Can a gross profit margin of 0.34% support the dream of a hotel in Xi'an?

In 2023, the domestic tourism market in China has rebounded, but Xi'an Tourism, one of the three major tourism listed companies in Shaanxi, continues to experience a loss. Its hotel business, as the main sector, has a gross profit margin of only 0.34%, much lower than that of major domestic hotel groups.

Since the launch of the Wan Ao Hotel in 2020, Xi'an Tourism has gradually increased its focus on the hotel business. Last year, it planned to raise nearly 600 million yuan through private placement to establish 17 self-operated hotels in multiple locations across the country, following a heavy asset-burning strategy of "self-operated stores as the vanguard, expanding nationwide." It is reported that this private placement plan has been approved.

According to "Hotel Management and Finance," several subsidiaries of Xi'an Tourism Holdings that are related to the hotel business are in a loss-making state. The business volume and operating scale of the "Wan Ao series," which the company has high hopes for, are still limited.

It seems that Xi'an Tourism may need to put in more effort to expand and improve its hotel business.

01. The main business is difficult to generate profits, and hotel profitability is also challenging.

After the epidemic, Xi'an's tourism market showed explosive growth. As a popular tourist destination, Xi'an has long been ranked first in terms of tourist numbers among internet-famous cities.

In 2023, Xi'an Tourism can be described as "booming": it received 278 million tourists throughout the year, with tourism revenue reaching 335 billion yuan, representing increases of 33.9% and 65.1% respectively.

However, despite such a hot market, Xi'an Tourism still struggles to make a profit, and its revenue growth is challenging.

The financial report shows that in the first quarter of 2024, Xi'an Tourism achieved a revenue of 131 million yuan, a 6.1% year-on-year decrease, and a net loss of 30.1149 million yuan, compared to a loss of 29.4123 million yuan in the same period last year. In 2023, the company suffered a loss of 154 million yuan.

Xi'an Tourism is a state-owned enterprise under Xi'an Tourism Group, and it is also the earliest state-owned listed company in the tourism industry in the northwest region. It was listed on the A-share market as early as 1996, with its main business being travel agencies, hotels, and commercial operations, and its revenue mainly coming from Xi'an.

Overall, travel agencies and hotel businesses are the main sectors of Xi'an Tourism. However, the dilemma facing Xi'an Tourism at present is that neither of its two core business sectors is very profitable.

The financial report shows that Xi'an Tourism's total revenue has been stagnant at around 600 million yuan since 2011. Looking through its annual financial reports, it is found that the gross profit margin of its main travel agency business has remained at around 3% for many years. The gross profit margin of the hotel business was 11.00%, -79.08%, and 0.34% in 2021, 2022, and 2023, respectively.

It is not difficult to see that, compared to the main domestic hotel groups, the profitability of Xi'an Tourism's hotel business still has a large gap.

The performance of its hotel business sector in recent years has shown significant fluctuations, and it is still unclear. Currently, many of its hotel management subsidiaries are still in a loss-making state.

In addition, the highly anticipated "Wan Ao series" has been affected by the epidemic, and its market performance is not ideal.

According to its financial report, in 2023, Xi'an Xilv Wan Ao Hotel Management Co., Ltd. achieved a revenue of 12.7747 million yuan and a net profit of 2.1714 million yuan. Chengdu Xilv Wan Ao Hotel Management Co., Ltd. achieved a revenue of 24.4953 million yuan and a net loss of 14.9066 million yuan.

The company does not have a business that can generate "food" (profits), and the financial burden of Xi'an Tourism is also very heavy. Its operating cash flow has been negative for ten consecutive years, and its capital reserves are worrying.

In addition, an analysis of the debt-to-profit relationship of listed tourism companies reveals a positive correlation between the debt ratio and profit, with 50% being a critical threshold.

According to statistics, in 2023, companies with a debt ratio lower than 50% generally achieved profitability, such as Disney at 46.7%, China Travel at 27%, and Huangshan Tourism at 17.6%.

Conversely, companies with a debt ratio exceeding 50% generally fell into a loss quagmire, and Xi'an Tourism, with a debt ratio of over 70%, is one of them.

Accumulating nearly 700 million yuan in losses over the years, with a debt ratio of over 70%, it is still burning money to expand its direct-operated hotels nationwide. This reflects the passive and helpless situation of Xi'an Tourism in turning the tide.

Can betting on hotels open up a new "blood-making" path?

Xi'an Tourism, whose main business is not performing well, is ambitiously betting on direct-operated hotels, but the industry has many concerns about this move.

An article in "Jiuguan Finance" titled "Xi'an Tourism plans to 'borrow' over 400 million to build 17 hotels, or the direct-operated kind" mentioned that in this round of private placement, most of the funds raised by Xi'an Tourism are planned to be used for investment and construction of direct-operated hotel projects.

Specifically, the plan is to expand the "Wan Ao series" hotel brands under Xi'an Tourism, including high-end hotels (Wan Ao Executive Apartments/Platinum Wan Ao), mid-to-high-end hotels (Wan Ao Hotel), and mid-range hotels (Wan Ao Select Hotel), with plans to implement them in stages in 9 cities across 8 provinces in China, including Xi'an, Shenzhen, Guangzhou, Hangzhou, and Suzhou.

The official website shows that the Xilv Wan'ao Hotel Group currently includes nine major systems, including high-end hotels such as "Wan'ao Executive Apartments," "Platinum Wan'ao," mid-to-high-end hotels such as "Wan'ao Hotel," and mid-range hotels such as "Wan'ao Selected Hotels." It is currently operating and has signed contracts for 27+ projects, covering 11 cities in 8 provinces, but most of the stores are concentrated in Shaanxi.

In addition to the previously mentioned issue of capital reserves, it remains to be seen whether the talent and management in 8 provinces and 9 cities over the next three years can keep up and whether they have the development experience and capabilities to achieve nationwide expansion.

According to its official introduction, directly operated hotels, as the flagship stores of its hotel enterprise layout in various regional markets, have a good demonstration effect and can provide valuable practical experience for hotel enterprises to develop new hotels, expand franchise operations, and entrusted management businesses.

Some industry insiders believe that Xi'an Tourism's move may be aimed at creating a "benchmark" store through direct operation, in order to build the influence of its hotel brand and pave the way for its asset-light franchise model.

However, local tourism enterprises do not necessarily have to adopt an asset-heavy model to achieve nationwide market layout when building their own hotel brands.

As early as 2023, the Zhejiang Tourism Investment Group's Radisson Hotel Group, which was the first to complete the separation of light and heavy assets, may provide a new reference path for Xi'an Tourism, which is also a local state-owned tourism enterprise.

It is reported that the Zhejiang Tourism Investment Group has divided its hotel sector into two parts, positioning the Radisson Hotel Group as a "light asset operation platform" and the Radisson Hospitality Group as a "heavy asset management platform." After the separation of light and heavy assets, the Radisson Hotel Group has operated independently as the main body of the light asset platform.

Returning to the aspect of its own operations, is the hotel still a good business for Xi'an Tourism?

In recent years, Shangri-La, Huazhu, and Atour have launched brand matrices, accelerating the layout of mid-to-high-end hotels. As more players enter the mid-to-high-end hotel market, it is gradually becoming crowded.

In response to this, Zhou Mingqi, the founder of Jingjian Think Tank, believes that the current domestic hotel industry is already mature and highly competitive, making it difficult for Xi'an Tourism to seize the market.

According to "Hotel Management & Finance," the construction cost of a single room for the mid-to-high-end Wanda Realm Hotel is 100,000 yuan, while the construction cost of a single room for the mid-to-high-end InterContinental is 120,000 yuan, and the construction cost of a single room for Atour is 135,000 yuan.

Faced with such a large number of strong competitors, the "Wan Ao series" focusing on the middle and high-end, can it seize the opportunity to capture the market, or can it focus more on cost-effectiveness.

"Hotel Management and Finance" noticed that in March of this year, the Wan Ao Hotel Group, along with its nine comprehensive hotel brands covering from resort hotels, middle and high-end business hotels to youth social hotels, made its first appearance at the Shanghai International Hotel and Commercial Space Expo, attempting to increase its exposure and influence in the industry.

In response, a hotel and travel professional also told "Hotel Management and Finance" that in terms of the completeness of its brand portfolio and investment perspective, Wan Ao Hotels has already achieved multi-dimensional coverage in investment choices and has certain strength. However, whether the direct investment raised in this private placement will generate positive benefits in the later stage of the hotel project remains to be seen.

The more difficult the times, the more we need to think about strategy, and the more we need to adhere to our strategy.

Instead of being indecisive and constantly immersed in the anxiety of "midlife crisis" transformation, it is better to maintain inner peace, serve the core customers who generate the main profits, and build competitive core products.

"Hotel Management and Finance" believes that Xi'an tourism needs to reorganize its core strategy, to "lose fat and gain muscle," decisively abandon ineffective and inefficient businesses, especially those with unclear market prospects, unprofitable, and hazy businesses.

The most urgent task is to persist in profitable growth. Since we are in the hotel business, we need to target specific markets, concentrate resources, continue to make efforts, and strive to become a benchmark. Only then will there be a greater chance of success.

After all, for a traditional travel enterprise that has struggled with losses for many years, the most important thing is to survive.