Research published by Blue Lotus Research on January 5, 2023

 

(37 Pages, 44 graphs and tables)
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• We initiate Atour with a BUY because we believe it has stricken a best-in-class balance among  (1) price-benefit for travellers, (2) investment-return for franchisees and (3) input-advancement for employees;
• We expect Atour to embark on a single-brand network expansion to >2,500 hotels while maintaining its service and brand premiums. It will have to pursue a multi-brand strategy afterwards but choices are aplenty;
• We initiate the stock with Buy rating and a target price at US$35.

 
Hospitality industry is foremost and more so a people business
Behind Atour’s superior customer experience and price-benefit to travelers is its organizational strength and corporate culture. Hospitality industry is essentially the right mix of people, location and capital, with people driving the other two. Both Atour and Huazhu ahead of it got the mix right.
 
China’s hospitality industry has NOT reached maturity
The Great Consolidation of 2015 saw two private enterprises merging into two SOE’s, which, in our view, only reflects the unsustainability of hasty growth in the go-go days. Since 2015, new players in all segments have emerged. Mobile Internet, coupled with High-Speed-Rail (HSR) and private auto ownership, reduced the importance of location, ushering in new era of competition. 
 
Maintain the integrity of brand amid expansion is key
Atour has consistently delivered higher Occupancy Rate (OCC) at higher Average Daily Rate (ADR) than its rivals, resulting in its franchisees realizing higher and more stable EBITDA margins. We found Atour’s higher upfront investment easily digestible and its operational cost in par with peers. We expect Atour to raise take rate by 2-3ppt after 2025 after its first phase of single-brand network expansion, from ~900 to >2,500 hotels, is complete.
 
Negative press campaign offers rare investment opportunity
Evidence shows a smear campaign has existed since Atour’s IPO attempts from 2019, which in our view contributed to Atour’s below-industry multiple of 26x of 2023 PE. We, however, believe this is an excellent opportunity to accumulate the stock for the long-term investors.

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