPLE’S REPUBLIC OF CHINA (“THE PRC”) (EXCEPT IN COMPLIANCE WITH THE APPLICABLE LAWS AND REGULATIONS OF PRC), EXCLUDING SPECIAL ADMINISTRATIVE REGIONS OF HONG KONG AND MACAU. 0bed7b6cf11c 30 November 2017

Hotels / Leisure / Gaming China Hotels

Investment thesis

What has happened in the past five years?

Hotels are probably one of the few consumer industries in China that have seen prices continue to drop in the past five years (see Figures 9, 10 and 11) despite rising consumer prices. The easiest explanation for this is to use a supply and demand model. On the supply side, economy hotels recorded a CAGR of 38% over 2010-2015 while on the demand side, travellers’ growth was only in mid-teens.

The imbalanced supply and demand growth is one of the key fundamental reasons why RevPAR has continued to decline in the past five years. However, we believe 2016 is a turning point, because new economy hotel additions were cut by half in 2016 while traveller growth was still robust at double-digit growth. As a result, RevPAR like bottomed out in 2016 and so far in 2017, it has maintained the growth momentum.

In this report, we look at factors contributing to the RevPAR drop in the past years and analyse whether the recovered RevPAR growth is sustainable in the next five years.

We highlight below key events that caused new economy hotel additions to witness sharp declines in 2016.

 7 Days and HomeInns were delisted, which eased competition for aggressive expansion.

 Many franchisees started to join the economy hotel business in 2008- 2010. The franchise contract is normally c. 8-10 years. Hence, franchisees that failed to make profits exited the business

 Economy hotel operators are launching a premium economy brand. In addition, they are expanding their midscale hotels. The upgraded hotels are meeting consumers’ trade-up demand. What will happen in the next five years?

Three key messages  (a) We believe REVPAR has bottomed; we expect the sector’s RevPAR to register a 6% CAGR over 2018-2022E. (Based on 2% occupancy rate improvement and 4% ADR increase). A breakdown would put economy hotels’ RevPAR at a 3% CAGR and mid- to high-scale hotels’ RevPAR at an 8% CAGR during the same period.

 (b) Consumers trading up as disposable income continue to grow. We expect more travellers to select midscale hotels. We expect demand to record a 11-13% CAGR over 2018-2022E.

 (c) highly leveraged business. With fixed cost forming 80% of total cost, based on our estimates, every dollar increase in ADR will flow directly to profit.

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30 November 2017 Hotels / Leisure / Gaming China Hotels

Incremental hotels over the next five years We estimate there are more than 100k economy hotels in China, among which only 26k are branded economy hotels. In terms of midscale hotels, we estimate there are a total 15k, with chain branded midscale hotels estimated at c. 1,600-1,800.

We estimate the number of midscale hotels will reach 40,000+ in the next five years of which 35% will be chain branded ones (vs. the US’s chain percentage of 70%), implying a CAGR of 21%. For economy hotels, we believe the overall supply will remain at 100k, but the percentage of chain branded ones will continue to increase. However, we believe annual addition for economy hotels will be stable at 2,000 per annum.

Figure 1: Current economy/midscale hotel numbers Figure 2: DB’s estimate of economy/midscale hotel numbers by 2022E

120,000 120,000 100,000 100,000 100,000 100,000

80,000 80,000

60,000 60,000 40,000 40,000 26,000 40,000 33,000 20,000 15,000 14,000 1,700 20,000 - Total economy Chain branded Total midscale Chain branded - hotels economy hotels hotels midscale hotels Total economy Chain branded Total midscale Chain branded hotels economy hotels hotels midscale hotels

Source: Deutsche Bank Source: Deutsche Bank

The robust growth of midscale hotels is mostly from “conversion” from low- star-rated hotels/mom & pop hotels/government-owned hotels. Those hotels are normally called “society hotels”, which account for the majority of hotels in China and are mostly inefficiently operated.

China’s overall accommodation market is over-supplied. However, within the different segments, the chain branded economy (upgraded) and midscale hotels are under supplied. Therefore, while total supply of the hotel market is likely to remain stable, we believe the percentage of chain hotel and midscale hotel supply will increase, mostly converted from the existing “society” hotels.

Valuation and growth

Share price and valuation Share price performance. The hotel sector has recorded an average share price increase of 50% YTD. China Lodging led the sector with a 150% share price increase YTD, followed by Shangri-La and BTG/Jinjiang-H.

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Hotels / Leisure / Gaming China Hotels

Figure 3: Share price performance

180%

130%

80%

30%

-20%

BTG Hotels China Lodging Shangri-La Jinjiang-A Jinjiang-H

Source: Deutsche Bank, Bloomberg Finance LP

On valuation, the market (Bloomberg consensus) seems to reward industry leaders with a higher multiple. China Lodging is trading at 16x 2018E EV/EBITDA. Jinjiang-A and HomeInns are trading at similar 12-14x 2018E EV/EBITDA. Jinjiang H, the parent company of Jinjiang A, is trading at less than 10x 2018E EV/EBITDA.

Jinjiang H has both limited service and full service hotel business. The low valuations assigned by the market could be due to concerns over liquidity. We believe these valuations are highly correlated with EBITDA/earnings growth. Therefore, with China Lodging’s growth likely to remain strong, we believe the valuation gap between China Lodging and Jinjiang/BTG will remain.

Figure 4: EV/EBITDA comparison

Source: Deutsche Bank, Bloomberg consensus estimates

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30 November 2017 Hotels / Leisure / Gaming China Hotels

A leveraged business

RevPAR growth is key

A simple profit analysis on RevPAR Economy hotels’ revenue and profit are primarily determined by room charges. As there is no banquet business, we believe RevPAR growth is key to this segment’s profit growth because economy hotels are a leveraged business. We perform a simple profit analysis of a single hotel to demonstrate the sensitivity between RevPAR and profit:

 RevPAR at RMB150 on average is a breakeven line for economy hotels, based on our studies.

 Operating cost including staff cost/utilities/channel fee is roughly RMB80 per room. This is a relatively fixed number.

 We derive a GOP of RMB70 that can cover cost of rent, financial costs and others.

Figure 5: A simple model of a hotel’s profit analysis Per room per night, RMB Occupancy rate 75% ADR 200 RevPAR 150 Operating cost 80 Gross operating profit (GOP) 70 -Rent cost 30 -Financial cost 20 -Others 20 Profit 0 Source: Deutsche Bank

We further divide RevPAR by ADR and occupancy rate and perform a profit sensitivity analysis between them, as illustrated in the table below. Our findings: since per room cost remains largely unchanged, any incremental change in ADR or occupancy rate will directly contribute to earnings.

Figure 6: Profit sensitivity analysis between ADR and Occupancy rate

ADR Highly leveraged business: for 0 120 140 160 180 200 220 240 260 280 55% -84 -73 -62 -51 -40 -29 -18 -7 4 every 10% increase in ADR Occupancy rate 60% -78 -66 -54 -42 -30 -18 -6 6 18 (i.e. From RMB 220-240) with 65% -72 -59 -46 -33 -20 -7 6 19 32 occupancy rate unchanged, 70% -66 -52 -38 -24 -10 4 18 32 46 operating profit will double 75% -60 -45 -30 -15 0 15 30 45 60 80% -54 -38 -22 -6 10 26 42 58 74 85% -48 -31 -14 3 20 37 54 71 88 90% -42 -24 -6 12 30 48 66 84 102 95% -36 -17 2 21 40 59 78 97 116 Source: Deutsche Bank

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Hotels / Leisure / Gaming China Hotels

Hotel room operating cost analysis, key cost is staff cost Hotel operating cost comprises several hotel-room related items, such as: 1) staff cost; 2) utility expense; 3) housekeeping costs such as bedding sheets/bottle water/shampoo, etc. and 3) booking channel expense.

By deducting operating cost from hotel room revenue, gross operating profit (GOP) is one that hotels normally use to measure operation efficiency. GOP is a line above rent cost so that it is an operation-related indicator.

 Staff cost is the largest item in operating cost. Different from full service hotels which employ additional staff for dinning/banqueting etc., economy hotels have a very limited number of staff.

 Ching Lodging/HomeInns/Jinjiang keep their staff-to-room ratio at 0.18-0.2. This means if they have a 100-room hotel, the number of staff including cleaning/security/reception is only 18-20. This is much lower than full service hotels, which usually have a staff-to-room ratio of 1.0-5.0.

 Utilities/linen per room is the minimum. The purchase of towel/bed sheet/cloths is centralized and per room cost for such is therefore the minimum.

 Booking channel expense. This includes payment to OTA and economy hotels. OTA normally charges 15% and economy hotels charge 8% of room revenue if the corresponding booking is made through their channel. Rent cost, key cost item but not operation related Rent cost is another key cost for economy hotels. However, as rent cost is not manageable, it is below the line of GOP. The franchisee’s contract with the property owner is normally 8-10 years and the cost is fixed during the period. Therefore, once the contract expires, the cost will surge significantly. From our channel checks, we find that rent in is more than RMB3/sq.m per day for hotel property vs. only RMB2/sq.m per day 5-7 years ago.

RevPAR is key to increasing profit Conclusion: In our view, increasing RevPAR is key to maximizing profit because cost is largely fixed. As we have mentioned above, economy hotels’ two largest cost items are: 1) staff cost, which is already manageable at a staff-to-room ratio of 0.18-0.2, and 2) rent cost, which is normally fixed for 8- 10 years.

The question next is what will drive RevPAR growth in the next 10 years? ADR increase or occupancy rate increase? While China’s macro growth will likely have an effect on occupancy rate, we believe increasing ADR is important for hotel chain brands, by upgrading their products continuously. In the next section, we discuss ways to upgrade hotel products to drive ADR growth in the next 10 years.

Capex is limited for the economy hotel sector About 90-95% of new hotel additions are on a franchise basis, according to listed companies such as BTG, China Lodging and Jinjiang. Operators of economy hotels do not need to invest capex for expansion. Even for 5-10% of lease and owned (LO) hotels, the operators do not own the land nor the property. The limited capex is budgeted for initial renovation (i.e. RMB4-6m for economy hotels and RMB20-30m for midscale hotels).

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The table below illustrates the 2018 capex estimate for Jinjiang, China Lodging and BTG.

Figure 7: Capex forecast, 2018 Capex (RMBm) 2018E China Lodging 1,022 Jinjiang-A 1,407 BTG (HomeInns) 751 Source: Deutsche Bank estimates

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Hotels / Leisure / Gaming China Hotels

Competition intensity easing for economy hotels

Competition is getting less intense

Net additions of branded economy hotels is decreasing significantly Branded economy hotel new additions continued to grow in the seven years from 2009 to 2015. This has led to intensifying competition for the branded economy hotel sector, evidenced by the continued decline in RevPAR from 2009 to 2015 (as shown in the figures below).

As of 2015, after adding 5,106 new branded chain economy hotels, the number of economy hotels surged to 21,481, from less than 4,000 in 2009. Such a big jump in the hotel number led to increased competition for ADR growth. The industry occupancy rate also decreased as the number of travellers did not grow in line with hotel number growth.

As shown in Figure 8 and Figure 9, domestic travellers recorded average growth of 11-13% vs. a 30% CAGR for branded economy hotels over 2009- 2015. Consequently, the industry’s RevPAR declined, reflected by major players such as China Lodging, and Home .

Figure 8: Net adds of economy hotels decreased sharply to 2,669 in 2016 from 5,106 in 2015. New adds are expected to continue to decrease in 2017

30,000 6,000

25,000 5,106 5,000

20,000 4,000 3,648

15,000 3,000 2,803 2,610 2,669 2,194 10,000 2,100 2,000

952 1,363 5,000 1,000

- - 2009 2010 2011 2012 2013 2014 2015 2016 2017E

Source: Deutsche Bank, Company data

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30 November 2017 Hotels / Leisure / Gaming China Hotels

Sector recovery seemingly started in 2016 when new additions dropped In 2016, net additions of economy hotels dropped by half to only 2,669 and, according to China Lodging, new additions will continue to drop in 2017 for the industry. Figure 9 shows industry RevPAR started to pick up in the third quarter of 2016 and has continued the uptrend in 2017 YTD.

Figure 9: RevPAR continued to drop for branded economy hotels over 2009- 2015. RevPAR rebound started in 2016

190

183 180 RevPAR continued to drop from 2009-2015 170 168 164 165 163 162 163 160 159 156 157 154 152 153 153 150 150 147 146 147 145 144 144 142 142 142 140 141 141 140 141 138 136 134 132 130

120 2008 2009 2010 2011 2012 2013 2014 2015 2016

Huazhu Jinjiang Homeinns 7 Days We expect domestic travellers Source: Company data to record a CAGR of 13% over 2017-2019E

Figure 10: Branded chain hotel number growth, 2010- Figure 11: Domestic travellers’ growth, 2009-2015 2017E

45% 43% 40% 36% 36% 35% 31% 28% 29% 30% 25% 20% 15% 12% 9% 10% 5% 0% Branded eonomy hotel No. yoy

Source: Deutsche Bank, CEIC Source: Deutsche Bank, CEIC

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Hotels / Leisure / Gaming China Hotels

Secular RevPAR growth for economy hotels in the long term

Upside for hotel ADR growth? If we compare the consumer product price of key segments between China and the US, it is not hard to find economy hotels have a much wider pricing gap than other segments, such as fast food/movie ticket/consumer discretionary such as sneakers (same brand, same product).

Figure 12: Comparison of consumer product prices between China and the US

Comparison of Consumer Product Price Between China and US

Unit: US$ Item Brand Brand Diff.

Economy 26 Speed 8 62 2.4x Chinese Hotel ADRs Hotel ADR are Significantly UNDER-PRICED vs. Midscale Other Consumer 47 Holiday 114 2.4x Hotel ADR Products

McMeal McDonald 5 McDonald 7 1.4x

Running Shoe NIKE 75 NIKE 75 1.0x

Movie Ticket 5 8 1.6x

Source: Deutsche Bank, Company Data

What has caused the 2.4x pricing gap? A supply and demand model for analysis Our economy hotels’ ADR is determined by two major factors: 1) the incremental supply of the economy hotels and 2) incremental demand from consumers. As we have analysed above, the decline in incremental supply of branded economy hotels is largely the reason that leads to RevPAR growth for the sector. In Figure 8, we adopt a supply and demand model to demonstrate the ADR trend for the economy hotel sector.

There is a reason for the high new addition growth between 2009 and 2015 The price gap of 2.4x between the US and China was mainly due to the strong supply growth of branded economy hotels from 2009 to 2015 during which the three economy hotel giants finished their IPOs and started to compete with each other with significant funds. To recall:

 China Lodging was listed in 2010,

 7Days Group was listed in 2009 and;

 HomeInns was listed in 2006

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To gain market share, the three economy giants competed with each other on gaining more franchised hotels. As a result, new economy hotel additions maintained a 30%+ CAGR until 2015.

Why is 2016 the turning point? Critical to call secular growth from here. We believe it is important to make analysis on why 2016 is the turning point so that we can argue and forecast whether the next five years will be a secular growth phase for the economy hotel industry. A few things happened in 2016, which we believe contributed to the “turning point”.

 New additions of branded economy hotels were cut by half (from 5,106 in 2015 to 2,669 in 2016).

 HomeInns and 7 Days were delisted. HomeInns was acquired by Tourism Group and 7 Days was acquired by Jinjiang Hotels.

 The Chinese government tightened FX regulations to control RMB outflows.

 Macro data turned better. China’s official PMI keeps an upward trend (from 50.4% in September 2016 to a one-year high of 52.4% in September 2017).

Our takeaway of events in 2016

 Competition became less intense. After HomeInns and 7 Days were consolidated by two Chinese SOEs, we believe market competition is less intense regarding franchised store openings.

 Contract cycle of 8-10 years seems to end in 2016 with highest number of store closures. Normally, a franchised contract with brand or a lease contract with property owner is 8-10 years. As we have mentioned above, the head-to-head competition started intensively in 2009-2010 when China Lodging and 7 Days were listed. In 2016, China Lodging closed more than 200 stores, the highest in its history.

 Hotels normally lag macro recovery by 6-9 months. China Lodging’s RevPAR growth turned positive in 3Q16, a 6-month lag from China’s macro recovery in March 2016. The continued recovery in macro economies suggests more business meetings, exhibitions and business trips, which should benefit the occupancy rate and ADR of the economy hotel sector.

Our forecast for economy hotel growth 2018-2022E

 We believe new economy hotel additions will continue to drop over 2018-2022E, as the competition to attract more franchisees is becoming less intense.

 Meanwhile, we also believe the total capacity of branded chain economy hotels has yet to reach its full potential.

 We expect net new additions of economy hotels to maintain at 1,500- 2,000 p.a. over the next five years. This translates into a CAGR of 6.7% over 2018-2022E if we assume annual hotel growth of 2,000.

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Hotels / Leisure / Gaming China Hotels

By the end of 2017E, there will be 26k-27k branded economy hotels according to China Lodging and CNTA. As shown in the figure below, China’s branded economy hotels have witnessed a CAGR of 38% for the past 10 years. We believe increasing the hotel number is not a key growth driver for economy hotel operators, given that RevPAR has been declining over the past decade.

Figure 13: Branded economy hotel CAGR of 38% from 2006-2016, DB forecasts CAGR to be 6.7% over 2017E-2022E

Source: Deutsche Bank, Company data

The market is getting more and more concentrated The table below illustrates the number of economy hotels held by the three listed hotel groups, China Lodging, Jinjiang (including 7Days) and BTG (including HomeInns). As of 2016, they had a combined c 10k economy hotels, equivalent to ~35% of the country’s total economy hotels.

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Figure 14: Economy hotel brand of the top 3 groups Economy Hotel Brand # of Hotels Operating (2016-end) China Lodging 2,823 Hanting 2,181 Hi Inns 375 Elan 185 Hotel 72 Hotels 10 Jinjiang (Original) 1,099 Jinjiang Inn 1,011 Bestay Hotel Express 60 Jinguang 28 Jinjiang (Plateno) 2,722 7 2,424 PAI 163 IU 135 BTG () 2,947 Home Inn 2,385 Motel 411 Fairyland Hotel 33 Ease Hotel 14 Pebble Motel 77 Ripple Hotel 27 Source: Deutsche Bank, Company data

Meanwhile, other private economy hotel brands such as GreenTree, 118 Inns, etc. took a combined 10-12% market share in China. The other brands accounted for 44% of total market share, as shown in Figure 15.

We believe that instead of seeing absolute growth in the total supply of economy hotels, branded chain hotel operators are gradually consolidating the market by converting non-brand/small-brand hotels to China Lodging/HomeInns/Jinjiang’s brand portfolio.

Figure 15: Market share of economy hotel brands in China, 2016

7 days 13%

Home Inn other brands 13% 44%

Hanting 12%

GreenTree 118 Inns 7% Jinjiang Star 6% 5%

Source: Deutsche Bank, CEIC

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Hotels / Leisure / Gaming China Hotels

Rise of the midscale is a long-term play

Increasing proportion of midscale hotels is key contributor to RevPAR growth in the next five years

Our conclusion: We estimate that there are a total of 15k midscale hotels in China. However, there are only 1,700 chain branded ones (operated by China Lodging, Atour, Jinjiang HomeInns, etc.). We expect the number of midscale hotels to grow to 40,000 in the next five years, implying a CAGR of 21%. We also expect chain branded midscale hotels to reach 14,000, accounting for 35% of total midscale market share.

In terms of market share, we believe midscale hotels will expand to 28.5% by 2020, from the current 13%. We believe accommodation trade-up will be the main investment thesis for China’s lodging sector in the next five years as: 1) on the demand side, consumers are trading up, and 2) on the supply side, high-end star-rated hotels remain weak due to their unappealing pricing while economy hotels’ supply growth is slowing down.

Middle class’ expenditure growth to decide midscale hotels’ expansion We compare the hotel structure between China and the US. China has more than 100,000 hotels, 3x that of the US. However, most of them are economy hotels. The key difference here is demography. Most of China’s working population is: 1) urban mass, and 2) rural workers. As a result, leisure spending as a percentage of total household spending is 9.2% vs the US’s 17.3%, as shown in Figure 16.

Hotels, especially economy/midscale hotels, are targeting the working population (rural population is not necessarily targeted, but rural workers are). China has total working population of 770m (see Figure 16). However, China urban mass and rural workers, a total of 623m, account for 81% of the total working population. Such a demographic structure determines the structure of the hotel tiers in China. As illustrated in Figure 17, the majority of China’s hotels are economy/budget hotels.

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Figure 16: Demographic comparison between the US and China on ‘fun’ spending

Working Population Annual Income = 770.4 Million Per Capita

% of Personal Spending on “Fun” Movers & Shakers 1.4 Million $500,000 China

Urban Middle 146 Million $11,773 Expenditure on “Fun” things Urban Mass 236 Million $5,858

9.2% Rural Workers 387 Million $2,000 Vs. U.S. 17.3%

“Fun” includes travelling, dining out. Sports and gaming. Source: China National Bureau of Statistics

Figure 17: China’s hotel tier structure vs. the US’s

Luxury

Consumption Upscale upgrade drives midscale boom

Economy&Midscale chained hotel % Midscale continue to grow

Low end economy hotel% Will continue to shrink Economy

Number of Hotels 100,000 30,000

China independent China chained US independent US chained Source: Inntie Hotel Consulting, STR

On the other hand, the US has a different hotel tier structure. It has more midscale hotels than high/low end hotels. Similarly, this is because the US has more middle class population. The US’s middle and high income population account for more than 80% of the total population and these people are the major consumers.

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Figure 18: US population breakdown by income level, 1971-2015

Source: Deutsche Bank, Pew Research Center

More middle class consumers to fuel ADR

More demand than supply We believe there is a shortage of supply of China’s midscale hotels. Midscale hotels started to emerge in China only in 2010. Before 2010, China only had two kinds of hotels: economy hotels and star-rated hotels (3-5 star-rated hotels or full service hotels).

However, with China’s anti-corruption campaign, government officers and SOE employees can only choose hotels with ADR of no more than RMB500/night in most cities in China. On the other hand, we argue that China’s consumers are continuously trading up and this will fuel the ADR of midscale hotels.

Chinese consumer’s trade up power is robust According to the National Bureau of Statistics (NBS), domestic travelers’ hotel choice is concentrated on: 1) economy hotels with ADR below RMB300/night (50% of total options); 2) midscale hotels with ADR ranging RMB300-599 (33% vs. only 10-15% a few years ago).

In the past 10 years, China’s average disposable income has increased at a CAGR of 12%. We have seen continued growth of per capital travel consumption and traveler numbers in the past 10 years, as shown in the table below.

 Per capital travel consumption increased to RMB800 from less than RMB200 in 1994

 Total tourists number grew to 4.4bn in 2016 and we expect this number to grow to 6.6bn by 2020E.

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Figure 19: China’s per capital travel consumption (RMB), 1994-2015

900

800

700

600

500

400

300

200 Per capital travelconsumption (RMB) 100

0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Deutsche Bank, National Bureau of Statistics

Figure 20: Domestic tourists number growth, 2000-2020E

7.0

6.0

5.0 CAGR=12%, 2000-16

4.0

3.0

2.0 Domestic tourists (billion people) 1.0

-

Source: Deutsche Bank estimates, WIND

Oversupply should not be a concern

Some investors are wary that the fast expansion of midscale hotels could follow a similar path to that of economy hotels in the past cycle. We believe the oversupply of midscale hotels should not be a concern due to the following reasons:

 Property criteria. The criteria for midscale hotels is much more demanding and complicated than for economy hotels. The lobby area of a midscale hotel, for example, should at least be 3-4x larger than that of an economy hotel. In addition, most midscale hotels need to have 120-150 hotel rooms and, therefore the space for living area also

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needs to be larger than that of the average economy hotel. The property itself should be independent and guest elevators should not be used for other functions.

 Barriers to entry in terms of investment for franchisee. The initial investment for midscale hotels such as JI Hotel is c. RMB20m-30m, vs. RMB4-6m for economy hotels. This higher initial investment sets a high “watermark” for franchisees.

Brands and products. Given that the target consumers of midscale hotels have higher expectations on service quality and room quality, regular capex is needed to stay ahead of competition. This may be challenging for small and independent operators as they lack the scale. 90% of the demand for midscale is existing ones (not newly created demand). Figure 21 illustrates the mid- to high-scale hotel brands by different operators. Ji Hotel by China Lodging and Vienna Hotel by Jinjiang now lead in terms of number and expansion. Our channel checks with hotel experts and franchisees underscore our view that the demand for midscale hotels is not newly-created. Our channel checks found that 90% of the midscale hotels’ property was already being used as a hotel before it was converted to a branded one. Hence, we believe instead of questioning whether there is oversupply in the market, it is more prudent to ask whether consumers are willing to spend an additional RMB50-100 for an upgraded hotel. We believe the answer is yes, because Chinese customers are trading up.

Figure 21: Hotel segment from low to high end for China Lodging/Jinjiang/BTB 8

Standardized Standardized in Core Standardized in Styles Elements

581 Upscale

Upper Midscale 327

Midscale 215

148 130 136 Entry 115 level Midscale

Mass Vienna Lavande JI Starway Crystal Atour Homeinn Orange Plus Market

Budget

Standardization

Source: Deutsche Bank, Company data

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30 November 2017 Hotels / Leisure / Gaming China Hotels

Stock picks

China Lodging>BTG>Jinjiang

Operation comparison Following our initiation on BTG, DB now has a full coverage of the China hotels sectors, from economy to luxury hotels as shown in the table below.

Figure 22: DB has full coverage of China hotel sector Company Target Price Current price Market cap (USD m) 2018E PER 2018E EV/EBITDA DB Recomm. Hotels 2017 2018 2018 CHINA LODGING 130.0 115.36 7,268 27.1x 11.8x Buy SHANGHAI JIN J-H 3.8 2.75 1,981 23.3x 9.7x Buy SHANGHAI JINJI-A 37.0 31.00 3,994 26.8x 9.7x Buy SHANGRI-LA ASIA 20.0 17.38 8,221 36.0x 16.9x Buy BTG HOTELS 35.0 27.82 3,360 25.1x 10.9x Buy Source: Deutsche Bank estimates

A breakdown of hotel numbers and room numbers is shown in Figure 23. We also show a breakdown of hotel numbers and room numbers by economy hotel brand/midscale hotel brand.

 From a total hotel size perspective, Jinjiang ranks No.1 with more than 6,000 hotels across China and more than 600k hotel rooms.

 BTG and China Lodging have the same number of hotels.

 For economy hotels, Jinjiang now has two key brands: 7 Days and Jinjiang. We compare 7 Days with HomeInns and China Lodging’s HanTing. Their hotel size is within the 2,000-3,000 range.

 For midscale hotels, Jinjiang’s Vienna brand is growing faster than other competitors. When Vienna was acquired by Jinjiang, Vienna had only c. 300 hotels and now the number is almost doubled.

 On a relative basis, China Lodging has the highest percentage of midscale hotels. Total midscale hotels as percentage of group is 18%, much higher than the two other operators.

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Figure 23: Hotel breakdown summary for Jinjiang-A BTG and China Lodging, 1H17 Hotels in operation (As of 1H17) Jinjiang-A BTG Hotels China Lodging # of Hotels 6,297 3,472 3,541 # of Rooms 609,087 374,939 359,530

L/O hotels 1,077 971 686 M/F hotels 5,220 2,501 2,855

L/O hotels 17% 28% 19% M/F hotels 83% 72% 81%

Economy hotels 5,456 3,003 2,893 Midscale and upscale hotels 841 354 648 Others 115 NA

Economy hotels 87% 86% 82% Midscale and upscale hotels 13% 10% 18% Others NA 3% NA

Economy key brand 7 Days HomeInns HanTing # of Hotels 3,258 2,355 2,213 # of Rooms 270,101 247,392 NA

L/O hotels 454 645 473 M/F hotels 2,804 1,710 1,740

L/O hotels 14% 27% 21% M/F hotels 86% 73% 79%

Midscale iconic brand Vienna HomeInns Select/Plus + Yitel JI Hotel # of Hotels 581 238 327 # of Rooms 91,660 27,485 NA

L/O hotels 51 91 85 M/F hotels 530 147 242

L/O hotels 9% 38% 26% M/F hotels 91% 62% 74% Source: Deutsche Bank

RevPAR is key, China Lodging stands out on execution capability As we have mentioned, the hotel business is a leveraged business, and RevPAR is key to profitability, not only for hotel operators but also for franchisees. We believe profitability is the utmost important KPI for economy hotel brand franchise operators because franchisees will continue to reinvest more with other properties. This will enable economy hotel brand operators to keep gaining market share in China.

China Lodging has led in RevPAR, in terms of growth and absolute numbers (see Figure 24).

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Figure 24: Group blended RevPAR growth 2017 YTD RevPAR (RMB) 1Q17 2Q17 3Q17 China Lodging 152 179 203 yoy 9.4% 14.0% 17.3% HomeInns 133 150 168 yoy 4.5% 6.7% 8.0% Jinjiang 129 150 166 yoy 1.7% 2.7% 7.6% Source: Deutsche Bank, Company data

BTG seemingly has more incentives than Jinjiang BTG and Jinjiang share many common features: 1) BTG (reports to Beijing SAISAC) and Jinjiang (reports to Shanghai SAISAC) are SOE companies; 2) they have hotels ranging from economy to star-rated hotels; and 3) they have acquired US-listed economy hotel brands. Jinjiang acquired 7 Days and BTG acquired HomeInns.

From execution and management perspective, BTG is more marketable than Jinjiang, in our view. Mr. Sun Jian, CEO of HomeInns is now General Manager of BTG. In addition, both the CFO and COO of HomeInns are also key management members of HomeInns. As for Jinjiang and 7 Days, they remain largely independent from each other in terms of operations although financially they are consolidated.

From a management incentive perspective, we believe BTG’s management has more incentives to maximize profit for its shareholders. BTG unveiled an incentive plan for seven key management members in April 2017, with detailed revenue target, whereas Jinjiang has yet to announce its plan.

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Rating Company Price at 28 Nov 2017 (USD) 114.48 Price target - 12mth (USD) 130.00 Buy China Lodging 52-week range (USD) 141.02 - 46.10

HANG SENG INDEX 29,866 Asia China Tallan Zhou Karen Tang

Consumer Research Analyst Research Analyst (+852 ) 2203 6464 (+852 ) 2203 6141 Reuters Bloomberg Hotels / Leisure / [email protected] [email protected] Gaming HTHT.OQ HTHT US

Key changes TP 125.00 to 130.00 ↑ 4.0% Beyond a strong Q3, we see secular Sales (FYE) 7,959 to 8,368 ↑ 5.1%

Op prof 22.2 to 20.2 ↓ -9.0% growth in the long term - Buy margin (FYE) Net profit 1,380.4 to ↓ -2.1% Secular growth story intact, led by continuous "price" hike in the long term (FYE) 1,352.0 We reiterate our Buy and raise our TP slightly to USD 130. In addition to Source: Deutsche Bank secular growth, we believe China Lodging, as industry leader, will enjoy a premium on both RevPAR and growth over its competitors. Furthermore, we Price/price relative believe its strategy, to strengthen its network of midscale hotels (favorable “mix up”), will further improve the blended RevPAR. We slightly cut our 160 2017E profit by 2% to factor in Crystal Orange. Although Crystal Orange 120 contributed top-line/RevPAR growth significantly, its margin may be lower 80 than the original China Lodging business, on its higher portion of lease and owned hotels. 40 0 3Q17 EBITDA growth in-line, record-high growth, but it’s NOT the end of story 11/15 5/16 11/16 5/17 China Lodging reported 3Q17 EBITDA growth of 55% yoy today (or 38% yoy China Lodging excluding contribution from Crystal Orange). This is in line with the market and HANG SENG INDEX (Rebased) our expectation. The company further guided that although Oct RevPar growth slowed slightly for some one-off reasons, Nov RevPAR was as strong as Q3 Performance (%) 1m 3m 12m and they are confident that Dec RevPAR growth should also be healthy. In Absolute -12.2 7.7 123.8 addition, we have seen management’s confidence on the high growth HANG SENG INDEX 4.4 6.5 30.0 potential of the mid-high scale hotel segment, as they guided an accelerated Source: Deutsche Bank pace in new store openings in 2018E. Management expects to open 650-700 new stores (gross opening) in 2018E and 60-65% will be mid-high scale hotels. “3 keys” in managing the long-term RevPAR growth We believe there is still potential for China Lodging to drive up its RevPAR in the long term: a) although the reported occupancy rate has hit 90%+ high, c.10% is contributed by paid-by-hour hotels. Thus, the stay-over occupancy rate is c. 80%, meaning there is still potential for further improvement; b) ADR on a same hotel basis should continue to rise, as more hotels renovate and upgrade; and c) as it continues to enhance the expansion of midscale hotels, the favorable “mix up” is estimated to contribute at least 4% RevPAR growth. Valuation and risks We change our primary valuation to DCF (9.2% WACC and 3% TGR) from EV/EBITDA, as we view DCF as a better valuation methodology to capture: 1) secular growth; 2) strong cash flow generation; and 3) the asset light business model over the medium term. It is currently trading at 2018 EV/EBITDA of 12x, higher than BTG’s 11x and Jinjiang’s 10x, for its industry leader status and higher EBITDA growth. Risks: 1) lower tourism demand; 2) a stronger RMB, leading to more outbound travel; and 3) government policy changes. Forecasts And Ratios Year End Dec 31 2015A 2016A 2017E 2018E Sales (CNYm) 5,774.6 6,538.6 8,367.6 10,061.2 EBITDA (CNYm) 1,262.6 1,565.8 2,532.6 3,402.7 Reported NPAT (CNYm) 436.6 804.6 1,352.0 1,958.6 Reported EPS FD(CNY) 1.70 2.84 4.64 6.67 DB EPS FD(CNY) 1.91 3.04 4.88 6.97 EV/EBITDA (x) 6.0 8.7 16.7 11.8 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close

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3Q result in-line, more new store openings next year

EBITDA growth in line, margin expanded in Q3

Net income increased by 60% yoy in 3Q17. EBITDA growth was 55% yoy in 3Q17. On the conference call, management disclosed that excluding the contribution from Crystal Orange, the like-for-like EBITA growth was 38% yoy, which we believe seems to be close to the growth rate in 2Q17.

Blended 3Q RevPAR growth is 17.3% yoy vs. 2Q17’s 14% yoy Net revenue of RMB2.37bn increased by 33.8% yoy from RMB1.77bn in 3Q16, in line with the higher range of the guidance. Topline growth was mainly driven by robust RevPAR growth, together with a contribution from Crystal Orange. In mid-October, China Lodging reported its 3Q17 hotel operational data. The company reported a set of solid operational results with (blended) RevPAR growth of 17.3% yoy (including Crystal Orange) to RMB203 in 3Q17 vs. 14% in 2Q17. In detail: ADR increased by 12.4% yoy to RMB218 in 3Q17 from RMB194 in 3Q16; the occupancy rate increased by 4% to 93% in 3Q17 from 89% in 3Q16. If we exclude the contribution from Crystal Orange, management guided that RevPAR growth is c. 13-14% yoy.

Crystal Orange update in Q3? In Q3, same hotel RevPAR growth for Crystal Orange is c. 14.5% yoy and RevPAR is RMB 367 vs. RMB 320 last period. If we break down the growth, ADR growth is significant at 7.1% yoy and the occupancy rate was improved by 5.6 pts. Operational and booking systems have been fully consolidated to China Lodging in Q3.

4Q17 guidance, accelerating on new store opening The company expects the 4Q17 net revenue growth to be 29% to 32% and full year net revenue growth of 24% to 25% yoy. As a result of a strong quarter and this momentum being likely to continue in the rest of the year, management has lifted its new store (gross) opening guidance to 650-700 in 2018E, of which 60-65% will be mid-upscale hotels.

Figure 25: 3Q17 blended RevPAR growth breakdown Operational data 3Q16 3Q17 yoy Blended Occupancy 89% 93% +4 ppt Blended ADR 194 218 12% Blended RevPAR 173 203 17% Source: Deutsche Bank, Company data

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Figure 26: China Lodging – same hotel and Blended RevPAR growth rate, 2014-2017

Source: Deutsche Bank, Company data

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Three keys in driving RevPAR in the longer term a) Occupancy rate, b) ADR, c) “mix up”

Occupancy rate, it’s high, but will it be higher? Our recent marketing feedback from clients was that they were worried that China Lodging has limited upside on occupancy rate, as it has already hit 90%. Clients believe that it will be tough for China Lodging to further lift its occupancy rate.

We disagree on that, because the calculation method China Lodging has adopted is different from other hotel operators. China Lodging counts the occupancy rate of hotel rooms paid for by the hour in the total occupancy rate too. Therefore, the 90% occupancy rate includes both overnight stays and paid-by-hour stays. If we exclude the impact from the paid-by-hour occupancy rate (c.10% guided by management), the overnight stay occupancy rate is 80%, which still has a lot of room for improvement.

ADR, this is something the company can “manage” We believe there is still upside potential for China Lodging on the ADR side. Take 3Q17 (peak season) for example, mid-scale hotel ADR growth is 5.2%, which is similar to economy hotels’ ADR growth of 4.3%. The ADR increase elasticity of midscale hotels is normally much higher than that of economy hotels, given that midscale’s ADR range is RMB 400-800. Therefore, we are confident that there is still ADR upside for China Lodging for 2018 and 2019, given the higher percentage of midscale hotels.

Do not overlook favorable mix contribution, 4% RevPAR growth contribution In addition to the absolute occupancy rate and ADR upside, we believe product mix change is also a critical factor that investors may have missed here. We estimate that a simple “mix up” to a higher proportion of midscale hotels could contribute 4% blended RevPAR growth in 2017E.

As shown in Figure 27 we assume that RevPAR for midscale and economy hotel remains unchanged. The only variable here is the mix change between midscale and economy hotels, i.e. the midscale percentage increased from 11% in 1Q16 to 21% in 4Q17E. The blended RevPAR growth contribution for every quarter is c. 4-5%. On an annual basis, blended RevPAR is likely to increase by 2% in 2018-19E, driven by favorable hotel mix change.

Figure 27: Favorable mix change’s contribution to blended RevPAR growth, 1Q16-4Q17E Hotel Mix Change 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17E - Midscale/Upscale 11% 12% 13% 14% 15% 18% 20% 21% - Economy 89% 88% 87% 86% 85% 82% 80% 79% RevPAR - Midscale/Upscale 250 250 250 250 250 250 250 250 - Economy 150 150 150 150 150 150 150 150 Blended 161 162 163 164 165 168 170 171 yoy 1% 1% 2% 1% 2% 4% 4% 5% Source: Deutsche Bank estimates

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Hotels / Leisure / Gaming China Hotels

Valuation

Lift our target price slightly to USD130

We change our method to DCF We reiterate our Buy rating on China Lodging with a new target price of USD130, implying 13% upside potential at current levels. We have changed our primary valuation method to DCF which we believe makes more sense than EV/EBITDA at the current stage.

As we mentioned in our sector report, we are expecting secular growth for the economy hotel sector in the longer term. In addition, China Lodging’s main expansion is through the franchised model which doesn’t require capex. Even for its lease and owned hotels, they only rent the property.

Therefore, we believe DCF is better in capturing: 1) the long-term growth; 2) strong operating cash; and 3) asset light business model.

DCF-based valuation

We derive our target price based on a DCF valuation. China Lodging’s operations are strong and its free cash flow should continue to increase. As a result, we believe DCF is the best way to value China Lodging from a long-term perspective. Our key valuation assumptions include:

 WACC of 9.2%.

 Targeting 90% equity for its capital structure. The company is in a net cash position at the moment, with only c. RMB3m of interest-bearing debt.

 Cost of equity of 9.7%.

 A risk-free rate of 3.9% and a market risk premium of 5.6% (in line with our in-house estimates).

 A beta of 1.0, the same as the average of our China tourism and hotel companies

 Cost of debt (pre-tax) of 6.0% (our in-house estimate).

 Terminal growth of 3%. This is the same as our terminal growth rate for our China tourism and hotel companies. Chinese consumers are starting to change their consumption behaviors – pursuing more luxury products and favoring upgraded hotels. In the long-term, as the middle-class in the tier-2 and tier-3 cities grow, new consumers will likely continue to join the market. We believe China Lodging will be able to sustain growth at 3%.

 A tax rate of 25% (for terminal growth).

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Figure 28: Our DCF assumptions DCF assumptions Equity as % of capital structure 90.0% Beta (3Y beta from Bloomberg) 1.0 Risk free rate 3.9% Equity risk premium 5.6% Cost of equity 9.7% Tax rate (for discount rate calculation) 25% Cost of debt (pre-tax) 6.0% WACC 9.2% Source: Deutsche Bank

Figure 29: Our DCF valuation Items Discounted FCF 58,090 WACC 9.2% Net Cash 6,473 Minority Interest (17) Equity Value 64,546 Shares Outstanding 71 Value per Share (RMB) RMB 913 Value per Share (USD) USD 130 Source: Deutsche Bank

Figure 30: Our DCF valuation continued RMB m 2018 2019 2020 2021 2022 2023 2024 2025 2025 2025 Revenue 10,061 11,398 12,880 14,554 16,446 18,584 21,000 23,730 26,815 28,156 EBIT 2,530 3,090 3,440 3,829 4,294 4,815 5,399 6,054 6,787 7,070 Tax (670) (819) (860) (957) (1,074) (1,204) (1,350) (1,513) (1,697) (1,767) NOPAT 1,860 2,271 2,580 2,872 3,221 3,611 4,049 4,540 5,090 5,302 D&A 959 1,077 1,030 1,164 1,316 1,487 1,680 1,898 2,145 2,252 Capex (993) (1,080) (1,030) (1,164) (1,316) (1,487) (1,680) (1,898) (2,145) (2,252) Change Working Cap 58 50 56 64 72 81 92 104 117 123 FCF 1,883 2,318 2,637 2,936 3,293 3,693 4,141 4,644 5,208 5,426 3.0% 90,115 1,883 2,318 2,637 2,936 3,293 3,693 4,141 4,644 5,208 95,541 Discounted 1,711 1,929 2,009 2,048 2,103 2,160 2,218 2,278 2,339 39,295 Source: Deutsche Bank

Figure 31: Sensitivity analysis of terminal growth and WACC WACC USD 130 7.2% 7.7% 8.2% 8.7% 9.2% 9.7% 10.2% 10.7% 11.2% 11.7% Terminal Growth Rate 1.5% 157 144 133 123 115 108 101 96 91 86 2.0% 167 152 139 128 119 111 104 98 93 88 2.5% 179 161 147 135 124 116 108 101 95 90 3.0% 194 173 156 142 130 121 112 105 98 93 3.5% 212 187 167 151 137 126 117 109 102 96 4.0% 237 205 180 161 146 133 122 113 105 99 4.5% 270 228 197 174 156 141 129 118 110 102 Source: Deutsche Bank

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China Lodging is currently trading at 2018 EV/EBITDA of 12x which we believe is attractive given its leading position in the Chinese hotel industry recovery.

Figure 32: Valuation comps

Current Market cap 2017E 2018E 2017E 2018E DB Ticker English name Chinese name price (USD m) ROE (%) P/B PER PER EV/EBITDA EV/EBITDA Recomm. HK/China hotel companies 69 HK Equity SHANGRI-LA ASIA 香格里拉(亞洲) 17.38 8,221.14 3.0 1.3x 45.8x 36.0x 20.5x 16.9x Buy 2006 HK Equity SHANGHAI JIN J-H 錦江酒店 2.75 1,980.67 9.6 1.3x 26.2x 23.3x 10.0x 9.7x Buy HTHT US Equity CHINA LODGING 華住酒店集團有限公司 115.36 7,267.91 21.9 7.8x 38.7x 27.1x 16.7x 11.8x Buy 600754 CH Equity SHANGHAI JINJI-A 錦江股份 31.00 3,993.63 8.6 2.3x 29.0x 26.8x 9.4x 9.7x Buy 600258 CH Equity BTG HOTELS GRO-A 首旅酒店 27.82 3,360.41 9.4 3.1x 33.9x 25.1x 13.6x 10.9x Buy HK/China hotels average 3.2x 34.7x 27.6x 14.0x 11.8x Asia hotel companies Source: Deutsche Bank

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Rating Company Price at 27 Nov 2017 (CNY) 27.69 Price target - 12mth (CNY) 35.00 Buy BTG Hotels 52-week range (CNY) 31.75 - 18.08

Shanghai Composite 3,323 Asia China Tallan Zhou Karen Tang

Consumer Research Analyst Research Analyst (+852 ) 2203 6464 (+852 ) 2203 6141 Reuters Bloomberg Hotels / Leisure / [email protected] [email protected] Gaming 600258.SS 600258 CH

Price/price relative

32 Leveraged to mid-scale hotel growth - 28 24 Buy 20 16 Upgrading to meet consumers' trade-up; initiating with Buy 12 We initiate coverage of Beijing Tourism Group (BTG) Hotels with a Buy rating 12/15 6/16 12/16 6/17 and PT of RMB35. BTG fully integrated its Homeinns acquisition in 2016, BTG Hotels Shanghai Composite (Rebased) which now accounts for more than 85% of consolidated earnings. We expect BTG to further upgrade its hotel products through three key mid-scale brands. Performance (%) 1m 3m 12m As a result, we are confident that it will maintain earnings growth at 24% in Absolute -2.8 -1.2 34.5 2018-20E. As an SOE, BTG 1) hired Homeinns’ more professional management to manage BTG and 2) launched an incentive plan for its key management Shanghai Composite -2.4 -0.9 1.7 team. We believe this will enhance BTG’s ability to execute plans. Source: Deutsche Bank

Expanding mid-scale hotels under three key brands Of the 400-500 new hotels it is adding every year, we expect 30-40% to be mid-scale ones. We thus expect the proportion of mid-scale hotels to increase to 19% of the total number by 2020 from 10% in 2016. The focus is on three key mid-scale brands: Home Inn Selected, Home Inn Plus and Yitel. We expect these brands to account for more than 1,000 hotels and contribute 45-50% of BTG’s earnings by 2019. We have confidence in management’s execution and corporate governance We believe BTG’s management has better execution abilities than other SOE companies. Homeinns’ CEO is now the general manager of BTG and has made it more marketable, relative to the previous management, in our view. After acquiring Homeinns, BTG launched an incentive plan for key management in June 2017. Key objectives included 1) a revenue target and 2) new hotels. We believe this is a first step to a broader incentive plan that will also include middle and senior management. Valuation and risks (see pages 38, 39 & 45 for details) Our primary valuation method is based on DCF (8.2% WACC and 3% TGR) as this captures long-term growth. BTG Hotels is trading at 2018E EV/EBITDA of 10.9x, much lower than competitor China Lodging. Our target price translates into a targeted EV/EBITDA of 15x, lower than China Lodging’s, given that the two companies have the same hotel portfolio size (3,000-4,000). Downside risks include 1) lower tourism demand, 2) a stronger RMB leading to an increase in outbound travel, and 3) government policy changes.

Forecasts And Ratios Year End Dec 31 2015A 2016A 2017E 2018E 2019E Sales (CNYm) 1,332.8 6,522.8 8,498.5 9,387.4 10,339.5 EBITDA (CNYm) 311.8 1,052.5 1,887.1 2,249.4 2,273.2 Reported NPAT (CNYm) 100.1 210.9 660.1 946.7 1,057.4 Reported EPS FD(CNY) 0.43 0.62 0.88 1.16 1.30 DB EPS FD(CNY) 0.14 0.43 0.82 1.10 1.24 DB EPS growth (%) -71.9 214.6 92.1 34.5 12.3 PER (x) 110.4 42.6 33.9 25.2 22.4 EV/EBITDA (x) 16.1 9.8 13.7 11.0 10.4 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close

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Our earnings forecast

Homeinns contributes 85% of BTG’s earnings

BTG now controls a 100% stake in Homeinns Following two stages of acquisitions, BTG has integrated 100% of Homeinns’ equity. BTG first acquired a 66.14% stake in Homeinns in April 2016. The total consideration was USD1.157bn, implying an EV/EBITDA valuation of 7x. In October 2016, BTG increased its stake to 100% for a total consideration of USD1.16bn and valuation of 7x. As of 9M17, Homeinns’ business accounted for c.85% of consolidated revenue as well as net profit.

Before the acquisition, BTG had operated c.150 hotels under the Jianguo, Jinglun and Shindom series, ranging from five-star to budget lodgings. With Homeinns, BTG added over 3,200 hotels in 2016, c.30% of which were leased and owned (L/O), and c.70% were “manachised” and franchised (M/F) hotels. We list BTG’s hotels by brand as of 2016 and 1H17 in Fig 33.

Figure 33: Hotels by BTG brand BTG Hotels brands 2016 1H17 Homeinns Economy 2,947 2,944 Home Inn 2,385 2,355 Motel 411 394 Fairyland Hotel 33 34 Ease Hotel 14 31 Pebble Motel 77 94 Ripple Hotel 27 36 Homeinns Midscale 220 254 Yitel 85 91 Home Inn Plus 100 115 Home Inn Selected 23 32 Pu Yin 1 1 QQ Moma 2 2 Superior Hotel 2 4 Gold Ease Hotel 7 9 Homeinns Others 80 115 BTG Economy (Original) 58 59 BTG Midscale (Original) 97 100

Total 3,402 3,472 Source: Deutsche Bank, Company data

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Figure 34: Hotels by location, 1H17

By 1H17 LO MF Total # Hotels # Hotel rooms # Hotels # Hotel rooms # Hotels # Hotel rooms Beijing 50 6,959 226 28,140 276 35,099 Shanghai 97 13,752 229 22,576 326 36,328 Sub-total 147 20,711 455 50,716 602 71,427 Outside of SH/B 824 97,095 2,045 206,217 2,869 303,312 -Jiangsu,Zhejiang 253 29,064 702 68,973 955 98,037 Total 971 117,806 2,500 256,933 3,471 374,739 Source: Deutsche Bank

Which company is recovering faster…? As Homeinns accounted for the highest share of profit and the number of hotels for BTG, we compared the blended RevPAR growth trends of BTG and China Lodging in Fig 35. Although the overall RevPAR growth trends look similar, we observe that RevPAR growth at China Lodging looks more resilient with its absolute RevPAR also higher than BTG’s.

Figure 35: RevPAR growth − BTG vs. China Lodging, 2010-2Q17 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% (5.0%) (10.0%) (15.0%) (20.0%)

China Lodging (Group) Homeinns

Source: Deutsche Bank

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Figure 36: RevPAR (RMB/night) − BTG vs. China Lodging, 2010-2Q17

240 RevPar (RMB) 220 200 180 160 140 120 100

China Lodging (Group) Homeinns

Source: Deutsche Bank

…and why is that? We classified the hotels into L/O (leased and owned) vs. M/F (manachised and franchised) and economy vs. mid-scale in Fig 37. With both having a similar number of hotel rooms (300k+ as of 1H17), we noticed that the difference in the proportion of mid-scale/up-scale hotels seems to be the key reason.

In terms of economy/mid-scale mix, China Lodging has a bigger portion of mid-scale hotels. In contrast, Homeinns has only half the number of mid-scale hotels at 354, compared to China Lodging’s 648.

Figure 37: Hotel operations data comparison − BTG vs. China Lodging Hotels in operation BTG China Lodging (As of 1H17) # of Hotels 3,472 3,541 # of Rooms 374,939 359,530

L/O hotels 971 686 M/F hotels 2,501 2,855

L/O hotels 28% 19% M/F hotels 72% 81%

Economy hotels 3,003 2,893 Midscale and upscale 354 648 Others 115 NA

Economy hotels 86% 82% Midscale and upscale 10% 18% Others 3% NA Source: Deutsche Bank. L/O = leased and owned; M/F = manachised and franchised.

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In our forecast, mid-scale hotels appear to drive growth

Homeinns will likely continuously increase the percentage of mid-scale hotels We forecast an earnings CAGR of 24% during 2017-20, driven by 1) percentage increase of mid-scale hotels and 2) margin expansion, thanks to the nature of the hotel business (leverage).

Figure 38: BTG – our earnings forecast, 2016-20E RMB m 2016 2017E 2018E 2019E 2020E Sales revenue 6,523 8,498 9,387 10,340 11,367 EBITDA 1,052 1,887 2,249 2,273 2,339 EBIT 701 976 1,327 1,417 1,569 Net profit 211 660 947 1,057 1,210 Core net profit 145 613 900 1,011 1,163 yoy (%) Sales revenue 389% 30% 10% 10% 10% EBITDA 238% 79% 19% 1% 3% EBIT 352% 39% 36% 7% 11% Net profit 111% 213% 43% 12% 14% Core net profit 363% 322% 47% 12% 15% Source: Company data, Deutsche Bank estimates

Our key assumptions behind ADR and occupancy rate We forecast BTG Hotels to achieve a 4%/6% CAGR for its economy/mid-scale hotel RevPAR in 2017-19. As the Homeinns integration occurred in 2016, we believe it makes more sense to look at YTD RevPAR growth. We observed that Homeinns’ RevPAR growth is accelerating each quarter with both improvement in occupancy rates and ADR. We listed our assumption of the occupancy rate and ADR for mid-scale/economy hotels from 2017 to 2020E in Fig 39.

Figure 39: Group blended RevPAR growth 2017 YTD RevPAR (RMB) 1Q17 2Q17 3Q17 China Lodging 152 179 203 yoy 9.4% 14.0% 17.3% Homeinns 133 150 168 yoy 4.5% 6.7% 8.0% Jinjiang 129 150 166 yoy 1.7% 2.7% 7.6% Source: Deutsche Bank, Company data

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Figure 40: BTG: our key assumptions behind occupancy rate/ADR, 2017-20E Major assumptions 2017E 2018E 2019E 2020E - ADR yoy growth Economy 3% 3% 3% 3% Midscale 5% 5% 5% 5% - Occupancy yoy growth Economy 1 ppt 1 ppt 1 ppt 1 ppt Midscale 1 ppt 1 ppt 1 ppt 1 ppt - RevPAR yoy growth Economy 4% 4% 4% 4% Midscale 6% 6% 6% 6% - New adds (Hotels) 440 440 440 440 Owned/Leased 40 40 40 40 Franchised 400 400 400 400 - New adds (Hotels) 440 440 440 440 Economy 280 280 280 280 Midscale 160 160 160 160 Source: Deutsche Bank estimates

New midscale hotels to account for 30-40% of the total

We expect BTG to add 400-500 hotels every year in 2017-2020E. We expect 30-40% of the additions to be midscale hotels, in line with company guidance.

As shown in the chart below, by the end of 2016, only 10% of the hotels in operation were midscale/upscale hotels. We believe this ratio will increase to 19% by 2020E, similar to China Lodging’s current ratio.

Figure 41: Midscale hotels as a proportion of total hotels, 2016-2020E

20% 19%

18% 17%

16% 15%

14% 13% 12% 10% 10%

8%

6%

4%

2%

0% 2016 2017E 2018E 2019E 2020E

Source: Company data, Deutsche Bank estimates

Home Inn Plus, Home Inn Selected and Yitel are the 3 brands in focus Of its 254 midscale hotels as of 1H17, over 90% operate under three brands: Home Inn Plus (如家精选), Home Inn Selected (如家商旅) and Yitel (和颐酒店). We believe its midscale hotels (including 100 from heritage BTG) will exceed 1,000 over the next 3-4 years, in line with management guidance earlier this year.

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Figure 42: Home Inn Plus Figure 43: Home Inn Selected

Source: Company data Source: Company data

Figure 44: Yitel Figure 45: Yitel

Source: Company data Source: Company data

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Figure 46: BTG – number of hotels, 2016-2020E

Hotel Info 2016 2017E 2018E 2019E 2020E No. of hotels - In operation 3,322 3,762 4,202 4,642 5,082 Owned/Leased 957 997 1,037 1,077 1,117 Franchised 2,365 2,765 3,165 3,565 3,965

Hotel mix % Owned 29% 27% 25% 23% 22% Franchised 71% 73% 75% 77% 78%

No. of hotels - In operation 3,322 3,762 4,202 4,642 5,082 Economy 3,005 3,285 3,565 3,845 4,125 Midscale 317 477 637 797 957

Hotel mix % Economy 90% 87% 85% 83% 81% Midscale 10% 13% 15% 17% 19%

- New adds 3,168 440 440 440 440 Owned/Leased 925 40 40 40 40 Franchised 2,243 400 400 400 400

- New adds 3,168 440 440 440 440 Economy 2,949 280 280 280 280 Midscale 219 160 160 160 160 Source: Deutsche Bank estimates, Company data

‘Other business’ is scenic spot operations

Nanshan Culture Zone in Sanya, Hainan BTG controls a 75% stake in Nanshan Culture Park, a Buddha thematic cultural park in Sanya. The main revenue from Nanshan comes from entrance tickets, dining, souvenirs, and accommodation charges. As of 1H17, scenic spot operations accounted for only 6% of total revenue but 26% of group net profit.

Nanshan benefits from robust growth in Sanya traffic, consistent with CITS’s Haitang Bay duty-free traffic growth. Total visitors to Nanshan increased 25% yoy and ticket revenue was up 21% yoy in 1H17.

Our estimates vs. consensus

There is a gap between net profit and core net profit, and this is mainly due to a government subsidy (RMB58.5m in 2016). We conservatively remove this component from net profit.

Figure 47: Our forecast vs. consensus RMB m 2017E 2018E DB estimate Consensus Diff. DB estimate Consensus Diff. Sales revenue 8,498 8,669 -2% 9,387 9,596 -2% EBITDA 1,887 1,842 2% 2,249 2,138 5% EBIT 976 983 -1% 1,327 1,255 6% Net profit 660 648 2% 947 831 14% Core net profit 613 648 -5% 900 831 8% Source: Deutsche Bank estimates, Bloomberg Finance LP

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Management incentive plan shows confidence

Cash incentive

BTG Hotels announced a Management Incentive Plan in June 2017. It is based on Homeinns’ model and links company management compensation to results performance. Although not uncommon, it is a major step in China's SOE reform to enhance efficiency. Company management compensations will now rise and fall with company performance.

Details of 2017 incentive plan The new incentive plan has two main goals:

 2017 net number of new hotel openings: 400-450 (c. 300 in 2015/16)

 2017 revenue target: RMB 8.2-8.4bn The 7-member key management team earned a total compensation of RMB 17m in 2016. However, under the new 2017 plan, that sum will be reduced to RMB 8.75m, plus other conditional compensations:

 Basic salary (50-85% of total compensation), RMB 8.75m

 Basic welfare (0.2% of total compensation)

 Commission (10+15% of total compensation)

 Equity options (0-40% of total compensation)

 Total compensation will be capped at RMB 20m (+18% yoy) Even though the initial plan targets only key management, we see the potential for the company to grant options to mid-ranking employees.

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Valuation

Initiating with Buy – target price of RMB35

DCF is our main valuation method We initiate coverage of BTG Hotels with a Buy rating and a target price of RMB35, implying 25% upside potential at current levels. Our primary valuation method is DCF to capture the long-term growth thesis for BTG Hotels, as we believe China’s hotel industry will enjoy secular growth in the next 5 years.

DCF-based valuation

We derive our target price based on a DCF valuation. BTG Hotels’ operations are strong and free cash flow should continue to increase. As a result, we believe DCF is the best way to value BTG Hotels from a long-term perspective. Our key valuation assumptions include:

 WACC of 8.2%.

 Targeting 70% equity for its capital structure. The company is in a net debt position at the moment, with c. RMB5bn of interest-bearing debt related to the acquisition of Homeinns.

 Cost of equity of 9.7%.

 A risk-free rate of 3.9% and a market risk premium of 5.6% (in line with our in-house estimates).

 A beta of 1.0, the same as the average for our China tourism and hotel companies.

 Cost of debt (pre-tax) of 6.0% (our in-house estimate).

 Terminal growth of 3%. This is the same as our terminal growth rate for our China tourism and hotel companies. Chinese consumers are starting to change their consumption behaviors -- pursuing more luxury products and favoring upgraded hotels. In the long-term, as the middle-class in the tier-2 and tier-3 cities grow, new consumers will continue to join the market. We believe BTG Hotels will be able to sustain a growth at 3%.

 A tax rate of 25% (for terminal growth).

Figure 48: Our DCF assumptions DCF assumptions Equity as % of capital structure 70.0% Beta (3Y beta from Bloomberg) 1.0 Risk free rate 3.9% Equity risk premium 5.6% Cost of equity 9.7% Tax rate (for discount rate calculation) 25% Cost of debt (pre-tax) 6.0% WACC 8.2% Source: Deutsche Bank

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Figure 49: Our DCF valuation Items Discounted FCF 30,639 WACC 8.2% Net Cash (1,927) Minority Interest (283) Equity Value 28,429 Shares Outstanding 816 Value per Share (RMB) RMB 35 Upside potential 25% Source: Deutsche Bank

Figure 50: Our DCF valuation (continued) RMB m 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 Revenue 9,387 10,340 11,367 12,497 13,740 15,106 16,608 18,259 20,074 22,069 EBIT 1,327 1,417 1,569 1,725 1,896 2,084 2,292 2,520 2,770 3,045 Tax (308) (329) (364) (400) (440) (483) (531) (584) (642) (761) NOPAT 1,020 1,088 1,205 1,325 1,456 1,601 1,760 1,935 2,128 2,284 D&A 1,534 1,544 1,591 750 824 906 996 1,096 1,204 1,324 Capex (751) (827) (909) (750) (824) (906) (996) (1,096) (1,204) (1,324) Change Working Cap (123) (125) (67) (62) (69) (76) (83) (91) (100) (110) FCF 1,680 1,681 1,819 1,262 1,388 1,526 1,677 1,844 2,027 2,174 3.0% 43,416 1,680 1,681 1,819 1,262 1,388 1,526 1,677 1,844 2,027 45,590 1,535 1,420 1,421 912 927 942 957 973 989 20,564 Source: Deutsche Bank estimates

Figure 51: Sensitivity analysis of terminal growth and WACC WACC CNY 35 6.2% 6.7% 7.2% 7.7% 8.2% 8.7% 9.2% 9.7% 10.2% 10.7% 1.5% 60 51 44 39 35 31 29 26 24 22 2.0% 60 51 44 39 35 31 29 26 24 22 2.5% 60 51 44 39 35 31 29 26 24 22 Terminal Growth Rate 3.0% 60 51 44 39 35 31 29 26 24 22 3.5% 60 51 44 39 35 31 29 26 24 22 4.0% 60 51 44 39 35 31 29 26 24 22 4.5% 60 51 44 39 35 31 29 26 24 22 Source: Deutsche Bank

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Figure 52: EV/EBITDA comparison

Source: Deutsche Bank, Bloomberg

Figure 53: Hotels: valuation comps

Current Market cap 2017E 2018E 2017E 2018E DB Ticker English name Chinese name price (USD m) ROE (%) P/B PER PER EV/EBITD EV/EBITD Recomm. HK/China hotel companies 45 HK Equity HK&S HOTELS 大酒店 11.14 2,284.15 2.7 0.5x 22.0x 23.4x NA NA NR MAND SP Equity MANDARIN ORIENTL 文華東方國際有限公司 2.17 2,716.84 3.9 2.2x 60.0x 42.4x NA NA NR 69 HK Equity SHANGRI-LA ASIA 香格里拉(亞洲) 17.38 8,221.14 3.0 1.3x 45.8x 36.0x 20.5x 16.9x Buy 2006 HK Equity SHANGHAI JIN J-H 錦江酒店 2.75 1,980.67 9.6 1.3x 26.2x 23.3x 10.0x 9.7x Buy HTHT US Equity CHINA LODGING 華住酒店集團有限公司 115.36 7,267.91 21.9 7.8x 38.7x 27.1x 16.7x 11.8x Buy 600754 CH Equity SHANGHAI JINJI-A 錦江股份 31.00 3,993.63 8.6 2.3x 29.0x 26.8x 9.4x 9.7x Buy 600258 CH Equity BTG HOTELS GRO-A 首旅酒店 27.82 3,360.41 9.4 3.1x 33.9x 25.1x 13.6x 10.9x Buy HK/China hotels average 2.7x 36.5x 29.1x 14.0x 11.8x Asia hotel companies CENTEL TB Equity CENTRAL PLAZA HT 中央廣場飯店大眾有限公司 53.00 2,012.78 18.6 5.7x 32.3x 26.7x 16.3x 14.1x Buy EIH IN Equity EIH LTD EIH有限公司 151.65 1,337.58 3.8 3.1x 73.5x 47.1x 30.3x 21.9x NR IH IN Equity INDIAN HOTELS CO Indian Hotels Co Ltd/The 119.80 2,279.92 (2.5) 5.0x 89.7x 48.7x 25.6x 21.2x NR MINT TB Equity MINOR INTERNATIO Minor International PCL 44.50 5,930.25 13.5 4.7x 36.7x 31.7x 19.3x 17.4x Buy Asia hotels average 4.6x 58.1x 38.6x 22.9x 18.6x Global major hotel companies AC FP Equity SA 法國雅高國際酒店集團 41.80 14,134.81 7.8 2.1x 43.6x 34.1x 22.0x 18.5x Buy BEL US Equity BELMOND LTD-A Belmond有限公司 12.50 1,266.88 (1.9) 1.8x 92.1x 46.8x 18.0x 12.3x Hold HLT US Equity 希爾頓全球控股公司 76.00 24,037.74 62.6 18.7x 38.9x 31.6x 15.5x 14.2x Buy H US Equity HOTELS-A 凱悅酒店集團 71.22 8,767.92 9.2 2.4x 39.6x 47.8x 11.9x 11.6x Hold MAR US Equity MARRIOTT INTL-A 萬豪國際集團 126.93 94,131.62 33.0 47.6x 29.6x 26.3x 32.2x 30.3x Hold MLC LN Equity MILLENNIUM & COP 美麗年和科波托公司 588.50 2,573.49 4.2 0.7x 18.9x 17.8x 12.8x 12.4x NR NHH SM Equity NH HOTEL GROUP S NH Hotel Group SA 5.95 2,298.89 5.3 1.7x 45.0x 26.6x 10.9x 9.7x Hold Global major hotels average 10.7x 44.0x 33.0x 17.6x 15.6x Global major economy hotel companies CHH US Equity CHOICE HOTELS 精品國際酒店集團 77.10 4,256.78 NM NM 26.4x 24.0x 16.9x 14.5x Hold STAY US Equity EXTENDED STAY AM 美國長住飯店 17.24 3,193.21 13.6 2.6x 17.0x 16.5x 9.5x 9.0x Buy WTB LN Equity WHITBREAD PLC 惠特貝瑞公開有限公司 3,555.00 9,301.96 17.1 2.8x 15.6x 13.9x 10.8x 9.2x Buy WYN US Equity WYNDHAM WORLDWID 溫翰全球公司 108.87 11,181.35 82.7 17.9x 18.3x 16.1x 10.6x 10.0x NR Global major economy hotels average 7.8x 19.3x 17.6x 11.9x 10.7x

Source: Deutsche Bank estimates, Bloomberg Finance LP (Market close of November 28), Bloomberg consensus for non-rated (NR) stocks, Current Prices are in local currency

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Financials

Consolidated income statement

Summary We expect BTG Hotels’ earnings to expand at yoy growth rates of 213% in 2017 and 43% in 2018 to reach RMB947m from RMB211m in 2016, driven by 1) Homeinns full-year consolidation, 2) RevPAR growth and 3) midscale hotels’ expansion.

Figure 54: Summary RMB m 2015 2016 2017E 2018E 2019E 2020E Revenue 1,333 6,523 8,498 9,387 10,340 11,367 L/O Hotels 772 5,193 6,964 7,689 8,463 9,301 M/F Hotels 206 958 1,146 1,292 1,451 1,621 Scenic spot operation 355 372 389 407 425 445 Gross profit 1,151 6,164 8,022 8,868 9,768 10,743 - L/O Hotels 636 4,880 6,544 7,225 7,953 8,740 - M/F Hotels 202 956 1,135 1,284 1,440 1,610 - Scenic spot operation 313 328 343 359 375 392 SG&A (997) (5,397) (6,980) (7,475) (8,285) (9,109) EBITDA 312 1,052 1,887 2,249 2,273 2,339 EBIT 155 701 976 1,327 1,417 1,569 Pre-tax profit 147 528 967 1,387 1,550 1,773 Net profit 100 211 660 947 1,057 1,210 Core net profit 31 145 613 900 1,011 1,163 EPS (RMB) 0.43 0.62 0.88 1.16 1.30 1.48 Core EPS (RMB) 0.14 0.43 0.82 1.10 1.24 1.43 Margins (%) Gross margin 86% 94% 94% 94% 94% 95% - L/O hotels 82% 94% 94% 94% 94% 94% - M/F hotels 98% 100% 99% 99% 99% 99% - Scenic spot operation 88% 88% 88% 88% 88% 88% SG&A as % of sales 75% 83% 82% 80% 80% 80% EBITDA margin 23% 16% 22% 24% 22% 21% EBIT margin 12% 11% 11% 14% 14% 14% Tax rate 23% 37% 23% 23% 23% 23% Net margin 8% 3% 8% 10% 10% 11% Core net margin 2% 2% 7% 10% 10% 10% YoY (%) Revenue -52% 389% 30% 10% 10% 10% Gross profit 23% 435% 30% 11% 10% 10% SG&A 30% 441% 29% 7% 11% 10% EBITDA 29% 238% 79% 19% 1% 3% EBIT -5% 352% 39% 36% 7% 11% Pre-tax profit -14% 260% 83% 43% 12% 14% Net profit -11% 111% 213% 43% 12% 14% Core net profit -68% 363% 322% 47% 12% 15% Source: Company data, Deutsche Bank estimates. L/O = leased and owned; M/F = manachised and franchised.

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Figure 55: P&L statement RMB mn 2015 2016 2017E 2018E 2019E 2020E Total revenue 1,333 6,523 8,498 9,387 10,340 11,367 COGS (181) (359) (477) (519) (572) (625) Gross Profit (total) 1,151 6,164 8,022 8,868 9,768 10,743 SG&A (997) (5,397) (6,980) (7,475) (8,285) (9,109) Sales taxes (71) (106) (139) (153) (169) (185) Sales and marketing (475) (3,793) (4,844) (5,069) (5,583) (6,138) expenses Administrative expenses (451) (1,498) (1,997) (2,253) (2,533) (2,785) Other operating expenses 1 (65) (65) (65) (65) (65) Asset impairment 1 (65) (65) (65) (65) (65) EBITDA 312 1,052 1,887 2,249 2,273 2,339 Depreciation (126) (282) (793) (799) (728) (637) Amortization (31) (69) (118) (123) (128) (134) EBIT 155 701 976 1,327 1,417 1,569 Financial Cost (118) (405) (241) (172) (99) (28) Investment gain/loss 96 171 171 171 171 171 Change in fair value ------Non-operating income/(loss) 13 61 61 61 61 61 Non-operating income 19 93 93 93 93 93 Non-operating expense (6) (32) (32) (32) (32) (32) Pre-tax profit 147 528 967 1,387 1,550 1,773 Income taxes (34) (195) (224) (322) (359) (411) Net income 113 333 743 1,066 1,190 1,362 Minority interest (13) (122) (83) (119) (133) (152) Net income to parents 100 211 660 947 1,057 1,210 Adjustments (69) (66) (47) (47) (47) (47) Core net income 31 145 613 900 1,011 1,163

Weighted avg number of 231 340 748 816 816 816 shares (mn) Number of shares (mn) 231 680 816 816 816 816 Diluted number of shares 231 680 816 816 816 816 (mn) Basic EPS (RMB) 0.43 0.62 0.88 1.16 1.30 1.48 Core EPS (RMB) 0.14 0.43 0.82 1.10 1.24 1.43 Source: Company data, Deutsche Bank estimates

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Figure 56: Balance sheet RMB mn 2014 2015 2016 2017E 2018E 2019E 2020E Cash 248 167 1,104 2,167 3,283 4,385 5,607 Account receivable 20 35 177 93 103 113 125 Other receivable 21 14 229 74 261 108 297 Inventory 16 23 54 48 64 59 75 Other current assets 222 138 305 305 305 305 305 Current assets 528 378 1,870 2,687 4,015 4,970 6,408

PP&E 642 1,888 2,657 2,898 2,795 2,687 2,573 Construction in progress 14 75 159 159 159 159 159 Investment properties 4 4 3 3 3 3 3 Intangible assets 340 763 4,085 4,020 3,976 3,954 3,953 Goodwill 52 246 4,768 4,768 4,768 4,768 4,768 Long-term pre-paid expenses 35 29 2,467 2,168 2,001 1,931 1,933 Long-term equity investment 411 449 234 234 234 234 234 Other non-current assets 202 130 1,049 1,049 1,049 1,049 1,049 Non-current assets 1,701 3,583 15,424 15,300 14,986 14,786 14,673

Total assets 2,229 3,961 17,293 17,987 19,001 19,757 21,082

Short-term borrowings 360 1,319 4,920 4,920 4,920 4,920 4,920 Account payable 47 83 110 151 133 180 162 Advance payment 16 83 148 193 213 234 258 Other payables 84 133 1,852 1,806 1,894 1,553 1,698 Other current liabilities 41 95 804 804 804 804 804 Current liabilities 549 1,713 7,835 7,875 7,964 7,693 7,842

Long-term debt 313 618 290 290 290 290 290 Other long-term liabilities 24 223 2,165 2,165 2,165 2,165 2,165 Long-term liabilities 337 841 2,455 2,455 2,455 2,455 2,455

Total liabilities 886 2,555 10,290 10,330 10,419 10,148 10,297

Shares capital 231 231 680 680 680 680 680 Additional paid-in capital 117 86 5,037 5,037 5,037 5,037 5,037 Surplus 183 193 191 191 191 191 191 Other comprehensive 70 75 39 39 39 39 39 income Retained earnings 545 601 774 1,427 2,352 3,379 4,555 Minority interest 197 220 283 283 283 283 283 Equity 1,343 1,406 7,003 7,657 8,582 9,609 10,784 Source: Company data, Deutsche Bank estimates

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Figure 57: Cash flow statement RMB mn 2014 2015 2016 2017E 2018E 2019E 2020E Net income 112 100 211 660 947 1,057 1,210 Depreciation & Amortization 86 713 2,134 1,569 1,534 1,544 1,591 Change in working capital 90 221 1,256 285 (123) (125) (67) Account receivables (20) (15) (142) 84 (10) (10) (11) Inventory (16) (6) (32) 6 (15) 4 (15) Account payables 47 35 27 42 (18) 47 (18) Other receivables/payables 80 207 1,402 154 (79) (166) (22) Other adjustments (42) (669) (2,118) (425) (469) (517) (568) Operating cash flow 246 364 1,482 2,089 1,888 1,960 2,165 Capital expenditure (34) (37) (407) (1,020) (751) (827) (909) Other long-term investment (338) (19) (6,195) - - - - Investing cash flow (372) (56) (6,602) (1,020) (751) (827) (909) Issuance of shares - - 3,804 - - - - Issuance/(repayment) of debt 695 2,975 16,474 - - - - Dividend - (35) (35) (7) (21) (31) (34) Others (620) (3,329) (14,123) - - - - Financing cash flow 75 (389) 6,120 (7) (21) (31) (34) Effect of exchange 0 0 (64) - - - - Net change in cash (51) (81) 937 1,063 1,116 1,102 1,222 Opening cash balance 299 248 167 1,104 2,167 3,283 4,385 Ending cash balance 248 167 1,104 2,167 3,283 4,385 5,607 Source: Company data, Deutsche Bank estimates

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Risks

Downside risks

 Margin tightening: Due to increasing competition in the hotel sector and online travel agency business, the number of promotions would increase, increasing the risks of declining margins and challenging market conditions.

 Potential inability to locate new sites: BTG Hotels’ competitors are growing at a fast pace (China Lodging added 500+ hotels in 2016), adding to potential difficulties in locating ideal sites for growth.

 Domestic tourism market downturn: Due to China’s anti-graft campaign, the number of tourists/business people travelling locally has declined, which has affected hotels’ RevPAR. Furthermore, depreciation in other countries’ currencies and the relaxation of their visa policies for Chinese citizens have made Chinese tourists more willing to spend their money abroad.

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Company background

BTG Hotels and Homeinns

Founded in 1999, BTG Hotels (Group) Co., Ltd. is a China-based company engaged mainly in the operation and management of hotels. It has two business segments: hotels and scenic spots. Hotel operations mainly consist of running hotels and leasing hotel properties. The hotel management business mainly involve its brand franchises and other franchise businesses. Its brands include Home Inn, Motel, and Fairyland.

BTG Hotels acquired Homeinns at USD35.8 per share, an 11.4% premium to the closing price of USD32.14 on 4 December 2015 and a 9.1% premium to the original “going-private” price of USD32.81 proposed in June 2015.

Figure 58: BTG Hotels and Homeinns historical highlights

Source: Company, Deutsche Bank

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Figure 59: Homeinns acquisition steps

Source: Company, Deutsche Bank

Figure 60: BTG hotels business

Source: Company data, Deutsche Bank

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Figure 61: BTG Hotels acquired the remaining 34.87% of Homeinns’ equity

Source: Deutsche Bank

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Rating Company Price at 28 Nov 2017 (CNY) 31.00 Price target - 12mth (CNY) 37.00 Buy Jinjiang Hotels 52-week range (CNY) 33.82 - 24.60

Shanghai Composite 3,323 Asia Develop China Tallan Zhou Karen Tang

Consumer Research Analyst Research Analyst (+852 ) 2203 6464 (+852 ) 2203 6141 Reuters Bloomberg Hotels / Leisure / [email protected] [email protected] Gaming 600754.SS 600754 CH

Price/price relative

60

Benefits from product upgrade; 50

reiterating Buy 40 30

20 Jinjiang is also on the way of products upgrade 11/15 5/16 11/16 5/17 We reiterate Buy on Jinjiang Hotels with a TP of RMB37. We believe Jinjiang Jinjiang Hotels Deve is also in the process of upgrading its product to meet higher demand from Shanghai Composite (Rebased) Chinese customers' trading-up, especially in tier 1-2 cities. We also believe the company will start to focus on internal consolidation of its current four hotel Performance (%) 1m 3m 12m brands and that it is likely to halt further expansion through acquisition. Absolute 3.5 7.1 -0.2 Earnings growth driven by new brand full-year consolidation; RevPAR growth Shanghai Composite -2.4 -0.9 1.7 Recall, 9M17 core earnings increased by 62% yoy to RMB494m (vs. RMB306m Source: Deutsche Bank in 9M16). This is mainly due to 1) Plateno and Vienna’s full-year consolidation in 2017, 2) reduced cost and expenses after acquisition, and 3) 9M17 Jinjiang RevPAR growth of 4.3% (9M17 blended RevPAR growth of 6-7% if excluding VAT reform effect), driven by the Chinese economy hotels’ recovery. Midscale hotels expansion driven by Vienna The hotel sector's recovery is mainly due to the robust domestic travel growth. In addition, mid-high-scale economy hotels' growth is driven by the rise in demand of domestic and business travelers, as well as consumer trade-up. Jinjiang is upgrading its products aggressively to mid-to-upscale hotels, mainly through the Vienna brand, just like China Lodging's strategy for more mid-to- upscale hotels and the Hanting upgrade. Management had guided previously that more than 1,000 hotels were mid-scale out of a total of 6,503 hotels in operation as of 9M17. In addition, 50-60% of the hotel portfolio pipelines are midscale. As of 9M17, the Vienna brand led the midscale hotel market expansion with more than 300 hotels added in 2017 YTD. Valuation and risks TP based on SOTP methodology (12-month weighted average EV/EBITDA); Jinjiang operates in multiple business segments (we use DCF as the primary methodology for other hotel companies to capture secular growth over the medium term). We separately calculate EBIDTA of Jinjiang’s Chinese and overseas selected hotel businesses. We assign a 12x multiple to Hotel Louvre, which is in line with the high end of European peers. We assign a 14x multiple to Plateno (7 days) and the original Jinjiang Chinese selected hotel business, which is the average for peers. Downside risks: 1) lower tourism demand; 2) stronger RMB, leading to more outbound travel; and 3) govt policy changes.

Forecasts And Ratios Year End Dec 31 2015A 2016A 2017E 2018E Sales (CNYm) 5,411.4 10,451.4 12,402.7 12,795.0 EBITDA (CNYm) 1,188.5 2,048.6 3,859.6 3,627.8 Reported NPAT (CNYm) 637.6 694.6 1,134.3 1,223.1 PER (x) 93.4 82.9 27.3 25.2 EV/EBITDA (x) 30.8 20.9 9.0 9.3 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close

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Model updated:28 November 2017 Fiscal year end 31-Dec 2015 2016 2017E 2018E

Running the numbers Financial Summary Asia DB EPS (CNY) 1.91 3.04 4.88 6.97 Reported EPS (CNY) 1.70 2.84 4.64 6.67 China DPS (CNY) 1.06 0.00 0.00 0.00 BVPS (CNY) 13.4 19.1 24.3 31.7 Hotels / Leisure / Gaming Weighted average shares (m) 251 275 284 286 China Lodging Average market cap (CNYm) 9,711 17,567 47,618 47,618 Enterprise value (CNYm) 7,558 13,582 42,280 40,098 Reuters: HTHT.OQ Bloomberg: HTHT US Valuation Metrics P/E (DB) (x) 20.3 21.0 38.7 27.1 Buy P/E (Reported) (x) 22.7 22.4 40.8 28.3 Price (28 Nov 17) USD 114.48 P/BV (x) 3.67 4.51 7.77 5.97

Target Price USD 130.00 FCF Yield (%) 11.3 8.7 2.5 4.0 Dividend Yield (%) 2.7 0.0 0.0 0.0 52 Week range USD 46.10 - 141.02 EV/Sales (x) 1.3 2.1 5.1 4.0 Market Cap (m) EURm 6,076 EV/EBITDA (x) 6.0 8.7 16.7 11.8 EV/EBIT (x) 12.6 15.6 25.0 16.4 USDm 7,212 Income Statement (CNYm) Company Profile Sales revenue 5,775 6,539 8,368 10,061 China Lodging Group is an economy hotel chain in China Gross profit 1,908 2,283 3,509 4,500 which commenced operations in 2005. The company EBITDA 1,263 1,566 2,533 3,403 offers three hotel brands which target three distinctive Depreciation 648 674 819 938 customer groups. HanTing Express caters to value Amortisation 13 21 21 21 conscious travelers, HanTing Seasons caters to SME EBIT 601 871 1,692 2,444 business/corporate travelers and HanTing Hi Inn is for Net interest income(expense) 23 56 96 137 budget constrained travelers. Associates/affiliates 0 0 0 0 Exceptionals/extraordinaries 12 156 32 57 Other pre-tax income/(expense) 0 0 0 0 Profit before tax 636 1,084 1,821 2,638 Price Performance Income tax expense 197 287 482 699 Minorities 3 -8 -14 -20 160 Other post-tax income/(expense) 0 0 0 0 Net profit 437 805 1,352 1,959 120

DB adjustments (including dilution) 53 55 72 86 80 DB Net profit 489 860 1,424 2,045 40 Cash Flow (CNYm) 0 Nov 15Feb 16May 16Aug 16Nov 16Feb 17May 17Aug 17 Cash flow from operations 1,750 2,048 2,417 3,152 Net Capex -649 -517 -1,079 -993 China Lodging HANG SENG INDEX (Rebased) Free cash flow 1,101 1,531 1,339 2,159 Equity raised/(bought back) 23 12 0 1 Margin Trends Dividends paid 0 -276 0 0 Net inc/(dec) in borrowings 306 -51 0 0 36 Other investing/financing cash flows -1,000 505 14 22 32 28 Net cash flow 429 1,721 1,352 2,182 24 Change in working capital 437 -45 64 58 20 16 Balance Sheet (CNYm) 12 Cash and other liquid assets 1,598 3,236 4,588 6,771 8 Tangible fixed assets 3,806 3,710 3,941 4,009 15 16 17E 18E Goodwill/intangible assets 253 514 480 445 EBITDA Margin EBIT Margin Associates/investments 890 1,064 1,064 1,064

Other assets 1,146 1,469 1,509 1,549 Growth & Profitability Total assets 7,694 9,993 11,582 13,838 Interest bearing debt 325 298 298 298 30 30 Other liabilities 3,928 4,279 4,383 4,480 25 25 Total liabilities 4,253 4,577 4,681 4,778 20 20 Shareholders' equity 3,430 5,400 6,927 9,084 15 15 Minorities 11 17 17 17 10 10 Total shareholders' equity 3,441 5,416 6,943 9,101 5 5 Net debt -1,274 -2,937 -4,290 -6,473 0 0 15 16 17E 18E Key Company Metrics Sales growth (%) nm 13.2 28.0 20.2 Sales growth (LHS) ROE (RHS)

DB EPS growth (%) na 59.2 60.6 42.7 Solvency EBITDA Margin (%) 21.9 23.9 30.3 33.8 EBIT Margin (%) 10.4 13.3 20.2 24.3 0 Payout ratio (%) 60.7 0.0 0.0 0.0 ROE (%) 13.1 18.2 21.9 24.5 -20 Capex/sales (%) 11.2 7.9 12.9 9.9 -40 Capex/depreciation (x) 1.0 0.7 1.3 1.0 Net debt/equity (%) -37.0 -54.2 -61.8 -71.1 -60 Net interest cover (x) nm nm nm nm

-80 Source: Company data, Deutsche Bank estimates 15 16 17E 18E

Net debt/equity (LHS) Net interest cover (RHS)

Tallan Zhou +852 2203 6464 [email protected]

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Model updated:07 June 2017 Fiscal year end 31-Dec 2014 2015 2016 2017E 2018E

Running the numbers Financial Summary Asia DB EPS (CNY) 0.23 0.37 0.42 1.14 1.23 Reported EPS (CNY) 0.79 0.79 0.77 1.18 1.28 China DPS (CNY) 0.40 0.40 0.51 0.78 0.85 BVPS (CNY) 10.8 10.3 13.4 14.1 14.6 Hotels / Leisure / Gaming Weighted average shares (m) 620 805 907 958 958 Jinjiang Hotels Development Average market cap (CNYm) 11,073 28,187 31,716 24,940 24,940 Enterprise value (CNYm) 5,839 36,584 42,855 34,640 33,687 Reuters: 600754.SS Bloomberg: 600754 CH Valuation Metrics P/E (DB) (x) 78.2 93.4 82.9 27.3 25.2 Buy P/E (Reported) (x) 22.7 44.2 45.7 26.2 24.3 Price (28 Nov 17) CNY 31.00 P/BV (x) 2.32 4.99 2.21 2.20 2.13

Target Price CNY 37.00 FCF Yield (%) 1.6 1.7 4.4 6.5 5.8 Dividend Yield (%) 2.2 1.1 1.4 2.5 2.7 52 Week range CNY 24.60 - 33.82 EV/Sales (x) 2.1 6.8 4.1 2.8 2.6 Market Cap (m) CNYm 24,940 EV/EBITDA (x) 9.3 30.8 20.9 9.0 9.3 EV/EBIT (x) 24.2 71.5 55.7 20.0 18.9 USDm 3,778 Income Statement (CNYm) Company Profile Sales revenue 2,763 5,411 10,451 12,403 12,795 Jinjiang Economy Hotels is a state-owned-hotel company, Gross profit 2,455 4,917 9,447 11,333 11,692 primarily operating in the economy hotel segment. Its two EBITDA 631 1,189 2,049 3,860 3,628 key businesses are: (i) limited-service hotels; and (ii) F&B. Depreciation 208 443 602 623 673 Amortisation 181 234 678 1,507 1,174 EBIT 241 512 769 1,730 1,781 Net interest income(expense) -70 -175 -387 -391 -321 Associates/affiliates -10 46 96 96 96 Exceptionals/extraordinaries 455 445 420 61 61 Other pre-tax income/(expense) 48 52 80 80 80 Profit before tax 666 880 978 1,576 1,697 Price Performance Income tax expense 175 239 259 418 450 Minorities 3 4 24 24 24 60 Other post-tax income/(expense) 0 0 0 0 0 Net profit 487 638 695 1,134 1,223 50

DB adjustments (including dilution) -345 -336 -312 -45 -45 40 DB Net profit 142 302 383 1,089 1,178 30 Cash Flow (CNYm) 20 Nov 15Feb 16May 16Aug 16Nov 16Feb 17May 17Aug 17 Cash flow from operations 559 1,124 2,282 3,289 3,135 Net Capex -379 -658 -898 -1,367 -1,407 Jinjiang Hotels Development Free cash flow 180 466 1,384 1,922 1,728 Shanghai Composite (Rebased) Equity raised/(bought back) 3,028 8 4,535 0 0 Margin Trends Dividends paid -232 -517 -550 -484 -775 Net inc/(dec) in borrowings -526 29,716 21,725 0 0 32 Other investing/financing cash flows 422 -29,427 -24,534 0 0 28 24 Net cash flow 2,873 246 2,561 1,438 953 20 Change in working capital 92 40 279 1 40 16 12 Balance Sheet (CNYm) 8 Cash and other liquid assets 3,552 4,742 7,789 9,228 10,180 4 Tangible fixed assets 3,161 7,230 7,480 8,089 8,687 14 15 16 17E 18E Goodwill/intangible assets 335 6,672 18,255 17,768 17,314 EBITDA Margin EBIT Margin Associates/investments 2,521 1,595 1,656 1,656 1,656

Other assets 1,795 6,787 9,016 8,263 7,705 Growth & Profitability Total assets 11,363 27,026 44,196 45,003 45,543 Interest bearing debt 809 14,543 19,066 19,066 19,066 120 10 Other liabilities 1,825 4,009 10,812 10,944 11,012 100 8 Total liabilities 2,635 18,552 29,878 30,011 30,078 80 6 Shareholders' equity 8,699 8,284 12,801 13,476 13,948 60 Minorities 29 191 1,517 1,517 1,517 4 40 Total shareholders' equity 8,728 8,475 14,318 14,993 15,465 20 2 Net debt -2,742 9,802 11,277 9,839 8,886 0 0 14 15 16 17E 18E Key Company Metrics Sales growth (%) nm 95.8 93.1 18.7 3.2 Sales growth (LHS) ROE (RHS)

DB EPS growth (%) na 64.1 12.5 169.5 8.2 Solvency EBITDA Margin (%) 22.8 22.0 19.6 31.1 28.4 EBIT Margin (%) 8.7 9.5 7.4 13.9 13.9 150 6 Payout ratio (%) 50.9 50.5 66.2 66.2 66.2 5 ROE (%) 7.5 7.5 6.6 8.6 8.9 100 4 Capex/sales (%) 14.2 12.2 9.0 11.0 11.0 50 3 Capex/depreciation (x) 1.0 1.0 0.7 0.6 0.8 2 Net debt/equity (%) -31.4 115.7 78.8 65.6 57.5 0 1 Net interest cover (x) 3.5 2.9 2.0 4.4 5.6 -50 0 Source: Company data, Deutsche Bank estimates 14 15 16 17E 18E

Net debt/equity (LHS) Net interest cover (RHS)

Tallan Zhou +852 2203 6464 [email protected]

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Model updated:06 November 2017 Fiscal year end 31-Dec 2014 2015 2016 2017E 2018E 2019E

Running the numbers Financial Summary Asia DB EPS (CNY) 0.48 0.14 0.43 0.82 1.10 1.24 Reported EPS (CNY) 0.49 0.43 0.62 0.88 1.16 1.30 China DPS (CNY) 0.15 0.15 0.02 0.03 0.04 0.04 BVPS (CNY) 5.0 5.1 9.9 9.0 10.2 11.4 Hotels / Leisure / Gaming Weighted average shares (m) 231 231 340 748 816 816 BTG Hotels Average market cap (CNYm) 2,854 3,468 6,188 22,686 22,686 22,686 Enterprise value (CNYm) 3,061 5,005 10,339 25,775 24,658 23,556 Reuters: 600258.SS Bloomberg: 600258 CH Valuation Metrics P/E (DB) (x) 25.6 110.4 42.6 33.9 25.2 22.4 Buy P/E (Reported) (x) 25.4 34.6 29.3 31.5 24.0 21.5 Price (28 Nov 17) CNY 27.81 P/BV (x) 2.75 4.82 1.93 3.08 2.73 2.43

Target Price CNY 35.00 FCF Yield (%) 7.4 9.4 17.4 5.1 5.0 5.0 Dividend Yield (%) 1.2 1.0 0.1 0.1 0.1 0.2 52 Week range CNY 18.08 - 31.75 EV/Sales (x) 1.1 3.8 1.6 3.0 2.6 2.3 Market Cap (m) CNYm 22,686 EV/EBITDA (x) 12.7 16.1 9.8 13.7 11.0 10.4 EV/EBIT (x) 18.7 32.2 14.7 26.4 18.6 16.6 USDm 3,436 Income Statement (CNYm) Company Profile Sales revenue 2,791 1,333 6,523 8,498 9,387 10,340 The company is a large all-encompassing publicly-listed Gross profit 933 1,151 6,164 8,022 8,868 9,768 Chinese tourism company, specializing in hotel EBITDA 241 312 1,052 1,887 2,249 2,273 management operations, scenic destinations and other Depreciation 64 126 282 793 799 728 commercial activities. Amortisation 13 31 69 118 123 128 EBIT 164 155 701 976 1,327 1,417 Net interest income(expense) -31 -118 -405 -241 -172 -99 Associates/affiliates 0 0 0 0 0 0 Exceptionals/extraordinaries 0 0 0 0 0 0 Other pre-tax income/(expense) 37 109 232 232 232 232 Profit before tax 170 147 528 967 1,387 1,550 Price Performance Income tax expense 36 34 195 224 322 359 Minorities 21 13 122 83 119 133 32 Other post-tax income/(expense) 0 0 0 0 0 0 28 Net profit 112 100 211 660 947 1,057

24 DB adjustments (including dilution) -1 -69 -66 -47 -47 -47 20 DB Net profit 112 31 145 613 900 1,011 16 Cash Flow (CNYm) 12 Dec 15Mar 16Jun 16Sep 16Dec 16Mar 17Jun 17Sep 17 Cash flow from operations 246 364 1,482 2,089 1,888 1,960 Net Capex -34 -37 -407 -1,020 -751 -827 BTG Hotels Shanghai Composite (Rebased) Free cash flow 213 327 1,075 1,070 1,137 1,133 Equity raised/(bought back) 0 0 3,804 0 0 0 Margin Trends Dividends paid 0 -35 -35 -7 -21 -31 Net inc/(dec) in borrowings 695 2,975 16,474 0 0 0 28 Other investing/financing cash flows -958 -3,349 -20,381 0 0 0 24 Net cash flow -51 -81 937 1,063 1,116 1,102 20 Change in working capital 90 221 1,256 285 -123 -125 16 12 Balance Sheet (CNYm) 8 Cash and other liquid assets 248 167 1,104 2,167 3,283 4,385 4 Tangible fixed assets 657 1,963 2,816 3,057 2,954 2,846 14 15 16 17E 18E 19E Goodwill/intangible assets 392 1,009 8,853 8,788 8,744 8,722 EBITDA Margin EBIT Margin Associates/investments 416 453 238 238 238 238

Other assets 516 370 4,282 3,738 3,783 3,566 Growth & Profitability Total assets 2,229 3,961 17,293 17,987 19,001 19,757 Interest bearing debt 673 1,937 5,210 5,210 5,210 5,210 500 14 Other liabilities 213 618 5,080 5,120 5,209 4,938 400 12 Total liabilities 886 2,555 10,290 10,330 10,419 10,148 300 10 8 Shareholders' equity 1,146 1,186 6,720 7,373 8,299 9,325 200 6 Minorities 197 220 283 283 283 283 100 4 Total shareholders' equity 1,343 1,406 7,003 7,657 8,582 9,609 0 2 Net debt 425 1,770 4,106 3,043 1,927 825 -100 0 14 15 16 17E 18E 19E Key Company Metrics Sales growth (%) nm -52.2 389.4 30.3 10.5 10.1 Sales growth (LHS) ROE (RHS)

DB EPS growth (%) na -71.9 214.6 92.1 34.5 12.3 Solvency EBITDA Margin (%) 8.6 23.4 16.1 22.2 24.0 22.0 EBIT Margin (%) 5.9 11.6 10.8 11.5 14.1 13.7 140 15 Payout ratio (%) 30.9 34.7 3.2 3.2 3.2 3.2 120 ROE (%) 9.8 8.6 5.3 9.4 12.1 12.0 100 10 Capex/sales (%) 1.2 2.8 6.2 12.0 8.0 8.0 80 Capex/depreciation (x) 0.4 0.2 1.2 1.1 0.8 1.0 60 40 5 Net debt/equity (%) 31.6 125.9 58.6 39.7 22.5 8.6 20 Net interest cover (x) 5.3 1.3 1.7 4.1 7.7 14.3

0 0 Source: Company data, Deutsche Bank estimates 14 15 16 17E 18E 19E

Net debt/equity (LHS) Net interest cover (RHS)

Tallan Zhou +852 2203 6464 [email protected]

Page 52 Deutsche Bank AG/Hong Kong

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The authors of this report wish to acknowledge the contribution made by Mengyi (Matt) Zhang, an employee of CRISIL Global Research & Analytics, a division of CRISIL Limited, a third-party provider of offshore research support services to Deutsche Bank.

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Appendix 1

Important Disclosures

*Other information available upon request

Disclosure checklist Company Ticker Recent price* Disclosure China Lodging HTHT.OQ 114.48 (USD) 28 Nov 17 1,2,7,14 Jinjiang International Hotels-H 2006.HK 2.77 (HKD) 29 Nov 17 NA Jinjiang Hotels Development-A 600754.SS 31.50 (CNY) 29 Nov 17 NA BTG Hotels 600258.SS 26.96 (CNY) 29 Nov 17 NA Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes.

1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees.

2. Deutsche Bank and/or its affiliate(s) makes a market in equity securities issued by this company.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.

14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year.

Important Disclosures Required by Non-U.S. Regulators Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes.

1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees.

2. Deutsche Bank and/or its affiliate(s) makes a market in equity securities issued by this company.

7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Tallan Zhou

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Historical recommendations and target price: China Lodging (HTHT.OQ) (as of 11/29/2017)

160.00 Previous Recommendations

Strong Buy 140.00 Buy 9 Market Perform 120.00 Underperform 8 Not Rated 100.00 Suspended Rating 7 Current Recommendations 80.00 6 Buy 5 Hold

Security Price 60.00 4 Sell 3 2 Not Rated 40.00 1 Suspended Rating *New Recommendation Structure 20.00 as of September 9,2002

**Analyst is no longer at Deutsche 0.00 Bank

Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 Date

1. 11/03/2016: Hold, Target Price Change USD28.00 Karen Tang 6. 05/05/2017: Buy, Target Price Change USD87.00 Tallan Zhou 2. 12/05/2016: Hold, Target Price Change USD30.50 Karen Tang 7. 20/06/2017: Buy, Target Price Change USD93.00 Tallan Zhou 3. 16/08/2016: Hold, Target Price Change USD35.00 Karen Tang 8. 17/08/2017: Buy, Target Price Change USD125.00 Tallan Zhou 4. 30/12/2016: Upgrade to Buy, Target Price Change USD60.00 Tallan 9. 29/11/2017: Buy, Target Price Change USD130.00 Tallan Zhou Zhou 5. 15/03/2017: Buy, Target Price Change USD63.00 Tallan Zhou

Historical recommendations and target price: Jinjiang International Hotels-H (2006.HK) (as of 11/29/2017)

4.00 Previous Recommendations

Strong Buy 3.50 Buy 1 Market Perform 3.00 Underperform Not Rated 2.50 2 Suspended Rating Current Recommendations 2.00 Buy Hold

Security Price 1.50 Sell Not Rated 1.00 Suspended Rating

*New Recommendation Structure 0.50 as of September 9,2002

**Analyst is no longer at Deutsche 0.00 Bank

Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 Date

1. 01/02/2016: Upgrade to Buy, Target Price Change HKD3.70 Tallan 2. 09/06/2017: Buy, Target Price Change HKD3.80 Tallan Zhou Zhou

Historical recommendations and target price: Jinjiang Hotels Development-A (600754.SS) (as of 11/29/2017)

Deutsche Bank AG/Hong Kong Page 55

30 November 2017 Hotels / Leisure / Gaming China Hotels

60.00 Previous Recommendations

Strong Buy 50.00 Buy Market Perform Underperform Not Rated 40.00 Suspended Rating 1 2 Current Recommendations 30.00 3 Buy Hold Security Price 20.00 Sell Not Rated Suspended Rating

10.00 *New Recommendation Structure as of September 9,2002

**Analyst is no longer at Deutsche 0.00 Bank

Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 Date

1. 01/02/2016: Upgrade to Hold, Target Price Change CNY36.00 3. 09/06/2017: Upgrade to Buy, Target Price Change CNY37.00 Tallan Tallan Zhou Zhou 2. 07/03/2017: Hold, Target Price Change CNY34.00 Tallan Zhou

Historical recommendations and target price: BTG Hotels (600258.SS) (as of 11/29/2017)

35.00 Previous Recommendations

Strong Buy 30.00 1 Buy Market Perform Underperform 25.00 Not Rated Suspended Rating 20.00 Current Recommendations

Buy 15.00 Hold Security Price Sell 10.00 Not Rated Suspended Rating

*New Recommendation Structure 5.00 as of September 9,2002

**Analyst is no longer at Deutsche 0.00 Bank

Dec 15 Mar 16 Jun 16 Sep 16 Dec 16 Mar 17 Jun 17 Sep 17 Date

1. 29/11/2017: Upgrade to Buy, Target Price Change CNY35.00 Tallan Zhou

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Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total 600 share-holder return (TSR = percentage change in 56 % share price from current price to projected target price 500 plus pro-jected dividend yield ) , we recommend that 400 investors buy the stock. 300 33 % 200 Sell: Based on a current 12-month view of total share- 17 % 11 % 17 % holder return, we recommend that investors sell the 100 12 % stock 0 Buy Hold Sell Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not Companies Covered Cos. w/ Banking Relationship recommend either a Buy or Sell. Asia-Pacific Universe Newly issued research recommendations and target prices supersede previously published research.

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Additional Information

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Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor who is long fixed-rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or liquidation of positions), and settlement issues related to local clearing houses are also important risk factors. The sensitivity of fixed-income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates – these are common in emerging markets. The index fixings may – by construction – lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. Funding in a currency that differs from the currency in which coupons are denominated carries FX risk. Options on swaps (swaptions) the risks typical to options in addition to the risks related to rates movements.

Derivative transactions involve numerous risks including market, counterparty default and illiquidity risk. The appropriateness of these products for use by investors depends on the investors' own circumstances, including their tax position, their regulatory environment and the nature of their other assets and liabilities; as such, investors should take expert legal and financial advice before entering into any transaction similar to or inspired by the contents of this publication. The risk of loss in futures trading and options, foreign or domestic, can be substantial. As a result of the high degree of leverage obtainable in futures and options trading, losses may be incurred that are greater than the amount of funds initially deposited – up to theoretically unlimited losses. Trading in options involves risk and is not suitable for all investors. Prior to buying or selling an option, investors must review the "Characteristics and Risks of Standardized Options”, at http://www.optionsclearing.com/about/publications/character-risks.jsp. If you are unable to access the website, please contact your Deutsche Bank representative for a copy of this important document.

Participants in foreign exchange transactions may incur risks arising from several factors, including: (i) exchange rates can be volatile and are subject to large fluctuations; (ii) the value of currencies may be affected by numerous market factors, including world and national economic, political and regulatory events, events in equity and debt markets and changes in interest rates; and (iii) currencies may be subject to devaluation or government-imposed exchange controls, which could affect the value of the currency. Investors in securities such as ADRs, whose values are affected by the currency of an underlying security, effectively assume currency risk.

Deutsche Bank is not acting as a financial adviser, consultant or fiduciary to you or any of your agents with respect to any information provided in this report. Deutsche Bank does not provide investment, legal, tax or accounting advice, and is not acting as an impartial adviser. Information contained herein is being provided on the basis that the recipient will make an independent assessment of the merits of any investment decision, and is not meant for retirement accounts or for any specific person or account type. The information we provide is directed only to persons we believe to be financially sophisticated, who are capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies, and who understand that Deutsche Bank has financial interests in the offering of its products and services. If this is not the case, or if you or your agent are an IRA or other retail investor receiving this directly from us, we ask that you inform us immediately. Unless governing law provides otherwise, all transactions should be executed through the Deutsche Bank entity in the investor's home jurisdiction. Aside from within this report, important risk and conflict disclosures can also be found at https://gm.db.com on each company’s research page and under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.

United States: Approved and/or distributed by Deutsche Bank Securities Incorporated, a member of FINRA, NFA and SIPC. Analysts located outside of the United States are employed by non-US affiliates that are not subject to FINRA regulations, including those regarding contacts with issuer companies.

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Germany: Approved and/or distributed by Deutsche Bank AG, a joint stock corporation with limited liability incorporated in the Federal Republic of Germany with its principal office in Frankfurt am Main. Deutsche Bank AG is authorized under German Banking Law and is subject to supervision by the European Central Bank and by BaFin, Germany’s Federal Financial Supervisory Authority.

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India: Prepared by Deutsche Equities India Private Limited (DEIPL) having CIN: U65990MH2002PTC137431 and registered office at 14th Floor, The Capital, C-70, G Block, Bandra Kurla Complex Mumbai (India) 400051. Tel: + 91 22 7180 4444. It is registered by the Securities and Exchange Board of India (SEBI) as a Stock broker bearing registration nos.: NSE (Capital Market Segment) - INB231196834, NSE (F&O Segment) INF231196834, NSE (Currency Derivatives Segment) INE231196834, BSE (Capital Market Segment) INB011196830; Merchant Banker bearing SEBI Registration no.: INM000010833 and Research Analyst bearing SEBI Registration no.: INH000001741. DEIPL may have received administrative warnings from the SEBI for breaches of Indian regulations. Deutsche Bank and/or its affiliate(s) may have debt holdings or positions in the subject company. With regard to information on associates, please refer to the “Shareholdings” section in the Annual Report at: https://www.db.com/ir/en/annual-reports.htm.

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Korea: Distributed by Deutsche Securities Korea Co.

South Africa: Deutsche Bank AG Johannesburg is incorporated in the Federal Republic of Germany (Branch Register Number in South Africa: 1998/003298/10).

Singapore: This report is issued by Deutsche Bank AG, Singapore Branch or Deutsche Securities Asia Limited, Singapore Branch (One Raffles Quay #18-00 South Tower Singapore 048583, +65 6423 8001), which may be contacted in respect of any matters arising from, or in connection with, this report. Where this report is issued or promulgated by Deutsche Bank in Singapore to a person who is not an accredited investor, expert investor or institutional investor (as defined in the applicable Singapore laws and regulations), they accept legal responsibility to such person for its contents.

Taiwan: Information on securities/investments that trade in Taiwan is for your reference only. Readers should independently evaluate investment risks and are solely responsible for their investment decisions. Deutsche Bank

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research may not be distributed to the Taiwan public media or quoted or used by the Taiwan public media without written consent. Information on securities/instruments that do not trade in Taiwan is for informational purposes only and is not to be construed as a recommendation to trade in such securities/instruments. Deutsche Securities Asia Limited, Taipei Branch may not execute transactions for clients in these securities/instruments.

Qatar: Deutsche Bank AG in the Qatar Financial Centre (registered no. 00032) is regulated by the Qatar Financial Centre Regulatory Authority. Deutsche Bank AG - QFC Branch may undertake only the financial services activities that fall within the scope of its existing QFCRA license. Its principal place of business in the QFC: Qatar Financial Centre, Tower, West Bay, Level 5, PO Box 14928, Doha, Qatar. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available only to Business Customers, as defined by the Qatar Financial Centre Regulatory Authority.

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United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may undertake only the financial services activities that fall within the scope of its existing DFSA license. Its principal place of business in the DIFC: Dubai International Financial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been distributed by Deutsche Bank AG. Related financial products or services are available only to Professional Clients, as defined by the Dubai Financial Services Authority.

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Australia and New Zealand: This research is intended only for "wholesale clients" within the meaning of the Australian Corporations Act and New Zealand Financial Advisors Act, respectively.

Additional information relative to securities, other financial products or issuers discussed in this report is available upon request. This report may not be reproduced, distributed or published without Deutsche Bank's prior written consent. Copyright © 2017 Deutsche Bank AG

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David Folkerts-Landau Group Chief Economist and Global Head of Research

Raj Hindocha Michael Spencer Steve Pollard Global Chief Operating Officer Head of APAC Research Head of Americas Research Research Global Head of Economics Global Head of Equity Research

Anthony Klarman Paul Reynolds Dave Clark Pam Finelli Global Head of Head of EMEA Head of APAC Global Head of Debt Research Equity Research Equity Research Equity Derivatives Research

Andreas Neubauer Spyros Mesomeris Head of Research - Germany Global Head of Quantitative and QIS Research

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