invest-in-china

China’s bustling middle class will be a key driver for many major industries. This includes the travel industry.

Chinese households with income levels of between $16,000 and $34,000 will to rise from 14% to 54% (of total households) by 2020. Chinese consumers will be spending that extra money on travel. Chinese travelers could take upwards of 1.7 billion trips annually by 2030, versus the current 500 million.

Starwood Hotels (NYSE: HOT) is one of the world’s leading hotel operators. While most investors think of the Westin or Sheraton hotels when they hear Starwood, it is also happens to be the best way to invest in China’s travel boom.

Starwood has impressive exposure to China. The majority of Starwood’s development pipeline is in international markets, with a focus on China.

Over 80% of its development pipeline is located in international markets, with 44% of its pipeline in China. China also has a growing appetite for luxury goods. Starwood is out in front of the trend.

McKinsey & Company believes that China will account for 20% of the world’s luxury purchases by the end of this year. The “big spenders” in China are also younger than in the U.S. 45% of Chinese luxury shoppers are 35 years old or younger. The average Chinese millionaire is 37. The average U.S. millionaire is 57 in the United States.

Starwood has a big opportunity to turn Chinese luxury spenders into Starwood brand loyalists at a relatively early age. These travelers will be around much longer than the older U.S. luxury travelers will.

Starwood is rolling out more luxury hotels catering to Chinese travelers. It actually has more luxury hotels under construction in China than it has open. Starwood is also rolling out its high-end W brand in China this year. A dozen W hotels will be open in Asia before 2019.

In an effort to grow even faster, Starwood has been selling most of its owned hotels over the last few years.

This is part of its move away from a company-owned model to a franchising model. The franchise-based model is more profitable than hotel ownership. Franchising hotels also requires less capital, allowing Starwood to grow its portfolio at a faster rate.

Starwood has a strong presence in major metropolitan markets. Starwood can capitalize as the global economy rebounds. With limited hotel growth in the developed markets, this should allow the major hoteliers to increase prices and boost profitability.

The other big opportunity for Starwood is to cater to Chinese travelers leaving China to visit other parts of the world. Currently, about 25% of the 100 million travelers leaving the country for travel are doing it for the first time. To help make this experience easier, Starwood has a personalized Chinese travel program to streamline the process.

Starwood’s 13% return on invested capital is one of the best in the industry. Although its P/E ratio of 28 seems high, it is below the likes of Hilton Worldwide (NYSE: HLT) and Marriott International (NYSE:MAR). Meanwhile, Starwood’s 9.3% net profit margin is nearly double Hilton and Marriott.

*****

While the economic growth numbers that China puts out are often questionable and cannot always be trusted, the rising level of prosperity in the country is unquestionable. As more China consumers become part of the middle class, they will have more money to spend on travel. Starwood is the best way to capitalize on China’s travel boom. Investors also get a 1.7% dividend yield — the highest among the major hotel operators.

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Published by Wyatt Investment Research at