Why Investors Favor Chinese Hotel Stocks, Like Atour?

The hotel operator’s revenue rose 55% last year, but it forecast the growth would slow to about half that level in 2025

Key Takeaways:

• Atour’s revenue rose 38.5% in the fourth quarter, mostly due to new hotel openings and strong growth for its retail business selling products like pillows and comforters
• The company forecast its retail business would grow at least 35% this year, marking a sharp slowdown from its 128% growth in 2024

Hotel operator or e-commerce company?

Atour Lifestyle Holdings Ltd. (ATAT.US) seems to have found a sweet spot in between the two, recording strong revenue growth and fat profits by providing travelers with comfortable rooms and beds, and then selling them room-based related products like pillows and comforters. Its unusual combination of hospitality and retail have given the company’s enviable gross margins compared to other hotel companies, since retail typically carries higher margins than hotel operations.

All of those factors were evident in the company’s latest quarterly report, which showed Atour’s revenue rose 38.5% in the fourth quarter, while its profit rose by an even stronger 50.5%. But the report was also filled with signals that show the company’s growth is rapidly slowing with China’s slowing economy. And at this point, most or all of the growth is coming from new hotel openings rather than improving performance by individual hotels.

Atour certainly isn’t alone in this regard, and it seems quite possible that the company could slip into revenue contraction in 2026 if China’s economy doesn’t stabilize soon. Reflecting its slowdown, the company forecast 25% revenue growth this year – making it one of the few companies bold enough to give out such a forecast in the face of so many economic uncertainties.

Such a growth rate would represent a halving of the company’s 55% revenue growth for all of 2024. It also trails the 31% increase the company is targeting this year for its hotel count, as it aims to add 500 new properties in 2025 on top of its 1,619 in operation at the end of last year. That means that without the addition of revenue from new hotels, the company might easily record little or no revenue growth this year.

Despite all those headwinds, Chinese hotel stocks have become an investor favorite these days, commanding relatively strong valuation multiples. Atour currently trades at a price-to-earnings (P/E) ratio of 23, while domestic peers H World Group (HTHT.US; 1179) and Jin Jiang (600754.SH) trade even higher at 29 and 26, respectively. All three of those are ahead of the 19 for global giant Accor (ACC.PA), though they trail the 30 for Marriott International (MAR.US).

Investors seem attracted to the travel industry for its relative ability to hold up during China’s economic slowdown compared with other consumer-related sectors. The industry posted explosive growth in 2023 on a wave of “revenge travel” after China lifted its strict pandemic controls at the end of 2022. While its growth has inevitably slowed, which shows up in Atour’s latest data that we’ll review shortly, the slowdown has so far been milder than for other sectors like property, restaurants and cars.

The best indicator for the hotel industry is revenue per available room (revpar), which combines hotel occupancy rates with room prices. That metric for Atour dropped about 6% in the fourth quarter year-on-year to 337 yuan from 358 yuan a year earlier, as both occupancy and room rates dropped.

New openings

While it got less revenue for each of its rooms in the fourth quarter, Atour was able to post its 38.5% revenue growth for the period by opening 471 hotels over the last year, boosting the size of its network by a similar 33.8%. Its actual fourth-quarter revenue totaled 2.08 billion yuan ($286 million), up from 1.51 billion yuan a year earlier.

Like many of its industry peers, Atour, which calls itself an “upper midscale” brand, directly operates its own hotels and also provides management services to franchisees, which it calls “manchised” hotels. It is gradually downplaying the self-operated hotel business, which is more capital intensive and generally carries lower margins that the manchised business.

The company’s self-operated hotels business slipped to providing just 8% of its overall revenue in the fourth quarter, down from 13% a year earlier. Its manchised business also slipped to 53% of revenue in the quarter from 56.5% a year earlier. Both of those figures fell because of an 85.6% year-on-year surge in revenue from the company’s retail business, which grew to 37% of its total revenue in the fourth quarter from 27% a year earlier.

The retail business has been doing quite well, typically selling room-based products like tea, shampoo and pillows to guests. Most of those guests do their purchasing online, suggesting they probably buy such merchandise after liking what they experience in the hotel room and then placing orders after their stay.

Sleep-related products have been one of the most successful categories, with Chairman Wang Haijun pointing to the company’s memory foam pillows and thermos-regulating comforters as best-sellers. He said such pillows now sell more than 3.8 million units annually, while comforter sales topped 770,000 units last year. But even retail is expected to slow with China’s slowing economy, as Wang forecast the business would grow at least 35% this year – far less than the 128% growth in gross merchandise value (GMV) for the retail business all last year.

The retail business generated gross profit margins of 49.6% in the fourth quarter, improving by about 6 percentage points from 43.7% a year earlier. By comparison, the gross margin for the hotel business was lower but also rose to 37.5% in the fourth quarter from 29.9% a year earlier.

The strong revenue growth, combined with its improving margins, helped Atour to record 50.5% year-on-year profit growth, as the figure rose to 331 million yuan in the last year’s fourth quarter from 220 million yuan a year earlier.

The bottom line is that Atour is relatively well positioned due to the milder effects of China’s economic slowdown on the travel industry, and also the company’s higher-margin retail business. The analyst community is also quite positive on the company, with all 15 analysts polled by Yahoo Finance rating the stock a “buy” or “strong buy” – a relatively rare show of unanimous support in the realm of Chinese stocks these days.