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HOTEL INDUSTRY IN THE PRC
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HOTEL INDUSTRY IN THE PRC PN21
This section contains certain information and statistics that have been extracted from various official government publications and private publications. The REIT Manager believes that the sources of this information are appropriate sources for such information and have taken reasonable care in extracting and reproducing such information. The REIT Manager has no reason to believe that such information is false or misleading or that any fact has been omitted that would render such information false or misleading. The information has not been independently verified by the REIT Manager, the Trustee or any other party involved.
The Market Consultant was commissioned by the REIT Manager to prepare a report on the hotel property markets in Hangzhou, Xiaoshan, Qiandao Lake, Ningbo and Changchun. The section contains an extract of information included in the Market Consultant’s report issued by Horwath HTL (“Horwath Report”), the full text and sources of which are set out in Appendix V to this Document. All views expressed in the Market Consultant’s letter are the independent views of the Market Consultant. The REIT Manager, after taking reasonable care, believes that there is no adverse change in the market information contained in this section since the date of the Horwath Report which may qualify, contradict or have an impact on the information contained in this section. The information and statistics may not be consistent with other information and statistics compiled within or outside China. For a discussion of the sources, methodologies, bases and assumptions used in the preparation of the Horwath Report, see “— Sources of Information”. For a discussion of the risks relating to the hospitality industry in China, see “Risk Factors — Risks Relating to the Hospitality Industry” in this Document.
SOURCES OF INFORMATION
Investors should note that the Market Consultant, an industry consultant, was engaged by the REIT Manager to prepare the Horwath Report, an independent expert report on the hospitality industry in markets where the Initial Hotel Properties are located, for use in whole or in part in this Document. The REIT Manager has paid a total of RMB400,000 to the Market Consultant in consideration of the preparation and use of the Horwath Report. The payment of such amount was not contingent or on the results of the Horwath Report. The REIT Manager has included certain information from the Horwath Report in this Document because it believes such information facilitates an understanding of the related market for potential investors.
The Market Consultant is the world’s largest hospitality consulting firm, with 50 offices across the globe providing expert local knowledge. The Market Consultant is a member of Crowe Horwath International, a professional association of accounting and management consulting firms founded in New York in 1915 and ranked among the top ten international professional service groups.
The Market Consultant prepared the Horwath Report based on its in-house database, independent third-party reports and publicly available data from what it considered to be reputable industry organisations. The Market Consultant has assumed that the information and data, which it obtained from independent third parties and publicly available data, are complete and accurate. The Market Consultant has provided part of the statistical and graphical information contained in this section.
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Information about the projected market benchmark growth rate, market room nights available, market room nights demand, and market room supply information in the respective local markets was obtained through interviews with industry experts and participants. The Market Consultant’s research may be affected by the accuracy of these assumptions and the choice of these parameters. The information contained herein has been obtained from sources which the Market Consultant believes are reliable, but there can be no assurance as to the accuracy or completeness of any such information.
ECONOMIC CONDITIONS IN CHINA B2(e)(ii) PN21
Continuous and Rapid Growth of the PRC Economy
The PRC economy has grown significantly since the PRC government introduced economic reforms in the late 1970’s. China’s accession to the World Trade Organization (“WTO”) in 2001 further accelerated reform of the PRC economy. According to the National Bureau of Statistics of China, China overtook Japan as the second largest economy in the world in terms of nominal gross domestic product in the second quarter of 2010. Strong growth in the PRC economy and per capita GDP has resulted in an increase in disposable income in China and improvement in living standards. The table below sets out selected Chinese economic statistics for the years indicated.
CAGR 2006 2007 2008 2009 2010 2011 2012 (2006-2012)
Nominal GDP (RMB in billions, except for CAGR) ...... 21,631 26,581 31,405 34,090 40,151 47,288 51,932 15.7% Per capita GDP (RMB, except for CAGR)...... 16,500 20,169 23,708 25,608 30,015 35,181 38,354(1) 15.1% Per capita disposable income of urban households (RMB, except for CAGR) ...... 11,760 13,786 15,781 17,175 19,109 21,810 24,565 13.1% Fixed asset investments (RMB in billions, except for CAGR) ...... 11,000 13,732 17,283 22,460 25,168 31,149 37,468 22.7% Total retail sales of consumer goods (RMB in billions, except for CAGR) ...... 7,641 8,921 11,483 13,268 15,700 18,392 21,031 18.4%
Source: China Statistical Yearbook 2012, 2011, 2010 and 2009, 2012 National Economic and Social Development Statistical Bulletin Note:
(1) The per capita GDP number was calculated by dividing the nominal GDP in 2012 by the year end population number of 1.35 billion published by the 2012 National Economic and Social Development Statistical Bulletin
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THE TOURISM AND HOSPITALITY INDUSTRIES IN CHINA B2(e)(vii)
Overview of the Tourism and Hospitality Industries in China
Recent Developments in the Tourism and Hospitality Industries in China
China’s tourism and hospitality industries have benefited from the increase in disposable income of urban households resulting from strong economic growth in China. According to the National Tourism Administration of China, the tourism industry in China demonstrated positive growth momentum during China’s 11th Five Year Plan between the years 2006 to 2010. On average, the number of domestic travelers increased 12% annually during this period. Total revenues from China’s tourism sector have grown by an average of 15% per year from 2006 to 2010. During the same period, tourism consumption contributed over 10% of the total domestic retail consumer consumption. In 2009, the State Council issued the Opinions on Accelerating the Development of Tourism Industry (Document No. 41) and the Several Opinions on Promoting the Building and Development of the Hainan International Tourism Island (Document No. 44), both of which have further facilitated the development of China’s tourism industry and increased its prominence as a contributor to China’s economic and social developments. According to UNWTO (聯合國世界旅遊組織), China has also become the third most popular destination for foreign travelers based on the number of international inbound travelers in 2011. The travel frequency of Chinese residents was 2.0 times per year per person in 2011.
The hospitality industry, a major segment of the tourism industry, has also experienced rapid growth since the adoption of the “open door” policy in 1978. According to the 2011 Bulletin of Statistics of China’s Star-rated Hotels, there were a total of 11,676 star-rated hotels with 1,474,900 hotel rooms and 2,586,300 beds in China as of the end of 2011. The total revenues of the 11,676 star-rated hotels in China which participated in the survey of Bulletin of Statistics of China’s Star-rated Hotels in 2011 amounted to RMB231.5 billion. However, China’s hospitality industry is still considered to be at an early development stage compared to more developed countries. According to Euromonitor, as of 2011 there were 8.4 hotel rooms per thousand in China, in contrast to 13.6 hotel rooms per thousand people in the United States.
China’s hotel rating system follows the Star-rating Classification, a national standard. The star rating system prescribes five levels ranging from 1-star to 5-star, 5-star being the highest. Pursuant to the Star-rating Classification, an applicant hotel must meet the specific requirements in terms of renovation, facilities, equipment, and operation and service qualities for a star rating it is applying for. Only the national hotel star-rating committee (全國旅遊星級飯店評定委員會), a committee under the National Tourism Administration of the PRC (國家旅遊局) has the authorization to grant the 5-star rating to a hotel. Only the provincial counterpart of the national hotel star-rating committee has the authorization to grant the 4-star rating to a hotel. A hotel can apply for a star-rating one year after its opening. A star rating, once granted, is valid only for three years, subject to reviews and re-grants by the relevant hotel star-rating committee.
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Increase in Demand in the Tourism and Hotel Industry
• Continuous Increases in the Number of Domestic Travelers and Inbound Travelers
The number of domestic leisure and business travelers has been increasing along with the rapid economic development in China. In addition, with the strong growth of China’s export-oriented economy and its integration into the global economy, the number of foreign visitors to China has been increasing. The following table sets forth the number of each category of travelers for the periods indicated.
CAGR 2006 2007 2008 2009 2010 2011 2012 (2006-2012)
Number of domestic travelers (in millions, except for CAGR) ...... 1,394 1,610 1,712 1,902 2,103 2,641 2,960 13.4% Number of foreign inbound travelers (in millions, except for CAGR) ...... 125 132 130 126 134 135 132 0.9%
Source: China Statistical Yearbook 2011 and 2012, 2012 National Economic and Social Development Statistical Bulletin
• Continuous Increases in Revenues from Tourism in China
The increase in revenues generated from tourism in China correlate with the increase in the number of travelers. The following table sets forth the revenues from tourism in China for the periods indicated:
CAGR 2006 2007 2008 2009 2010 2011 2012 (2006-2012)
Revenues attributed to domestic tourism (RMB in billions, except for CAGR) ...... 623 777 875 1,018 1,258 1,931 2,271 24.1% Revenues attributed to foreign inbound tourism (US$ in billions, except for CAGR) ...... 34 42 41 40 46 48 50 6.6% Total tourism revenues (RMB in billions, except for CAGR) ...... 894 1,096 1,160 1,290 1,570 2,250 2,586(1) 19.4% As a percentage of GDP . . 4.1% 4.1% 3.7% 3.8% 3.9% 4.8% 5.0% —
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Source: Bulletin of Statistics of China’s Tourism (2006-2011); 2011 National Economic and Social Development Statistical Bulletin, 2012 National Economic and Social Development Statistical Bulletin Note (1): An exchange rate of 6.3 RMB to 1.0 USD announced by PBOC on the date of 2012 National Economic and Social Development Statistical Bulletin was used to convert revenue attributed to foreign inbound tourism from USD to RMB. Total tourism revenues in 2012 was the summation of revenues attributed to domestic tourism and foreign inbound tourism.
Increase in Supply of 4 and 5-Star Hotels and Hotel Rooms
Driven by consumer demand from an increasingly affluent domestic population, the number of hotels and hotel rooms in China rated 3-stars and above has continuously increased from 2006 to 2011. In particular, the number of 4 and 5-star hotels and hotel rooms have achieved a significant compound annual growth rate, while the number of 1 and 2-star hotels and hotel rooms have decreased during the same period. The following table sets forth the number of hotels and hotel rooms for each star-rating from 2006 to 2011.
CAGR 2006 2007 2008 2009 2010 2011 (2006-2011)
Number of hotels ...... 5-star 302 369 432 506 595 615(1) 15.3% 4-star 1,369 1,595 1,821 1,984 2,219 2,148(1) 9.4% 3-star 4,779 5,307 5,712 5,917 6,268 5,473(1) 2.7% 2-star 5,698 5,718 5,616 5,375 4,612 3,276(1) -10.5% 1-star 603 594 518 455 297 164(1) -22.9%
Number of rooms 5-star 115 137 157 181 218 218(1) 13.6% (in thousands, except 4-star 290 337 370 397 449 425(1) 7.9% for CAGR) ...... 3-star 599 648 647 689 715 611(1) 0.4% 2-star 424 420 392 384 314 214(1) -12.8% 1-star 32 32 26 22 14 8(1) -24.2%
Source: Bulletin of Statistics of China’s Star-rated Hotels (2006-2011); the Yearbook of China Tourism Statistics from 2007 to 2010 Note:
(1) Statistics for star-rated hotels which participated in the survey of Bulletin of Statistics of China’s Star-rated hotels (2011).
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Operation Overview in the Hotel Industry
Total revenues of star-rated hotels have experienced consistent growth, with a slight increase in food & beverage revenues as a percentage of total revenues. The following table sets forth the total revenues of star-rated hotels and food & beverage revenues as a percentage of the total revenues of star-rated hotels in China from 2006 to 2011.
Year 2006 2007 2008 2009 2010 2011
Total revenues of star-rated hotels (RMB in billions, except for CAGR) . 148 165 176 182 212 232(1) Food & beverage revenue as a percentage of the total revenues of star-rated hotels ...... 36.0% 36.6% 38.9% 40.8% 42.6% 39.2%(1)
Source: Yearbook of China Tourism Statistics from 2007 to 2011; Bulletin of Statistics of China’s Star-rated Hotels (2011) Note:
(1) Statistics for star-rated hotels which participated in the survey of Bulletin of Statistics of China’s Star-rated hotels (2011).
4 and 5-Star hotels consistently outperformed the rest of the segment in terms of occupancy rate. The following table sets forth the occupancy rate of star-rated hotels for the periods indicated.
Year ended December 31,
2006 2007 2008 2009 2010 2011
China — Total ...... 61.0% 61.0% 58.3% 57.9% 60.3% 61.1%(1) 5-star ...... 66.4% 64.6% 57.3% 51.1% 60.4% 61.9%(1) 4-star ...... 64.3% 63.8% 59.9% 59.7% 61.8% 62.8%(1) 3-star ...... 61.3% 61.3% 58.5% 59.4% 60.2% 60.8%(1) 2-star ...... 56.9% 56.7% 57.2% 58.2% 58.4% 57.8%(1) 1-star ...... 53.1% 56.8% 51.0% 51.2% 50.1% 52.1%(1)
Source: Bulletin of Statistics of China’s Star-rated Hotels (2006-2010) and the 2011 Bulletin of Statistics of China’s Tourism Note:
(1) Statistics for star-rated hotels which participated in the survey of Bulletin of Statistics of China’s Tourism (2011).
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Growth Drivers and the Future Outlook of China’s Hospitality Industry
Growth Drivers of the Hospitality Industry
• Strong Economic Growth in China
China’s nominal GDP has grown at a CAGR of 15.7% from 2006 to 2012. The growth rate is expected to remain steady during the next five years, averaging approximately 11.9% per annum between 2013 and 2017. According to the National Bureau of Statistics of China, China overtook Japan as the second largest economy in the world in terms of nominal GDP in the second quarter of 2010.
• Rapid Increase in Business Travel in China
According to the 2012 Global Business Travel Forecast announced by American Express, the recession in North America and Europe did not severely impact most of the countries in the Asia Pacific region. As a result, China will continue to have a strong economic growth. 43% of the companies that participated in the survey in China expect to increase their travel and entertainment spending in the next 12 months. 78% of the interviewees said the increase in travel and entertainment budget relates to the business activities in the PRC.
Nationwide policies promulgated by the Chinese government that aim at stimulating domestic consumption and improving infrastructure will meanwhile also have a positive effect on the increase of travel spending by China-based companies.
• Increase in Chinese Disposable Income and Change of Lifestyle
With the increase in per capita disposable income and the improvement of a paid leave system in China, the tourism industry in China has experienced rapid growth. Spending on leisure travel has been increasing and the hospitality industry has played a significant role in stimulating domestic demand. According to the 2011 Bulletin of Statistics of China’s Tourism and the 2006 Bulletin of Statistics of China’s Tourism, revenue from domestic tourism as a percentage of the total revenue from tourism rose from 69.7% in 2006 to 85.8% in 2011. Vacations have become part of the lifestyle of many in China, who consider frequent holidays an important part of the improvement of living standards.
• Policy Support
The State Council issued the Opinions on Accelerating the Development of Tourism Industry (Document No. 41) and the Several Opinions on Promoting the Building and Development of the Hainan International Tourism Island (Document No. 44) in 2009.
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In 2010, the State-owned Assets Supervision and Administration Commission of the State Council announced its plans to spend three to five years spinning off and restructuring hotels invested and operated by key state-owned enterprises or their subsidiaries whose principal business is not hotel operations. It is expected that 2,500 hotels with total assets over RMB100 billion will be included in this hotel industry restructuring plan. The restructuring of hotels owned by key state-owned enterprises will offer more opportunities to major hotel investment and management groups for their expansion and will be beneficial to the development of a competitive hospitality industry.
In December 2011, the Outline of the Plan for the Development of Tourism in China during the 12th Five-year Plan was issued. According to the outline, tourism consumption will become a key part of national consumption. In addition, the outline estimates the total revenues from China’s tourism industry in 2015 will reach RMB2,500 billion, and the value of tourism industry as a percentage to the national GDP and as a percentage to the value of the services industry will increase to 4.5% and 12.0% respectively.
The following table sets for the historical growth rates and projected benchmark growth rate for the tourism industry in China from 2011 to 2015.
Average Annual Average Annual Average Annual Growth Rate Growth Rate Growth Rate during the 10th during the 11th during the 12th Five-Year Plan Five-Year Plan Five-Year Plan (2001-2005) (2006-2010) (2011-2015)
Number of domestic travelers ...... 10.3% 12.2% 9% Revenues from domestic tourism ...... 10.7% 16.9% 11% Number of inbound travelers ...... 7.6% 1.9% 3.0% Number of inbound travelers staying overnight . 8.4% 3.2% 4% Tourism revenues in foreign currency ...... 12.6% 9.5% 5.0% Number of outbound travelers ...... 24.3% 12.2% 10% Total Revenues from Tourism...... 11.1% 13.5% 10.0%
Source: Outline of the Plan for the Development of Tourism in China during the 12th Five-year Plan
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HANGZHOU MARKET OVERVIEW
Hangzhou Economic Overview
Hangzhou is the capital of Zhejiang Province with a total population of 8.9 million as of the B2(e)(i) beginning of 2012. It is an important tourist city in China well known for its primary attraction, the West Lake (西湖), the beauty of its natural scenery, its long history and rich culture, the Longjing tea plantation, and numerous historic monuments and sites. Located at the southern wing of Yangtze River Delta, it is also recognized as the hub for transportation in eastern China.
Despite a slowdown in the global economy in 2008 and 2009, Hangzhou maintained steady growth in most sectors of its economy, outpacing the national average. The following table presents the main economic indicators of Hangzhou from 2007 to 2012.
Year 2007 2008 2009 2010 2011 2012 CAGR
Registered population (in thousands) ..... 6,724 6,776 6,834 6,891 6,957 7,005 1% Growth % ...... 0.9% 0.8% 0.9% 0.8% 1.0% 0.7% — GDP (RMB in billions, except for CAGR). 410 478 510 595 701 780 14% Growth ...... 19% 17% 7% 17% 18% 11% — Fixed Asset Investment (RMB in billions, except for CAGR) ...... 168 196 229 275 311 372 17% Growth ...... 15% 17% 17% 20% 13% 20% — Retail Sales (RMB in billions, except for CAGR)...... 130 156 180 215 255 294 18% Growth ...... 17% 20% 16% 19% 19% 15% — Per capita disposable income of urban households (RMB, except for CAGR). . . 21,689 24,104 26,864 30,035 34,065 37,511 12% Growth % ...... 14% 11% 11% 12% 13% 10% — Utilized FDI (US$ in billions, except for CAGR)...... 5.58 6.23 6.97 7.71 8.17 8.27 8% Growth ...... 4% 12% 12% 11% 6% 1% — Import and Export (US$ in billions, except for CAGR) ...... 43 48 40 52 64 62 7% Growth ...... 12% 12% (17%) 30% 23% (3%)
Source: Bulletin of Statistics of National Economy and Social Development of Hangzhou (2006-2012)
Hangzhou’s GDP registered strong, double-digit growth of 18% and 11% in 2011 and 2012 respectively. From 2007 to 2012, Hangzhou’s GDP grew by a CAGR of 14%.
With manufacturing and services contributing to almost 50% of its GDP, Hangzhou has established a solid industrial base. In contrast, agriculture only accounts for a small percentage of the city’s GDP. Electronics, pharmaceuticals, mechanical manufacturing, weaving and clothing, and food and beverage are the pillar industries of Hangzhou.
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In 2012, utilized FDI and fixed asset investment increased by 1% and 20% respectively while retail sales showed even stronger growth with a 15% increase in 2012.
Hangzhou Tourism Industry
Hangzhou is also known domestically and abroad as a ‘Heaven on Earth’. Well known for its natural scenery and historical heritage, the city’s top attractions feature the West Lake, Leifeng Pagodas (雷鋒塔), Lingyin Temple (靈隱寺) and numerous bridges, gardens, causeways and pavilions. The West Lake Cultural Landscape has been listed as a UNESCO World Heritage site since June 2011 in recognition of its exceptional cultural tradition.
In recent years, the Hangzhou government has put in place measures to protect, preserve and manage the West Lake landscape. Such measures include moving industrial and educational facilities out of the city center to areas like Xiaoshan, Binjiang and Xiasha.
With regard to Hangzhou’s future tourism development, the local government has laid down plans to improve the appeal of the city’s established tourism destinations as well as to market undeveloped destinations.
International Tourism
Hangzhou has always been a significant destination for international tourists. In 2011, Hangzhou’s international tourist arrivals reached 3.06 million, representing an increase of 11% compared to the previous year. The following table shows the historical international arrivals and foreign exchange receipts for Hangzhou since 2007.
International Visitor Arrivals and Forex Receipts, 2007-2012
2007 2008 2009 2010 2011 2012 CAGR
Arrivals (in thousands, except for CAGR)(1) ...... 2,086 2,213 2,304 2,757 3,063 3,311 10% Annual Growth ...... 15% 6% 4% 20% 11% 8% — Foreign Exchange Receipts (USD in millions, except for CAGR) ...... 1,119 1,296 1,380 1,690 1,960 2,202 14%
Source: Hangzhou Statistical Yearbook and Bulletin of Statistics of National Economy and Social Development of Hangzhou (2006-2012) Note: (1) It should be noted that, although the tourism statistics were sourced from Hangzhou Municipal Tourism Administration, the arrival figures in particular should be interpreted with caution due to possible instances of multiple counting as total arrivals are calculated based on the total visitors to all the major attractions in the city.
Benefiting from close proximity to Shanghai, the city has attracted an increasing number of international tourists.
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Domestic Tourism
Hangzhou has traditionally been a popular destination for domestic travelers. The table below shows a summary of tourist arrivals in the last five years.
Domestic Visitor Arrivals and Receipts, 2007-2012
2007 2008 2009 2010 2011 2012 CAGR
Arrivals (in thousands, except for CAGR)(1)...... 41,119 45,517 50,937 63,049 71,809 82,369 15% Annual Growth ...... 12% 11% 12% 24% 14% 15% — Domestic Tourism Receipts (RMB in millions, except for CAGR)...... 54,860 61,720 70,890 91,090 106,380 125,352(2) 18%
Source: Hangzhou Statistical Yearbook and Bulletin of Statistics of National Economy and Social Development of Hangzhou (2006-2012) Notes: (1) It should be noted that, although the tourism statistics were sourced from Hangzhou Municipal Tourism Administration, the arrival figures in particular should be interpreted with caution due to possible instances of multiple counting as total arrivals are calculated based on the total visitors to all the major attractions in the city. (2) The domestic tourism receipts were calculated from the difference between total tourism income and foreign exchange receipts from international tourism. An exchange rate of 6.3 announced by PBOC on the date of 2012 Bulletin of Statistic of National Economy and Social Development of Hangzhou was used to convert foreign exchange receipts from USD to RMB.
Since 2007, Hangzhou’s domestic arrivals have grown on an average of 15% annually, with stronger growth registered in recent years. At the end of 2012, domestic tourist arrivals reached over 82 million with domestic tourism receipts of RMB125 billion.
Hangzhou’s Transportation Infrastructure
Hangzhou is linked to notable cities such as Shanghai, Ningbo and Qiandao Lake by expressways. The expressway bisecting the city has been further split into two routes to pass through the city center, as well as the industrial zones in the eastern part of the city along Xiaoshan and Xiasha. Currently, the city is accessible from every county in Zhejiang Province via expressways.
The city is also the rail hub for Zhejiang’s railways connecting Shanghai, Jiangxi Province and Ningbo. The express railway has been in operation since 2007 and has shortened traveling time from Shanghai to Hangzhou to 90 minutes. Trains run from Hangzhou East Train Station eight times a day. The special express railway line connecting Hangzhou to Shanghai commenced its operation in 2010 and has further reduced the traveling time between the two cites to 50 minutes. Other express railways under development or the testing stage include the Hangzhou-Nanjing Express Railway and one connecting Shanghai, Hangzhou, Ningbo, Wenzhou, Xiamen and Shenzhen.
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The Hangzhou Xiaoshan International Airport is ranked one of the top ten airports in China in terms of passenger, cargo and mail handling capacities. Total passenger arrivals at the Hangzhou Xiaoshan International Airport reached 17.5 million in 2011, up 3% from the previous year. Total cargo traffic volume in 2011 amounted to 306,243 tons, up 8% from the previous year. In 2010, total cargo traffic volume increased by 25% to 283,427 tons.
In December 2012, the Hangzhou Xiaoshan International Airport began operations of second runway and a second domestic terminal to facilitate the growing number of passenger arrivals into Hangzhou. As a result, the airport is now able to handle 33.0 million passengers and 805,000 tons of cargo per year.
XIAOSHAN DISTRICT, HANGZHOU
Overview
As one of Hangzhou’s eight districts, Xiaoshan lies in the eastern part Hangzhou city. The district is home to 1.2 million inhabitants as of the end of 2011, occupying an area of 1,420 square km and has an extensive history of 8,000 years. In 2012, Xiaoshan’s GDP was RMB161.2 billion.
Xiaoshan is an industrial base for Hangzhou, facilitated by the Hangzhou Xiaoshan International Airport and Xiaoshan Economic and Technological Development Zone. Textiles, printing, dyeing and automobile parts manufacturing are the major industrial segments in Xiaoshan. Xiaoshan is developing its tourism industry in an attempt to catch up with Hangzhou. The local government has spent much effort in the development of the new tourist destination Xiang Lake (湘湖).
Xiaoshan Development Zones
Xiaoshan Economic and Technology Development Zone (“XETZ”) was established in 1993, covering an area of 181 square km. As of June 2012, XETZ includes 550 approved foreign invested enterprises, with a total investment of US$8.4 billion. The development zone pillar industries include manufacturing of mechanics, electrical and electronic devices, automobiles and parts, textile and clothing, pharmaceuticals and food, and furniture and construction materials. The development zone currently hosts 14 of the Global Fortune 500 companies. Total industrial output was RMB56.1 billion in 2011.
Tourism
Xiang Lake, located in the western part of Xiaoshan and 20 kilometers from Hangzhou city center is a main tourist attraction and has significant archaelogical history. It was approved by the Zhejiang provincial government as a provincial tourism resort in 1995. The resort covers an area of 51.7 square km.
Surrounding Xiang Lake are various theme parks, among which Rotten Apple is the newest. Others include Hangzhou Polar Ocean Park and Hangzhou Paradise theme park.
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Performance of Top-tier Hotels and Upper-tier Hotels in Xiaoshan
The top-tier hotel market includes First World, Crown Plaza Xanadu, New Century Grand Hotel Hangzhou and Jinma Palace while the upper-tier hotel market includes Holiday Inn, Kaihao, Baosheng and New Century Hotel Xiaoshan Zhejiang.
The table below shows the historical performance of the top-tier hotel market from 2010 to 2012.
Room Room Nights Night Occupancy ADR RevPAR Available Change Demand Change Rate Change(1) (RMB) Change (RMB) Change
2010 ...... 716,130 — 448,676 — 63% — 472 — 296 — 2011...... 716,130 0% 442,218 -1% 62% -1% 507 7% 313 6% 2012 ...... 716,130 0% 424,572 -4% 59% -3% 523 3% 310 -1%
Source: Horwath Report Note: (1) Annual change in occupancy is on a percentage point basis
The top-tier hotel market in Xiaoshan has been stable for the past three years with no new supply of hotels. ADR has had a healthy CAGR of 5% from 2010 to 2012, breaching the RMB500 mark in 2011.
The table below shows the historical performance of upper-tier hotel market from 2010 to 2012.
Room Room Nights Night Occupancy ADR RevPAR Available Change Demand Change Rate Change(1) (RMB) Change (RMB) Change
2010 ...... 423,765 — 266,159 — 63% — 321 — 202 — 2011...... 423,765 0% 244,601 -8% 58% -8% 333 4% 193 -4% 2012 ..... 416,465 -2% 231,723 -5% 56% -3% 332 0% 186 -4%
Source: Horwath Report Note: (1) Annual change in occupancy is on a percentage point basis
The REIT Manager believes that New Century Grand Hotel Hangzhou and New Century Hotel Xiaoshan Zhejiang were among the market leaders in ADR growth and these two hotels also generated higher F&B revenue compared with major competitors in 2011. During the Track Record Period, New Century Grand Hotel Hangzhou’s achieved materially higher ADR compare to its major competitors and was the market leader in the primary competitive set in terms of RevPAR. New Century Hotel Xiaoshan Zhejiang was the market leader in the secondary competitive set in terms of RevPAR during the Track Record Period.
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Demand for Top-tier Hotels in Xiaoshan, Hangzhou in 2012
FIT 13%
Others 6% Corporate Contracts 35%
Meetings 37% Leisure Groups 9%
Source: Horwath Report
Meetings and corporate contracts are the most significant contributors to hotel demand in Xiaoshan, accounting for 72% of the total demand for top-tier hotels in 2012. There are many hotels with extensive meeting facilities in Xiaoshan, allowing meeting organizers to save costs compared to holding a similar meeting in the city of Hangzhou. In 2012, an estimated demand of 250,000 room nights came from MICE.
Unlike Hangzhou, most of the meetings held in Xiaoshan are not incentive meetings. Instead, the majority of meetings are for internal annual meetings, training sessions and product launches. With few hotels in Hangzhou having more than 3,000 sq.m. of meeting space, Xiaoshan has established itself as an alternative meeting venue to Hangzhou, providing much lower prices while still close in proximity to the Hangzhou city center.
The second largest demand generator was corporate contracts, which comes from the numerous domestic and increasingly international corporations with offices base located in Xiaoshan. In 2012, the demand of approximately 230,000 room nights came from this segment.
In 2012, 13% of demand was from Free Independent Traveler (“FIT”) guests, contributing approximately 85,000 room nights.
Leisure group demand in 2012 only accounted for less than 10% of the total demand in Xiaoshan, contributing approximately 60,000 room nights.
Other demand includes government demand, airline demand and long-stay demand and represents 6% of total demand or 40,000 room nights in 2012.
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In 2012, Xiaoshan remained a domestic demand driven market with 86% of hotel guests coming from the PRC. International guests only contributed to 14% of the total hotel demand as most flights in and out of the Hangzhou Xiaoshan Airport are domestic. Currently, Xiaoshan International Airport only hosts airlines connecting Hangzhou to Japan, South Korea, Taiwan, Singapore, Thailand, Indonesia, India, Malaysia and Vietnam.
Supply of Hotels in Xiaoshan, Hangzhou
Estimated Room Supply, Xiaoshan, Hangzhou, 2013-2017
2013 2014 2015 2016 2017
New Supply...... Jinma Hotel ...... 420 Landison Hotel ...... 100 200 New Supply for the year ...... 520 200 0 0 0 Total Market Supply ...... 3,647 3,847 3,847 3,847 3,847
Source: Horwath Report
The top-tier hotel market in Xiaoshan has been stable during the past three years with no new supply of hotels.
Hotel Market Trend and Growth Drivers
The top-tier and upper-tier hotel market in Xiaoshan will be driven by the following positive factors:
• The opening of the subway that connects Xiaoshan with Hangzhou will bring opportunities to the area’s occupancy rate and ADR.
• The development of Xiang Lake into a successful tourist destination will also help to improve overall hotel room nights demand in the area.
• Xiaoshan is located much closer to the airport than Hangzhou city. With the development of the Xiaoshan’s infrastructure, there will be potential relocation of offices to Xiaoshan to benefit from its increased connectivity, cheaper rent and better traffic conditions.
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The estimated occupancy projection in the local market is shown in the table below.
Room Night Room Night Occupancy Available Change Demand Change Rate
2012 ...... 1,141,355 — 656,613 — 58% 2013 ...... 1,331,155 17% 738,300 12% 55% 2014 ...... 1,404,155 5% 808,973 10% 58% 2015 ...... 1,404,155 0% 855,069 6% 61% 2016 ...... 1,404,155 0% 870,835 2% 62% 2017 ...... 1,404,155 0% 887,389 2% 63%
Source: Horwath Report
Xiaoshan’s hotel market has historically proven to be stable, with no new entrant in the past five years. Recent additions to the local hotel market will include the proposed opening of another new Jinma hotel in 2013 and a new player, Landison, possibly in mid-2013. The opening of the subway that connects Xiaoshan with Hangzhou may bring opportunities to the area’s occupancy rate and hence ADR. The development of Xiang Lake into a successful tourist destination will also help to improve overall hotel room nights demand in the area. According to Horwath, market ADR is expected to show a positive CAGR of about 3% to 5% over the next five years.
The REIT Manager believes that New Century Grand Hotel Hangzhou has historically been a market leader in ADR growth and achieved a higher occupancy rate than the average occupancy rate for the top-tier hotels in the competitive set during the Track Record Period. The REIT Manager believes that New Century Hotel Xiaoshan Zhejiang achieved an occupancy rate that is above the market average in the Track Record Period. It is expected they will continue to maintain their market leader position going forward, with higher occupancy rate and ADR growth.
QIANDAO LAKE MARKET OVERVIEW
Overview
Qiandao Lake is located in Chun’an county the south-western part of Hangzhou. Qiandao Lake is a man-made lake. Currently, 1,078 islets are scattered around the lake that covers an area of 573 square km. The islets in the lake cover about 86 square km.
Qiandao Lake town has a population of around 101,000 and covers an area of over 356 square B2(e)(i) km. The area also hosts the largest national forest park in China and was awarded by the PRC central government as the ‘International Garden City’.
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Qiandao Lake Transportation
Qiandao Lake is accessible by road. Its distance from Shanghai and Hangzhou is approximately 370 km and 180 km, respectively.
The Hangzhou-Huangshan high-speed rail is currently under plan and is expected to complete in 2018. Once in operation, it will run through Chun’an County. The construction of a highway connecting Qiaodao Lake to Mount Huang is also currently under plan, which is expected to complete before the high-speed rail.
Tourism
Qiandao Lake is famous for its myriad of scenic and natural attractions such as pristine forests, verdant hills, unusual caves, diverse islands and tranquil waters. The boat tour around the Qiandao Lake is among the most popular tourist attractions. Qiandao Lake is also well known for its abundant wildlife both on land and in water. Tourists can also enjoy fresh fish from the lake.
Performance of Top-tier Hotels in Qiandao Lake
The local hotel sector is based around the central and southeast area of Qiandao Lake. This area has attracted both local and international hotels, including New Century Resort Qiandao Lake Hangzhou, the Sheraton, ZTG Wenxindao, the InterContinental, the Hilton and Runhe Jianguo. The table below illustrates the historical performance of the top-tier hotel market.
Room Room Nights Night Occupancy ADR RevPAR Available Change Demand Change Rate Change(1) (RMB) Change (RMB) Change
2010 ...... 189,800 — 83,821 — 44% — 786 — 347 — 2011...... 371,205 96% 163,493 95% 44% 0% 782 -1% 345 -1% 2012 ...... 584,365 57% 261,775 60% 45% 1% 745 -5% 334 -3%
Source: Horwath Report Note: (1) Annual change in occupancy is on percentage point basis.
The top-tier hotel market has been undergoing a period of high growth driven by Qiandao Lake’s tourism sector growth in recent years. Increase in awareness of Qiandao Lake as a leisure destination leads to a rapid rise in room nights demand. Despite a 75% growth in room nights available from 2010 to 2012, room nights demand has managed to outpace supply by 2%. Occupancy in this sector has remained stable at 44% to 45% in the past three years.
New Century Resort Qiandao Lake Hangzhou has been the pioneer in the top-tier hotel market in Qiandao Lake. Due to its reputation and good base of regular guests, it has been able to achieve the highest occupancy rate in the market.
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During the Track Record Period, New Century Resort Qiandao Lake Hangzhou has achieved higher occupancy rates and RevPAR than its major competitors in the top-tier hotel market.
Demand for Top-tier Hotels in Qiandao Lake in 2012
Corporate Contracts 7%
FIT Leisure Groups 35% 21%
Meetings 37%
Source: Horwath Report
Leisure demand makes up over 50% of the guests in the hotel segment in Qiandao Lake. In 2012, approximately 145,000 room nights demand came from leisure demand.
Unlike many lakes surrounding the Yangtze River Delta that have been polluted as a result of rapid urbanization, much effort has been spent to preserve the natural condition of Qiandao Lake, which also serves as the reservoir for Hangzhou and the surrounding area.
The second largest market segment in terms of room nights is the MICE segment where the majority of the meetings are incentive meetings with a tourism component. In 2012, less than 100,000 room nights demand came from this segment. Holding a MICE event in Qiandao Lake is generally much more cost efficient than holding a similar event in Shanghai or Hangzhou. Although MICE groups would typically reward the hotel with a lower ADR, to help boost occupancy rate level as well as food and beverage revenues.
Corporate demand of approximately 17,000 room nights contributed 7% of total demand in 2012.
Qiandao Lake remains a domestic tourist driven market. The driving time from the Hangzhou Xiaoshan International Airport to Qiandao Lake is typically three hours. The majority of domestic guests are from Hangzhou and Shanghai. Peak season for hotel demand is from April to October, when the weather is pleasant and people could go swim in the Lake. Each of the “golden holidays” in May and October also marks the busiest season in the year, as well as summer holiday from July to August.
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Supply of Hotels
Hotel supply in the area is expected to continue to rise to higher levels given a few hotels already have plans to open up in the next few years. The table below shows the estimated new room supply in the market from 2013 to 2018.
Estimated New Room Supply, Qiandao Lake, Hangzhou, 2013-2018
2013 2014 2015 2016 2017 2018
New Supply ...... Anantara ...... 60 60 Landison ...... 250 Hualian Integrated Resort. . . 150 150 150 150 New Supply for the year . . — 310 210 150 150 150 Total Market Supply ..... 1,601 1,911 2,121 2,271 2,421 2,571
Source: Horwath Report
Hotel Market Trend and Growth Drivers
The top-tier hotel market in Qiandao Lake will be driven by the following positive factors:
• The planned construction of which connecting Qiaodao Lake to Mount Huang, the completion of which is expected to greatly increase tourist traffic on the Hangzhou, Qiandao Lake and Huangshan 5A National Tourist Attractions belt;
• The completion of the Huang-Hang high-speed railway connecting Hangzhou and Huangshan, Anhui, which is expected to help boost tourist arrivals to Qiandao Lake;
• Three new international branded hotels opening in the past three years, the area is becoming a better recognized tourist attraction;
• The hotspring located 40 minutes from New Century Resort Qiandao Lake Hangzhou, which will attract more guests to visit Qiandao Lake during winter.
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Room Nights Room Night Occupancy Available Change Demand Change Rate
2012 ...... 584,365 — 261,775 — 45% 2013 ...... 584,365 0% 284,018 8% 49% 2014 ...... 697,515 19% 322,704 14% 46% 2015 ...... 774,165 11% 361,274 12% 47% 2016 ...... 828,915 7% 392,192 9% 47% 2017 ...... 883,665 7% 425,817 9% 48% 2018 ...... 938,415 6% 495,305 16% 53%
Source: Horwath Report
With the entrance of new hotels into the market, room nights available are expected to increase at a CAGR of 8% operations of the next five years.
Demand for top-tier hotels in Qiandao Lake will grow at a CAGR of 11% over the next five years. Horwath expects ADR in the market to remain stable between 2014 and 2017, with strong growth expected in 2018 due to the commencement of operations of the high-speed railway.
The REIT Manager believes that New Century Resort Qiandao Lake Hangzhou has historically achieved the highest occupancy rate and RevPAR in the top-tier hotel market. It is expected they will continue to maintain their market leader position going forward, with higher occupancy rate and RevPAR.
NINGBO MARKET OVERVIEW
Ningbo Economic Overview
Ningbo is a coastal city located in the northeast of Zhejiang Province, with a total area of approximately 2,462 square km. Ningbo lies south of the Hangzhou Bay, facing the East China Sea, with a coast line spanning 788 km. With sub-provincial administrative status, the city had a registered B2(e)(i) population of approximately 5.8 million in 2012.
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Key Economic Indicators, 2007-2012
Year 2007 2008 2009 2010 2011 2012 CAGR
Registered Population (in thousands) ...... 5,646 5,681 5,710 5,741 5,764 5,777 0.5% GDP (RMB in billions) ...... 343 396 421 513 601 652 14% Growth % ...... 20% 15% 6% 22% 17% 8% — Fixed-Asset Investment (RMB in billions) ...... 160 173 200 221 239 290 13% Growth % ...... 4% 8% 16% 11% 8% 21% — Retail Sales (RMB in billions) .... 104 124 143 170 202 233 18% Growth % ...... 18% 19% 15% 19% 18% 15% — Per capita disposable income of urban households (RMB) ...... 22,307 25,304 27,368 30,166 34,058 37,902 11% Growth % ...... 13% 13% 8% 10% 13% 11% — Utilized FDI (US$ in millions, except CAGR) ...... 2,505 2,540 2,210 2,320 2,810 2,850 3% Growth % ...... 3% 1% -13% 5% 21% 1% — Total Import Value (US$ in millions) ...... 18,244 21,510 22,160 30,930 37,360 35,130 14% Growth % ...... 36% 18% 3% 40% 21% (6%) — Total Export Value (US$ in millions) ...... 38,255 46,330 38,650 51,970 60,830 61,440 10% Growth % ...... 33% 21% -17% 34% 17% 1% —
Source: Bulletin of Statistics of National Economy and Social Development of Ningbo (2006-2012)
Despite the recent global economic downturn, Ningbo’s economy has grown rapidly from 2007 to 2012, with a GDP recorded a CAGR of approximately 14% during the period. Ningbo’s GDP grew by approximately 8% in 2012 compared with 2011, which indicates continued economic development. As the effects of the global financial crisis continue to fade away, Ningbo’s economy is expected to continue to enjoy rapid development over the long term.
With an early adoption of market-driven economy, Ningbo has a high proportion of private enterprises as compared with many other cities in the PRC. In 2011, there were approximately 12,010 private enterprises in Ningbo. Foreign trade is an important economic driver for the city. Benefiting from its unique coastal location, Ningbo has maintained its position as an important export base in the Yangtze River Delta. Between 2007 and 2012, import and export values showed strong CAGR of 14% and 10% respectively.
Ningbo Transportation Infrastructure
Ningbo has a well-developed transportation network. Ningbo Lishe International Airport is fifteen kilometres southwest of the city center and connects Ningbo by air to multiple major cities in China as well as international destinations including Hong Kong, Macau, Seoul, Singapore and Taipei.
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Ningbo is currently connected to the national railway network via the Yong-Tai-Wen Railway Line (甬台溫鐵路線) and Xiao-Yong Railway Line (蕭甬鐵路線). In addition, the Hangzhou-Ningbo High Speed Railway Line is expected to be completed in the first half of 2013, reducing the travel time between Ningbo and Hangzhou from 2 hours to 30 minutes. Passing through Ningbo, the Hu-Gang High Speed Railway (connecting Hong Kong and Shanghai) is expected to commence operations in 2014, reducing the travel time between Shanghai and Hong Kong to approximately three and a half hours.
Ningbo has an extensive road transportation network that is well integrated with the rest of China. In addition, the 36-kilometre Hangzhou Bay Bridge completed in 2007 is currently the longest trans-sea bridge in the world and has reduced the driving time between Ningbo and Shanghai from four to two and a half hours.
In addition, Beilun Port is at the entrance of Yangtze River and approximately 30 kilometres from Ningbo’s city centre. As the second largest port in China since 1998, it boasts a total of 27 deep-water berths and more than 140 domestic and international container routes.
The construction of Ningbo’s subway system was approved in December 2008. Two subway lines, Line 1 and Line 2, are currently under construction and are both scheduled to be completed in 2015.
Performance of Top-Tier Hotels in Ningbo
The top-tier hotel market in Ningbo comprises 13 domestic and international hotels, including New Century Grand Hotel Ningbo, Sofitel Wanda, Nanyuan Universe from Yinzhou District; Nanyuan Hotel, Crowne Plaza City Center, Sheraton, Howard Johnson Plaza, Marriott, Shangri-La, Westin and Howard Johnson Sunshine Plaza from City Center, Howard Johnson IFC and Pan Pacific from Eastern New Town.
Room Room Nights Night Occupancy ADR RevPAR Available Change Demand Change Rate Change(1) (RMB) Change (RMB) Change
2010 .....1,208,150 — 693,825 — 57% — 608 — 349 — 2011.....1,213,990 1% 753,957 9% 62% 5% 628 3% 390 12% 2012 .....1,591,176 31% 883,744 17% 56% -6% 635 1% 353 -9%
Source: Horwath Report Note: (1) Annual change in occupancy is on percentage point basis
From 2010 to 2012, market demand for top-tier hotels in Ningbo has remained strong, with a CAGR of 13%, as a result of constant development of the city, particularly the gradual maturity of Ningbo’s developments zones and ports, which have stimulated corporate and MICE activities in Ningbo.
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Despite market occupancy rate in Ningbo dropped from 57% in 2010 to 56% in 2012, the REIT Manager believes that New Century Grand Hotel Ningbo managed to increase its occupancy rate from 49% in 2010 to 55% in 2012. While market ADR in Ningbo increased by 2% from 2010 to 2012, New Century Grand Hotel Ningbo’s ADR increased by 4% during the same period.
Historical Occupancy Performance by District
CAGR 2010 2011 2012 (2010-2012)
Yinzhou District...... 53% 62% 62% 8.2% City Centre ...... 59% 62% 56% (2.6%) Eastern New Town ...... — — 27% — Average ...... 57% 62% 56% (0.9%)
Source: Horwath Report
Historical ADR Performance by District
CAGR 2010 2011 2012 (2010-2012)
Yinzhou District...... 569 635 675 8.9% City Centre ...... 620 625 628 0.6% Eastern New Town ...... — — 470 — Average ...... 608 628 635 2.2%
Source: Horwath Report
Historical RevPAR Performance by District
CAGR 2010 2011 2012 (2010-2012)
Yinzhou District...... 299 395 418 18.2% City Centre ...... 368 388 352 (2.2%) Eastern New Town ...... — — 128 — Average ...... 349 390 353 0.6%
Source: Horwath Report
The average hotel occupancy rate in Yinzhou district rose from 53% in 2010 to 62% in 2012. The occupancy performance was not affected by the recent increase in market supply in the competitive market as the new supply additions occurred in Ningbo’s city center and Eastern New Town, further
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With a strong ADR CAGR of 9% from 2010 to 2012, Yinzhou District was the best performing area in Ningbo city.
Demand for Top-tier Hotels in Ningbo in 2012
Other 5%
MICE 20%
Leisure Group Corporate 7% 59%
Leisure FIT 9%
Source: Horwath Report
In 2012, 59% of the demand for top-tier hotels in Ningbo came from corporate travelers. As one of the major economic centers in Zhejiang Province and an important export base in the Yangtze River Delta, Ningbo has witnessed a strong growth in room demand from the corporate segment over the years. Companies with a local presence in the city center, surrounding industrial zones, and neighboring towns generate significant corporate demand for top-tier hotels. In addition, the city’s large corporations (such as Geely Automobile, Sinopec, LG) have also helped develop the city’s top-tier hotel segment.
With the Ningbo government’s efforts in promoting Ningbo as a MICE destination, demand from the MICE segment accounted for 20% of Ningbo’s top-tier hotel demand in 2012. Ningbo has successfully hosted numerous large national events and exhibitions in the past, such as the 65th China Automobile Parts Fair, annual Ningbo International Fashion Festival, Zhejiang Investment & Trade Symposium and the China International Consumer Goods Fair.
The leisure demand segment accounted for approximately 16% of Ningbo’s top-tier hotel demand in 2012. The improved road network in the Yangtze River Delta has created a growing trend in weekend drive-in leisure demand to Ningbo from nearby cities.
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Supply of Top-tier Hotels in Ningbo
Estimated Room Supply, Ningbo, 2013-2017
2013 2014 2015 2016 2017
New Supply InterContinental ...... 234 233 Landison ...... 101 299 Langham Place...... 140 Courtyard Yinzhou ...... 256 Novotel ...... 125 125 Four Seasons ...... 110 110 New Supply for the year ...... 335 1,053 125 110 110 Total Market Supply ...... 5,406 6,459 6,584 6,694 6,804
Source: Horwath Report
According to Horwath, there will be six new top-tier hotels opening in Ningbo from 2013 to 2017, including InterContinental, Landison, Langham Place, Courtyard Yinzhou, Novotel and Four Seasons, with a total of 1,733 rooms. It is expected that total supply of top-tier hotels will increase by 24% and 19% in 2013 and 2014, respectively, with a moderate growth of 2% per annum from 2015 to 2017.
Market Trend and Growth Drivers
The top-tier hotel market in Ningbo will be driven by the following positive factors:
• Optimistic economic outlook, such as continuing to be the core logistics & trading hub in the southern Yangtze River Delta and the growing development of the city’s key industries, will boost corporate, MICE and other demand segments.
• Maturity of the development zones, ports, Yinzhou and Eastern New Town will introduce new enterprises to Ningbo, further stimulating growth in the corporate, MICE and other demand segments.
• More comprehensive transportation network in Ningbo will boost overall hotel room night demand generating potential.
• There will be an increase in weekend leisure drive-in demand due to better accessibility and a rise in disposable income among the domestic population.
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Room Night Room Night Occupancy Available Change Demand Change Rate
2012 ...... 1,591,176 — 883,744 — 56% 2013 ...... 1,973,190 24% 959,923 9% 49% 2014 ...... 2,357,535 19% 1,083,664 13% 46% 2015 ...... 2,403,160 2% 1,218,147 12% 51% 2016 ...... 2,443,310 2% 1,334,644 10% 55% 2017 ...... 2,483,460 2% 1,425,535 7% 57%
Source: Horwath Report
Despite the expected increase in the supply of top-tier hotels in Ningbo, with a projected CAGR of 9% between 2012 and 2017, corresponding demand is expected to outpace the increase in supply and grow, with a projected CAGR of 10%. It’s expected that the ADRs of top-tier hotels in Ningbo will remain stable in the coming five years.
Benefiting from its strategic location in Yinzhou District and away from the fierce competition in the city center, the REIT Manager believes that New Century Grand Hotel Ningbo is expected to continue outperforming its peers.
CHANGCHUN MARKET OVERVIEW
Changchun Economic Overview
Changchun, the capital and largest city in Jilin Province with a total area of approximately 20,604 square km, is located in the center of the Songliao Plains in Northeast China. With B2(e)(i) sub-provincial administrative status, the city had a population of approximately 7.6 million in 2011.
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Key Economic Indicators, 2007-2012
Year 2007 2008 2009 2010 2011 2012 CAGR
Registered Population (in thousands) ...... 7,459 7,525 7,565 7,589 7,618 — — Growth % ...... 1% 1% 1% 0% 0% — GDP (RMB in billion) ...... 209 256 285 333 400 446(1) 16% Growth % ...... 20% 22% 11% 17% 20% 12% Fixed Asset Investment (RMB in billion)...... 135 182 230 300 243 317(1) 19% Growth % ...... 42% 35% 26% 30% -19% 30% Retail Sales (RMB in billion)...... 78 95 109 129 151 174(1) 17% Growth % ...... 17% 22% 15% 18% 17% 15% Per capita disposable income of urban households (RMB) ...... 12,811 15,003 16,072 17,922 20,487 23,089(1) 13% Growth % ...... 13% 17% 7% 12% 14% 13% Utilized FDI (US$ in million) .... 1,690 2,040 2,430 2,670 3,080 3,680(1) 17% Growth % ...... 20% 21% 19% 10% 15% 19% Total Import Value (US$ in millions, except CAGR) ...... 5,430 7,150 7,460 11,220 15,070 16,780(1) 25% Growth % ...... 31% 32% 4% 50% 34% 11% Total Export Value (US$ in millions, except CAGR) ...... 1,510 1,640 1,090 2,000 2,270 2,900(1) 14% Growth % ...... 39% 9% -34% 83% 14% 28%
Source: Bulletin of Statistics of National Economy and Social Development of Changchun (2006 to 2011) and 2012 Economic Operation Analysis of Changchun
Note:
(1) Information from 2012 Economic Operation Analysis of Changchun
(2) CAGR from 2007 to 2011
Changchun’s economy has grown drastically from 2007 to 2012, with a GDP experiencing a CAGR of approximately 16% during the period, demonstrating the city’s resilience against the global financial downturn. Changchun’s GDP grew by approximately 12% in 2012 compared with the corresponding period in 2011, and indicates continued economic development.
Known as the automobile city of China, Changchun is an important industrial base with a particular focus on the automobile sector, the output of which accounted for approximately 59% of the city’s total large-scale industrial output in 2012. From 2007 to 2012, the city’s automobile industry output grew at a CAGR of 19%. First Automobile Works (“FAW”), the largest automobile manufacturer in China and listed as one of the Fortune 500 companies, is based in Changchun.
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Changchun Transportation Infrastructure
Changchun has a comprehensive transportation network. Changchun Longjia International Airport is 31 kilometers east of the city center and connects Changchun to many major cities in China as well as international destinations including Hong Kong, Seoul, Vladivostok and Tokyo.
The Changchun-Jilin Inter-City Rail Line commenced operations in December 2010 and reduced the travelling time between the two cities from 1 hour 40 minutes to 39 minutes. The Harbin-Dalian High Speed Rail Line was completed in December 2012 and shortened the travelling time between Harbin and Dalian from 9 hours to 4 hours. The travelling time from Changchun to Harbin and Dalian will be shortened to approximately 40 minutes and two and a half hours respectively.
Changchun is one of the first cities in China to implement an on-ground light rail system. Lines 3 and 4 are currently in operation, with a total length of 48 kilometres and 49 stations. The light rail system will be extended by two new underground subway lines. The 37-kilometre long Line 1 with 16 station stops is expected to be completed in 2015 whereas the 25-kilometre long Line 2 with 17 station stops is scheduled to be completed in 2016.
Changchun is easily accessible by road, and the four main highways, Changchun-Jilin, Changchun-Yingchengzi, Changchun-Siping and Changchun-Fuyu, connecting Changchun, Shenyang, Dalian, Beijing, as well as other national highways in Jilin Province and cities in the surrounding provinces.
Performance of Top-Tier Hotels in Changchun
The top-tier competitive market in Changchun comprises both international and domestic hotels such as New Century Grand Hotel Changchun, South Lake Hotel, Swiss-Bel Hotel, Shangri-La, Days Hotel, Jin-An Hotel, Huatian Hotel and Song Yuan Hotel.
The table below illustrates the historical performance of top-tier hotels in Changchun from 2010-2012.
Room Room Nights Night Occupancy ADR RevPAR Available Change Demand Change Rate Change(1) (RMB) Change (RMB) Change
2010 ...... 1,011,415 — 684,777 — 68% — 557 — 377 — 2011...... 1,071,275 6% 738,243 8% 69% 1% 582 4% 401 6% 2012 ...... 1,124,565 5% 768,521 4% 68% -1% 612 5% 418 4%
Source: Horwath Report Note: Sheraton Changchun Jingyuetan Hotel, opened in December 2012, was not included in the above analysis. (1) Annual change in occupancy is on percentage point basis.
—92— THIS WEB PROOF INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Web Proof Information Pack must be read in conjunction with the section headed “Warning” on the cover of this Web Proof Information Pack. HOTEL INDUSTRY IN THE PRC
While many other cities in China are facing oversupply, Changchun’s new supply of top-tier hotels from 2010 to 2012 was in line with the increase in demand during the same period. The occupancy rate of Changchun’s top-tier hotels remained stable from 2010 to 2012. The ADR and RevPAR increased at a CAGR of 5% and 5% respectively.
New Century Grand Hotel Changchun achieved an ADR and occupancy rate that are higher than the top-tier hotel market average in 2012.
Demand for Top-tier Hotels in Changchun in 2012
Other / Long Stay 16%
MICE Corporate 26% 52%
Leisure FIT 6%
Source: Horwath Report
In 2012, approximately 52% of the demand for top-tier hotels in Changchun was corporate travelers. Changchun’s corporate segment demand is mainly generated from middle-management business travelers, foreign technical support staff and senior corporate executives. FAW, one of the largest automobile manufacturers in China, along with other smaller auto-related companies, are the primary source of corporate demand for top-tier hotels. According to Horwath, more than half of the total demand for top-tier hotels in Changchun came from domestic corporate travelers who are more rate-conscious and less brand-loyal than international travellers.
Driven primarily by corporate and government meetings, demand from the MICE segment accounted for approximately 26% of Changchun’s top-tier hotel segment in 2012. FAW and other auto-related enterprises are the main contributors to corporate MICE demand. As the capital city of Jinlin Province, Changchun is able to capture a large portion of the local government’s MICE demand, including government meetings, government-initiated trade shows, industry forums and exhibitions, such as the annual Changchun International Automobile Exhibition, International Agriculture Exhibition and China-Northeast Asia Expo (中國 — 東北亞博覽會).
The leisure demand segment accounted for approximately 6% of Changchun’s top-tier hotel demand in 2012.
—93— THIS WEB PROOF INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Web Proof Information Pack must be read in conjunction with the section headed “Warning” on the cover of this Web Proof Information Pack. HOTEL INDUSTRY IN THE PRC
Supply of Top-tier Hotels in Changchun
Estimated Room Supply, Changchun, 2012-2017
2012 2013 2014 2015 2016 2017
New Supply Sheraton Jingyuetan ...... 21 324 Hyatt Regency ...... 358 69 New Supply for the year . . 21 324 358 69 0 0 Total Market Supply ..... 3,102 3,419 3,881 3,950 3,950 3,950
Source: Horwath Report
According to Horwath, there will be two new top-tier hotels opening in Changchun from 2012 to 2017, including the Sheraton Jingyuetan and the Hyatt Regency, with a combined total of 772 rooms. New supply of top-tier hotels in Chuangchun is expected to be moderate in the next five years.
Market Trend and Growth Drivers
The top-tier hotel market in Changchun will be driven by the following positive factors:
• Continuous improvement in transportation infrastructure should boost the overall demand generating potential;
• Constant economic growth, along with more mature development zones and the introduction of grade-A offices to prompt an inflow of new businesses/corporations, will support growth in corporate and MICE demands;
• Being the main manufacturing hub of high speed rails in China will also generate increasing corporate and MICE demand in the market; and
• Changchun, as the capital of Jilin Province, will continue to be an important commercial, political and cultural center in the province, supporting growth in the market’s future corporate and MICE segments.
—94— THIS WEB PROOF INFORMATION PACK IS IN DRAFT FORM. The information contained in it is incomplete and is subject to change. This Web Proof Information Pack must be read in conjunction with the section headed “Warning” on the cover of this Web Proof Information Pack. HOTEL INDUSTRY IN THE PRC
Room Night Room Night Occupancy Available Change Demand Change Rate
2012 ...... 1,132,230 — 768,521 — 68% 2013 ...... 1,247,935 10% 798,232 4% 64% 2014 ...... 1,416,565 14% 860,160 8% 61% 2015 ...... 1,441,750 2% 916,520 7% 64% 2016 ...... 1,441,750 0% 962,329 5% 67% 2017 ...... 1,441,750 0% 997,441 4% 69%
Source: Horwath Report
The demand for and supply of top-tier hotels in the Changchun market are expected to be fairly stable in the next five years. Based on the historical trends and future market supply and demand conditions, Horwath expects the market ADR outlook to be optimistic in Changchun, with a positive CAGR of about 3% to 5% over the next five years.
New Century Grand Hotel Changchun achieved higher occupancy compared to the top-tier competitive market average in 2011 and 2012. The REIT Manager believes that they will continue to maintain their market leader position going forward with higher occupancy rate.
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