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Elevator Pitch
I assign a Hold rating to Atour Lifestyle Holdings Limited’s (NASDAQ:ATAT) shares. ATAT is a play on a rise in the hotel chain penetration rate and strong demand for upper midscale hotels in China. But the market has factored these positives into ATAT’s stock price and valuations. Therefore, Atour Lifestyle is rated as a Hold, instead of a Buy or Sell.
Business Profile
Atour Lifestyle refers to itself as “the largest upper midscale hotel chain in China” as per Frost & Sullivan data on the company’s investor relations website. ATAT was first started in 2012, and its shares were listed on the NASDAQ since November 2022.
According to its IPO prospectus, ATAT boasted a portfolio of 880 hotels comprising of 102,707 rooms as of the end of third quarter of 2022. Atour Lifestyle generated 61%, 25%, and 14% of its revenue for the first nine months of the previous year from manachised (managed and franchised) hotels, leased hotels, and retail operations, respectively.
Two Key Industry Trends To Watch
Investors with an eye on investment opportunities in the Chinese hotel market should watch two key trends, namely the increased popularity of upper midscale (four-star) hotels among travelers in China, and the market share gains for hotel chains (as opposed to independent hotels).
Based on Frost & Sullivan’s research cited in ATAT’s IPO prospectus, upper midscale was the fastest growing hotel segment in China for the period between 2016 and 2021 in terms of hotel room growth. Looking ahead, Frost & Sullivan forecasted that revenue derived from upper midscale hotel chains will grow by a +18.7% CAGR from RMB66 billion for 2021 to RMB155 billion in 2026. Frost & Sullivan also estimated that the ADR (Average Daily Rate) for China’s upper midscale hotel segment will expand from RMB371 to RMB432 in the same time frame.
Frost & Sullivan’s historical data and forward-looking forecasts are aligned with Chinese hospitality research firm Inntie’s findings cited in a Jefferies (JEF) report (not publicly available) titled “Standing At The Turning Point” issued on January 4, 2023. Inntie’s research highlighted that the percentage of two-star or economy hotels as a proportion of total hotel rooms for the Chinese market decreased from 65% for 2019 to 59% in 2021. During the same period, three-star and four-star Chinese hotels in aggregate saw their share of total hotel rooms in China grow from 29% to 33%.
In other words, it is clear that travelers in China are increasingly seeking hotels of better quality in recent years.
Another key trend to watch is chained hotel operators taking market share away from independent hotel operators in China.
According to Frost & Sullivan, the penetration of chained hotels for the Chinese market increased from 18.1% for 2016 to 34.4% in 2021. More significantly, Frost & Sullivan sees chained hotels’ penetration rate in China expanding further to 47.8% by 2026.
Also, there is a difference in the penetration rates of Chinese chained hotels by segment. Inntie’s data cited in the January 4, 2023 Jefferies referred to above indicated that the penetration rate of hotel chains in the five-star segment for China already exceeded 50% in 2021. In comparison, the four-star hotel chains’ penetration rate in the Chinese market was still below 40% in 2021.
In a nutshell, chained hotels are very likely to continue taking share away from independents in the Chinese market going forward. In particular, the four-star or upper midscale segment holds strong potential for further hotel chain penetration.
The abovementioned industry trends are positive for Atour Lifestyle as detailed in the next section.
Focused On Upper Midscale Segment With A Significant Presence In Upper Tier Cities
ATAT has a total of six hotel brands. But its flagship brand is Atour in the upper midscale segment which accounts for 82% of the company’s total hotel rooms. Another 3% of ATAT’s hotel rooms is contributed by the company’s other upper midscale brand, Atour X. This implies that the vast majority or 85% of Atour Lifestyle’s hotel rooms are in the upper midscale segment. In addition, 79% of ATAT’s rooms come from hotels located in Tier-1 and Tier-2 cities in Mainland China.
In the preceding section, I have already explained why China’s upper midscale hotel segment has attractive growth prospects. Travelers are willingly to pay more to enjoy a better stay as industry data indicates, and this means that a hotel operator with greater exposure to the upper midscale segment and upper tier Chinese cities like Atour Lifestyle should perform well in the short to medium term.
Separately, Atour Lifestyle is also well-positioned to benefit from an increase in hotel chain penetration in China, especially in the upper midscale segment, considering its market leadership. As per Frost & Sullivan data highlighted in ATAT’s IPO prospectus, Atour Lifestyle had a 10.1% share of China’s upper midscale hotel segment in 2021 on the basis of having the largest number of hotel rooms in this segment. But the five biggest hotel chain operators (including ATAT) in the upper midscale segment only accounted for 36.9% of hotel rooms in 2021. This suggests that ATAT and its peers have room to expand their respective market shares at the expense of independent hotel operators in the coming years.
Positives Are Already Factored Into ATAT’s Premium Valuations
Atour Lifestyle last traded at $21.87 as of January 18, 2023, which implies that the stock has more than doubled as compared to its IPO price of $11.00. Also, ATAT trades at a premium to its peers based on the forward EV/EBITDA metric as per the peer comparison table presented below.
ATAT’s Peer Valuation Comparison
| Stock | Consensus Forward Next Twelve Months’ EV/EBITDA Multiple |
| Atour Lifestyle | 34.6 |
| H World Group Limited (HTHT) | 30.1 |
| Shanghai Jin Jiang International Hotels Co., Ltd. [600754 CH] | 21.8 |
| BTG Hotels (Group) Co., Ltd. [600258 CH] | 15.4 |
Source: S&P Capital IQ
ATAT has a relatively short track record as a listed company, having recently listed its shares in November last year. Separately, there have been changes to Atour Lifestyle’s management team, with its Chief People Officer resigning at the end of 2022. These factors warrant some form of valuation discount for ATAT.
Given that Atour Lifestyle’s current EV/EBITDA valuation multiple is rather rich on an absolute and relative basis, it is fair to say that ATAT isn’t undervalued.
Closing Thoughts
My investment rating for Atour Lifestyle is a Hold. ATAT’s share price performance since its listing and its reasonably high EV/EBITDA multiple suggest that the positive outlook for the company is already priced in.
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