European Hotels Outlook 2017

Transcription

1 Europe Equity Research Travel & Leisure Research Analysts Tim Ramskill, CFA tim.ramskill@credit-suisse.com Julia Pennington julia.pennington@credit-suisse.com Giulio Pescatore giulio.pescatore@credit-suisse.com European Hotels Outlook 217 SECTOR REVIEW Improving momentum; wary on valuation 1 key themes for 217 look broadly supportive: We enter 217 with a glass half-full perspective noting: good macro momentum in Europe, an 86% US revenue per available room (RevPAR) correlation with investment spend, improving end markets, high occupancies, muted supply growth (even in the US vs history), limited risk from rising US inflation, potential consolidation, scope for lower US taxes and a UK backdrop helped by sterling weakness. We maintain our Outperform (OP) on International Hotels Group (IHG), which we view as high quality and low risk but also non-consensus. We upgrade Whitbread to OP given improving macro, self-help and valuation. Our thematic concern on Airbnb remains, and with Accor most exposed we maintain our Underperform (UP) rating and note concerns on valuation for its two divisions. Figure 1: 216 was tough but trends are improving (RevPAR growth %) Jan-12 Apr-12 Jul-12 Oct-12 Source: Credit Suisse research Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Accor IHG WTB Whitbread (upgrade to OP, TP 455p from 43p): We upgrade Whitbread to Outperform reflecting three key observations 1) we see a return to positive hotel trading momentum and raise Feb-18E RevPAR to 3%; 2) the company's 15m cost-saving plan mitigates the risk from National Living Wage increases, and 3) valuation has rarely looked this inexpensive. With 19% potential upside to our new 455p target price, we upgrade our rating to OP. IHG (OP, TP 433p from 355p): IHG shares have underperformed US peers by 14% in Q4 and we see scope for potential 217 surprises from cash returns, lower US taxes, an improving US macro and consolidation. Thus with 17% potential upside we maintain our Outperform rating. Accor (UP, TP 34.8 from 3.5): Improved macro momentum drives a 9% 217E EPS increase and our TP rises 14% to 34.8 per share as inputs are rolled forward. We see 217 as being driven by valuation for both the disposal of HotelInvest and the ongoing multiple for HotelServices but we are sceptical on both and retain our Underperform rating. Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 Key charts and tables Figure 2: Credit Suisse Hotel Investment Framework Accor Underperform TP 34.8 (from 3.5) 7% potential downside InterContinental Outperform TP 433p (from 355p) 17% potential upside Millennium & Copthorne Neutral TP 42p 7% potential downside Whitbread Outperform (from Neutral) TP 455p (from 43p) 19% potential upside Momentum is returning to Europe (8% of 215A EBIT) but Airbnb remains a peers. 1% on RevPAR adds 5% to EPS. We forecast room growth in E averaging 5% but the see as higher risk. RevPAR and earnings outlook Room growth Restructuring and reinvestment After a period of limited lease restructuring but more acquisitions key risk with Accor more exposed than pipeline is skewed to EM which we the focus in 217 is the planned 7% of EBIT is generated in the Americas, with potential upside from lower taxes and higher investment spend that is closely correlated to RevPAR. 1% on RevPAR adds 2% to EPS. c85% of EBIT is generated in London, Singapore and Rest of Asia. M&C continues to underperform end markets. 1% on RevPAR adds 2-3% to EPS. UK macro momentum, strong recent trading and the headwind from weak currency lead us to upgrade RevPAR for Feb-18E. 1% on RevPAR adds 3% to EPS. Pipeline signings have been strong and we forecast E average system growth of 4%. A 6,6-room pipeline is mostly management contract with little potential EBIT impact. 5-year room CAGR of 6% with solus, joint site and hub formats giving maximum flexibility. disposal of a majority of HotelInvest. IHG is a simple model and hence could be a consolidation target. Meanwhile the business generates excess cashflow and we see scope for 37% of its market cap to be returned by 22E. Re-investment plans have been slow to execute, nothing has been sold and acquisitions have performed poorly. Pub restructuring unlikely, in our view. Spin-off of Costa unlikely until International has scale EBIT contribution more likely 3 yr story than 12m story, in our view. Source: Credit Suisse estimate; * Note we include pension deficits and capitalize lease costs at 8x in our calculation of Invested Capital. Figure 3: Key valuation metrics Returns* 216E ROIC 8.9% and rises modestly thereafter given lease repurchase plans but held back by sub-cost of capital FRHI acquisition. 216E ROIC 28.% post disposal of major assets. IHG is truly asset light. 216E ROIC 4.2% compared to c1% cost of capital. UK and/or US disposals needed to close the gap, in our view. 217E ROIC 11.4% and we forecast it to be stable going forward. The National Living Wage has lessened forecast ROIC Company Rating 217E 218E 217E 218E 217E 218E 217E 218E EV/EBITDA EV/EBITDA PE PE FCF yield FCF yield divi yield divi yield Accor UNDERPERFORM % 6.4% 2.6% 3.% InterContinental OUTPERFORM % 6.6% 2.5% 2.8% Millennium & Copthorne NEUTRAL % 9.6% 1.6% 1.7% Whitbread OUTPERFORM % 5.8% 2.6% 2.8% Average % 7.1% 2.3% 2.6% Source: Credit Suisse estimates. Whitbread based on annualised multiples, Accor PE is depreciation adjusted, all EV calculations include pension where applicable. Figure 4: The European macro uptick is encouraging gains. Figure 5: UK macro momentum is the best since 214 CS lead indicator driven Europe RevPAR model (RevPAR growth %) CS lead indicator driven UK RevPAR model (RevPAR growth %) Sep-98 Sep-99 Sep- Sep-1 Sep-2 Sep-3 Sep-4 Sep-5 Sep-6 Sep-7 Sep-8 Sep-9 Sep-1 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan Actual RevPAR CS RevPAR model -25 Actual RevPAR CS RevPAR model Source: Credit Suisse estimates, STR Source: Credit Suisse estimates, STR European Hotels Outlook 217 2

3 Figure 6: Upside to previous real peak highlights the UK regional and French potential Figure 7: UK trading should begin to see a benefit from sterling weakness Implied recovery potential to previous real peak % Net outbound passenger growth (12m MA basis) vs change in / Current RevPAR index Previous peak RevPAR index Current vs previous peak Upside vs Change previous YoY in real peak RevPAR US % n/a 2% Europe ex-uk % 4% 1% UK regions % 9% 2% London % 4% -3% France % 8% -6% Spain % n/a 12% 2% 15% 1% 5% -- (5%) (1%) (15%) (2%) (25%) Net inbound Net outbound Net outbound / chg 9m lead Source: STR, HCS, Credit Suisse research Source: ONS, Thomson Reuters Figure 8: Our proxy model highlights some inflection after weak momentum in 216 RevPAR growth 3m MA basis % US room growth % Figure 9: US supply growth is rising but remains subdued when compared with the previous two cycles Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct % 4.% 3.5% 3.% 2.5% 2.% 1.5% 1.%.5%.% Trough year Recovery year 1 Recovery year 2 Recovery year 3 Recovery year 4 Recovery year 5 Recovery year 6 Recovery year 7 Accor IHG WTB Source: Credit Suisse research Source: STR Figure 1: We see scope for IHG to return 37% of its market cap by 22E via dividends and buybacks with a $.3bn special dividend likely to be announced in February US$ millions 25 2 Figure 11: Whitbread's PE premium over the FTSE25 has been lower than now only 13% of the time since 28 WTB PE premium vs FTSE25 5% 4% 15 3% 1 5 2% 1% E 217E 218E 219E 22E % Dividends, specials and buybacks Specials/buybacks (not in forecasts) -1% Jan-8 Jun-8 Nov-8 Apr-9 Sep-9 Feb-1 Jul-1 Dec-1 May-11 Oct-11 Mar-12 Aug-12 Jan-13 Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul-15 Dec-15 May-16 Oct-16 Source: Company data, Credit Suisse estimates Source: the BLOOMBERG PROFESSIONAL service European Hotels Outlook 217 3

4 1 key themes for performance was driven by geography: As shown in Figure 12, share price moves in 216 were significantly influenced by geography with the Europe-centric hotels declining an average 7%, whilst the US rose 2%. This was partly a function of risk appetite and the pressures the European sector encountered against a backdrop of unprecedented levels of terrorist and geopolitical events. It is also worth noting the bulk of the performance of the US hotels occurred in Q4 after the US election. Currency also had a significant influence, most obviously for IHG, with the London listing rising 37% vs 13% in the US and as such on an underlying basis (focusing on the US listing) it underperformed US peers Hilton and Marriott by an average 11% in 216 and 14% in Q4. Figure 12: European hotels underperformed the US in 216 Share price change 12m (%) 4% 3% 2% 1% % -1% -2% NH Hotel Whitbread Accor Melia Millennium IHG US$ Rezidor Marriott Hilton IHG -3% Source: the BLOOMBERG PROFESSIONAL service Global focus 1: Recovering momentum in lead indicators Our proprietary lead indicator models indicate improving trends in all markets: We continue to track the outlook for the hotel sector using our proprietary lead indicator models. These take closely monitored forward-focused macro indicators and supply growth to establish the outlook broadly six months in advance. Our US model has been 91% correlated with actual RevPAR growth since 29. US outlook improving if modest: Our US model (Figure 13) suggests RevPAR growth of 2.8% over the period January to July 217. This compares with the 3.% we forecast for IHG in the Americas in 217. We note guidance set by Marriott and Hilton at their respective Q3 results (around early Nov) was in the -3% range (MAR -2%; HLT 1-3%), whilst industry data provider STR has forecast 217 US RevPAR growth of 2.3%. UK macro outlook the best for two years: The UK macro data points continue to be robust despite the uncertainty that remains post the 216 referendum. Our model points to January to May 217E RevPAR growth of 5.9%. Such an outcome would be the strongest period of trading since early 215. Given this outlook plus strong trading over the past eight weeks and our analysis of the potential benefits of currency (see European Hotels Outlook 217 4

5 further below), we have revised up our UK RevPAR forecasts for Whitbread as discussed fully in the company section. Our Whitbread RevPAR forecast moves up to 3.% in the year to Feb-18, with an associated 3% EPS increase. Figure 13: US improving if modest outlook Figure 14: UK outlook is the best since late 214 RevPAR growth % RevPAR growth % Dec- Dec-1 Dec-2 Dec-3 Dec-4 Dec-5 Dec-6 Actual RevPAR Dec-7 Dec-8 Dec-9 Dec-1 Dec-11 Dec-12 Dec-13 CS RevPAR model Dec-14 Dec-15 Dec Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Actual RevPAR Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 CS RevPAR model Sep-15 Jan-16 May-16 Sep-16 Jan-17 Source: STR, Credit Suisse research Source: STR, Credit Suisse research European outlook: Similarly to the UK, the macro data points from Europe are driving an improvement in the outlook. Our model indicates European RevPAR growth of 6.1% over the period January to March 217E, representing its most positive reading since the middle of 214. France most dependent on speed of leisure tourist recovery: Our French lead indicator model is shown in Figure 16. Importantly we have added a dummy variable to capture the impact of the terrorist attacks in Paris in November 215. Given subsequent incidents in Brussels and Nice (amongst others), it is tough to determine at what stage leisure-centric customers will return to the market. In terms of the outlook, we show two outcomes with the terrorism dummy variable remaining and excluded these are marked by the red and green lines on the chart. For now we show our core model output as the average of these two. It indicates RevPAR growth of -.8% from January to June 217 and regardless of how we model the tourism recovery, it is clear the macro outlook has improved (the green line averages 2.8%). We have increased our French and European assumptions for Accor see the company section below. Figure 15: European outlook best since mid-214 Figure 16: France should return to growth in 217 RevPAR growth % RevPAR growth % Sep-98 Sep-99 Sep- Sep-1 Sep-2 Sep-3 Sep-4 Sep-5 Sep-6 Actual RevPAR Sep-7 Sep-8 Sep-9 Sep-1 Sep-11 Sep-12 CS RevPAR model Sep-13 Sep-14 Sep-15 Sep (5) (1) (15) Sep-7 Sep-8 No terrorist threat Actual RevPAR Sep-9 Sep-1 Sep-11 Sep-12 Terrorist threat CS RevPAR model Sep-13 Sep-14 Sep-15 Sep-16 Source: STR, Credit Suisse research Source: HCS, Credit Suisse research European Hotels Outlook 217 5

6 Figure 17: US RevPAR growth is 86% correlated with investment spend. Our Economists' forecasts in 217 would imply 4.4% RevPAR growth Global focus 2: Investment spend indicates potential upside to RevPAR growth Increased focus on investment: One of our Global Strategists' key themes for 217 is Infrastructure and fiscal QE as discussed in the team's report, 217 Outlook: Themes, Sectors and Styles, dated 21 December 216. Given this focus, we have assessed the relationship between hotel trading performance and investment spend. We have looked at the relationship over periods up to the past 15 years in the US, UK, Europe and France. We note high correlations between the data sets especially in the US and Europe. Our Economists' 217 investment growth forecasts imply RevPAR growth of 4.4% in the US and 6.% in Europe both above our respective forecasts. Figure 18: European RevPAR growth is 8% correlated with investment spend. Our Economists' forecasts in 217E would imply 6.% RevPAR growth Growth in investment spend vs RevPAR (%) Growth in investment spend vs RevPAR (%) US Europe RevPAR Investment RevPAR Investment 15.% 15.% 1.% 1.% 5.% 5.%.%.% -5.% -5.% -1.% -1.% -15.% -15.% -2.% -2.% -25.% -25.% Source: STR, Thomson Reuters Source: STR, Thomson Reuters Figure 19: UK RevPAR growth is 59% correlated with investment spend. Our Economists' forecasts in 217 would imply 2.2% RevPAR growth Figure 2: French RevPAR growth is 66% correlated with investment spend. Our Economists' forecasts in 217E would imply 3.6% RevPAR growth Growth in investment spend vs RevPAR (%) Growth in investment spend vs RevPAR (%) UK France RevPAR Investment RevPAR Investment 15.% 15.% 1.% 5.%.% 1.% 5.% -5.%.% -1.% -15.% -2.% -5.% -1.% -25.% -15.% Source: STR, Thomson Reuters Source: STR, Thomson Reuters European Hotels Outlook 217 6

7 Figure 21: Our proxy RevPAR models are showing signs of improvement Global focus 3: Proxy models indicate improving trends Credit Suisse's proxy model tracks end-market performance: We use our proxy models to translate the industry data we obtain, weighted by the various operators' end markets to arrive at proxy models of current trends. There was a universal improvement in the data across all major markets during Q4 with December broadly the best month of the year. As shown in Figure 21, 216 was characterised by weak momentum for the peer group. However, more recently that trend has begun to rebound, especially in December, as shown in Figure 22, where the data are monthly rather than blended for 3-month periods. RevPAR growth (3m MA basis) % RevPAR growth % Figure 22: December has been the best month since the end of Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov Accor IHG WTB Accor IHG WTB Source: Credit Suisse research Source: Credit Suisse research Global focus 4: Pricing power and real RevPAR Figure 23: Our analysis of pricing power is positive except in France given the impact of terrorist attacks Occupancy % US Total UK regions Germany Europe ex-uk Asia London France Structural occupancy Current Occ Occ 12m ago Trough Occ Source: STR, HCS, Credit Suisse research European Hotels Outlook 217 7

8 216 saw limited evidence of pricing power: In Figure 23, we show our updated analysis of pricing power. This analysis compares current occupancy levels with the occupancy level at which historical pricing power has been enjoyed. We define pricing power as real price changes and define the requisite occupancy level as structural occupancy. At the start of 216 we anticipated a robust outlook for pricing power given that occupancy levels were at record highs in most key markets. In reality 216 was negatively impacted by geopolitical issues, terrorism and we believe the growth of Airbnb. As shown below, in real terms, RevPAR fell in France (-6%) and in London (-3%), with more modest rises in Europe (+1%) and the US (+2%) than have been typical in recent years. The greatest exception was Spain where real RevPAR expanded 12%. 217 should be more robust: We still see a clear structural risk from the ongoing growth of Airbnb potentially curtailing pricing power and certainly acknowledge that most of the lost ground since the financial crisis has been regained (see Figure 24 for example). However, we still don t see excessive supply as a risk (discussed in the next section) and, with occupancy levels high by historical standards, believe pricing should be robust if unspectacular. Figure 24: US RevPAR is 9% above the previous peak in real terms Real RevPAR (index 1 in Dec-87) 12 Figure 25: European RevPAR has stagnated in real terms in 216 and is 4% below the 28 peak Real RevPAR (index 1 in Dec-4) Oct-88 Oct-9 Oct-92 Oct-94 Oct-96 Oct-98 Oct- Oct-2 Oct-4 Oct-6 Oct-8 Oct-1 Oct-12 Oct-14 Oct-16 Oct-5 Apr-6 Oct-6 Apr-7 Oct-7 Apr-8 Oct-8 Apr-9 Oct-9 Apr-1 Oct-1 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Source: Credit Suisse research Source: Credit Suisse research Figure 26: The gap between London and UK regional performance has narrowed considerably but the UK regions remain 9% below the previous peak Real RevPAR (index 1 in Jan-98) Figure 27: Spanish RevPAR has now recovered fully and is 5% above the 28 peak. After a tough year, France is 8% below the peak of 215 Real RevPAR (index 1 in Dec-6) Oct-98 Oct-99 Oct- Oct-1 Oct-2 Oct-3 Oct-4 Oct-5 Oct-6 Oct-7 Oct-8 Oct-9 Oct-1 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 6 Dec-6 May-7 Oct-7 Mar-8 Aug-8 Jan-9 Jun-9 Nov-9 Apr-1 Sep-1 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 UK regions London France Spain Source: Credit Suisse research Source: Credit Suisse research European Hotels Outlook 217 8

9 Tracking real RevPAR: Whilst a somewhat static analysis (i.e. it ignores current changes in the demand/supply balance), we believe monitoring real RevPAR versus previous cycles is useful. From Figure 24 to Figure 27 we would note the UK regions and France offer the most significant recovery potential. Global focus 5: Supply growth muted outside US Figure 28: Room growth remains subdued Room growth % 4.5% 4.% 3.5% 3.% 2.5% 2.% 1.5% 1.%.5%.% E Europe UK Asia Pac US Source: STR Supply picture muted in most markets: Across the majority of hotel markets, the trajectory of supply growth is muted with slower growth in Europe (including the UK) and Asia than has been experienced over the past five years (see Figure 28). The one exception is the US. US supply still low given the stage of the cycle: With real US RevPAR 9% above the previous peak (as noted above), the current level of supply growth is still fairly modest. We believe this is best demonstrated when considering full cycles. In the previous two cycles, by the end of year six, there had been 17% and 12% cumulative supply growth. During this cycle, the equivalent figure is 7%. European Hotels Outlook 217 9

10 Figure 29: In the previous two cycle there had been 17% and 12% growth by the end of the sixth year. In this cycle, that figure is just 7%. Room growth % 4.5% 4.% 3.5% 3.% 2.5% 2.% 1.5% 1.%.5%.% Trough year Recovery year 1 Recovery year 2 Recovery year 3 Recovery year 4 Recovery year 5 Recovery year 6 Recovery year Source: Company data, Credit Suisse research Global focus 6: Cost inflation, owner profitability and fee structures Figure 3: US wage inflation is running at its highest level since the financial crisis Wage inflation Leisure and Hospitality (%) 8. Figure 31: US wage inflation has exceeded US RevPAR growth for the first time since early 21 Differential between US RevPAR and US wage inflation Mar-88 Mar-9 Mar-92 Mar-94 Mar-96 Mar-98 Mar- Mar-2 Mar-4 Mar-6 Mar-8 Mar-1 Mar-12 Mar-14 Mar Source: BLS Source: STR, BLS, Credit Suisse research Assessing a more inflationary environment: During recent interactions with investors, we have received more questions regarding the outlook for cost inflation. As shown in Figure 3, wage inflation is running at close to 4% for the hospitality sector in the US. This has occurred at the same time as RevPAR growth has slowed. This has driven a squeeze in the gap between the top line and cost inflation as illustrated by Figure 31. US REIT estimates allow for some margin weakness: We continue to track the financial performance and forecasts of the hospitality REITs as a good proxy for owner profitability. As shown in Figure 32, the margins of Host have returned to 27 levels but are expected to fall 5bps in 217 as cost inflation exceeds top-line growth. European Hotels Outlook 217 1

11 Figure 32: Host EBITDA margins are forecast to hit 27 levels in 216 before dipping 5bps in 217 Host EBITDA margin % Figure 33: Marriott is more geared to incentive fees than IHG or Hilton Share of fees from incentive fees 3% 25% 2% 21% 23% 25% 27% 25% 18% 18% 2% 21% 23% 26% 25% 27% 26% 18% 16% 14% 12% 15% 1% 1% 8% 6% 5% 4% % E 217E 2% % IHG Hilton Marriott Source: Host, Bloomberg for estimates Source: Company data Figure 34: There is a clear link between management fees and margins EBITDA margins % (x-axis) vs Management fees as % revenues (y-axis) 6.% 5.% 4.% 3.% 2.% 1.%.% -5% % 5% 1% 15% 2% 25% 3% Source: Host Implications for fee-based hoteliers: For IHG and its US listed peers Marriott and Hilton (especially post its spin-offs), it is worth considering the impact of this backdrop of potentially worsening owner profitability for fee streams. Remember that management contracts contain both base fees (linked to revenues) and incentive fees (linked to profitability). We estimate in 216 IHG will have generated 74% of fee EBIT from franchising and 26% from management contracts. The company also discloses that around 85% of fees relate to room revenues and that 7% of other fees are incentive fees. As shown in Figure 33, Marriott is more exposed to incentive fees than IHG or Hilton (based on its post spin-off pro forma financial disclosure). As such, we don t see a material risk from the current backdrop of higher wage inflation for IHG's profitability outlook. Global focus 7: Consolidation A medium-term theme we expect to continue: 216 was a year in which we saw two meaningful transactions completed (Marriott/Starwood and Accor/Fairmont Raffles) but European Hotels Outlook

12 Figure 35: Key global hotel players Accor (post FRHI) no new deals announced per se. That said, this is a rather simplified view of the world and two further trends emerged, which suggest more deal activity is likely: 1) Sector interest from China: In March 216 Starwood received a follow-up bid from Chinese insurance group Anbang, which led to Marriott improving the cash component of its bid for Starwood. In October HNA acquired a 25% strategic stake in Hilton. In December Rezidor announced it was evaluating an offer from HNA Tourism Group after the latter announced a mandatory public offering to acquire all shares in Rezidor given it owned 51.3% of the outstanding share capital following its acquisition of Carlson Hotels (separately announced in April). We believe these transactions, together with Jin Jiang's stake in Accor, indicate Chinese capital is being invested in all elements of the global hotel value chain. 2) Restructuring of asset-heavy groups: Hilton completed splitting the group into three separately listed entities in January 217 legacy Hilton with 9% of EBITDA stemming from fee-based business, Park Hotels & Resorts (a REIT) and Hilton Grand Vacations (its timeshare business). Accor also confirmed plans to sell a majority stake in HotelInvest, its asset-intensive business. Completion of these plans would leave Hilton and Accor fundamentally more asset light. IHG Hilton (post spin-off) Hyatt Wyndham Marriott (ex-starwood) Starwood Number of rooms (s) US mix % 13% 64% 81% 71% 7% 77% 56% 215 financials ($m) Management and franchised fees Owned EBITDA Timeshare EBITDA Mix Management and franchised fees 6% 96% 91% 51% 55% 88% 7% Owned/leased EBITDA 4% 4% 9% 49% % 12% 19% Timeshare EBITDA % % % % 45% % 11% Segmental mix Luxury 6% 8% 2% 22% % 4% 11% Upper Upscale 7% 2% 31% 51% % 41% 74% Upscale 38% 2% 35% 24% 7% 39% 16% Upper Midscale 1% 63% 31% % 3% 16% % Midscale 33% 4% % % 26% % % Economy/Other 15% 3% 1% 3% 64% % % PP&E (US$ bn) Mkt cap (US$ bn) * PP&E as % mkt cap 3% 5% 2% 57% 18% 6% 16% Source: Company data; *Hilton market cap shown on a pre spin-off basis Scenario analysis and key conclusions: We have modelled possible consolidation scenarios previously see our October 216 Ideas Engine for full detail. Our key conclusions from that report remain unchanged, namely; 1) Planned corporate action is supportive of further M&A. The tidying-up of Hilton by spinning off timeshare and a REIT, and Accor's plans to part-sell HotelInvest increase the likelihood of further consolidation focused on combining asset-light fee-based businesses. 2) IHG appears to be the most attractive asset. Of the five global hotel companies that have not participated in consolidation (i.e. ignoring the Marriott and Starwood merger), we see IHG as the most straightforward and hence attractive asset. It is effectively 1% fee based already, with no real estate or ownership complications and offers the benefits of global scale and synergies. 3) We see the next move as critical. Whilst there are numerous possible combination scenarios, the next deal to be announced (if any) is key as it would leave those who have not participated thus far with more limited European Hotels Outlook

13 Figure 36: Paris hotel trends have been noticeably weaker than airport trends options. As such, we believe the fear of missing out could be a driver of bringing deals to a head fairly rapidly over the course of the next months. Global focus 8: Airbnb growth vs regulation Ideas Engine report of October 216: We wrote extensively on the topic of Airbnb in October 216 (see note). The regional differences in the growth of Airbnb do not appear to be widely appreciated by investors, but we acknowledge there have continued to be changes to the regulatory landscape for Airbnb (see Figure 4). In Figure 36 to Figure 39 we show the key charts from our Ideas Engine highlighting its growth and significantly greater focus on Europe. We note a number of cities have tightened the regulatory framework, most typically via caps on the number of days a host can rent their property. We believe Airbnb has been clear in its desire to become a mainstream part of the industry and fully accepts regulation and taxation are elements of that. Whilst this may have some negative drag effect on short-term growth, we believe it establishes Airbnb on a more sustainable long-term footing. Figure 37: French searches for Airbnb now exceed Ibis by a factor of 2.4x (parity in Feb-15) Change YoY (%) Search ratio Airbnb vs Ibis (France) Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul Paris chg occupancy CdG pax growth 3% 25% 2% 15% 1% 5% % Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 France vs Ibis Source: ADP, HCS Source: Google Trends Figure 38: Our proprietary analysis indicates Accor faces a 4x greater risk from Airbnb than IHG June 216 effective end market penetration of Airbnb % Figure 39: Instant Book is now available on 28% of Airbnb listings driving a 2.5x lift in conversion rates 9.% 35% 8.% 7.% 6.% 3% 25% 5.% 2% 4.% 3.% 2.% 15% 1% 1.% 5%.% IHG M&C Whitbread Accor % Apr-16 Aug-16 1 month out 3 months out Source: Credit Suisse estimates Source: Credit Suisse research European Hotels Outlook

14 Figure 4: Summary of Airbnb regulations City Amsterdam Barcelona Berlin Boston Chicago London New Orleans New York City Paris Philadelphia San Francisco Seattle Regulations A new category of accommodation was created, called Private Rental, which allows locals to rent their residences for up to 6 days a year Short-term rentals are allowed only by those registered with the city as primary residents in each particular dwelling Hosts must ensure that units meet all fire and safety rules Airbnb collects all applicable bed and tourist taxes (an additional 5%) Permit required granted through registration, 'small' fee, evidence of rental insurance and safe conditions, tax on rental revenue 6, maximum possible fine for apartments rented that are not registered with the Catalan Tourism Register (RTC) Website allows residents to check whether an address is legally rented for tourism purposes or not, and anonymously report any suspect properties Only rooms can be rented, not entire flats or houses Fines of EUR 1, for anyone renting more than 5% of their apartment for less than 2 months without a permit A website for anonymous tip offs has been set up 5.7% hotel excise tax on stays of 31 days or less at private residences No restrictions on number of nights a listing can be used for short-term rentals, both for hosted and un-hosted stays No limits on the number of listings a host can have in the city Easy, streamlined registration that protects the privacy and personal information of Airbnb hosts while allowing the city to enforce the terms of the ordinance Limits number of listings in multi-unit buildings to 25% of the listings or no more than six units, whichever is less Hosts in London can share their homes for up to 9 days per year without this being considered a change of use requiring planning permission Hosts across the UK are able to earn up to 7,5 per year from renting part of their primary residence - or 1, from renting their whole home - without having to pay income taxes on it Airbnb is now responsible for making sure their hosts stick to the local limits for short-term rentals unless the hosts have the proper licenses Cannot rent out whole dwelling for more than 3 days in a year Up to two spare bedrooms, with the exception of larger properties which are allowed three, can be rented without special approval Residential neighbourhoods allowed longer term rentals or vacation homes with special permission from City Council All rentals require license Illegal to list apartments for short term rental. Already illegal to rent unoccupied apartment in a building with three or more units for fewer than 3 days Penalties: $1, for the first violation, $5, for the second violation, and $7,5 for the third and every violation thereafter Flats rented out for less than 12 days a year require a licence. Industry lobby groups launched a complaint into tax payments from Airbnb and are campaigning for all listings to be at the residents primary address Hosts can share a primary home for up to 18 days Anyone can share their home for up to 9 days per year regardless of whether they are an owner or renter, and regardless of how many listings they have. After 9 days rented in a given year, they must get a permit from the city Shared properties must remain residences, with guest lodging a secondary use Hosts must maintain records for one year and make them available to the city Hosts must provide contact information to lodgers for the purpose of responding to complaints The tax component of the ordinance allows a booking agent such as Airbnb to collect and remit taxes. This includes the 6% Hotel Room Tax, the Local Sales Tax which is 1% of the listing price, including any fees, and All hosts register with the city, requiring documents to be submitted in person. $5 registration fee $1 fine for Airbnb per listing per day in violation (Proposed) Properties not occupied by permanent residents prohibited from having more than 9 days of short-term rentals per year Otherwise pay business license and applicable taxes, share quarterly rental data with the city Source: Company data European Hotels Outlook

15 Regional focus 1: US tax rate IHG a potential beneficiary of US tax changes: Given Trump's indications of lower US corporate tax rates, we show in Figure 41 a sensitivity for IHG. In 218E we estimate a 5pt reduction in the US corporate tax rate would lower IHG's tax burden by $25m, equivalent to 5% of net income. Trump has indicated a desire to reduce the corporate tax rate by 2pts, which would therefore have a materially greater impact. Figure 41: IHG is a potential beneficiary of lower US corporate taxes. We show the impact of a 5pt reduction in US corporate tax rates. in US$ millions, unless otherwise stated 217E 218E 219E 22E 221E Americas EBIT (post allocated of central costs) US share of Americas rooms 9% 9% 9% 9% 9% US EBIT Impact of 5pt change in US tax rate Impact on group net income 5.2% 5.1% 5.% 4.9% 4.8% Source: Credit Suisse estimates Regional focus 2: UK impact from weak sterling Figure 42: The UK outlook for travel is likely to be impacted by currency shifts Changes in net outbound travel from UK (12m MA chg %) vs changes in / 2% 15% Net outbound 1% 5% -- (5%) (1%) (15%) (2%) Net inbound (25%) Net outbound / chg 9m lead Source: ONS, Thomson Reuters UK outlook is uncertain but should see a positive fx impact: Whilst the UK macro outlook remains uncertain as the country enters Brexit negotiations, it is likely that the meaningful shift in currency already experienced will impact trading in 217. In Figure 42 we track net outbound travel from the UK (there are more outbound trips than inbound each year) and compare this with changes in currency focused on the / exchange rate. Importantly, we find the relationship between the two data sets is closest with a 9m lag introduced. In other words, travel decisions take around nine months to respond to changing exchange rates. As the chart demonstrates, current exchange rates are likely to lead to an increase in net inbound travel by the middle of 217. We would anticipate this driving an increase in inbound and domestically sourced demand for London hotels plus a domestic "staycation" benefit for regional hotels. We have raised our Premier Inn RevPAR growth forecast for the year to Feb-18 to 3.% from 1.% and now see Hotels and Restaurant margins up 2bps versus guidance of margins down 2-3bps. European Hotels Outlook

16 Europe/France Travel & Leisure Rating UNDERPERFORM Price (4 Jan 17, ) Target price (12-mth, ) (from 3.5) 34.8 Market Cap ( m) 1,652.1 Enterprise value ( m) 12,488.3 *Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector. ¹Target price is for 12 months. Share price performance Research Analysts Tim Ramskill, CFA tim.ramskill@credit-suisse.com Julia Pennington julia.pennington@credit-suisse.com Giulio Pescatore giulio.pescatore@credit-suisse.com Ja n Ju l Jan Ju l Ja n ACCP.PA CAC 4 INDEX The price relative chart measures performance against the CAC 4 INDEX which closed at on 4/1/17 On 4/1/17 the spot exchange rate was 1/Eu 1.- Eu.95/US$1 Performance 1M 3M 12M Absolute (%) Relative (%) Accor (ACCP.PA) Improving macro vs valuation concerns Momentum is better but valuation concerns remain: Improved macro momentum drives a 9% 217E EPS increase and our TP rises 14% to 34.8 per share as inputs are rolled forward. We see 217 as being driven by valuation for both the disposal of HotelInvest (HI) and the ongoing multiple for HotelServices (HS); we are sceptical on both and retain our Underperform rating. European momentum is improving: There are clear signs of improving macro momentum with both our European and French lead indicator models having shifted into robust, positive territory. We raise our French RevPAR to 2% from % noting comp effects prior to the anniversary of the Nice attack and the UEFA Euros in 216. For the rest of Europe we assume 4% growth. The impact of these changes increases 217E EPS by 9%. Catalysts and Risks: We see the disposal of a majority of HotelInvest as the key determinant of Accor's share price performance in 217 (discussed below). FY17 results are published on 22 February. Key risks centre on European trading, the disposal process and Fairmont integration. Plus we estimate Accor is the most exposed to Airbnb's successful growth in Europe (effective 8% new supply in Accor's end markets). Two-part valuation debate: Accor is planning to sell the majority of HotelInvest in 217. This drives two questions what is the appropriate valuation for HotelInvest (HI) and where will HotelServices (HS) trade on a standalone basis. As a starting point our updated peer-based SOTP is 37.2 per share including a value of 5.7bn for HI. The company has disclosed a value of 7.3bn for HI, which is worth an extra 5.6 per share. However, we also question where HS will trade. Our SOTP uses parity US peer multiples (Choice, Marriott, IHG) to value HS, but each 1% discount on EV/EBIT lowers our valuation by 2.4 per share. We expect a debate about the valuation of HS post the HI disposal given our 218 EBIT forecast for HotelServices is flat versus 212, whereas for IHG our forecasts imply 58% fee-based EBIT growth over that period. Financial and valuation metrics Year 12/15A 12/16E 12/17E 12/18E Revenue ( m) 5,581. 5, , ,412.2 EBITDA ( m) ,16.1 1,237.3 Adjusted net income ( m) CS EPS (adj.) ( ) Prev. EPS ( ) ROIC (%) P/E (adj.) (x) P/E rel. (%) EV/EBITDA (x) Dividend (12/16E, ).86 Net debt/equity (12/16E,%) 57.1 Dividend yield (12/16E,%) 2.3 Net debt (12/16E, m) 1,836.2 BV/share (12/16E, ) 11.5 IC (12/16E, m) 5,51.3 Free float (%) 1. EV/IC (12/16E, (x) 2.5 Source: Company data, Thomson Reuters, Credit Suisse estimates European Hotels Outlook

17 Accor (ACCP.PA) Price (4 Jan 217): ; Rating: UNDERPERFORM; Target Price: (from 3.5) 34.8; Analyst: Tim Ramskill Income statement ( m) 12/15A 12/16E 12/17E 12/18E Revenue 5,581 5,654 6,19 6,412 EBITDA ,16 1,237 Depr. & amort. (321) (31) (344) (354) EBIT Net interest exp. (18) (76) (88) (65) Associates PBT Income taxes (136) (143) (197) (24) Profit after tax Minorities (27) (28) (29) (3) Preferred dividends Associates & other Net profit Other NPAT adjustments (164) (78) (43) Reported net income Cash flow ( m) 12/15A 12/16E 12/17E 12/18E EBIT Net interest (18) (76) (88) (65) Cash taxes paid (171) (175) (214) (24) Change in working capital Other cash and non-cash items Cash flow from operations CAPEX (635) (544) (557) (339) Free cashflow to the firm Acquisitions Divestments 357 (916) Other investment/(outflows) () Cash flow from investments (278) (1,46) (557) (339) Net share issue/(repurchase) Dividends paid (174) (234) (222) (275) Issuance (retirement) of debt Cashflow from financing (174) (234) (222) (275) Changes in net cash/debt 297 (1,57) Net debt at start 1, ,836 1,775 Change in net debt (297) 1,57 (61) (344) Net debt at end 779 1,836 1,775 1,431 Balance sheet ( m) 12/15A 12/16E 12/17E 12/18E Assets Total current assets 4,198 3,74 3,749 3,768 Total assets 8,954 9,64 9,856 9,854 Liabilities Total current liabilities 2,49 2,27 2,8 2,19 Total liabilities 5,854 6,389 6,381 6,67 Total equity and liabilities 8,954 9,64 9,856 9,854 Per share 12/15A 12/16E 12/17E 12/18E No. of shares (wtd avg.) (mn) CS EPS (adj.) ( ) Dividend ( ) Free cash flow per share ( ) Key ratios and valuation 12/15A 12/16E 12/17E 12/18E Growth/Margin (%) Sales growth (%) EBIT growth (%) Net income growth (%) (9.3) EPS growth (%) (1.9) (2.2) EBITDA margin (%) EBIT margin (%) Pretax profit margin (%) Net income margin (%) Valuation 12/15A 12/16E 12/17E 12/18E EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Dividend yield (%) P/E (x) Credit ratios (%) 12/15A 12/16E 12/17E 12/18E Net debt/equity (%) Net debt to EBITDA (x) Interest coverage ratio (x) Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates Company Background The hospitality company Accor is one of the world's leading hotel operators, owning or managing more than 4,2 properties across the globe. Accor has hotels in nearly 1 countries that serves travelers through luxury brand Sofitel; midscale Mercure. Blue/Grey Sky Scenario Our Blue Sky Scenario ( ) (from 47.5) 5.2 Given the high operational gearing at Accor we believe the most critical factor to flex is RevPAR growth. In our blue sky scenario we assume overall group RevPAR growth of 4.% in both 217 and 218. We then apply the mid-point of through cycle and peak PE and EV/EBITDA multiples to the profits derived for 218E under this scenario. Our Grey Sky Scenario ( ) (from 21.2) 23.4 Given the high operational gearing at Accor we believe the most critical factor to flex is RevPAR growth. In our grey sky scenario we assume overall group RevPAR growth in both 217 and 218 is.%. We then apply the mid-point of trough and through cycle PE and EV/EBITDA multiples to the profits derived for 218E under this scenario Share price performance Jan- 15 May- 15 Sep- 15 Jan- 16 May- 16 Sep- 16 Jan- 17 ACCP.PA CAC 4 INDEX The price relative chart measures performance against the CAC 4 INDEX which closed at on 4/1/17 On 4/1/17 the spot exchange rate was 1/Eu 1.- Eu.95/US$1 European Hotels Outlook

18 Figure 43: Our European RevPAR model has the best outlook since mid-214 Accor key charts and tables RevPAR growth % RevPAR growth % Sep-98 Sep-99 Sep- Sep-1 Sep-2 Sep-3 Sep-4 Sep-5 Sep-6 Actual RevPAR Sep-7 Sep-8 Sep-9 Sep-1 Sep-11 Sep-12 CS RevPAR model Sep-13 Sep-14 Sep-15 Sep-16 Figure 44: France should return to growth in 217 with the macro improving and weak comps after the Paris and Nice terror attacks (5) (1) (15) Sep-7 Sep-8 No terrorist threat Actual RevPAR Sep-9 Sep-1 Sep-11 Sep-12 Terrorist threat CS RevPAR model Sep-13 Sep-14 Sep-15 Sep-16 Source: STR, Credit Suisse research Source: HCS, Credit Suisse research Figure 45: We reflect an improved macro outlook for Europe in our forecasts with RevPAR in France +2% and Europe +4% (previously % and +2%). This drives an 8-9% increase in EPS. in millions, unless otherwise stated New 216 New 217 New 218 Old 216 Old 217 Old 218 Change 216 Change 217 Change 218 Sales 5,654 6,19 6,412 5,654 6,98 6,318 % 2% 1% Clean EBITDA 978 1,16 1, ,97 1,172 % 6% 6% Clean EBIT % 8% 7% Clean PBT % 9% 8% FD adjusted EPS (GBp) % 9% 8% DPS (GBp) % 9% 8% Source: Credit Suisse estimates Figure 46: Between 212 and 218E Hotel Services EBIT is flat vs IHG's up 58% Fee EBIT growth (%) 15% 1% 5% Figure 47: IHG spends 1.6x that of Accor supporting each room through expenditure on technology, marketing and distribution Operating cost per room US$ % -5% -1% -15% E 217E 218E IHG fee EBIT growth Hotel Services EBIT growth Accor IHG Source: Company data, Credit Suisse estimates Source: Company data European Hotels Outlook

19 Figure 48: Accor DCF yields a value of 32.5 per share in millions, unless otherwise stated Target price raised to 34.8 but maintain UP rating New target price 34.8: We raise our target price by 14% to 34.8 per share, which continues to be based on the average of our DCF and SOTP. The increase reflects our higher EPS forecasts, the roll-forward of our DCF and higher peer multiples. 217E 218E 219E 22E 221E 222E 223E 224E 225E 226E Terminal Sales 6,19 6,412 6,65 6,885 7,9 7,34 7,527 7,759 8,1 8,243 8,48 % growth 9.5% 3.6% 3.7% 3.5% 3.% 3.% 3.% 3.1% 3.1% 3.% 2.% EBITA ,22 1,68 1,111 1,151 1,194 1,24 1, EBITA margin (%) 13.2% 13.8% 14.6% 14.8% 15.1% 15.2% 15.3% 15.4% 15.5% 15.6% 15.6% Cash tax rate 29% 29% 29% 29% 29% 29% 29% 29% 29% 29% 29% NOPAT Depreciation Capital Expenditure Change in working capital Free Cash Flow WACC 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% 8.9% Terminal Growth rate 2.% Present value of cash flow Net Present value (1-1 yrs) 4,925 PV terminal value 6,56 Total NPV (EV) 1,981 Net (debt)/cash incl pension and -2,177 minorities (Dec-16) Associates 334 Implied Equity Value 9,138 Number of shares (m) 281 Value per share ( ) 32.5 Source: Credit Suisse estimates Figure 49: Accor SOTP yields 37.2 per share. Based on peer multiples this assumes a value for HotelInvest of 5.7bn (external value 7.3bn) and a parity multiple for HotelServices to peers despite its lack of EBIT growth. Division 217E EBIT multiple 217E EBIT EV HotelServices including FRHI ,233 HotelInvest - Owned ,894 HotelInvest - Leased ,828 onefinestay nm Corporate ,37 Total ,66 Net (debt)/cash incl pension and minorities (Dec-16/17) Associates 334 Implied Equity Value 1,55 Number of shares (m) 283 Value per share ( ) 37.2 Source: Company data, Credit Suisse estimates -1,895 European Hotels Outlook

20 Figure 5: Accor HOLT valuation in millions, unless otherwise stated Accor in Credit Suisse HOLT When inputting our forecasts to HOLT it returns a warranted price of 17.3 given the business generates sub-cost of capital returns. We acknowledge that plans to dispose of asset-heavy HotelInvest would likely be at multiples higher than any cash flow-based valuation analysis would apply. ACCOR (ACCP) Current Price: EUR Warranted Price: EUR 17.3 Valuation date: 5-Jan-17 Sales Growth (parallel % point change to forecasts) Dec 14A Dec 15A Dec 16E Dec 17E Dec 18E EUR -2.% -1.%.% 1.% 2.% Sales Growth, % EBITDA Margin (parallel % point change to forecasts) -2.% -93% -84% -73% -6% -46% -1.% -85% -75% -63% -5% -35%.% -77% -66% -54% -4% -24% 1.% -69% -57% -44% -3% -13% 2.% -61% -49% -35% -2% -2% EBITDA Mgn, % Asset Turns, x CFROI, % Disc Rate, % Asset Grth, % Value/Cost, x Economic PE, x Leverage, % HOLT - Credit Suisse Analyst Scenario Data More than 1% downside CFROI & Discount Rate (in %) Within 1% More than 1% upside Historical CFROI Historical Transaction CFROI Forecast CFROI Forecast CFROI CFROI Discount Rate Asset Growth (in %) Historical Asset Growth Rate Forecast Growth Normalised Growth Rate Forecast Growth RAGR Sales Growth (%) EBITDA Margin Asset Turns (x) Source: Credit Suisse HOLT. CFROI and HOLTare trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries. Source: Credit Suisse HOLT, Company data, Credit Suisse estimates European Hotels Outlook 217 2