China's budget hotel industry, still in an expansion phase, saw its first acquisition when Home Inns & Hotels Management Inc announced last week it acquired the Top Star hotel chain for 340 million yuan (US$45.3 million).

 

The deal, aimed to further consolidate Home Inns' leading position in the country, will help it increase its domestic portfolio to 330 hotels in more than 80 cities, according to David Sun, chief executive officer of Home Inns. Sun didn't say how long it would take to reach the target.

 

As planned, Home Inns, the largest budget hotel chain in China, will take over Top Star's operation - 26 hotels in 18 cities - from November. Meanwhile, the company said it will retain the Top Star brand while adding Home Inns' logo to the acquired hotels.

 

Home Inns also plans to leverage its customer network, technology platform as well as operations expertise to improve the earnings and cash flow of the Top Star hotels in the near future, the company said.

 

The acquisition, the first of its kind in the country, might indicate the beginning of mergers and acquisitions among domestic budget hotel operators, industry people said.

 

"The acquisition may reflect a general trend of more frequent mergers and acquisitions in the future," said Zhang Minghou, an official with the China Hotel Association, which now represents between 8,000 and 9,000 hotels - from deluxe hotels to budget inns - across the country. "However, it will still take time to see how Home Inns is going to consolidate the two brands and their cultures to make the deal a success."

 

He Jianmin, a professor with Shanghai University of Finance & Economics, also agreed that more mergers and acquisition deals would likely occur in the budget hotel industry. He said brands with larger operations and sound capital flows will have a competitive edge.

 

Established in 2002, Home Inns now operates 201 hotels, or 23,977 rooms, across the country, according to the latest statistics released on the Website of the China Hotel Association, outnumbering its long time rival Shanghai Jinjiang Inn Co Ltd.

 

Home Inns raised some US$109 million in an October 2006 initial public offering on Nasdaq and garnered an additional US$120 million through a new share sale in May this year.

 

China's budget inn industry started in 1997 when Shanghai-based Jinjiang Inn Co Ltd opened its first inn in the city.

 

According to earlier media reports, at present, there are already more than 1,000 budget hotels in the country, operating under some 100 brands. Jinjiang Inn, Home Inns, Motel 168 and 7 Days Inn are the major domestic brands competing with overseas rivals such as Super 8.

 

As competitions turn intense, major players in the industry are all very keen to expand.

 

Standing out

 

For instance, Guangzhou-based 7 Days Inn Group is planning to increase its domestic portfolio to 150 hotels by the end of this year after receiving an additional investment of US$95 million from Merrill Lynch, Deutsche Bank and Warburg Pincus, Zheng Nanyan, chief executive officer of 7 Days Inn, said in September.

 

Established in March 2005, 7 Days Inn has opened 61 hotels in more than 20 cities across the country as of August 31. Another 70 are in the pipeline.

 

While a large presence is very important for budget hotel operators, a more diversified positioning could also be a key to future success, industry experts said.

 

"Industry players such as Motel and Hanting have both developed different brands which are aimed at different customers," Zhang at the hotel association said. "That kind of strategy will probably help them better position their products and attract more customers with different needs."

 

At the moment, Motel operates economy hotels under Motel 168, Motel 268 and QQ brands. Hanting has two brands including Hanting Business and Hanting Express, according to Zhang.

 

An industry guideline, to be drafted by the China Hotel Association, will likely set up detailed requirements to help divide budget hotels into three categories by the end of the year, Zhang said in an earlier interview.

 

(Shanghai Daily October 30, 2007)