E GreenTree Hospitality Group: Value Is In The Details

Recommendation Summary

(Click on image to enlarge)

*Source: Bloomberg

In my opinion, GreenTree Hospitality Group (GHG) has been a company mostly under the radar. Except for a big drop in July 2018 the stock hasn’t seen much action, so could we expect anything worthwhile from the company anytime soon?

The core investment thesis is that GHG has been undervalued by the market. The company grew revenues by an average of 20.7% for the last 2 years, has kept operating margins around 50% and according to their last earning’s call, they are expecting to grow around 20-25% in the next year. On top of that GreenTree acquired a majority stake in the Australian hotel chain, Argyle Hotel Management Group. Such a move will allow GHG to tap into a broader market in Southwest China especially focused on the growing middle-class in the country. Considering all this I find GHG a lucrative long target.

Company Background and Overview

*Source: Company Presentation

GreenTree Group is the leading pure-play franchised hotel operator, headquartered in Shanghai, China, with the majority of its hotels both franchised-and-managed. In 2017, GreenTree was the fourth largest economy to mid-scale hotel group in China based on number of hotel rooms according to China Hospitality Association. Based on their last annual report, the company operates 2,757 hotels, which 368 of them were opened in the last 6 months.  From all the hotels 98.9% fall under the franchised-and-managed model, which remains as the company’s primary focus.

In the last 2 years, GreenTree has focused more on opening new economy and up-scale hotels than their prevailing mid-scale. I find this as good news since this should bring diversification to GHG’s business and revenue stream as China’s upper-middle-class is expected to “explode” according to a McKinsey luxury report.

Investment Thesis

*Source: Company Presentation

Currently I believe the market overlooks GHG and as a result, it trades at a valuation below, its fair value. However, in the long-term I think the stock could present as an attractive long position due to the following reasons listed below:

  • Above average metrics – With operating margins of 43% and ROIC of 30% GreenTree completely surpasses industry average operating earnings and returns on invested capital by 3 times.  
  • Increasing presence – GHG continues to build up the hotel pipeline and fuels accelerated growth. With further developments of business to mid-to-up-scale brands, the company has experienced rapid growth and increased number of hotels in operations. This has further fueled the increase in the revenue per available room of an average of around 4% YOY growth in the last year.
  • Majority stake in Argyle Hotel Management Group - Argyle hotel network consists of eight mid-scale and upscale brands, from stylish business hotels to five-star luxury hotels. With such high-end hotels GHG will further be able to tap into the high-end hospitality industry while also increasing their geographic coverage.
  • Investment in Gingko – Ginkgo is considered to be a pioneer in developing and providing higher education services for the hospitality industry in China. The company is currently ranked as China's number one hospitality university by the "Gaosan Web Association". This will help GHG not only with access to better personnel, but could also help offset the increasing wages in China. By hiring university graduates the company could also minimize the time-to-hire period, thus cutting out search time and skipping straight to the interview stage.
  • China, the tourist destination of tomorrow – According to a research conducted last year in November, by 2030 China is expected to become the top tourist destination. The report estimates there will be 127 million arrivals in China each year by the end of the next decade, compared to 126 million in France and 116 million in the US. Euromonitor International’s Head of Travel Caroline Bremner said:

 “Destinations like China are poised for a successful performance in inbound tourism, with China set to overtake France as the leading destination worldwide by 2030”

All of the factors presented will be extensively reviewed in more detail further in the analysis.

Below you can find several company metrics (based on my calculations) and see where the company stands right now. The numbers I have used for calculating these metrics are as follows, share price of ¥94.7 per share or $13.7 per share, Enterprise Value of ¥8,846 million and an EBIT of ¥428 million (EBIT has been calculated by including an adjustment for operating leases of ¥-107 million Chinese yuan) and shares outstanding of 101.6:

  • P/E Ratio – 16x – Global industry average: 73.64x
  • EV/Revenue – 9.4x – Global industry average: 2.48x
  • EV/EBIT – 20.7x -  Global industry average: 17.28x

Keep in mind the numbers I have used for global and U.S. industry averages are gotten from professor Damodaran’s website.

Per the numbers presented above, the company trades at P/E below the global industry averages for the sector and EV/EBIT and EV/Revenue above global numbers. These numbers may not incorporate the true underlying value of the company, but offer a quick overview of where it sits in a market of its peers.

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Will Master 6 months ago Member's comment

Why is the stock declining?

Bill Johnson 6 months ago Member's comment

Good question.

Will Master 6 months ago Member's comment

Must be related to geopolitical risk (e.g., trade war), governance risk, FX risk, lack of trust around accurate accounting and reporting? Hopefully the auditors can at least confirm the cash balances though, which seem to be growing even with significant investment.

Adam Reynolds 5 months ago Member's comment

$GHG has been up today. How do you feel about it now?

Will Master 5 months ago Member's comment

I think the multiple is far too low considering how much cash and growth they are generating. We'll see.

Christian Stoyanov 5 months ago Author's comment

I would be careful with the trade war. You have to be patient with this one.

Will Master 5 months ago Member's comment

This is a domestic player within China, not a global player. They're less exposed to cross-border risk compared to say semi-conductors, or many large global players. Who knows how the cards shake out, and if anything I feel like it is a good hedge against a larger global or US centric portfolio. They're may be some currency risk on the exchange rate, or risk if the gov't decides to somehow impact corp governance, but I feel there is plenty of upside as well. I also think Trump is too focused on the economy (seems to be his #1 priority) to push the trade war too far - he is just negotiating.

Christian Stoyanov 5 months ago Author's comment

I do aggree tat does make sense, but 2 things. First they are opening hotels in the US and are also looking into other options. Second altough this makes full sense the market loves to overreact, just look at cannabis stocks

Susan Miller 5 months ago Member's comment

Will Master, very thoughtfull response.

Adam Reynolds 5 months ago Member's comment

Agreed. Lot's of uncertainty.

Alpha Stockman 9 months ago Member's comment

An impressive thorough analysis as usual. $GHG.

Adam Reynolds 9 months ago Member's comment

Yes but not great timing as $GHG is down at the moment.

Beating Buffett 9 months ago Member's comment

Great to see such a thorough analysis of $GHG. Not sure why more people aren't covering this stock.

Wannabe Warren 9 months ago Member's comment

Lol, I was just about to say the same thing. Great minds think alike.