CFA Institute Research Challenge Hosted by CFA Society Shanghai, China Shanghai Advanced Institute of Finance

China Lodging Group, Ltd (ADR)

(NASDAQ:HTHT)

Shanghai Advanced Institute of Finance $ Price of HTHT and NASDAQ Rating: BUY 30 Target Price (USD): $27.77 25 Price, 11 Nov 13 (USD): $24.69 20 Upside (%): 12.47% 15

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Market Data HTHT NASDAQ

52-week high $24.90 Source: Bloomberg 52-week low $13.90 Investment Summary Previous close $24.69 HTHT’s fundamentals support a BUY After analyzing HTHT’s balance sheet, income statement, and using two appropriate Market Cap $1528 M stock valuation models, FCFE and EV/EBITDA, we have set a target price of $27.77 for Outstanding shares(Mil) 61.12 HTHT by the end of the year, an upside of 12.47% from its current price of $24.69. We believe HTHT warrants such a valuation and a buy because of its record of strong Trailing P/E Ratio 44.35x revenue growth and a financing free aggressive expansion strategy. HTHT’s financials EV/EBITDA 9.40x are strong as it has zero debt and being a cash-based business, it has high liquidity.

Industry leader in revenue growth, revenue per available room and expansion plans In the past two years, HTHT has outperformed its competitors in the key performance indicator of Revenue Per Available Room (RevPAR) and is projected to do so again in

2013. It also boasts the industry’s highest revenue growth rate, which is bolstered and supported by HTHT pursuing the industry’s most aggressive expansion plan.

Figure 1 RevPAR of Competitors

RMB ￥ RevPAR 190 180

170 160 150 140 130 120 110 100 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 Home Inn Jin Jiang 7 Days China Lodging Source: Company website and press release HTHT’s multi-brand strategy diversifies risk and supports expansion HTHT’s multi-brand, multi-price segment strategy diversifies the companies risk while increasing its potential reward. As HTHT continues to develop its mid-scale and upscale brands, it will better position itself to profit from increased domestic tourism spending across all consumption levels. This diversification away from its core economy hotel brand Hanting also diversifies its risk to any factors that might more negatively impact one price segment of the industry. For example, the recent Chinese government campaign of austerity has significantly affected the revenues and occupancy rates for

upscale hotels. This multiple brand strategy will support HTHT’s planned expansion by allowing it to aggressively enter new markets in three different, non-competing price-segments.

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Emphasis on customer service HTHT prides itself on customer satisfaction and is continuously seeking ways to improve the customer experience. Recently, at select hotels, HTHT began testing its 40 Table 1 Hotel Operation Breakdown of HTHT second check in and zero second check out process. Further, HTHT continues to enhance customer loyalty through expansion of its membership program. In the first Hotel Mode # of hotels in # of rooms in # of hotels in and No. for operation(Q3) operation(Q3) pipeline(Q3) two quarters of 2013, HTHT’s membership program grew by 38%, from 8.4 million to HTHT 11.6 million members. By comparison, the much larger Home inn’s membership Q3 Q3 Period 2013 2013 2013 2013 program only grew by 20% from 11.9 to 14.3 million members. Bookings from HTHT’s

Leased 24 538 2235 62964 76 members, on average, contribute more than 80% of rooms sold per night. Thus sustained membership growth reinforces sustained revenue growth. Manachised 98 777 9320 78866 379 Franchised 3 26 382 2664 Aggressive expansion plan to lower tier cities and new price segments Currently, HTHT’s hotel locations remain concentrated in the Yangzi River Delta (≈ Total 125 1341 11937 144494 4555 38%), the Bohai Economic Rim (≈22%), and in first and second tier cities (≈63%). Source: Company website and press release HTHT’s growth strategy thus centers on expansion to fast growing lower tier cities and underrepresented regions such as the Pearl River Delta (≈6%). Further, the midscale hotel market is very fragmented as branded hotels make up only 4% of the entire Table 2 Operating Result of HTHT market. HTHT plans to take advantage of this fragmentation by increasing its number of midscale hotels from 89 to around 900 by 2021, the fastest planned expansion rate in HTHT Operating Results For the 13Q3 quarter ended the industry. Amongst its competitors, HTHT is the current leader in the midscale

2012.9.30 2013.6.30 2013.9.30 market, with more than double the number of hotels than its competition.

Occupancy rate Favorable macroeconomic factors and government policies

Leased 97% 90% 93% Expenditure on both domestic leisure and business travel has increased dramatically in the past decade, a trend that is projected to continue in the upcoming one. Moreover, Manachised 98% 92% 95% recent government decisions and policies bode well for HTHT’s growth strategy. The Blended 97% 91% 94% most recent five year plan provided for continued investment in the country’s transportation infrastructure and in 2013 the government outlined a new tourism Average daily room rate(in RMB) policy which focused on developing domestic tourism attractions and providing citizens Leased 188 190 193 with more off days for travel.

Manachised 177 176 180 Manachise model allows for rapid growth with minimal risk Blended 183 182 186 A manchise hotel is one that HTHT controls quality by appointing the on-site manager but HTHT is not responsible for capital expenditure and instead receives a fixed fee of RevPAR(in RMB) 20% of annual revenue, not profit. The manachise model fuels HTHT’s rapid expansion Leased 183 172 179 by allowing for minimum capital expenditure and is a growing trend amongst all firms in the industry. HTHT’s percentage of manachise hotels has increased from 13% in 2008 Manachised 173 162 171 to 58% presently and the company plans for 75% of all new hotels to operate under the Blended 178 167 175 manachise model.

Source: Company website and press release A proven track-record of innovation in the travel industry HTHT’s cofounder and CEO Qi Ji brings boasts a wealth of experience and success in the Table 3 Brand breakdown of HTHT travel industry. Under Qi Ji, HTHT has become the industry’s leader in innovation and Hotel Brand No. of Industry Segment Price per night relentlessly aims to improve the customer experience. Examples of HTHT’s track record Hotels of innovation include its extensive online booking platform, online room selection, Han Ting 1165 Budget(business) RMB 150-300 interactive games and advertising stations at airports and its recently launched 40 second check in 0 second check out process. Moreover, HTHT’s COO, Mr. Yunheng Xue HI-inn 72 Budget RMB 100-200 brings over 16 years of experience in the IT industry to the company, experience that JI Hotel 56 Midscale RMB 250-500 will help HTHT stay ahead of its competition in the form of technological and new media innovation. Starway Hotel 48 Midscale RMB 250-600

Joya Hotel* 1 Upscale RMB 500-1000 Business Description Man Xin 1 Upscale RMB 800-1000 China Lodging (HTHT) was established in 2007 by Mr. Qi Ji, who saw an opening in the Data: as of September 30, 2013; Source: HTHT Website Chinese market for economy hotels that target business travelers, a rapidly growing segment of China’s travel industry. Prioritizing the customer experience and modeled

after economy western chains such as Ibis, HTHT’s HanTing brand quickly became one of the largest hotel chains in China. Three years after its founding, HTHT was th successfully listed on NASDAQ on March 26 2010.

Under founder and CEO, Mr. Qi Ji, HTHT has pursued a policy of rapid expansion, quickly going from its first hotel and one brand in 2007 to over 1200 hotels and five brands today. Mr Ji and HTHT plan to continue on this torrid expansion pace and have set an impressive target to operate around 5000 hotels by 2021. To achieve this target, HTHT’s future expansion plans center on growing its hotel holdings across all price segments, especially the midscale and upscale segments. A description of HTHT’s six brands are in table 3.

HTHT employs three different hotel operating styles: Lease, Manachise, and Franchise. PAGE 2

Currently, HTHT’s operating breakdown is: Lease- 538, Manachise-777, and Franchise – 26. Franchise hotels are limited to the Starway Brand which was acquired in 2012.

CEO and co-founder Qi Ji has a track record of innovation in the travel industry, having previously founded and served as CEO for two other well-known Chinese travel Figure 2 Residents per capita income and growth of retail sales companies: C-trip and Home Inns. Mr. Qi has lofty goals for HTHT, expecting to become % % the largest hotel chain in the world by 2020. HTHT is well on its way towards that goal. 24 18 It has signed loyalty contracts with over 150 of Fortune’s Global 500 companies and 22 16 260 of China's top 500 companies. HTHT currently employs over 30,000 employees and 14 possesses a loyal membership base of over 11 million individuals in over 190 cities. 20 12 18 10 16 8 Macro Analysis 6 14 Political: Continued government investment in infrastructure 4 Local and national Chinese governments continue to invest in and develop 12 2 transportation infrastructure, which will continue to support growth in the hospitality and tourism industries. At the end of 2012 in conjunction with the 12th Five Year Plan, China’s National Development and Reform Commission green lighted 25 major railway MoM: Retail sales YoY: Residents' income[R] and 13 highway construction projects throughout the country. YoY: Residents' expense[R] Source: Wind Political: Government efforts to support tourism industry The Chinese government’s new tourism policy for 2013-2020 demonstrates the government’ support on developing the domestic tourism industry through policy changes and investments. The policy outlined several strategies including increasing the number of off days for workers and increasing the number of tourist facilities such Table 4 Unit labor cost and nominal wages as tourism zones and hotels. If successfully implemented, the new policy will support Per Capita Engel Domestic Business travel continued growth in the hospitality industry, especially for already established Year Disposable Index Tourism(Mil) Expense(Mil￥) Income(￥) companies such as China Lodging. 2007 13,786 36.29 1,394 840,384 Economic: Growth of the Middle Class 2008 15,781 37.89 1,610 907,614 Wages have increased rapidly in recent years, especially for migrant and industrial 2009 17,175 36.52 1,712 980,224 workers, as the Chinese economy has reached the Lewisian Turning Point. This growth in wages has led to a significant increase in China’s middle class, which in turn creates 2010 19,109 35.70 1,902 1,058,641 more potential travelers and increases total tourism expenditure. Per capita income as 2011 21,810 36.30 2,103 1,143,333 measured by GDP per capita continues to increase and reached $6100 last year.

2012 24,565 36.50 2,641 1,234,800 Economic: Growth in total tourism expenditure Source: Wind The number of domestic tourists has more than doubled over the period from th 2007-2012 and according to the 12 Five Year Plan, the number of total domestic tourists will reach 3.3 billion by 2015. At that time, total spending on tourism and related industries is projected to account for 10% of national GDP. Although tourism consumption per capita declined during the global financial crisis from ¥907 in 2007 to ¥801 in 2009, the number has risen in the years since and in 2012 reached ¥897. This number will continue to increase along with disposable income per capita, which has increased at an average of 12% per year over the past five years. Over the same time, total tourism expenditure has increased by an average of 14% (both leisure and

business) per year. The principal customer base for economy hotels are domestic leisure and business travelers. According to the China Economy Hotel Survey, the current customer breakdown is: 42% individual business travelers, 23% leisure travelers, 21% corporate contract customers, and 14% other.

Economic: Continued growth of business travel expenditure Growth in spending on business travel will continue to outpace that of leisure travel. According to statistics from the Global Business Travel Association (GBTA), growth in total expenditure on business travel has grown at a rate of around 15.5% annually from 2000-2012. GBTA is predicting that total business travel expenditure will increase by 15.1% (¥1.379 trillion) in 2013 and 16.9% (¥1.543 trillion) in 2014. In 2012 total spending on business travel accounted for just over half of total tourism expenditure. HTHT’s flagship brand, Hanting, specifically targets business travelers and is in a good position to benefit from continued increases in business travel spending. Furthermore, the opening and successful implementation of the Shanghai Free Trade Zone should increase business travel to the Yangzi River Delta area, the home base and revenue foundation of China Lodging.

Industry Overview and Competitive Positioning -Industry Overview Continued growth in market for economy hotels Currently there exists large numbers of ‘high quality, high price’ midscale hotels, but

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these 1 to 3-star rated hotels only contribute 16% of total hotels in China. The Figure 3 China hotel classificaition remaining share (75%) of the market is dominated by “low quality, low price” guest houses. Upscale, 4/5 star rated hotels only comprise 3% of the market. The opportunity 6% for ‘high quality, low price’ economy (budget) hotels, currently at 6%, thus has great growth potential because this type of hotel fills the void left in between the low-end 16% guesthouses and 1 to 3 star rated hotels. Economy hotels provide better quality than the former while providing more value for money than the latter. As more and more 3% Chinese enter the middle class and the tourism industry continues to develop, the market for budget hotels will continue to expand. Economy hotels are appealing to 75% middle class Chinese customers because they focus on providing inexpensive, cozy, and comfortable rooms instead of expensive frills such as food and entertainment. The occupancy rate for economy hotels is currently around 90%, compared with a rate around 60%-70% for upscale hotels.

Budget hotel 1-3 star hotel The economy hotel market is less influenced by the economic downturns 4-5 star hotel guest house Despite a recent decline in growth rates in China’s economy, the market and demand for economy hotels remains strong and occupancy rates have not decreased. In hard times, Source: Wind economy hotels can be viewed as a substitute for midscale and upscale hotels. While an economic recession will cause some potential economy hotel customers to not travel, the same recession will also cause upscale hotel customers to choose economy hotels. Evidence supporting this phenomenon can be seen after the Chinese Government instituted a new government austerity policy at the beginning of 2013. After the policy % Figure 4 Occupancy rate and ADR of star rated % began occupancy rates for 13Q1 decreased by 10% for upscale hotels but only by 5.5% 120 400 and economy hotels for economy hotels. It should be noted that historically there has always been a 350 100 negative seasonal effect on the industry in the first quarter due to the Chinese New Year 300 80 holiday. 250 60 200 Economy hotel industry grew at 70% CAGR over the past few years 150 40 The number of economy hotels in China has been growing exponentially in the past 12 100 years, from 23 in 2000 to 9924 in 2012. Continued growth in the industry will be 20 50 spurred by overall growth in the Chinese economy and by taking away some of the 0 0 market share of 1 to 3 star hotels. This period of rapid expansion benefits established brands which have the resources and name recognition to expand rapidly. If the development of the Chinese market continues to follow that of more developed Occupancy Rate for Star hotels Occupancy Rate for Economy Hotels ADR for star hotels[R] ADR fro economy hotels[R] countries, this rate of expansion should continue. The economy hotels market accounts for around 70% of the total hotel market in Source: Wind developed countries such as US and European countries. Currently this proportion ratio in China, is just 10%. Established branded economy hotels can take advantage of this low penetration rate by offering reliable and standardized service at competitive prices.

Figure 5 Relationship between economy hotel Increasing use of manachise model 50% market size growth and GDP growh of China 11% In contrast with 4-5 star hotel operators, fast growing economy hotel chains grow through leasing and adapting already constructed buildings and properties into hotels 45% 10% instead of constructing brand new ones. Also, similar to the strategies employed by successful companies in international hotel markets such as Hilton and Accor, once established, expansion of the brand relies heavily on manachising. Manachising reduces 40% 9% investment risk by placing the responsibility for initial investment and capital expenditure on the manachise, and thus drive up overall profitability for the company. 35% 8% This model of operation also allows companies to execute quick expansion strategies and realize cost advantages through developing economies of scale. In comparison, it 30% 7% takes around 4 years for a leased and operated hotel to become profitable, thus the 2009 2010 2011 2012 risk-reward profile is greatly improved through this model. Market Size Growth Rate of Economy Hotel GDP Growth Rate Currently, each of the four major players are increasing their proportion in manachising hotels in their newly established hotels and hence reducing the proportion of the leased Source: Wind hotels gradually. They are also making use of acquisitions to speed up the manachising process. Overall, as companies rely more on the manachise model, the financial pressures and liabilities associated with investing in new leased and operated hotels decreases and overall profitability will increase. Table 5 Acquisition Cases in the Recent Year

Acquired 100% ownership of Human Huatian Star Hotel 7 Day Group Holding Management Limited in July 2011

HTHT Acquired 100% ownership of Starway in June 2012 Acquired 100% ownership of ELANINN in Sep 2013 Home Inn Acquired 100% ownership of Motel 168 in May 2011 Source: Company website and press release

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Figure 6 Growth of economy hotels in China E-commerce is becoming main reservation channel and useful port to capture 1,200,000 12,000 customers on Web2.0 Era 1,000,000 10,000 Another trend is using enhanced technology to increase revenue generated by the 800,000 8,000 Business to Customer (B2C) model. Making sales directly to the customers’ increases profitability by cutting out the middle men such as travel agents and online booking 600,000 6,000 sites which buy groups of rooms in advance at a much lower price than what an 400,000 4,000 individual customer would pay. Currently, the most common ways to execute the B2C 200,000 2,000 model for hotels are home websites, calling centers, SMS and mobile applications. In 2012, the average percentage of reservations generated from B2C platforms was 85% 0 0 for the four major players (7 Days/ Home Inn/ Jin Jiang Inn/ HTHT).

No. of Rooms of Economy Hotels in China Opportunities for growth in third and fourth tier cities for economy hotels No. of Economy Hotels in China Currently the first and second tier cities accounts for 80% of the total revenue in Source: Wind economy hotel market. However, this percentage is expected to decrease significantly in the coming years. The economy hotel market in first and second class cities has become more mature and highly penetrated. This fact has switched the major players’ development focus to third and fourth tier cities. The proportion of revenue from the 6 55% Figure 7 Proportion of leased hotels for major players most developed cities in China (Shanghai, Beijing, Shenzhen, Guangzhou, Nanjing, and 45% Hangzhou) decreased from 60% in 2005 to 35% in 2012.

35% Market concentration for branded economy hotels trails that in more developed markets 25% Currently, the market for Chinese economy hotels can be divided into three categories: Domestic Chain Brands (44.1%), International Chain Brands (18.65%) and Regional 15% Brands (37.25%). The total market share for large branded hotels, foreign and 11Q4 12Q1 12Q2 12Q3 12Q4 13Q1 domestic, is 62.75% which is significantly lower than the 80% market share for large Home Inn 7 Days China Lodging Jin Jiang Inn branded hotels in other developed markets such as the United States. This discrepancy signifies that there exists room for market share growth for the four most established Source: Wind economy hotel brands in China. Ibis (Accor) and Super 8 (Wyndham) are currently the most well-known international USD $ Figure 8 Operation results in 1st tier cities 80,000,000 80% brands that have entered the Chinese market. However, despite being more experienced in the industry abroad, as economy hotels they are currently charging rates that are relatively higher than that of their domestic competition. This difference 60,000,000 60% in price, together with less locations compared to domestic competition, (Ibis 70 hotels and Super 8 523 hotels), has limited these brands abilities to become major players in 40,000,000 40% the market.

20,000,000 20% Multi-brand strategy is the core competitiveness driver for industry leaders As the budget hotel market becomes more saturated and consumers’ disposable 0 0% income increases, the established players are seeking to expand their hotel holdings across different price segments. Currently, Jin Jiang and China Lodging are leading the Total Revenues in 6 First Tier Cities in China Proportion of Revenue in 6 First Tier Cities pack in executing this multi-brand, multi-segment strategy by opening more midscale and upscale brands to target consumers with greater consumption ability. This pattern Source: Wind follows the trend set by international hotel management companies after they had developed a solid foundation in the economy hotel market. Expanding brands across different price segments allows a hotel group to reduce overall business risk through Table 6 Distribution of China’s branded economy hotel the diversification effect, lessen customers’ price elasticity of demand, and increase overall profit margin by third degree discrimination. Home 7 Jin HTHT Coverage -Inn Days Jiang -Competitive Positioning First Tier 462 411 326 167 Highest Industrial RevPAR and ADR Cities There are three key performance indicators used in the hotel industry: Revenue per Second 794 564 531 288 available room (RevPAR), Average Daily Rate (ADR), and Occupancy Rate. These three Tier Cities indicators combine in the following formula: Third & RevPAR = ADR X Occupancy Rate Fourth Tier 865 736 504 397 Total Revenue = RevPAR X Number of Rooms Cities RevPAR indicates how much revenue a hotel is generating for each individual room and is the most common standard by which firms are compared within the industry. By the Total 2121 1711 1361 852 By 2013 end of 2012, HTHT was leading the budget sector in two of the three key indicators, RevPAR and ADR and it ranked second in occupancy rate. Further, if you look at the Source: wind quarter by quarter breakdown of RevPAR, since the start of 2011, HTHT’s growth in ADR has outpaced its competitors.

Favorable Geographic Location Shanghai is the business and financial capital of China and hence is one of the top domestic tourist and business travel destinations. The surrounding region, the Yangzi River Delta, is one of the most developed in the country and home to world class cities PAGE 5

such as Nanjing and Hangzhou. Combined with HTHT’s fast growing membership program and its popularity amongst business travelers, HTHT’s home base in the Yangzi River Delta has fueled HTHT’s rapid expansion. We believe that its strong and growing Table 7 Geographic distribution of HTHT hotels position in Eastern China will continue to provide support for HTHT’s bottom line and expansion plans. Currently, HTHT is the second largest brand in its home city of Home 7 Jin HTHT Coverage Shanghai, trailing only Home Inns, which was first to the market. However, despite -Inn Days Jiang trailing Home Inns in scale, HTHT is growing at a much faster rate and as of the end of Beijing North the second quarter of 2013, HTHT had 432 hotels in the pipeline while Home inn only 483 349 316 184 TianJin HeBei Area Shandong had 206. Shanghai Figure 10 Geographic distribution of HTHT hotels East Jiangsu 502 249 544 347 Area Zhejiang Anhui Henan Middle Shan’xi 165 124 139 102 Heilongjian Area Shanxi g Neimenggu Guangdong Jilin South Guangxi 200 446 91 63 Xinjiang Liaoning Area Hainan

Fujian Gansu Inner Mongolia Beijing Liaoning North Hebei 162 81 111 59 Jilin Ningxia East Qinghai Shanxi Heilongjiang Shandong Sichuan Shaanxi Henan South Yunnan 81 184 55 30 Tibet Jiangsu West Guizhou Anhui Shanghai Hubei Chongqing Sichuan Hunan Zhejiang Middle Jiangxi 98 245 68 49 Hubei Hunan South Jiangxi Gui zhou Fujian Yunnan Ningxia Taiwan Gansu Guangxi Guangdong North 73 33 37 18 Tibet West Xinjiang *Distribution of HTHT Total Hotels Qinghai Hainan Total 1764 1711 1361 852 By 2013 Rapid expansion strategy Amongst the major competitors, HTHT is executing the most rapid expansion strategy, Source: Company filings planning to expand to 5000 hotels by 2021 from just this year’s 1341. This expansion pace is more aggressive than that of its competitors, which will allow it to surpass Home Inn and 7 Days in terms of scale in the next decade. To assist in this expansion process, HTHT has also pursued an aggressive acquisition strategy, recently acquiring the midscale StarWay hotel and the economy hotel Elann Inn. Both of the acquired Table 8 Geographic distribution of HTHT hotels brands are based in the Yangzi River delta and their acquisitions will strengthen HTHT’s position in the region. Further, the acquisition of Starway will boost HTHT’s efforts to

North Area 316 23.22% gain a strong position in the growing midscale hotel market. Its rapid expansion East Area 544 39.97% strategy has also given HTHT more bargaining power over its suppliers, allowing it to achieve better cost effectiveness. Middle Area 139 10.21%

South Area 91 6.69% Current leader in the race to develop the midscale and upper-scale hotel market North East 111 8.16% The branded midscale hotel market is projected to grow significantly in the coming years. In 2011, there were only 341 branded midscale hotels which accounted for only South West 55 4.04% 4% of the midscale hotel sector. By 2016, the number of branded midscale hotels is Middle South 68 5.00% expected to balloon to around 3000, following a similar development path as the budget sector. In the current race to conquer this developing segment, HTHT is leading

North West 37 2.72% the way, having more than double the number of midscale hotels than each of its total 1361 competitors. HTHT already has two brands in the sector compared with just 1 for both 7 Days and Home Inns. HTHT plans to expand on its head start in the sector by Source: Company filings increasing from its current holding of 89 midscale hotels to around 500 in 2016 and 1000 in 2021. Its current lead and rapid expansion plans in the sector will provide a significant competitive advantage over its main competitors in the near future. Also, from Oct. in 2013, HT has introduced another new brand Man Xin, a high-end resort hotel. This has further enriched the company’s pipelines in the upper scale market.

World class management and history of innovation Lead by Qi Ji, a veteran entrepreneur in the Chinese travel industry, HTHT continues to lead the field in innovation. The company’s hiring of an experience IT industry executive as its COO signifies that the company recognizes the growing importance of

technology in the industry. HTHT recently introduced an improved online and mobile booking platform complete with advanced room selection as well as an interactive touch screen game at airports to attract potential customers as they arrive at a destination. Operation wise, HTHT was the first in the industry to develop and implement internal Manachising and Franchising Information Management System for all its manachisees. This system will reduce the cost of information flow between headquarters and its branches while improving communication and flattening the

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management structure. Table 9 Brand Positioning of HTHT Unwavering focus on quality and improving the customer experience Brand Features Positioning True to its founding, HTHT continues to focus on improving the customer experience. Infusion of scientific and art Most recently, it introduced the 40 second check in 0 second check out method at High-level Joya feeling, select hotel locations and its loyalty program continues to grow. By employing the managers or Hotel completely professionals manachise model, HTHT ensure the quality of the brand through appointing internally supported facilities trained personal as onsite managers. For professional development, HTHT has created an internal learning college that consists of a three tier training system. The three tiers Comfortable and Starway & Business people provide expertise level training for staff at all career stages and levels of the company. commodious Ji Hotel and white collars living conditions The aforementioned Manachising and Franchising Information Management System also enhanced quality control by improving information transmission to hotels.

Trendy and full of HI-Inn imagination,valua Young customers ble enjoyment Financial Analysis Note: In China, the hotel industry experiences a seasonal downturn each year in quarter 1 during the Chinese new year holiday. Thus, in our analysis, we do not compare quarter to Source: Company filings quarter growth for Q1 and Q2 and instead rely on year on year (yoy) growth.

Figure 11 Revenue and RevPAR of HTHT Earnings maintain high growth rate. HTHT achieved total revenue of RMB1034.8 million for the second quarter of 2013, an USD $ (mil) RMB increase of 29.6% yoy. Adjusted EBITDA from operating hotels (non-GAAP) was 1200 200 RMB306.2 million for the second quarter of 2013, an increase of 35.5% yoy. The one year EBITDA growth rate of HTHT is 45.46%, highest among all competitors. Net income 1000 150 attributable to HTHT Group was RMB96.3 million for the second quarter of 2013, an 800 increase of 37.0% yoy. 600 100 400 Aggressive store expansion equates to continued revenue growth 50 HTHT plans to expand to 2500 stores in 2016 and 5000 stores in 2021. The number of 200 hotels at the end of 2013 Q3 was 1341. If achieved, HTHT’s total hotel holdings will 0 0 expand at an average rate of 28% over the next two years and 22% over the next ten. In2013Q3, HTHT opened 125 hotels making a total of 306 hotels this year and is on track to achieve its target of 400 hotels for the year. With steady RevPAR and at its Revenue RevPAR current expansion rate, HTHT’s revenue will continue to experience strong yoy growth. By comparison, the one year revenue growth rate for HTHT was 29.6%, the highest Source: company filings amongst its competitors. The sales per share 1 yr growth rate was 28.62, also highest among competitors. This proves the aggressive store expansion executions and add 1200 Figure 12 HTHT hotel numbers leverage to the company. 1000 54 Operating margin has been improving 800 516 In 2012Q2, total hotel operating costs, excluding share-based compensation expenses 600 (non-GAAP), were RMB745.6 million, representing 72.0% of net revenues, compared to 295 72.6% for the second quarter in 2012. The year-over-year decrease in hotel operating 400 195 costs as a percentage of net revenues can be attributed to recent cost-saving efforts 465 200 63 344 such as reducing staff to room ratio, effective cost control of labor and consumable 22 243 145 173 0 costs at leased hotels and an increase in the revenue proportion generated by manachised hotels, which have lower operation costs. We expect HTHT’s operating margin to continue to improve as it increases its scale, its proportion of manachised Leased Hotels Manachised Hotels Franchised Hotels hotels and implements more innovative cost reducing strategies. By comparison, HTHT’s operating margin in Q2 was 12.48%, the highest among its competitors. HTHT’s profit margin was 9.3%, also the highest among its competitors. Source: company filings

% Sufficient cash flow to support expansion and capital investment. Figure 13 Operating statistics The hotel industry is a cash-based industry and HTHT is a cash cow. It can generate 30 enough revenue and cash from its current operations to fund its expansion. HTHTs cash position has remained strong in 2013 with a cash flow from operation RMB 915.69 million in trailing twelve months and a cash balance of RMB 370.44 million. In addition to its cash, HTHT has access to a credit line reserve of RMB 699 million, for a total 10 potential funding reserve RMB 1069.44 million. Net operating cash flow for the second quarter of 2013 was RMB 303.0 million, representing a 68% increase year on year. During the same quarter, investing cash flow was RMB 174.7million, which included

-10 the purchase of property and equipment, intangible assets, and long term investment Gross Margin EBITDA Margin and acquisitions necessary for its expansion. Operating Margin Net Income Margin Healthy balance sheet Source: company filings HTHT’s growing focus on the manachise model for expansion has greatly reduced the long term investment burden on its balance sheet. The net change in liabilities in 13Q2 was RMB 508.62 million, which represents a 2.8% decline from the 12Q2. HTHT has zero debt and the bulk of HTHT’s liabilities come from the lease obligations for its own

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500 leased and operated hotels. Short term and long term payables represented only .05% Figure 14 Cash flow statistics change in liabilities, further supporting HTHT’s health financial position. Moreover, the cost control efforts and management expertise helped HTHT to improve the company’s operating efficiency. The asset turnover of the company for the latest quarter was 0.88, higher than the industry average 0.77. Table 10 key financial indicators of competitors 0 Cash Sales / EBITDA Rev - 1 Asset Flow CFO/Total Sh - 1Yr 1Yr OPM PM Yr Gr:Q Turnover Per Liability Gr Growth Share Industry 19.20 14.97 22.44 0.75 8.15% 4.88% 1.08 12.18% Average

-500 HTHT 29.64 28.62 45.46 0.88 12.48% 9.31% 2.12 15.43% Cash From Operations Cash From Investing Activities Jin Jiang 2.83 6.86 0.58 6.00% 3.06% 0.03 8.92% Cash from Financing Activities Net Changes in Cash Free Cash Flow Home 10.44 8.56 32.41 0.61 11.99% 6.31% N/A N/A Inns Source: company filings 7 Days 17.52 19.85 5.02 0.92 2.14% 0.85% N/A N/A

Source: Company filings

Figure 16 The relationship between HTHT's stock price and big events 28 26.4 800 Figure 15 Capital structure statistics 20 26 Target :$27.77

24

600 0 ）

$ 22

（ 20 400 -20 18

200 -40 16 Stock Price Stock 14 0 -60 12 FQ2 FQ3 FQ4 FQ1 FQ2 FQ3 FQ4 FQ1 FQ2 2011 2011 2011 2012 2012 2012 2012 2013 2013 10 Net Change in Other Liabilities Net Change Short Term Debt[R] Net Change Long Term Debt[R] Source: company filings Source: company filings and press release

Valuation We evaluated HTHT using Discounted Cash Flow and Comparable Company Analysis.

We believe Free Cash Flow to Equity (FCFE) and EV/EBITDA are the most appropriate methods to evaluate this firm. The FCFF calculates the firm’s intrinsic value and the EV/EBITDA takes into account the market sentiment of this asset-heavy company.

Table 11 FCFE analysis Discounted Cash Flow Model: Free Cash Flow to Equity (FCFE) Cumulative PV of Future Cash Flow ¥(7072.00) This method is suitable for HTHT as the company is currently undergoing very fast growth and expansion. We forecast that HTHT’s growth over the next decade will be Terminal Year Free Cash Flow (2022E) ¥3655.08 divided into two periods: a high growth period the next first five years and a smoother Perpetual Growth Rate 3.00% growth period in the following five years. Thus, we calculate that the cumulated present value of future cash flow is -7,072 million. It is negative mostly because of high Terminal Value ¥47817.69 capital expenditure (29.33% of revenue from leased and operated hotels). Discount Factor 0.39 Three Main Components of FCFE: Cash, Ten-Year Projected Cash Flows and Terminal Present Value of Terminal Value 18564.00 Value % of Enterprise Value 177.85% HTHT’s cash is RMB 298 million while the 10-year projected cash flows per share is valued to be at RMB -7,072 million. The discounted terminal value component is RMB Enterprise Value ¥10438.22 18,564 million (Table 11), with a perpetual growth rate at 3%. This implies the intrinsic Less: Non-controlling Interest (24.74) value of HTHT is $28.82.

Plus: Cash and Cash Equivalents 370.44 Cost of Equity Implied Equity Value 10783.92 The cost of equity is calculated though CAPM. By doing a linear regression on daily data with NASDAQ composite index, we can conclude the beta of HTHT is 0.67.Historical 3 ADS Outstanding, in millions 61.12 year return on NASDAQ composite is 14.15% yoy, 10-year Chinese sovereign bond yield Exchange Rate as of 2013/11/13 6.1200 is 4.22%, which represents the risk-free rate. Hence, the cost of equity is estimated Implied Share Price (USD) $28.83 10.87%.

Source: company filings and team estimate Revenue Forecast We will breakdown and analyze the revenue of HTHT in two parts. 1.) Revenue from Leased and Operated Hotels There are two key revenue drivers for leased and operated hotels: RevPAR and Number of Rooms. Total revenue per year

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Table 12 Cost of Equity Estimate from leased and operated hotels is equal to RevPAR X Number of Rooms. RevPAR has fluctuated significantly over the past five years but the average has been nearly stable Risk-free Rate 4.22% and thus we predict it will not change significantly in the foreseeable future. As for Number of Rooms, we believe capital expenditure from the previous year can indicate Market Risk Premium 14.15% revenue growth in the current year. After conducting a regression analysis to test this, Levered Beta 0.67 we conclude that the ratio of capital expenditure in year n to revenue from leased and operated hotels in year n is almost perfectly linear correlated with the growth rate in Cost of Equity 10.87% year n+1, with a coefficient of 0.8462 and 0.1192. HTHT’s goal is to reach around 5000 Source: company filings and team estimate hotels by 2021, indicating that the growth rate of Number of Rooms (assuming average hotel size remains the same) should be no less than 19%, which is consistent with our capital expenditure assumption. Figure 17 Regression chart of CAPEX and revenue growth 2.) Revenue from manachised hotels For management hotel contracts under manachise model, the budget hotel chain usually negotiates on-going management Leased and Operated Hotels (% growth) fees based on a percentage of the managed hotel’s revenue, which typically falls in the range of 5-7% of the hotel room revenues. Also, the budget hotel chain will collect a 0.7 one-off joining fee of RMB 200,000. Most of the hotel management arrangements have 0.6 y = 0.8426x + 0.1192 a term of five to ten years. According to annual reports and the company’s prospectus, 0.5 R² = 0.9606 HTHT is going to increase both the revenue and number of manachised hotels, a trend 0.4 throughout the industry. We believe under a competitive environment, the growth rate 0.3 of revenues from manachised hotels will be 67% in 2013E, and decrease by 10% per 0.2 year in first 5 years, and 5% per year in following 5 years. 0.1 0 Capital Expenditures Assumption 0 0.2 0.4 0.6 0.8 Capital expenditure is the key driver for expansion. We believe capital expenditure (% Leased and Operated Hotels) will remain the same in first five years because the Source: company filings company needs investment for expansion in middle and high-end hotels. However after 5 years, we believe capital expenditure will decrease by 5% per year and decrease by 6% in the last year as by that time the chain hotel industry will be much more Figure 18 Estimated ratios competitive and there will be limited profitable projects to invest in.

Sensitivity Analysis Estimates Rate 0.8 Cost of equity and the perpetual growth rate are the most fundamental factors influencing stock price. We performed sensitivity analysis on both cost of equity and 0.6 Perpetual growth rate. The results are that the price is not very sensitive both of them.

0.4 Comparable Valuation: EV/EBITDA 0.2 This method accounts for the market valuation during macroeconomic uncertainty. We believe that EBITDA is a most useful financial metric to assess operating and financial 0 performance before the impact of investing and financing transactions and income 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Capital Expenditures (% Leased revenue) taxes. Given the significant investments that HTHT has made in leasehold Leased and Operated Hotels (% growth) improvements, depreciation and amortization expense comprises a significant portion Managed and Franchised Hotels (% growth) of their cost structure, the net income ratio may fluctuate significantly due to changes in depreciation and amortization. Source: company filings and team estimate

Comparable Company Pool We found a total of 14 comparable public companies across the globe. Two in China Mainland: SHANGHAI JIN JIANG INTL HO-H, HOME INNS & HOTELS MANAG-ADR; three Table 13 Sensitivity analysis on FCFE method in Hong Kong: MANDARIN ORIENTAL INTL LTD, HONGKONG & SHANGHAI HOTELS, Perpetual Growth Rate SHANGRI-LA ASIA LTD; three in Europe: WHITBREAD PLC, MILLENNIUM & COPTHORNE 2.70% 2.85% 3.00% 3.15% 3.30% HOTEL, INTERCONTINENTAL HOTELS GROUP; and four in United States: STARWOOD HOTELS & RESORTS, CHOICE HOTELS INTL INC, MARRIOTT INTERNATIONAL -CL A,

9.79% 38.78 40.17 41.63 43.14 44.73 WYNDHAM WORLDWIDE CORP. We calculated both the EV/EBITDA and P/E ratio for

10.33% 32.32 33.47 34.67 35.92 37.22 each of the companies. We can see that there are significant differences between the P/E ratios of those companies. However the EV/EBITDA ratios are similar for all. 10.87% 26.87 27.83 28.83 29.87 30.95 According to our analysis, we set a target EV/EBITDA at 10.04x, which implies a 11.42% 22.23 23.05 23.89 24.76 25.66

Cost of Equity of Cost per-ADS price of $26.17. 11.96% 18.26 18.95 19.66 20.40 21.16 Conclusion: Target Price Source: company filings and team estimate According to our two valuation methods, both of which account for the company’s intrinsic value, growth potential and the market sentiment, the fair price for HTHT is $27.65. This price is significantly higher than the current price of $23.73. Therefore, HTHT is a buy, with a potential absolute gain of 16.5% by the end of the year.

Investment Risk Upside: Upside Growth Opportunity Urbanization goal of the government boosts overall hotel demand China’s urbanization rate rose from 17.9% of 1978 to 52.5% of last year, a huge increase implying that our national consumption market development will contain PAGE 9

Table 14 Comparable company analysis great potential in the later years. In this regard some related industries such as tourism, catering and hotel industry are very likely to benefit a lot from that growth. Target EV/EBITDA 10.04x TTM EBITDA 124.92 Upside: International expansion and regional M&A A prominent development plan for HTHT is to use acquisitions to establish itself in new Enterprise Value 1253.94 regions. Recently, it successfully acquired and merged Starway and Yilai, reassuring its Minus: Financial liability 0.00 base in Eastern China. There always exists a possibility of international expansion, and Mr. Ji has made it clear that he desires China Lodging to become the world’s largest Minus: Preferred Stock 0.00 hotel management company. International expansion is not planned for the Minus: Non-controlling Interest (24.74) foreseeable future. Plus: Cash and Cash Equivalents 370.44 Competition Risk: Expansion brings greater competition and lower occupancy rates Equity Value 1599.63 In pursuit of its aggressive expansion strategy, HTHT may face a decrease in profit Diluted ADS outstanding 61.12 margin as a result of stiffer competition, low initial occupancy rates for new hotels, and/or price wars. As HTHT enters new regional markets and price segments it will face Implied Price $26.17 competition from already established competitors. Additionally, revenues and profit Source: company filings and team estimate margins from hotels in lower tier cities could be significantly lower than those from first and second tier cities. HTHT remains unproven in the midscale and upscale markets and it is possible that they may not be able to replicate its success at the economy segment. Further, the upscale and midscale markets are traditionally more Table 15 Target Price volatile and risky than the budget markets, thus as HTHT increases its holdings in these two segments, it will also be exposing itself to increased volatility in prices. Weight Price W x P FCFE 60% $28.83 $17.30 Operational Risk: Rising input costs Any increase in input costs such as labor, raw materials, and utilities, will have a EV/EBITDA 40% $26.17 $10.47 negative impact on earnings given that the net income margin is not too high. Target Price $27.77 However, as HTHT continues to rely more on manachised hotels, we do not feel that operational risks pose a significant threat. HTHT does not bear the operational costs for Source: company filings and team estimate manachised hotels and receives a fixed percentage of revenues, not profit.

Operational Risk: Quality of manachised and franchised hotels Despite strict manachise and franchise agreements, the reputation of HTHT’s brands and future occupancy rates depend on the compliance of the manachisees and franchisees. We feel this risk is greater for franchises as HTHT exerts more control over the quality of manachised hotels through the appointment of onsite managers. HTHT recognizes this risk and is making every effort to minimize it. Currently, franchises are only limited to acquired Starway hotels and HTHT currently has no future plans for additional franchises.

Operational Risk: IT and Technical failure As China Lodging relies more and more on technology to secure reservations and operate hotels, any major and long term technical failure could significantly affect HTHT’s reputation, brand and revenues.

Macro Risk: Declines in tourism expenditures As a hotel company, HTHT is susceptible to any shock that will cause a decrease in travel spending. These include but are not limited to: Global economic downturn, Domestic economic downturn, seasonality and inflation.

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Appendices Table of Contents:

1. Appendix I : Forecasted Financial Statements 2. Appendix II: Detailed explanation of key assumptions for FCFE method 3. Appendix III: Free Cash Flow 4. Appendix IV: EV/EBITDA Data 5. Appendix V: Comparable Company Analysis

NOTE: All other numbers and statistics were taken from public information on HTHT and its competitor’s websites.

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Appendix I: Forecasted Financial Statements

Reference Items of Balance Sheet Reference Items of Income Statement Accounting Standard US GAAP US GAAP US GAAP US GAAP US GAAP Accounting Standard US GAAP US GAAP US GAAP US GAAP US GAAP Shares Outstanding N/A N/A 60.272 60.6511 61.1235 EBITDA -62.8174 221.9858 427.8455 344.003 567.308 Operating Leases N/A 5204.4867 7689.5448 10130.055 15317.461 EBITDA Margin (T12M) -8.2195 17.6152 24.6101 15.2918 17.5935 Options Granted During Period N/A 0 0.7676 0.9728 2.8388 Gross Margin 10.0602 20.2921 32.1135 24.2826 23.8989 Options Outstanding at Period 12.6774 6.306 10.6568 9.7738 9.8048 Operating Margin -20.1052 6.0637 14.743 4.7629 6.8144 Net Debt -73.746 -133.5873 -1160.0667 -781.601 -457.918 Profit Margin -17.8165 3.376 12.4103 5.1046 5.4236 End Net Debt to Equity -9.6078 -14.8059 -54.5834 -34.6472 -18.3861 Actual Sales Per Employee 137702.452 203881.4 313242.1 210360.67 251268.37 Tangible Common Equity Ratio -5.5272 3.5796 68.4946 62.5258 55.2224 Interest Income 3.7864 1.8702 15.9448 18.111 14.554 Current Ratio 0.7044 1.1397 2.4634 1.4796 0.8634 Depreciation Expense 89.0589 143.6759 167.4902 229.742 337.511 Cash Conversion Cycle N/A -50.01 -57.1114 -64.4318 -67.3685 Pure Retained Earnings -288.0014 -245.4569 -29.7054 85.127 260.014 Goodwill 19.5501 18.4522 41.373 42.536 64.18 Number of Employees 5550 6181 5550 10694 12833 Forecasted Income Statement 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E Leased and Operated Hotels 797.82 1,288.90 1,707.77 2,172.93 3,069.43 4,196.90 5,738.53 7,846.42 10,728.60 14,669.46 Managed and Franchised Hotels 12.04 44.97 130.58 212.64 349.85 584.25 917.27 1,348.39 1,847.29 2,346.06 Business Tax and Related Surcharges (45.61) (73.67) (99.86) (135.98) (194.75) (267.74) (372.72) (514.91) (704.25) (952.87) Total Revenue 764.25 1,260.20 1,738.49 2,249.59 3,224.53 4,513.41 6,283.07 8,679.90 11,871.64 16,062.66 Hotel Operating Cost, excluding D&A (687.36) (1,004.47) (1,180.20) (1,703.34) (2,453.90) (2,747.81) (3,757.14) (5,137.23) (7,024.26) (9,604.43) Depreciation & Amortization (90.84) (141.60) (163.13) (227.94) (337.16) (434.05) (593.48) (811.49) (1,109.56) (1,517.13) SG&A (230.54) (179.31) (301.99) (439.11) (550.89) (811.93) (1,130.27) (1,561.44) (2,135.61) (2,889.54) Operating Income (153.65) 76.41 256.31 107.15 219.73 519.62 802.17 1,169.74 1,602.21 2,051.55 Interest Income (Expense), net 1.25 8.79 13.26 17.23 13.73 13.73 13.73 13.73 13.73 13.73 Pretax Income (excluding non-recurring items) (156.46) 69.44 279.06 142.95 233.67 505.89 788.44 1,156.01 1,588.48 2,037.82 Income Tax Income (Expense) 23.88 (17.99) (57.26) (24.82) (54.17) (126.47) (197.11) (289.00) (397.12) (509.45) Income Before XO Items (132.58) 51.45 221.79 118.14 179.50 379.42 591.33 867.01 1,191.36 1,528.36 Minority Interests 3.58 8.90 6.04 3.31 4.62 10.89 11.58 12.95 15.15 18.63 Net Income (136.16) 42.54 215.75 114.83 174.89 390.31 602.91 879.95 1,206.51 1,546.99 Net Inc Avail to Common Shareholders (136.16) 42.54 215.75 114.83 174.89 390.31 602.91 879.95 1,206.51 1,546.99 Normalized Income (136.16) 42.54 215.75 114.83 174.89 390.31 602.91 879.95 1,206.51 1,546.99 Weighted Avg Shares - - 49.63 60.48 60.82 62.42 62.42 62.42 62.42 62.42 Basic EPS RMB - - ¥4.20 ¥1.90 ¥2.88 ¥5.96 ¥9.28 ¥13.61 ¥18.70 ¥24.00

Appendix I: Forecasted Financial Statements Forecasted Balance Sheet 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E Assets Cash & Near Cash Items 183.246 270.5873 1060.0667 781.601 449.844 559.968 697.0509 867.6923 1080.108 1344.523 Short-Term Investments 0 0 100 0 8.074 8.074 8.074 8.074 8.074 8.074 Accounts & Notes Receivable 12.5619 15.1578 21.5355 37.416 50.633 85.602 128.403 192.6045 288.9068 433.3601 Inventories 22.6505 8.8831 18.2902 31.232 37.971 34.411 34.72323 35.03829 35.35621 35.67701 Other Current Assets 111.4661 121.9976 214.9257 323.568 450.384 647.8346 931.8485 1340.376 1928.003 2773.249 Total Current Assets 329.9244 416.6257 1414.8181 1173.817 996.906 1335.89 1800.1 2443.785 3340.448 4594.884 LT Investments & LT Receivables 0 0 0 0 28.129 28.525 28.525 28.525 28.525 28.525 Net Fixed Assets 957.4068 1028.2667 1422.4324 2095.794 2951.509 3717.378 4646.722 5808.403 7260.504 9075.629 Gross Fixed Assets 1093.399 1305.7961 1863.4863 2758.796 3965.203 4956.504 6195.63 7744.537 9680.671 12100.84 Accumulated Depreciation 135.9922 277.5294 441.0539 663.002 1013.694 1239.126 1548.907 1936.134 2420.168 3025.21 Other Long-Term Assets 145.609 136.2391 206.8289 255.339 353.643 448.536 568.8917 721.5424 915.1539 1160.717 Total Long-Term Assets 1103.0159 1164.5058 1629.2613 2351.133 3333.281 4194.439 5244.139 6558.47 8204.182 10264.87 Total Assets 1432.9403 1581.1315 3044.0794 3524.95 4330.187 5530.328 7044.239 9002.255 11544.63 14859.76

Liabilities & Shareholders' Equity Accounts Payable 182.803 141.5707 283.2028 417.605 624.824 937.236 1405.854 2108.781 3163.172 4744.757 Short-Term Borrowings 82 57 0 0 0 0 0 0 0 0 Other Short-Term Liabilities 203.5412 166.9801 291.1396 375.738 529.818 741.7452 964.2688 1253.549 1629.614 2118.498 Total Current Liabilities 468.3442 365.5508 574.3423 793.343 1154.642 1678.981 2370.123 3362.33 4792.786 6863.256 Long-Term Borrowings 27.5 80 0 0 0 0 0 0 0 0 Other Long-Term Liabilities 169.5339 233.324 344.4278 475.723 684.98 958.972 1246.664 1620.663 2106.861 2738.92 Total Long-Term Liabilities 197.0339 313.324 344.4278 475.723 684.98 958.972 1246.664 1620.663 2106.861 2738.92 Total Liabilities 665.3781 678.8748 918.7702 1269.066 1839.622 2637.953 3616.786 4982.993 6899.647 9602.176 Total Preferred Equity 796.8376 796.8376 0 0 0 0 0 0 0 0 Minority Interest 6.1116 11.3649 9.1758 9.79 25.376 26.84383 28.95975 31.71287 34.95158 38.31666 Share Capital & APIC 265.1083 352.0406 2168.5419 2200.133 2243.583 2262.795 2262.795 2262.795 2262.795 2262.795 Retained Earnings & Other Equity -300.4953 -257.9864 -52.4084 45.961 221.606 371.8328 579.5028 849.6666 1167.53 1497.795 Total Equity 767.5622 902.2567 2125.3092 2255.884 2490.565 2661.472 2871.258 3144.174 3465.276 3798.907 Total Liabilities & Equity 1432.9403 1581.1315 3044.0794 3524.95 4330.187 5299.425 6488.044 8127.167 10364.92 13401.08 Appendix I: Forecasted Financial Statements

Forecasted Statement of Cash Flow 2008A 2009A 2010A 2011A 2012A 2013E 2014E 2015E 2016E 2017E Cash From Operating Activities Net Income (136.16) 42.54 215.75 114.83 174.89 390.31 602.91 879.95 1206.51 1546.99 Depreciation & Amortization 90.84 145.57 171.54 236.86 347.58 438.07 604.54 834.27 1151.29 1588.77 Other Non-Cash Adjustments 69.96 111.01 133.42 156.65 245.59 339.55 469.46 649.08 897.43 1240.79 Changes in Non-Cash Capital (38.38) (2.79) (51.59) (49.60) (52.33) (173.80) (836.92) (568.63) (769.34) (1026.32) Cash From Operations (13.74) 296.34 469.13 458.74 715.72 994.13 840.00 1794.67 2485.88 3350.23

Cash From Investing Activities Disposal of Fixed Assets 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Capital Expenditures (469.50) (263.78) (397.25) (768.76) (998.05) (1311.06) (1809.26) (2496.78) (3445.56) (4754.87) Increase in Investments 0.00 0.00 0.00 0.00 (28.13) 0.00 0.00 0.00 0.00 0.00 Decrease in Investments 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Other Investing Activities 17.91 7.75 (118.06) 34.18 (41.95) (339.55) (469.46) (649.08) (897.43) (1240.79) Cash From Investing Activities (451.59) (256.03) (515.31) (734.58) (1068.13) (1650.61) (2278.73) (3145.87) (4342.99) (5995.66)

Cash from Financing Activities Dividends Paid (1.01) (2.20) (2.30) 0.00 (3.49) 0.00 0.00 0.00 0.00 0.00 Change in Short-Term Borrowings 42.20 (80.00) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Increase in Long-Term Borrowings 30.00 142.00 70.00 0.00 1.00 0.00 0.00 0.00 0.00 0.00 Decrease in Long-term Borrowings (0.50) (34.50) (207.00) 0.00 (1.00) 0.00 0.00 0.00 0.00 0.00 Increase in Capital Stocks 345.08 58.71 1004.16 15.61 22.82 19.22 19.22 19.22 19.22 19.22 Decrease in Capital Stocks 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Other Financing Activities 59.17 (36.98) (29.20) (18.24) 1.32 (4.79) (4.79) (4.79) (4.79) (4.79) Cash from Financing Activities 474.94 47.03 835.66 (2.63) 20.65 19.22 19.22 19.22 19.22 19.22

Net Changes in Cash 9.61 87.34 789.48 (278.47) (331.76) (637.26) (1419.51) (1331.98) (1837.88) (2626.21) Appendix II: Detailed explanation of key assumptions for FCFE method We divide forecasting 10 year period into two parts: high growth period in first five years, and smooth growth period in following five years. We assume capital expenditure to revenue from leased and operated hotels will be the same as year 2012 in high growth period, and will decrease by 5% per year in smooth growth period, and decrease 6% in last year as competition will be much more severe at that time. Growth of revenue from leased and operated hotels is determined by CAPEX. We assume growth rate of revenue from managed and franchised hotels will decrease by 10% in high growth period, and decrease by 5% in smooth growth period. Business tax and other surcharges remain the same as taxation laws regarding HTHT will not change in foreseeable future. We assume Hotel Operating Cost remain the same percentage to revenue from leased and operated hotels, SG&A remain the same percentage to total revenue, and depreciation & amortization remain the same percentage to revenue from leased and operated hotels.

Assumptions Table

High growth Smooth Growth

2008 2009 2010 2011 2012 09-12 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E

Historical Average

or growth CAGR

Capital Expenditures (% Leased revenue) -58.85% -20.47% -22.85% -34.17% -30.95% -29.33% -30.95% -30.95% -30.95% -30.95% -30.95% -25.95% -20.95% -15.95% -10.95% -4.95%

Leased and Operated Hotels (% growth) NA 61.55% 32.50% 27.24% 41.26% 33.54% 38.00% 38.00% 38.00% 38.00% 38.00% 38.00% 33.79% 29.57% 25.36% 21.15%

Managed and Franchised Hotels (% growth) 832.71% 273.50% 190.37% 62.84% 64.53% 98.15% 67.00% 57.0% 47.0% 37.0% 27.0% 22.00% 17.00% 12.00% 7.00% 2.00%

Business Tax and Related Surcharges (% revenue) -5.63% -5.52% -5.43% -5.70% -5.70% -5.60% -5.60% -5.60% -5.60% -5.60% -5.60% -5.60% -5.60% -5.60% -5.60% -5.60%

Hotel Operating Costs (% Leased revenue) -74.77% -66.95% -59.56% -67.90% -68.96% -65.47% -65.47% -65.47% -65.47% -65.47% -65.47% -65.47% -65.47% -65.47% -65.47% -65.47%

SG&A (% total revenue) -28.47% -13.44% -16.43% -18.41% -16.11% -16.98% -16.98% -16.98% -16.98% -16.98% -16.98% -16.98% -16.98% -16.98% -16.98% -16.98%

Depreciation & Amortization (% Leased revenue) -11.39% -10.99% -9.55% -10.49% -10.98% -10.34% -10.34% -10.34% -10.34% -10.34% -10.34% -10.34% -10.34% -10.34% -10.34% -10.34%

Tax Rate -25.00% -25.00% -25.00% -25.00% -25.00% -25.00% -25.00% -25.00% -25.00% -25.00% -25.00% -25.00% -25.00% -25.00% -25.00% -25.00%

Working Capital (% Leased revenue) 0.00% 3.96% 49.21% 17.51% -5.14% 13.11% 13.11% 13.11% 13.11% 13.11% 13.11% 13.11% 13.11% 13.11% 13.11% 13.11% Appendix II: Detailed explanation of key assumptions for FCFE method Revenue Forecast 1) Leased and Operated Hotels. According to analysis above, Total Revenue from leased and operated hotels is equal to RevPar X Number of Rooms. RevPar is stable over past 5 years, so the key driver for revenue growth is the increase of room numbers. We believe PPE at cost is a fair financial indicator to represent number of rooms, and capital expenditure is actually the increase of PPE at cost. We assume all the newly established hotels can only be put into use in the next year, then the growth rate of room numbers multiplies RevPar is equal to growth rate of leased and operated hotels. Denote revenue from leased and operated hotels this year R, increase of revenue from leased and operated hotels next year ∆R, PPE at cost in the beginning of this year PPE, increase in PPE at cost during this year is CAPEX. Then we have a graph below.

PPE, at cost CAPEX

R ∆R

We have,

Then use some math skills,

Which means the growth rate of revenue from leased and operated hotels is linear correlated with the ratio of CAPEX to revenue from leased and operated hotels. After doing linear regression on historical data, we have this regression chart. From the chart, we can see growth rate of revenue from leased and operated hotels is equal to 0.8426 x CAPEX to revenue from leased and operated hotels + 0.1192. The intercept 0.1192, or 11.92% can be considered as interior growth propulsion come from somewhere else other than capital investments.

Appendix II: Detailed explanation of key assumptions for FCFE method

Linear Regression Chart

70% 60% y = 0.8426x + 0.1192 R² = 0.9606 50% 40% 30% 20%

10% leased and operatedleased hotels growth rate of growth revenue from 0% 0% 10% 20% 30% 40% 50% 60% 70% Capex to revenue from leased and operated hotels

Depreciation & Amortization Expenses. Given the company have relative far less intangible assets, Depreciation and Amortization expenses is a certain proportion of PPE, at cost. According to revenue forecast, PPE at cost is linear correlated to Revenue from leased and operated hotels. Thus, Depreciation and Amortization is a certain percentage of revenue this year.

PPE, at cost

Depreciation & Amortization R

According to analysis on historical data, Depreciation & Amortization to Revenue from leased and operated hotels ration remain almost stable.

Revenue from Leased and Operated Hotels 797.82 1288.9 1707.77 2172.93 3069.43

Depreciation & Amortization -90.835 -141.6 -163.125 -227.938 -337.162

D&A to Revenue from leased and operated hotels -11.39% -10.99% -9.55% -10.49% -10.98%

It is fair for us to assume this will remain, then we think D&A (% revenue from leased and operated hotels) will be -10.34% in forecasting periods. Appendix III: Free Cash Flow

High growth Smooth Growth

2008 2009 2010 2011 2012 09-12 CAGR 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E

Revenue:

Leased and Operated Hotels 798 1,289 1,708 2,173 3,069 33.5% 4,236 5,845 8,067 11,132 15,362 21,200 28,363 36,751 46,071 55,814

% growth NA 61.6% 32.5% 27.2% 41.3% 38.0% 38.0% 38.0% 38.0% 38.0% 38.0% 33.8% 29.6% 25.4% 21.1%

Managed and Franchised Hotels 12 45 131 213 350 98.1% 584 917 1,348 1,847 2,346 2,862 3,349 3,751 4,013 4,093

% growth NA 273.5% 190.4% 62.8% 64.5% 67.0% 57.0% 47.0% 37.0% 27.0% 22.0% 17.0% 12.0% 7.0% 2.0%

Business Tax and Related Surcharges (46) (74) (100) (136) (195) (270) (379) (527) (727) (992) (1,347) (1,776) (2,268) (2,805) (3,355)

% Revenue -5.6% -5.5% -5.4% -5.7% -5.7% -5.6% -5.6% -5.6% -5.6% -5.6% -5.6% -5.6% -5.6% -5.6% -5.6%

Net Revenue 764 1,260 1,738 2,250 3,225 4,550 6,384 8,888 12,252 16,717 22,715 29,936 38,233 47,279 56,553

Hotel Operating Cost, excluding D&A (597) (863) (1,017) (1,475) (2,117) 4- year CAGR (2,773) (3,827) (5,281) (7,288) (10,058) (13,880) (18,570) (24,061) (30,164) (36,543)

Gross Profit 168 397 721 774 1,108 40.7% 1,777 2,557 3,606 4,964 6,659 8,835 11,366 14,172 17,116 20,010

% Margin 21.0% 30.8% 42.2% 35.6% 36.1% 42.0% 43.7% 44.7% 44.6% 43.3% 41.7% 40.1% 38.6% 37.2% 35.9%

SG&A (231) (179) (302) (439) (551) 4- year CAGR (819) (1,148) (1,599) (2,204) (3,007) (4,086) (5,385) (6,878) (8,505) (10,173)

EBITDA (63) 218 419 335 557 36.7% 958 1,408 2,008 2,760 3,651 4,748 5,981 7,294 8,610 9,837

% Margin -7.9% 16.9% 24.6% 15.4% 18.1% 22.6% 24.1% 24.9% 24.8% 23.8% 22.4% 21.1% 19.8% 18.7% 17.6%

Depreciation & Amortization (91) (142) (163) (228) (337) 4- year CAGR (438) (605) (834) (1,151) (1,589) (2,193) (2,933) (3,801) (4,765) (5,772)

EBIT (154) 76 256 107 220 42.2% 520 804 1,173 1,609 2,063 2,556 3,047 3,493 3,846 4,064

% Margin -19.3% 5.9% 15.0% 4.9% 7.2% 12.3% 13.8% 14.5% 14.5% 13.4% 12.1% 10.7% 9.5% 8.3% 7.3%

Taxes (24) (18) (57) (25) (54) 4- year CAGR (130) (201) (293) (402) (516) (639) (762) (873) (961) (1,016)

Net Income (178) 58 199 82 166 41.5% 390 603 880 1,207 1,547 1,917 2,286 2,620 2,884 3,048

plus: Depreciation & Amortization 91 142 163 228 337 438 605 834 1,151 1,589 2,193 2,933 3,801 4,765 5,772 minus: Increase in NWC (186) (189) (789) 460 538 (174) (837) (569) (769) (1,026) (1,372) (1,733) (2,034) (2,274) (2,402) minus: Capital Expenditure (470) (264) (397) (769) (998) (1,311) (1,809) (2,497) (3,446) (4,755) (5,502) (5,942) (5,862) (5,046) (2,764)

Free Cash Flow to Equity (742) (253) (824) 2 43 (656) (1,439) (1,351) (1,857) (2,645) (2,764) (2,457) (1,476) 330 3,655

Cost of Equity 10.87%

Discounting Period 0.166667 1.166667 2.166667 3.166667 4.166667 5.166667 6.166667 7.166667 8.166667 9.166667

Discounting Rate 0.982944 0.886549 0.799607 0.721191 0.650465 0.586676 0.529142 0.477250 0.430447 0.388234

Present Value of Future Cash Flow (645) (1,276) (1,080) (1,339) (1,721) (1,621) (1,300) (705) 142 1,419

Appendix IV: EV/EBITDA Data

Appendix V: Comparable Company Analysis

Price EV/EBITDA EBITDA P/E EPS

Name Ticker at Nov.13 Mkt Cap EV TTM 2013E 2014E 2015E CAGR 13-15E TTM 2013E 2014E 2015E CAGR 13-15E

China (3 securities)

CHINA LODGING GROUP-SPON ADS HTHT US $24.69 1503.72 1174.74 9.40 10.91 8.51 6.93 16.35% 44.35 33.29 24.94 20.46 17.62%

SHANGHAI JIN JIANG INTL HO-H 2006 HK $0.26 1572.09 2381.17 9.41 8.73 6.98 6.41 10.89% 34.21 20.04 26.71 26.71 -9.14%

HOME INNS & HOTELS MANAG-ADR HMIN US $37.15 1684.01 1858.53 11.30 8.75 7.34 6.68 9.41% 39.98 27.12 19.90 16.89 17.10%

Average $1586.61 $1804.81 10.04x 9.46x 7.61x 6.67x 12.22% 39.52x 26.82x 23.85x 21.35x 8.53%

Hong Kong (3 securities)

MANDARIN ORIENTAL INTL LTD MAND SP $1.72 1745.02 2258.72 14.87 12.58 11.85 10.69 5.60% 17.66 17.38 17.74 15.13 4.73%

HONGKONG & SHANGHAI HOTELS 45 HK $1.53 2266.75 2633.94 14.32 15.28 13.40 13.20 5.01% 11.14 35.64 29.95 28.98 7.14%

SHANGRI-LA ASIA LTD 69 HK $1.75 5631.29 9765.70 18.36 17.11 15.22 13.38 8.53% 14.93 44.14 31.23 26.27 18.88%

Average $3214.35 $4886.12 15.85x 14.99x 13.49x 12.42x 6.38% 14.58x 32.39x 26.31x 23.46x 10.25%

United Kingdom (3 securities)

WHITBREAD PLC WTB LN $53.89 9843.32 10524.06 11.90 12.95 11.67 10.65 6.72% 19.88 22.63 19.91 17.91 8.11%

MILLENNIUM & COPTHORNE HOTEL MLC LN $9.39 3063.98 3244.90 14.17 10.37 10.57 9.91 1.53% 15.65 18.12 18.17 17.13 1.89%

INTERCONTINENTAL HOTELS GROU IHG LN $29.07 7599.92 8428.92 11.91 11.42 11.10 10.21 3.82% 15.60 18.83 17.98 16.39 4.74%

Average $6835.74 $7399.30 12.66x 11.58x 11.11x 10.26x 4.02% 17.04x 19.86x 18.69x 17.14x 4.91%

United States (4 securities)

STARWOOD HOTELS & RESORTS HOT US $74.57 14281.04 15256.04 12.67 12.18 12.13 10.95 3.63% 25.10 25.24 24.88 21.33 5.77%

CHOICE HOTELS INTL INC CHH US $45.88 2687.23 3350.80 16.60 16.36 15.03 13.98 5.36% 24.03 24.07 22.23 20.18 6.05%

MARRIOTT INTERNATIONAL -CL A MAR US $46.67 13980.96 16992.96 13.96 14.40 12.83 11.64 7.36% 22.43 23.26 19.91 17.17 10.64%

WYNDHAM WORLDWIDE CORP WYN US $66.91 8718.83 13282.83 11.82 11.53 10.75 9.93 5.11% 18.01 17.55 15.50 13.38 9.45%

Average $9917.01 $12220.66 13.76x 13.62x 12.69x 11.62x 5.37% 22.39x 22.53x 20.63x 18.02x 7.98%

Disclosures:

Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with C, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

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