The Super-hot Chinese Sector

The Place to Be for Travel StocksWith Chinese New Year’s coming up on Monday, I have been focusing on China. The country has rapidly become one of the top tourism markets in the world for both domestic and international travelers. The country has been steadily building its road, rail, and air infrastructure aimed at make traveling in the country much easier.

China is predicted to see major growth in its domestic travel from now until 2013, according to research report, China Tourism Industry Forecast to 2012, by

As income levels rise in this country, we are seeing a corresponding increase in domestic travel. The country’s domestic travel market could be worth approximately RMB 3.9 trillion or about US$590 billion by 2020, according to a report published by The Boston Consulting Group (Taking Off: Travel and Tourism in China and Beyond). The country will see strong growth in its inbound travel industry from 2011 to 2013 that will be driven by overseas investment and the influx of foreign companies, according to report China Tourism Industry Forecast to 2012. But, while higher-end hotels like the Hilton are desirable, the cost is often out of reach for the majority of domestic and foreign visitors. I like the budget end of the hotel side similar to the Days Inn, Super 8 Motels, Howard Johnston, and Holiday Inns in the United States.

China has a population of about 1.34 billion people; over four times the size of the United States. The size of the middle class is over 300 million and this is expected to grow exponentially. The World Bank estimates that, within five years, there will be 542 million middle-class consumers in China. I have heard estimates of up to 700 million! And as wages increase so will the spending on non-essential items such as travel and recreation.

The Chinese economy saw its GDP slowed to 9.1% in the third quarter, down from 9.5% in the second quarter and over 10% in 2010. The Chinese economy may be slowing, but the growth is still staggering given the muted growth in the United States and Europe.

The reality is that the Chinese consumer is continuing to spend money. In September, retail sales in China grew a staggering 17% versus a muted 1.1% in the U.S.

To handle the expected increase in travel, there is a push to build more hotels and motels across the vast country.

I like Chinese travel stocks, including China Lodging Group, Limited (NASDAQ/HTHT), Home Inns & Hotels Management Inc. (NASDAQ/HMIN), and 7 Days Group Holdings Limited (NYSE/SVN). Note that these are not recommendations to buy; just an example of stocks to look at.

All three companies have above-average long-term share appreciation potential, but 7 Days Group is more interesting due to its better valuation versus the other two rivals.

7 Days Group is the third largest national economy hotel chain in China. The company offers limited services under the “7 Days Inn” brand, similar to budget hotels and motels in the U.S. In the third quarter of 2011, the company added 116 net hotels. As of September 30, 2011, 7 Days Group operated 838 hotels spread across 127 cities and 83,487 rooms. In addition, growth is expected to be strong, with 251 hotels in the pipeline.

7 Days Group may or may not have the greatest potential of the three stocks. Only time will tell, but what is for sure is that the travel sector in China is a key growth area.

I truly feel China continues to be the place to make money going forward, which you can read more on in China: On the Offensive Again.