Reds under the bed

Government employees at work

Wang Yong, director of China National Petroleum Corporation (CNPC) has never had to reserve a hotel room when going on domestic business trips. That’s because CNPC owns over 200 hotels around the country.

You may wonder why the country’s largest oil and gas producer owns so many hotel properties. But what is even more baffling is that CNPC is not alone; almost all of China’s large state enterprises operate hotels on the side.

The original intent: to have hotels that could host meetings, conferences, and accommodate high-ranking officials on visits, says the China Daily.

However, most state-owned enterprises (SOEs) have no experience operating hotels. As a result, they have a reputation for poor management and low occupancy rates. Many lose money.

This is bad news for the State-owned Assets Supervision and Administration Commission (Sasac), the government body that manages the country’s largest state-owned enterprises (see WiC45). By one estimate, there are currently over 2,000 hotels of varying quality that are owned by enterprises under its wing, indirectly rendering the Chinese government as the country’s biggest hotelier – and ranking it ahead of homegrown budget hotel chains like 7 Days Inn, which has 300 hotels, and Home Inns, with a portfolio of 600 properties.

Beijing has started to take heed. Sasac announced in early January that all SOEs should focus on their main businesses and sell unrelated operations (i.e. hotels), Shanghai Securities Journal reported.

“The announcement will help state-owned enterprises to focus their entire efforts on strengthening their core businesses,” says Li Xinjian, a professor with Beijing International Studies University’s School of Tourism Management.

Government statistics reveal that SOE’s hotel assets amount to Rmb100 billion ($14.6 billion), so the big question is how to restructure them.

Well, analysts reckon there are two ways for these central enterprises to get hotels off their books. One is to transfer them, at no cost, to other Sasac-controlled enterprises that specialise in the hospitality sector. The other is to sell them via spin-offs or public auctions, says Investor Journal.

Some SOEs have already spun off their hotel operations. In 2007, CNPC devolved all of its hotel assets to its subsidiary, CNPC Houyou Group, which has set up the Soluxe Hotel Group that primarily manages its hotel portfolio.

The shakeout is expected to benefit state-owned firms that already have extensive experience in hotel management, notably China National Travel Service (CTS) and the China National Cereals, Oils and Foodstuffs Cooperation (COFCO), says the Global Times. The two are likely to take over the majority of hotel assets from other SOEs.

Some hotel operators see the latest restructuring as an opportunity to expand. With domestic tourism growing fast, many hotel operators are looking for acquisition targets. Shenzhen-based hotel chain OCT, which owns several high-end hotels, has already expressed interest in snapping up some of the government’s hotels that will be up for sale.

“The selling off of state hotel assets will help us speed up our portfolio expansion, so these types of properties are what we want,” says Liu Pingchun, board chairman of OCT.

Sasac’s move also illustrates Beijing’s desire to create a strong local player in the national hotel industry. That’s perhaps a response to the rapid expansion of major foreign chains in China, spurred in part by high profile events like the Beijing Olympics and Shanghai Expo. Local firms didn’t benefit as much as their overseas rivals because they struggled to compete with such foreign chains on branding or service levels.

Beijing no doubt wants to cash in on the country’s growing demand for travel – in 2009, domestic tourism income was estimated at $146 billion, an increase of 15% from a year ago.

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