Hong Kong hotel owner Magnificent Estates boasts 97pc occupancy rates

Company chairman William Cheng offers his outlook for the hotel industry and the challenges it faces

PUBLISHED : Wednesday, 29 April, 2015, 2:00am
UPDATED : Wednesday, 29 April, 2015, 2:00am

William Cheng Kai-man, who serves as chairman of Magnificent Estates and holds a 71 per cent stake in the company, has grown the business from one 206-room hotel into one of the city's largest medium-tariff hotel operators since 2003.

Today, the company owns 2,300 rooms in six hotels in prime areas in Hong Kong, and one hotel in Shanghai . Leveraging on his expertise in construction and property investment, Cheng built up his portfolio through site assembly and the redevelopment of ageing residential projects into high-yield hotel developments.

His efforts have paid off. Hong Kong hotels in prime and non-prime locations enjoyed good growth for 11 straight years, until recently.

Now the hotel industry faces challenges in filling up rooms because mainland package tours - the bread and butter of Hong Kong hotels - have halved since Lunar New Year in February.

 

Can you give an update on the company's hotel business?

Despite the current market difficulties, with the shrinking of mainland groups, individual travellers and those from Southeast Asia, the hotels' month-to-day occupancy rate averaged 97 per cent. Pre-bookings for the Labour Day holiday and the remaining days of May are good and encouraging despite May and June being the traditional low season. There are always a few quiet days after the holiday.

Recent higher occupancy is giving us a positive outlook for gradual recovery of the hotel business, especially with the yuan rebounding and the mainland's GDP growth continuing at a rapid 7 per cent.

 

Do you worry about the changing market?

We receive 70 per cent of our booking through an online travel platform which is enough to offset the decline in mainland group tours. I never imagined there would be so many individual travellers and sales from the online bookings. It is fine for us as we sell directly to the customers without being undercut by agents.

 

What is your strategy to cope with these changes?

Our investment criteria focuses on hotels with 300 rooms in the city centre. The challenge for medium-tariff hotel operators is that we need to achieve a full house no matter in good days or in bad days. To achieve it, we have to keep a close eye on the bookings one month in advance. Then, we adjust our room rates several times a day in response to the change in reservations. The daily rate will be 10 per cent up or down, with the variation subject to the bookings.

 

Can you achieve full occupancy in your hotel portfolio?

All our hotels enjoyed an average 99 per cent occupancy rate last year with earnings before interest, taxes and amortisation (ebita) of 60 per cent, higher than the 30 to 40 per cent for boutique hotels and luxury chains. Ebita is widely used as a measure of a company's profitability and efficiency.

 

What kind of hotels are you interested in?

Hotel operating costs are relatively high no matter if you are operating a small or big hotel. All hotels have identical departments; front desk, security, engineering, housekeeping, sales and concierge. Each department needs enough people on duty in three shifts.

To achieve high efficiency we prefer investing in hotels with more rooms instead of boutique hotels with less than 100 rooms.

 

Will there be staff layoffs because demand for hotel accommodation is declining?

The labour market is still tight. It is not easy to get good people to work for us.

 

How does the current market situation compare with the severe acute respiratory syndrome epidemic in 2003?

The magnitude of the impact of declining tourists on us is far less compared with the devastating effect of Sars in 2003.

We are suffering lower occupancy rate but the impact is short term.

 

Will there be any tourist markets that can replace China?

No. Overnight travellers from the mainland were 19 million last year, compared with just five million from short-haul markets such as Taiwan, Japan, South Korea and Indonesia, and three million from the long-haul markets of the United States, Canada and Europe.

Even if the short- and long-haul markets grew by double or triple they still cannot surpass the mainland market.

China has created one of the world's biggest middle-income classes. The wealth effect created by the mainland stock market bull run will also be positive for us. Hong Kong is an attractive destination for this middle class.

 

Besides Hong Kong, where else are you interested in having hotels?

We are also interested in London - a successful tourist centre where hotels enjoy 80 per cent occupancy rates. It is a mature market with a strong sales network.

In addition, the depreciation of the pound makes asset values more attractive with annual investment yields of 5 per cent.

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